Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Fiscal Year Ended December 31, 1999.
[ ] 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 0-497
New Mexico and Arizona Land Company
(Exact name of registrant as specified in its charter)
Arizona 43-0433090
(State of incorporation) (I.R.S. Employer Identification No.)
3033 North 44th Street, Suite 270, Phoenix, Arizona 85018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/952-8836
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Common stock, no par value
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 twelve 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 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 as of March 20, 2000 was approximately $12,421,182 based upon the
closing price on the American Stock Exchange of $5.375 per share on such date.
For purposes of this disclosure, shares held by persons who hold more than 5% of
the outstanding shares of Common Stock and shares held by officers and directors
of the Registrant have been excluded because such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
The number of shares of the Registrant's Common Stock outstanding as of March
20, 2000 was 6,925,636 shares.
Documents Incorporated by Reference: Part III of the Form 10-K incorporates by
reference certain portions of the registrant's definitive proxy statement for
the 2000 Annual Meeting of Shareholders.
-1-
2
PART I
ITEM 1: BUSINESS
GENERAL
New Mexico and Arizona Land Company (the "Company" or "NZ") was
organized in 1908 as an Arizona corporation. At December 31, 1999, the Company
had 13 full-time employees and operated from its principal office in Phoenix,
Arizona. The Company operates under its own name or that of four of its five
wholly-owned subsidiaries: Bridge Financial Corporation, NZ Development
Corporation, NZ Properties, Inc., and NZU, Inc. The Company's fifth wholly-owned
subsidiary, Great Vacations International, Inc., is presently not active. In
1998 the Company began operating, and continues to operate, under the trade name
NZ/Bridge Financial in order to present a unified identity and brand name for
its two principal lines of business: short-term commercial real estate lending
and development, management and sale of real estate.
The Company has over a 90-year history in the southwestern United
States. In late 1997, the Company began the transition of its core business to
short-term commercial real estate lending from its historic emphasis on real
estate ownership and development. The Company expects to substantially complete
the transition by the end of 2000. The Company's wholly-owned subsidiary, Bridge
Financial Corporation ("Bridge" or "BFC"), conducts the lending business. In
addition, the Company owns over a million acres of mineral rights and three
known uranium deposits.
The Company operates under three business segments: short-term
commercial real estate lending, real estate and other. See Note 12 - Segments in
Item 8 - "Financial Statements and Supplementary Data" for additional
information and financial data about each segment.
Certain statements in this report and in the Company's annual report to
shareholders, including the President's letter, may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. Forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which could
cause actual results or outcomes to differ materially from those expressed in
such forward-looking statements. See "Operating Segments" in this Item 1 -
"Business", and Item 7 -"Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of important factors that
could cause actual results to differ from the forward-looking statements.
OPERATING SEGMENTS
- Short-term Commercial Real Estate Lending Segment
The short-term commercial real estate lending segment is primarily
engaged in providing, on a direct basis, short-term gap and participating loans
to qualified borrowers throughout California and the southwestern United States
who provide suitable real estate projects as collateral. The lending business is
conducted through the Company's wholly owned subsidiary, Bridge Financial
Corporation, which was formed for this purpose in 1997.
Historically, the Company conducted limited real estate lending
incidental to and in conjunction with the Company's real estate development and
sales business. The Company's management believes, however, that an under-served
niche exists in the real estate lending industry which merits the devotion of
substantial Company resources. This niche, on which Bridge focuses, consists of
providing time-sensitive loans to successful small to medium size developers and
others in the real estate business with a need to borrow $500,000 to $5,000,000
on a short-term basis, secured by a low-ratio mortgage (typically a mortgage
loan which is 65% or less than the value of the property mortgaged) on
commercial real estate. These borrowers need the ability to respond to a real
estate opportunity on a quick and flexible basis which traditional real estate
lenders are often not organized to do. By providing this responsive service
while maintaining high underwriting standards, management
-2-
3
believes that BFC will be able to continue to earn a premium return on loans it
extends to these borrowers by charging higher loan fees and interest rates than
traditional lenders who are not able to provide the premium service, while
maintaining a low-to-moderate risk profile. The key reasons management believes
it will be able to provide a superior level of service and to be successful in
this niche are that over time management expects the Company to be able to
secure lower cost and more consistent capital sources than other, smaller
lenders that operate in this segment of the lending industry, and management
expects to be able to respond more quickly to loan requests and provide a
superior level of customer service compared to other larger competitors.
Bridge Financial Corporation seeks to maintain a high quality portfolio
using clearly defined underwriting criteria and stringent portfolio management
techniques. Bridge diversifies its lending activities geographically in
California and the Southwest and among a variety of real estate types. Bridge's
customers are typically real estate professionals who have identified a
time-sensitive real estate opportunity for which they are unable to wait for
traditional lenders to commit to financing. Bridge Financial Corporation is
organized and operated in a fashion which enables the Company to quickly
underwrite and deliver financing in a timely and professional manner. In
exchange for this high level of service, Bridge is compensated with higher loan
fees and interest rates than are more traditional lenders.
Although the Company strives to mitigate credit risk during the
underwriting process, from time to time borrowers may default under the terms of
their loan obligations. The Company may foreclose or otherwise take back real
estate when a loan is in default. As a result, the lending segment may from time
to time include property owned by the Company as a result of foreclosure.
Foreclosure on delinquent loans, possession of collateral, and disposal of the
collateral is an extension of the lending function which may involve the
temporary operation or improvement of the repossessed property.
The managed loan portfolio may from time to time include loans which,
under the relevant accounting literature, are required to be accounted for as
joint ventures rather than loans. The characterization of such loans as joint
ventures for accounting purposes does not mean that a partnership relationship
exists under applicable law. Any such loans are included in "Investments in
joint ventures" in the Company's consolidated balance sheets.
Bridge had a 1999 year-end loan portfolio under management of
approximately $60.1 million, of which $28.5 million was participated and $26.8
million (net of an allowance for bad debts of $.6 million and undisbursed loan
proceeds of $1.1 million) was recorded in the Company's books in "Commercial
real estate loans, net" and $3.1 million was recorded in "Investments in joint
ventures." This compares to a 1998 year-end portfolio under management of
approximately $53.8 million, of which $32.4 million was participated and $20.7
million (net of an allowance for bad debts of $.3 million and undisbursed loan
proceeds of $.4 million) was recorded in the Company's books in "Commercial
real estate loans, net". (See Item 8 - "Financial Statements and Supplementary
Data").
As of March 15, 2000, Bridge has a loan portfolio under management of
$67.2 million, of which $28.5 million is participated and $33.9 million (net of
an allowance for bad debts of $.6 million and undisbursed loan proceeds of $1.1
million) is recorded in the Company's books, in "Commercial real estate loans,
net" and $3.1 million is recorded in "Investments in joint ventures."
- Real Estate Segment
The real estate segment primarily consists of the development and sale
of residential and recreational lots, the sales or exchanges of land and income
properties, rental income from commercial and industrial buildings, and rental
income from leasing rural land. The real estate segment also includes notes
receivable that are generated in connection with the sale of certain of the
Company's real estate assets.
