STRATUS PROPERTIES INC - 10-Q Quarterly Report

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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 June 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 June 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

Remarks	10

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	17

Controls and Procedures	17

Part II. Other Information	17

Signature	19

Exhibit Index	E-1

STRATUS PROPERTIES INC.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements

STRATUS PROPERTIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,		December 31,
	2003		2002
	(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $0.3 million at June 30, 2003 and $0.4 million at December 31, 2002)	$	1,929	$	1,361
Accounts receivable		529		654
Current portion of notes receivable from property sales		60		60
Prepaid expenses		106		146
Total current assets		2,624		2,221
Real estate and facilities, net		115,454		110,761
Rental properties, net		22,505		22,422
Investments in and advances to unconsolidated affiliates		-		191
Notes receivable from property sales, net of current portion		1,489		2,103
Other assets		1,872		1,742
Total assets	$	143,944	$	139,440

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	1,687	$	1,663
Accrued interest, property taxes and other		2,085		3,067
Current portion of borrowings outstanding		434		2,316
Total current liabilities		4,206		7,046
Long-term debt		51,282		42,483
Other liabilities		3,283		3,292
Commitments and contingencies
Stockholders' equity		85,173		86,619
Total liabilities and stockholders' equity	$	143,944	$	139,440

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

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2003			2002			2003			2002
	(In Thousands, Except Per Share Amounts)
Revenues:
Real estate	$	55		$	2,615		$	1,335		$	3,640
Rental income		940			652			1,848			914
Other		504			310			1,012			767
Total revenues		1,499			3,577			4,195			5,321
Cost of sales:
Real estate, net		578			1,282			1,475			2,173
Rental		578			439			1,149			553
Depreciation and amortization		332			231			648			327
Total cost of sales		1,488			1,952			3,273			3,053
General and administrative expenses		1,053			1,173			2,115			2,356
Total costs and expenses		2,541			3,125			5,388			5,409
Operating income (loss)		(1,042	)		452			(1,193	)		(88	)
Interest expense, net		(185	)		(164	)		(472	)		(212	)
Interest income		37			134			135			384
Equity in unconsolidated affiliates’ income (loss)		29			(46	)		29			372
Other income		-			-			-			286
Net income (loss)	$	(1,161	)	$	376		$	(1,501	)	$	742

Reconciliation of net income (loss) to net income (loss) attributable to common stock :
Net income (loss)	$	(1,161	)	$	376		$	(1,501	)	$	742
Discount on purchase of mandatorily redeemable preferred stock		-			-			-			2,367
Net income (loss) attributable to common stock	$	(1,161	)	$	376		$	(1,501	)	$	3,109

Net income (loss) per share of common stock:
Basic		($0.16	)		$0.05			($0.21	)		$0.44
Diluted		($0.16	)		$0.05			($0.21	)		$0.41

Average shares outstanding:
Basic		7,123			7,116			7,123			7,115
Diluted		7,123			7,261			7,123			7,535

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

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

	Six Months Ended
	June 30,
	2003			2002
	(In Thousands)
Cash flow from operating activities:
Net income (loss)	$	(1,501	)	$	742
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		649			327
Cost of real estate sold		339			955
Equity in unconsolidated affiliates’ (income) loss		(29	)		(372	)
Gain on sale of Stratus’ 50 percent interest in Walden Partnership		-			(286	)
Amortization of deferred compensation		59			20
(Increase) decrease in working capital:
Accounts receivable and other		165			1,348
Accounts payable and accrued liabilities		(966	)		(735	)
Long-term receivable and other		475			1,106
Distribution of unconsolidated affiliates’ income		29			278
Net cash (used in) provided by operating activities		(780	)		3,383

Cash flow from investing activities:
Real estate and facilities, net of cost of real estate sold		(5,764	)		(6,445	)
Net cash acquired from Barton Creek and 7000 West Joint Ventures		-			1,067
Proceeds from the sale of Stratus’ 50 percent interest in the Walden Partnership		-			3,141
Acquisition of Olympus’ interest in the Barton Creek and 7000 West Joint Ventures		-			(3,858	)
Investment in Lakeway Project		191			505
Net cash used in investing activities		(5,573	)		(5,590	)

Cash flow from financing activities:
Borrowings under revolving credit facility, net		9,494			2,912
Borrowings on term loan component of credit facility		-			4,645
Payments on term loan portion on credit facility		(493	)		(432	)
Proceeds from (payments on) 7500 Rialto project loan		(1,431	)		1,781
Payments on 7000 West project loan		(653	)		(64	)
Repurchase of mandatorily redeemable preferred stock		-			(7,633	)
Exercise of stock options and other		4			47
Net cash provided by financing activities		6,921			1,256
Net increase (decrease) in cash and cash equivalents		568			(951	)
Cash and cash equivalents at beginning of year		1,361			3,705
Cash and cash equivalents at end of period		1,929			2,754
Less cash restricted as to use		(266	)		(2,045	)
Unrestricted cash and cash equivalents at end of period	$	1,663		$	709

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 the Company’s 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 Properties Inc. at June 30, 2003 and December 31, 2002, and the results of operations for the three-month and the six-month periods ended June 30, 2003 and 2002 and cash flows for the six-month periods of 2003 and 2002. Operating results for the three months and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

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 year 2003 presentation

2. EARNINGS PER SHARE

Following 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 June 30,					Six Months Ended June 30,
	2003			2002		2003			2002
Basic net income (loss) per share of common stock:
Net income (loss)	$	(1,161	)	$	376	$	(1,501	)	$	742
Add: Discount on purchase of mandatorily redeemable preferred stock (Note 1)		-			-		-			2,367
Net income (loss) applicable to common shareholders	$	(1,161	)	$	376	$	(1,501	)	$	3,109

Weighted average common shares outstanding		7,123			7,116		7,123			7,115

Basic net income (loss) per share of common stock		$(0.16	)		$0.05		$(0.21	)		$0.44

Diluted net income (loss) per share of common stock:
Net income (loss)	$	(1,161	)	$	376	$	(1,501	)	$	742
Add: Discount on purchase of mandatorily redeemable preferred stock		-			-		-			2,367
Net income (loss) applicable to common shareholders	$	(1,161	)	$	376	$	(1,501	)	$	3,109

Weighted average common shares outstanding		7,123			7,116		7,123			7,115
Dilutive stock options		-	^a		145		-	^a		136
Assumed redemption of preferred stock		-			-		-			284
Weighted average common shares outstanding for purposes of calculating diluted net income (loss) per share		7,123			7,261		7,123			7,535
Diluted net income (loss) per share of common stock		$(0.16	)		$0.05		$(0.21	)		$0.41

Options representing approximately 128,000 shares of Stratus common stock in the second quarter of 2003 and 151,000 shares of Stratus common stock for the six months ended June 30, 2003 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:

	Second Quarter		Six Months
	2003	2002	2003	2002
Outstanding options	464,000	275,000	345,000	386,000
Average exercise price	$10.12	$10.96	$10.62	$10.31

Stock-Based Compensation Plans.

As of June 30, 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 earnings 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

June 30,

Six Months Ended

June 30,

2003

2002

2003

2002

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

(1,161

)