Residential Lot Development. The Company owns a 75% interest in a joint
venture located in Albuquerque, New Mexico. Brown/NZD (Development) Joint
Venture ("7-Bar"), develops and sells residential lots to home builders. In 1999
and 1998, 290 and 83 lots, respectively, were sold by the joint venture. The
joint venture had in inventory 16 finished lots and 91 lots under development as
of December 31, 1999. All lots under development are expected to be finished by
the end of 2000. Approximately 85% of the lots are under contract to local
builders. The remaining lots are being actively marketed.
Recreational Lot Programs. The Company has a recreational land sales
program in which land is sold primarily in 40-acre parcels. The northeastern
Arizona program was initiated in 1980 and over the last 20 years has sold some
80,000 acres of
-3-
4
NZ's rural land. The parcels are or were typically sold on installment
contracts, with down payments of 10 to 20%, and the balance of the contract
carried over 15 years. The receivables generated by the recreational lot sales
are included in the short-term commercial real estate lending segment. During
1999 and 1998 the Company sold 95 and 16 such parcels respectively. Sales are
handled by an independent real estate brokerage company.
Significant Land Holdings and Activity. The Company owns over 120,000
acres of rural land located in northeastern Arizona and New Mexico which were
derived originally from 19th century railroad land grants. The Company continues
to evaluate all opportunities for these holdings that will provide the greatest
value to shareholders.
In 1995, the Company, through a wholly owned limited liability company,
entered into a partnership (the "Partnership") to purchase 132 undeveloped acres
located near Sedona, Arizona (the "Sedona Project"). The Sedona Project is
approved for an 18-hole golf course and 300 two-bedroom timeshare units.
Architectural design, engineering work, and construction plans are complete.
Construction drawings for the golf course have been finalized, including
engineering of the irrigation and water distribution system. A development
agreement has been entered into with Yavapai County, and the plat for Phase I
has been recorded. The Company initially had a 90% ownership interest and was
not the managing partner, but assumed management control during 1996. During
1997, 1998 and 1999, the Company's ownership percentage increased due to the
Company continuing to fund development costs for the Sedona Project, while the
Company's partner did not make its required contribution for such costs. In
1996, a dispute arose between the Company and its partner concerning certain
aspects of the Partnership and the Sedona Project. Litigation over this dispute
commenced in 1997. During the fourth quarter of 1999, a settlement agreement was
reached. See Item 3 - "Legal Proceedings" for more information regarding the
settlement and the lawsuit. In connection with the settlement, the Company
recorded a write-down against the property in the amount of $500,000. The
Company continues to evaluate development and marketing strategies for the
entire Sedona Project. The Company believes that a sale is the most likely
disposition of the Sedona Project.
During 1999, NZ sold the following properties: Approximately 57 acres
at Greenfield and Dorsey Roads in Mesa, Arizona; approximately six acres near
Green Valley, Arizona; 635 acres near Cottonwood, Arizona; three apartment
complexes located in New Mexico; approximately 2,100 acres of surface rights in
Fremont County, Colorado; approximately 22,000 acres of rural land located in
Navajo County, Arizona; approximately 3.3 acres located at Menaul and Broadway
Roads in Albuquerque, New Mexico; and approximately 5.9 acres located at Spain
and Juan Tabo Roads in Albuquerque. Due to the low basis in the apartments for
Federal income tax purposes, the Company opted to exchange the property for
other income property pursuant to the provisions of Section 1031 of the Internal
Revenue Code. The replacement properties were commercial industrial buildings
acquired in 1999.
As of March 24, 2000, the Company has the following properties in
escrow: Approximately 2 acres at Cooper and Warner Roads in Gilbert, Arizona
and 14.6 acres at Ray and McClintock in Chandler, Arizona. Because the
contracts are subject to certain conditions and contingencies there can be no
assurance that the properties in escrow will actually close.
Rental Properties. As of December 31, 1999, NZ owned and operated five
office/industrial warehouse complexes in the metropolitan Phoenix area. Three of
these properties were acquired in 1999 in connection with tax-deferred exchanges
under Section 1031 of the Internal Revenue Code. The Company is also the lessor
under various grazing leases on 85,000 acres of its rural properties.
-4-
5
- Other Business Segments
The Company owns over one million acres of mineral rights in Arizona,
New Mexico, Colorado, and Oklahoma, including small working and royalty
interests in oil and gas wells. Certain of the Company's uranium resources are
held by its subsidiary NZU, Inc. Approximately 6,079 of the mineral acres have
been leased to operators. Presently, and for the foreseeable future, market
conditions are such that production from most of the Company's mineral acres is
not economically feasible. Revenue from minerals does not constitute a material
part of the Company's consolidated revenue.
-5-
6
ITEM 2: PROPERTIES
The following are schedules of properties owned by the Company at December 31,
1999:
Year Encumbrance
Location Description acquired (in thousands)
RENTAL PROPERTIES
ARIZONA
Tempe 12TH PLACE BUILDING
37,908 square foot building on 2.7 acres 1983 $ 725
Tempe GROVE COMMONS INDUSTRIAL PARK
113,730 square feet in 4 buildings on 7.13 acres 1997 4,950
Gilbert EL DORADO INDUSTRIAL BUILDING
113,130 square foot building on 7.75 acres 1999 4,408
Chandler ASPEN BUSINESS CENTER
105,757 square foot building on 6.2 acres 1999 3,427
Phoenix WATKINS DISTRIBUTION CENTER
76,800 square foot building on 4.42 acres 1999 1,933
PROPERTIES UNDER
DEVELOPMENT
ARIZONA
Sedona SEVEN CANYONS PROJECT(1)
Timeshare/golf course property
approved for 300 timeshare units and an 18-hole
golf course. 1995 --
NEW MEXICO
Albuquerque BROWN/NZD (DEVELOPMENT) JOINT VENTURE(2)
Residential lot development (Seven Bar North) 872 lots
planned, with 765 lots sold and 91 lots under
contract as of mid-February 2000. 1995 $515
(1) The property is currently in escrow.
(2) The property is owned by a general partnership of which the Company owns
75%.
-6-
7
UNDEVELOPED URBAN PROPERTIES
Year Encumbrance
Location Description acquired Acres (in thousands)
ARIZONA
Gilbert Cooper and Warner Roads(1) 1986 11.95 $ 155
Chandler Ray and McClintock Roads(2) 1986 14.66 --
NEW MEXICO
Albuquerque Menaul and Broadway Roads(3) 1986 14.40 --
Las Cruces Mesilla Hills(3) 1990 310.00 --
(1) A portion of this property is in escrow to be sold. The remainder is
for sale.
(2) This property is in escrow to be sold.
(3) This property is for sale.
RURAL AND MINERAL PROPERTIES
Acres Encumbrance
County State Surface Mineral (in thousands)
Apache Arizona 72,104 146,600 $ --
Coconino Arizona 21,191 --
Mohave Arizona 46,602 --
Navajo Arizona 49,310 482,950 --
Catron New Mexico 11,346 --
Cibola New Mexico 5,197 225,171 --
McKinley New Mexico 160 117,238 --
San Juan New Mexico 5,040 --
Socorro New Mexico 2,399 --
Valencia New Mexico 43,285 --
Fremont Colorado 1,480 --
Various Oklahoma 337 --
The Company's executive offices occupy approximately 3,340 square feet
in an office building in Phoenix, Arizona pursuant to a lease agreement with an
initial term expiring in April 2000. The Bridge Financial Corporation offices
occupy approximately 2,220 square feet in an office building in Tempe, Arizona
pursuant to a lease agreement with an initial term expiring in August 2002.
These two offices will be combined in June 2000 in an approximate 6,000 square
foot office in Phoenix, Arizona pursuant to a lease agreement with an initial
term expiring in March 2005. The Company expects to sublease the Tempe office at
a market rate.
-7-
8
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the
ordinary course of business. While the ultimate disposition of these matters is
uncertain, it is the opinion of management that the outcomes, including the
outcome of the matter described in the following paragraphs, will not have a
material adverse effect on the business, financial condition, or results of
operations of the Company.
The Company has previously reported on litigation concerning the Sedona
Project. This lawsuit arose in 1997 as a partnership dispute between the
Company, the Company's former partner in the Sedona Project, and certain other
persons. In November 1999, a settlement agreement was signed by all parties in
the Sedona Project litigation and stipulations for dismissal of the litigation
were filed with the court. The significant terms of the settlement provide: for
the Company's former partner to surrender all of its partnership rights; for
mutual releases and covenants not to sue; for dismissal of the litigation with
prejudice; for the Company to pay $1,500,000 cash to its former partner; for the
Company to grant its former partner an exclusive option to purchase the Sedona
Project at a fixed price for a period ending on March 9, 2000; for the Company's
former partner to have the right to extend the purchase option period for up to
two 30-day periods upon payment of an extension fee for each extension; that the
Company has the right to market the Sedona Project and accept offers subject to
the rights of the option holder. The former partner did not exercise the
extension options or the option to purchase. All rights that the former partner
had under the option to purchase have expired.
The Company paid the cash portion of the settlement from currently
available cash resources, and does not believe that the terms of the settlement
will have a material effect on the Company's financial condition or future cash
flows.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Set forth below is information respecting the names, ages and positions
with the Company of the executive officers and key employees of the Company at
December 31, 1999, who are not continuing directors or nominees. Information
respecting the executive offices of the Company who are continuing directors and
nominees is set forth in Item 10 of this Report.
PAUL SARGENT, EXECUTIVE VICE-PRESIDENT
Mr. Sargent, age 45, is experienced in short-term commercial real
estate lending. Until its acquisition by the Company in November, 1997, he had
directed the growth of RRH Financial from the ground up. During his tenure at
RRH Financial, the company originated nearly $100 million of loan transactions
in total.
Prior to forming RRH Financial, Mr. Sargent obtained experience at
Chase Bank in Arizona and New York, and earlier in his career, at Mellon
Financial Services and Pickrell Mortgage Company in Phoenix. Over the past
decade, he has placed loans with over 46 different institutions, ranging in
amounts from $125,000 to $35-million.
JEROME L. JOSEPH, CONTROLLER, TREASURER AND SECRETARY
Mr. Joseph, age 42, has acquired an in-depth knowledge of the
specialized finance and accounting needs of entrepreneurial real estate
development companies and early-stage companies. Mr. Joseph joined the Company
in January,
-8-
9
1998. He has worked with both public and private companies in compliance,
reporting, capital formation and cash management.
He came to the Company from Unison HealthCare Corporation, where he was
Vice President and Treasurer. Before Unison, he served three years at UDC Homes
Inc. as Manager of Finance, and ten years at Homes by Dave Brown, the last four
years as Senior Vice President-Finance and Treasurer. He has also worked in
various consulting capacities in management and finance.
J. D. SPHAR, VICE PRESIDENT, MINERALS
Mr. Sphar, age 59, joined the Company as Chief Geologist in 1971. He
was promoted to his current position in 1973. He manages the Company's mineral
assets and assists in the management of the Company's vast rural acres. Mr.
Sphar's efforts have generated over $8 million in leasehold payments to the
Company. He has been the principal negotiator for uranium sales of $30 million
and he has initiated sales and trades of 200,000 acres of fee minerals with the
federal government.
Prior to joining the Company, Mr. Sphar was Southwest District
Geologist for Western Nuclear, Inc. for two years and Mine Geologist for
Kerr-McGee Corporation for two years.
-9-
10
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is admitted to non-listed trading privileges
on the American Stock Exchange under the symbol "NZ". The following table sets
forth, for the periods indicated, the high and low closing price of the common
stock as reported by the American Stock Exchange. Amounts have been restated to
give effect to a stock split declared November 23, 1998, and a stock dividend
declared May 8, 1998.
THE MARKET PRICE RANGE BY QUARTER:
1999 1998
HIGH LOW High Low
---- --- ---- ---
1st quarter $9 7/8 $7 1/8 $8 1/11 $7 1/7
2nd quarter 7 7/8 7 8 1/8 7 7/16
3rd quarter 7 1/2 4 3/4 10 5/6 7 9/16
4th quarter 5 5/8 4 7/16 10 1/12 7 3/4
No cash dividends were declared in 1999 or 1998. The payment of cash
dividends is at the discretion of the Board of Directors of the Company. In 1999
and 1998 the Company used its earnings in the business and it is more likely
than not that it will continue to do so in the foreseeable future. There were
6,925,636 shares of the Company's common stock issued and outstanding at
December 31, 1999. Shareholders of record at March 15, 2000 totaled 632.
REPURCHASE BY NZ OF ITS COMMON STOCK
The Company's Board of Directors approved a stock buy-back program in
September 1999. The buy-back program authorizes the repurchase of up to 500,000
shares of NZ's common stock in the open market over the 12 month period ending
September 30, 2000. As of December 31, 1999, the Company had purchased no shares
under the program. As of March 15, 2000, the Company had purchased 20,600 shares
at an average price of $5.44.
ITEM 6: SELECTED FINANCIAL DATA
Years ended December 31,
(in thousands, except per share and shareholder data)
1999 1998 1997 1996 1995
SUMMARY OF OPERATIONS:
Gross revenue from operations $36,570 $21,985 $16,904 $23,660 $22,062
Net income 4,731 3,679 2,340 4,846 5,500
Earnings per share of common stock(1)
Basic 0.68 0.53 0.36 0.76 0.86
Diluted 0.68 0.53 0.36 0.76 0.86
SUMMARY OF FINANCIAL POSITION:
Total assets $87,218 $74,385 $69,511 $66,328 $57,682
Notes payable and lines of credit 20,983 14,264 12,503 16,036 14,080
Shareholders' equity 51,876 47,145 43,466 35,628 30,721
-10-
11
1999 1998 1997 1996 1995
OTHER SUPPLEMENTAL INFORMATION:
Weighted average number of common
shares outstanding(1)
Basic 6,926 6,926 6,472 6,387 6,380
Diluted 6,928 6,934 6,472 6,387 6,380
Number of shareholders of record 637 765 805 847 887
(1) Prior years restated to reflect a 10% stock dividend paid July 18,
1997, a 20% stock dividend paid July 10, 1998 and a 3 for 2 stock split to
shareholders of record on December 31, 1998 and paid January 15, 1999.
No cash dividends were declared for 1999 or 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONTINUATION OF NEW BUSINESS ACTIVITY AND CHANGE OF PRINCIPAL BUSINESS EMPHASIS
In 1997, the Company began participating in the commercial real estate
lending business as a direct lender through Bridge Financial Corporation ("BFC"
or "Bridge"), a wholly owned subsidiary. During 1998 and 1999, the Company
continued to reposition its historical static assets from real estate
development and sales into commercial real estate lending. Although the
disposition of real estate has been slower than anticipated, the Company expects
to complete most sales by the end of 2000. The Company currently maintains and
plans to continue to maintain a small high-quality office/industrial building
portfolio located in the Phoenix metropolitan area. The Company increased the
portfolio properties from two properties at the end of 1998 to five properties
at the end of 1999. The three additional properties were acquired in a
tax-deferred exchange following the sale of the apartments previously owned by
the Company in New Mexico. The portfolio contributes positive pre-tax revenue
and cash flow and is not management intensive. The Company will evaluate future
real estate sales on a case by case basis to determine if a tax deferred
exchange for other industrial properties is appropriate.
Management expects the short-term commercial real estate lending
business to provide more stable earnings patterns for the Company when compared
to the Company's historical pattern. This is because the earnings pattern in the
real estate development and sales industry is very dependent upon the occurrence
of large and sometimes isolated transactions, which are not readily predictable.
Furthermore, an increase in real estate assets does not necessarily translate
into a concurrent increase in revenue or earnings; such increases are often
deferred until the asset is liquidated. The lending business is, on the other
hand, more likely to have a predictable stream of interest income from a
portfolio of assets. The assets begin to contribute to earnings immediately upon
acquisition; consequently loan portfolio growth has a direct and immediate
impact on earnings.
RESULTS OF OPERATIONS
The following table summarizes the Company's revenues and earnings for the
indicated periods:
Fiscal Years Ended December 31:
(in thousands, except share data) 1999 1998 1997
---- ---- ----
Revenue $36,570 $21,985 $16,904
Earnings per share of common stock(1)
Basic $ .68 $ .53 $ .36
Diluted $ .68 $ .53 $ .36
(1) Prior years restated to reflect a 10% stock dividend paid July 18, 1997, a
20% stock dividend paid July 10, 1998 and a 3 for 2 stock split to shareholders
of record on December 31, 1998 and paid January 15, 1999.
-11-
12
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
Consolidated discussions represent data of the Company as presented in
the Consolidated Statements of Income as set forth in Item 8 of this Report.
Segment discussions represent data as reported by segment in Note 12 to
Consolidated Statements of Income.
Consolidated
Net income increased in by approximately 29% from $3,679,000 in 1998 to
$4,731,000 in 1999. Pre-tax earnings from property sales were up approximately
99% from $4,455,000 in 1998 to $8,858,000 in 1999. The Company continued the
successful transition from principally a real estate owner and developer to
principally a real estate lender. Operating income from property rentals
declined 64% from $1,838,000 in 1998 to $666,000 in 1999. The decrease is
primarily attributable to the sale of the four-federally subsidized apartment
complexes; one in the fourth quarter of 1998; two in the first quarter of 1999
and the last in the third quarter of 1999. The apartments were replaced with
industrial buildings, however, the buildings were not purchased until the third
quarter of 1999. In addition, 1999 operating income from property rentals
includes an operating loss of approximately $401,000 with respect to real estate
owned and operated due to a foreclosure. General and administrative expense
increased 19% from $3,222,000 in 1998 to $3,844,000 in 1999. The increase is
primarily attributable to increases in three items and partially offset by a
decrease in one item. Approximately $280,000 of the increase is due to an
increase in the allowance for bad debts, directly attributable to the growth in
the portfolio. Approximately $245,000 of the increase is due to increased legal
fees, primarily attributable to the Sedona Project litigation and fees
associated with the sale of real estate. Approximately $166,000 of the increase
is due to increased accounting costs, primarily attributable to professional
fees related to the Company's restatement of its 1998 quarterly financial
statements and additional audit and tax consulting surrounding the Company's
sale of several real estate assets. A portion of the increased accounting costs
is due to tax consulting related to improving the Company's tax analysis models
and systems. The decrease of approximately $110,000 is due to a non-recurring
excise tax incurred in 1998 but not 1999 in connection with the termination of
the Company's defined benefit plan. Included in general administrative expense
for 1999 and 1998 respectively is $726,000 and $541,000 for legal and other
professional fees related to the Sedona Project litigation. The litigation was
settled in November 1999.
Real Estate Segment
Income after allocations increased 91% from $3,288,000 in 1998 to
$6,280,000 in 1999. The increase is primarily attributable to the volume and mix
of real estate sales partially offset by a decline in operating income from
property rentals. The modest decline in identifiable assets from $48,134,000 in
1998 to $46,914,000 in 1999 is due to a net increase in assets from the sale of
the four apartment complexes in New Mexico and the subsequent exchange for
industrial buildings in the metropolitan Phoenix area, offset by a decrease in
assets from the disposition of real estate.
Short-term Commercial Real Estate Lending Segment
Revenues increased 40% from $3,752,000 in 1998 to $5,241,000 in 1999.
The increase is primarily attributable to increased revenues as a result of a
larger portfolio in 1999 than in 1998. Additionally, the 1999 revenues include
approximately $600,000 from property sales and operations from real estate owned
as a result of foreclosure and repossession of collateral on delinquent loans.
Income after allocations decreased 24% from $2,505,000 in 1998 to
$1,892,000 in 1999. This decrease compared to the increase in revenues is
due to increased expenses in three areas: operating expenses of approximately
$674,000 from real estate owned in 1999 and not owned in 1998; depreciation
expense of approximately $177,000 from real estate owned in 1999 and not in
1998; and an increase of approximately $190,000 in allocation of corporate
overhead. The
-12-
13
increase in corporate overhead allocation is attributable to an
increase in the lending segment's total assets as a proportion of consolidated
assets.
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
Consolidated discussions represent data of the Company as presented in
the Consolidated Statements of Income as set forth in Item 8 of this Report.
Segment discussions represent data as reported by segment in Note 12 to
Consolidated Statements of Income.
Consolidated
Net income increased in 1998 by approximately 57% from $2,340,000 in
1997 to $3,679,000 in 1998. The major reason for the increase in earnings was
the increase in short term commercial real estate lending, which increase
accounted for approximately 52% of the increase in revenue and approximately 65%
of the increase in earnings for the year. Revenue from property sales were up
slightly, to $14,251,000 from $12,005,000 as the Company continued to implement
its plan to transition from being principally a real estate owner to principally
a real estate lender. Gross margin on property sales for 1998 was approximately
31% compared to approximately 39% for 1997. This variance is merely reflective
of the basis in the different mix of properties sold in 1998. Operating income
from property rentals declined slightly from $1,878,000 in 1997 to $1,838,000 in
1998. The majority of the rental property income is from the four federally
subsidized apartment complexes that NZ owned for most of 1998. One of the
apartment complexes was sold in November 1998. General and administrative
expense increased approximately 55% from $2,083,000 in 1997 to $3,222,000 in
1998. The increase is due primarily to an increase in legal costs associated
with the Sedona Project litigation. Additionally, a full year of operating
expenses for Bridge Financial Corporation is included in 1998 as compared to 2
months in 1997. The other principal components of the increase in general and
administrative expense are a non-recurring excise tax in connection with the
final termination of the defined benefit pension plan (see Note 7 in Item 8 -
"Financial Statements and Supplementary Data"), the Company employing
certain professional advisors to assist in identifying capital sources and
identifying disposition alternatives for the Company's mineral resources.
Real Estate Segment
Income after allocations decreased slightly from $3,572,000 in 1997 to
$3,288,000 in 1998. The decrease is primarily attributable to the volume and mix
of real estate sales and an increase in legal costs associated with the Sedona
Project litigation. The decline in identifiable assets from $52,234,000 in 1997
to $48,134,000 in 1998 is due to the disposition of real estate.
Short-term Commercial Real Estate Lending Segment
Revenues increased 235% from $1,120,000 in 1997 to $3,752,000 in 1998.
The increase is primarily attributable to increased revenues as a result of a
growth in the commercial real estate loan portfolio and the inclusion of Bridge
Financial Corporation's operations for a full year in 1998 as compared to only 2
months in 1997.
Income after allocations increased 136% from $1,060,000 in 1997 to
$2,505,000 in 1998. The increase is primarily attributable to increased revenues
and increased operating expenses as a result of growth in the commercial real
estate portfolio and the inclusion of Bridge Financial Corporation's operations
for a full year in 1998 as compared to only 2 months in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The real estate lending business requires large amounts of capital to
be an effective competitor in the market. In addition, the Company requires cash
for working capital.
-13-
14
The Company expects to generate a substantial amount of cash from the
sale of real estate over the next 12 months. Cash will also be generated from
principal repayments on maturing loans in the Company's existing loan portfolio.
In addition, the Company now uses and intends to continue to use participants or
other joint funding sources on certain real estate loans. Further, the Company
has lines of credit with non-bank commercial lenders and a commercial bank from
which it can fund loans.
In 1999, the Company's operating activities provided $19,431,000 of net
cash flows, its investing activities used $27,158,000 of net cash flows and
financing activities provided $6,719,000 of net cash flows.
The Company intends to negotiate additional or expanded lines of credit
as business circumstances require. The principal outcomes of the Company's
discussions with potential lenders will be to determine how rapidly the Company
will be able to grow its commercial real estate lending business. The terms of
any new financing arrangement will likely have a material effect upon the
Company's margins in its lending business. If the Company is not successful in
negotiating such financing, the principal effect will be a slower growth in the
Company's lending business, with the pace of growth in the near term being
determined at least in significant part by the timing of the Company's sales of
existing real estate assets.
The Company currently has a $15 million partially-secured revolving
line of credit from a commercial bank, which can be used for general corporate
purposes. The line bears interest at the prime rate and expires in July 2000. At
December 31, 1999 the line had an outstanding balance of $3,850,000. As
of March 15, 2000 the line had an outstanding balance of $9,425,000.
This loan contains financial covenants which require the Company to maintain a
specified minimum ratio of net notes receivable (as defined) to the outstanding
loan balance; a specified minimum excess of current assets over current
liabilities (as defined); and a specified minimum ratio of tangible net worth.
At December 31, 1999 the Company was in compliance with these financial
covenants.
From a different commercial bank, one of the Albuquerque joint ventures
has a $925,000 loan facility to be utilized for lot development. At December 31,
1999 the aggregate outstanding balance under this loan facility was $515,000. At
March 15, 2000 the aggregate outstanding loan balance was $587,000. This loan
matures in May 2000 and bears interest at the prime rate plus .25%.
Additionally, BFC has a $25,000,000 warehouse line of credit with a
large non-bank commercial lender to finance certain portions of BFC's real
estate lending activities. The line bears interest at rates ranging from 30-day
LIBOR plus 250 basis points to 30-day LIBOR plus 300 basis points and expires
August 31, 2000. As amounts are drawn, the line will be secured by certain loan
assets of the Company. At December 31, 1999 the outstanding balance was
$1,020,000. This loan contains financial covenants which require BFC to maintain
a minimum tangible net worth; a specified maximum ratio of debt to tangible net
worth; and a specified minimum ratio of liquid assets to tangible net worth. At
December 31, 1999 Bridge Financial Corporation was in compliance with these
financial covenants. The line of credit is guaranteed by the Company.
In October 1999, BFC entered into a loan agreement with a different
large non-bank commercial lender to provide a revolving $20,000,000 warehouse
line of credit to finance certain portions of BFC's real estate lending
activities. As amounts are drawn, the line will be secured by certain loan
assets of the Company. The line bears interest at 30-day LIBOR plus 475 basis
points and expires October 1, 2001. At December 31, 1999 there was no
outstanding balance. This loan contains financial covenants that require BFC to
maintain a minimum tangible net worth and a minimum interest coverage ratio. As
of December 31, 1999, BFC was in compliance with these financial covenants. The
line of credit is guaranteed by the Company.
In addition to bank lines, the Company may seek qualified joint venture
partners to finance large real estate development projects or loans to the
extent that the Company actually engages in such projects or loans in the
future. The use of joint venture partners provides a source of capital,
mitigates the Company's risk by sharing it with another party, and gives
-14-
15
the Company access to expertise that it might not otherwise have for particular
projects.
INFLATION, DEFLATION, AND CHANGING PRICES
The results of operations may be affected by inflation, deflation, and
changing prices. Price changes and market trends in real estate, rental rates,
interest rates, oil, gas, and uranium could have significant effects on the
Company's operations. While the Company does not believe such items have had a
material effect on 1999 operations and knows of no conditions which would cause
the Company to believe that such items could have a material effect on 2000
results, changes in prevailing interest rates and real estate values could have
a significant effect on BFC's real estate lending business.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137,
cannot be applied retroactively and will be adopted as required January 1, 2001.
The Company has not completed its evaluation of whether the adoption of SFAS No.
133 will have a material effect on the financial position or results of
operations, therefore the Company is unable to disclose the effect of the
implementation of SFAS No. 133. The Company continues to monitor potential
changes and implementation guidance to this new accounting standard.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Certain information presented in this Report includes "forward-looking
statements" within the meaning of Federal securities laws. Forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth below,
which may have an effect on the Company's future results and financial
condition.
REAL ESTATE MARKET. The Company will continue to be linked to the
fortunes of the real estate market, particularly the markets in California and
the southwestern United States. A downturn in that market could adversely affect
the Company's performance. The Company is expecting to generate significant
amounts of cash and earnings over the next 12 months through the sale of several
real estate assets. While the real estate markets are generally healthy in the
areas where the Company currently owns real estate, there is no assurance that
the markets will continue to be favorable over the disposition period of these
assets. A downturn in the real estate market could have an adverse impact on the
Company's ability to sell its real estate assets at a profit or at all, and have
an adverse impact on the Company's ability to attract joint venture funding for
any future development or lending projects. If that were to happen, the
Company's growth, particularly the growth of BFC, could be restrained due to a
lack of capital. In addition, a downturn in the real estate market could affect
the Company's real estate lending business. If BFC finds it necessary to
foreclose on properties after a default by a borrower, it is possible that the
Company would not, particularly in the short term, be able to recover its entire
investment in the loan. Also, in the past, downturns in the real estate market
have resulted in a higher rate of foreclosures generally.
INTEREST RATE FLUCTUATIONS. Changes in interest rates can have a
variety of effects on the Company's commercial real estate lending business. In
particular, changes in interest rates affect the volume of loan originations and
acquisitions. The Company does not hold any loans for sale, except for the
syndications described below.
During periods of declining interest rates, the Company typically
experiences an increase in demand for loan originations because of increased
commercial real estate development activity.
-15-
16
The Company intends generally to hold loans that it funds in its loan
portfolio, although it may syndicate its loans to pension funds and other
institutional investors. The Company's net interest income is the difference
between the interest income it earns on loans held in its portfolio (generally
based on long-term interest rates) and the interest it pays on its borrowings
(generally based on short-term interest rates). To the extent short-term
interest rates are lower than long-term interest rates, the Company earns net
interest income from the difference, or the spread, during the time the mortgage
loans are held by the Company. To the extent this spread narrows, the Company's
results of operations could be adversely affected. In addition, the Company's
net interest income will be affected by borrowing costs other than interest
expense associated with its borrowings.
DELINQUENCY, FORECLOSURE AND OTHER CREDIT RISKS; LIABILITIES UNDER
REPRESENTATIONS AND WARRANTIES. Economic downturns can have a negative impact on
a real estate lender's profitability as the frequency of loan defaults tend to
increase. From the time that the Company funds the loans it originates, to the
time the loan is repaid (or is earlier sold by the Company), the Company is
generally at risk for any loan defaults. Once the Company sells the loans it
originates (or sells participations in such loans), the risk of loss from loan
defaults and foreclosures passes to the purchaser of the loans. However, in the
ordinary course of business, the Company makes certain representations and
warranties to the purchasers of loans and to loan participants. These
representations and warranties generally relate to the origination and servicing
of loans. If a loan defaults and there has been a breach of these
representations or warranties, the Company becomes liable for the unpaid
principal and interest on the defaulted loan. In such a case, the Company may be
required to repurchase the loan (or the loan participation) and bear any
subsequent loss on the loan.
LOAN PARTICIPATIONS. Bridge Financial Corporation often retains only a
portion of originated loans in its own portfolio and works with a participating
lender to place the other portion of the loans in the portfolio of the
participating lender. Most of the participations have been with pension funds
who manage significantly larger funds than BFC. The participants typically take
a position senior to the Company's position with respect to payment of the
principal portion of the loans. The participants also typically receive the same
interest income and points as does BFC. BFC normally receives an origination fee
and a servicing fee on the participant's portion of the loan. Generally, by
participating loans BFC is able to originate larger loans than it would normally
originate without participants, but the Company typically assumes a subordinate
position with respect to repayment of principal in relation to the position of
the loan participant.
Loan participants and prospective loan participants may change their
criteria for participating in loans, they may choose to not participate at all
and they may decide to compete with the Company in certain markets. To the
extent that loan participants and prospective loan participants change the way
in which they have participated in loans, the Company may be unable to originate
the size of loans it now plans and growth may be slowed.
AVAILABILITY OF FUNDING SOURCES. The Company will require substantial
capital resources to grow its commercial real estate lending business. The
amount and terms of financing available to the Company will have a material
effect upon how rapidly and to what level the Company will be able to increase
its lending activities.
While the Company expects to be able to obtain financing as its lending
arrangements mature, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is not successful
in arranging financing, it may have to curtail its loan origination activities.
CONCENTRATION OF BUSINESS. The Company continues to geographically
diversify its loan portfolio; however, a significant portion of the Company's
commercial lending business is conducted in Arizona. At December 31, 1999,
approximately 73% of the Company's managed loan portfolio was secured by
properties located in Arizona. Given the concentration of the Company's business
in Arizona, there can be no assurance that the Company's results of operations
would not be adversely affected to the extent Arizona experiences a period of
slow or negative economic growth which results in decreased commercial loan
originations and/or an increase in loan delinquencies and defaults.
-16-
17
COMPETITION. The commercial real estate lending business is highly
competitive. The Company competes with other non-bank lenders, commercial banks,
savings associations, credit unions and other financial institutions in every
aspect of its lending business, including funding loans and acquiring
origination capabilities. The Company competes with financial institutions that
have substantially greater financial resources, greater operating efficiencies
and longer operating histories than the Company. To the extent that market
pricing becomes more aggressive, the Company may be unable to achieve its
planned level of originations.
ABILITY TO ENTER NEW MARKETS. The ability of the Company to grow the
lending business depends to a significant degree upon management's ability to
originate loans in new markets in California and the southwestern United States.
This type of market expansion will require, among other tasks, hiring capable
and experienced people, marketing to new markets, additional underwriting
procedures for new markets, determining whether to open new offices or service
the loans from the central Phoenix office, and holding down overhead to keep the
new markets cost effective. Failure to adequately perform any or all of these
tasks effectively could significantly impair the Company's ability to expand
into new markets, and could materially and adversely affect the Company's
business, financial condition and results of operations.
CONTROL OF COSTS. Cost control is always an important element in
achieving profitable operations and is especially important during significant
expansions of operations, such as the Company's expansion into its new
commercial real estate lending line of business. Management believes that a
major factor that will allow the Company to effectively compete with larger
financial institutions in the southwestern United States is its ability to
originate loans at lower overall costs than many of its competitors. The
principal cost categories that must be closely managed are: (1) capital cost and
(2) overhead cost. The ability of management to control these costs is critical
to achieving profitability as it expands into new markets.
DEPENDENCE ON KEY INDIVIDUAL. R. Randy Stolworthy has been the chief
architect of the Company's transition from a real estate business to a lending
business. The Company has no employment agreement with Mr. Stolworthy. If the
Company were to lose Mr. Stolworthy's services for any reason, significant time
and money would be expended to try to identify, recruit and employ replacement
personnel to continue the transition, with no guarantees that such a person
could be found.
-17-
18
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
New Mexico and Arizona Land Company
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of New
Mexico and Arizona Land Company and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, cash flows and
shareholders' equity for the years then ended. Our audits also included the
financial statement schedules III and IV listed in Item 14 as of December 31,
1999 and 1998. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such 1999 and 1998 consolidated financial statements
present fairly, in all material respects, the financial position of New Mexico
and Arizona Land Company and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
such 1999 and 1998 financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Phoenix, Arizona
March 24, 2000
-18-
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
New Mexico and Arizona Land Company:
We have audited the accompanying consolidated statements of income, cash
flows, and shareholders' equity for the year ended December 31, 1997 of New
Mexico and Arizona Land Company and subsidiaries. In connection with our audit
of the consolidated financial statements, we also have audited financial
statement schedules III and IV for the year ended December 31, 1997. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of New Mexico and Arizona Land Company and subsidiaries for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Phoenix, Arizona
February 20, 1998
-19-
20
New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands) 1999 1998
ASSETS
Properties, net $46,324 $43,340
Commercial real estate loans, net 26,773 20,632
Receivables 6,237 4,961
Investments in joint ventures 3,134 11
Cash and cash equivalents 3,661 4,669
Other 1,089 772
------- -------
Total assets $87,218 $74,385
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and lines of credit $20,983 $14,264
Accounts payable and accrued liabilities 2,014 1,407
Deferred income taxes 4,834 4,160
Deferred revenue 6,951 5,520
------- -------
Total liabilities 34,782 25,351
------- -------
Non-controlling interests 560 1,889
------- -------
Commitments and contingencies (Notes 5, 7, 8 and 10)
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, none issued
Common stock, no par value; 30,000,000 shares
authorized; 6,925,636 issued and outstanding 35,341 35,341
Retained earnings 16,535 11,804
------- -------
Total shareholders' equity 51,876 47,145
------- -------
Total liabilities and shareholders' equity $87,218 $74,385
======= =======
See accompanying Notes to Consolidated Financial Statements.
-20-
21
New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
(In thousands, except per share data) 1999 1998 1997
REVENUE:
Property sales $ 28,608 $ 14,251 $ 12,005
Property rentals 2,428 2,905 3,065
Commercial real estate lending 4,576 3,701 1,117
Investment income 604 427 220
Other 354 701 497
- -------------------------------------------------------------------------------------------
36,570 21,985 16,904
- -------------------------------------------------------------------------------------------
EXPENSES:
Cost of property sales 19,750 9,796 7,319
Rental property 1,762 1,067 1,187
General and administrative 3,844 3,222 2,083
Writedown of properties 700 -- --
Interest 1,552 1,335 1,020
Depreciation, depletion and amortization 665 650 524
- -------------------------------------------------------------------------------------------
28,273 16,070 12,133
- -------------------------------------------------------------------------------------------
Income Before Joint Ventures, Non-controlling
Interests and Income Taxes 8,297 5,915 4,771
Equity in earnings of joint ventures -- 546 --
Non-controlling interest (422) (322) (883)
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,875 6,139 3,888
Income taxes 3,144 2,460 1,548
- -------------------------------------------------------------------------------------------
Net Income $ 4,731 $ 3,679 $ 2,340
===========================================================================================
EARNINGS PER SHARE OF COMMON STOCK (1)
Basic $ 0.68 $ 0.53 $ 0.36
Diluted $ 0.68 $ 0.53 $ 0.36
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (1)
Basic 6,926 6,926 6,472
Diluted 6,928 6,934 6,472
- -------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
(1) All years include the effect of a 10% stock dividend paid July 18,
1997, a 20% stock dividend paid July 10, 1998 and a 3 for 2 stock split
paid January 15, 1999 to shareholders of record on December 31, 1998.
-21-
22
New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands) 1999 1998 1997
Cash Flows provided by (used in) Operating Activities:
Net income $4,731 $3,679 $2,340
Gain from sale of partnership interest -- -- (257)
Non-cash items included above:
Depreciation, depletion and amortization 665 650 524
Deferred revenue 3,008 617 (812)
Deferred income taxes 674 (1,201) (324)
Allowance for bad debts 280 -- --
Write down of properties 700 -- --
Equity in earnings of joint ventures -- (546) --
Non-controlling interests 422 322 883
Director stock awards -- -- 36
Net change in:
Receivables (1,276) (4,868) 107
Properties under development 1,641 (11) 3,668
Other properties 8,297 4,353 (2,108)
Other assets (317) 79 (517)
Accounts payable and accrued liabilities 606 (239) 98
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,431 2,835 3,638
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows provided by (used in) Investing Activities:
Additions to properties (14,286) (1,479) (1,459)
Acquisition of commercial real estate loans -- -- (1,578)
Distribution from investment in joint ventures (1,751) 946 5
Proceeds from sale of partnership interest -- -- 895
Collections of principal on commercial real estate loans 16,691 11,415 3,595
Additions to commercial real estate loans (27,812) (16,599) (1,637)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (27,158) (5,717) (179)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows provided by (used in) Financing Activities:
Proceeds from debt 42,393 7,464 1,168
Payments of debt (35,674) (5,703) (4,701)
Distribution to non-controlling partners -- (226) (1,055)
Capital contribution by non-controlling partners -- -- 3
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,719 1,535 (4,585)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,008) (1,347) (1,126)
Cash and cash equivalents at beginning of year 4,669 6,016 7,142
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $3,661 $4,669 $6,016
===============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES -
Conversion of real estate loan to joint venture accounting $3,122
======
See accompanying Notes to Consolidated Financial Statements.
See notes 5 and 6 for additional cash flow information.
-22-
23
New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Common stock Treasury stock Share-
------------ -------------- Retained holders'
(in thousands) Shares Amount Shares Amount earnings Equity
BALANCES AT
DECEMBER 31, 1996 3,013 $ 14,705 -- $-- $20,923 $35,628
====================================================================================================================================
Net income 2,340 2,340
10% stock dividend 301 4,364 (4,369) (5)
Director stock award 2 36 36
Issuance of common stock 532 5,467 5,467
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 3,848 $24,572 -- -- $18,894 $43,466
====================================================================================================================================
Net income 3,679 3,679
20% stock dividend 769 10,769 (10,769)
3 for 2 stock split 2,309
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1998 6,926 $35,341 -- -- $11,804 $47,145
====================================================================================================================================
Net income 4,731 4,731
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1999 6,926 $35,341 -- -- $16,535 $51,876
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
-23-
24
New Mexico and Arizona Land Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
- ------------------
New Mexico and Arizona Land Company provides time-sensitive, short-term
commercial real estate loans to a client base located in California and the
southwestern United States. It conducts this specialty financing business
through its wholly owned subsidiary, Bridge Financial Corporation. Both directly
and through its other subsidiaries, the Company also develops, manages and sells
real estate and holds various mineral rights in the Southwest. The Company's
results of operations and financial condition can be adversely affected by
several factors, including a downturn in the real estate market, interest rate
fluctuations, and availability of funding sources.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of New
Mexico and Arizona Land Company, its wholly-owned subsidiaries, and
majority-owned partnerships (the "Company"). All intercompany transactions have
been eliminated in consolidation.
Properties
- -----------
Properties are recorded at cost net of valuation allowances.
Depreciation on rental properties is provided over the estimated useful lives of
the assets, ranging from 5 to 35 years, using the straight-line method.
Investments in Joint Ventures
- -----------------------------
The Company's investments in joint ventures are accounted for using the
equity method. Investments in joint ventures may from time to time include loans
which, under the relevant accounting literature, are required to be accounted
for as joint ventures rather than as loans. The characterization of such loans
as joint ventures for accounting purposes does not mean that a partnership
relationship exists under applicable law.
Property Sales and Deferred Revenue
- -----------------------------------
Profits on property sales are recognized, subject to the assessment of
collectibility of the related receivables, when the buyer's initial and required
continuing investment amounts to at least 20% of the sales price when
development is to commence within a two-year period, or 25% of the sales price
on all other sales other than retail land sales. In all instances the buyer
remains obligated to increase this investment by a minimum amount annually.
Profits on sales that do not meet these requirements and profits from retail
land sales are recognized on the installment basis provided minimum down
payments are received.
Deferred revenue consists principally of retail land sales and other
land sales recorded on the installment basis and rents collected in advance.
Rents collected in advance represent annual rental payments made in advance of
the lease year and are considered earned ratably over the lease year for
financial reporting purposes.
Income Taxes
- ------------
The Company follows Statement of Financial Accounting Standards
("SFAS") No.109, Accounting for Income Taxes. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
-24-
25
Earnings Per Share
- ------------------
Basic earnings per share is determined by dividing the income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is determined by dividing
net income by the weighted average number of common and common equivalent shares
(which reflect the effect of stock options) outstanding for the period.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand, cash held in trust,
money market accounts, and temporary investments with original maturities of
three months or less.
Fair Value of Financial Instruments
- -----------------------------------
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that a company disclose estimated fair values for its financial
instruments. The carrying amounts of the Company's commercial real estate loans
and notes payable and lines of credit approximate the estimated fair value
because they are at interest rates comparable to market rates, given the terms
and maturities. The carrying amounts of the Company's cash equivalents,
receivables, accounts payable and accrued liabilities approximate the fair value
of these instruments due to their short-term maturities. Considerable judgement
is required in interpreting market data to develop the estimates of fair value.
Accordingly, these fair value estimates are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Commercial Real Estate Loans and Allowance for Bad Debts
- --------------------------------------------------------
These loans are recorded at cost, less an allowance for bad debts and
undisbursed loan proceeds. Management, considering current information and
events regarding the borrowers' ability to repay their obligations, considers a
loan to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Impairment losses are included
in the allowance for doubtful accounts through a charge to bad debt expense. The
accrual of interest is discontinued when the related loan becomes 90 days past
due. Subsequently, cash receipts on impaired loans are applied to reduce the
principal amount of such loans until the principal has been recovered and are
recognized as interest income thereafter.
Stock - Based Compensation
- --------------------------
In accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", the Company
measures stock-based compensation expense as the excess of the market price at
the grant date over the amount the employee must pay for the stock. The
Company's policy is to generally grant stock options at fair market value at the
date of grant, so no compensation expense is recognized. As permitted, the
Company has elected to adopt the disclosure provisions only of SFAS No. 123,
"Accounting for Stock-Based Compensation" (see Note 8).
Management Estimates
- --------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the amounts of revenue and
expenses at the date of the financial statements. Actual results could differ
from those estimates.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company will adopt SFAS No. 133 as
required effective January 1, 2001. The Company has not completed its evaluation
of whether the adoption of SFAS No. 133 will have a material effect on the
financial position or results of operations, therefore the Company is unable to
disclose the effect of the implementation of SFAS No. 133.
-25-
26
Reclassifications
- -----------------
Certain financial statement items from prior years have been
reclassified to be consistent with the current year financial statement
presentation.
-26-
27
NOTE 2 - PROPERTIES
Properties are comprised of the following at December 31,
(in thousands) 1999 1998
Rural lands and unimproved urban properties $ 9,077 $19,119
Land under development 12,979 13,416
Rental properties 21,167 14,921
Other real estate owned 7,609 2,003
Other 1,737 1,937
Accumulated depreciation, depletion and amortization (2,145) (4,576)
Valuation allowance (4,100) (3,480)
- -------------------------------------------------------------------------------------------------------------------------
Properties, net $46,324 $43,340
=========================================================================================================================
The future rentals on non-cancelable operating leases related to the
Company's rental properties are as follows: $2,234,476 in 2000; $2,124,872 in
2001; $1,353,923 in 2002; $849,503 in 2003; $781,544 in 2004; and $1,500,169 in
later years. The Company owned three apartment complexes for part of 1999. The
apartment complexes were federally subsidized under the U.S. Department of
Housing and Urban Development Section 8 Housing-Assistance-Payments Program, and
contributed revenue of $540,000 in 1999, $2,340,000 in 1998, and $2,455,000 in
1997. The Company sold one complex in February 1999, one complex in March 1999
and the last complex in August 1999.
As of December 31, 1999 the Company held, as other real estate owned,
one hotel property acquired through foreclosure in 1998 and residential lots in
New Mexico acquired in 1999 from the Company's borrower. The hotel required
extensive refurbishment which was completed in the second quarter of 1999. The
hotel re-opened May 9, 1999 and is operating under a national franchise in
Phoenix, Arizona. The property is currently for sale. The New Mexico lots are
being sold back to the Company's borrower under a rolling option agreement.
NOTE 3 - COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans consist of the following at December 31,
(in thousands) 1999 1998
Managed portfolio $ 60,112 $ 53,749
Less participations (28,540) (32,452)
- -------------------------------------------------------------------------------------------------------------------------
Commercial real estate loans 31,572 21,297
Less allowance for bad debts (555) (275)
Undisbursed loan proceeds (1,122) (390)
Less loans accounted for as joint ventures (3,122) --
- -------------------------------------------------------------------------------------------------------------------------
Commercial real estate loans, net $ 26,773 $20,632
=========================================================================================================================
All loans are secured by mortgages and/or other security instruments.
Participating lenders typically take a position senior to the Company's position
with respect to payment of the principal portion of those loans which are
participated.
Undisbursed loan proceeds consist principally of interest and
construction cost reserve accounts which are held on behalf of borrowers to
ensure timely payment of periodic interest payments and final construction
costs. These loans bear interest at rates ranging from 11.00% to 18.00% with
initial terms ranging from 6 to 24 months.
The managed portfolio also includes loans made in connection with the
Company's recreational land sales. The notes receivable from these land sales,
due over fifteen years, bear interest at rates ranging from 11% to 12%, and are
secured by the properties sold. At December 31, 1999 and 1998 mortgage notes
receivable relating to these sales totaled $5,535,000 and $5,867,000,
respectively. The Company sold recreational land for mortgage notes receivable
in the amount of $1,040,000 and $184,000 during the years ended December 31,
1999 and 1998 respectively. In 1999 and 1998 the Company collected $1,136,000
and $829,000 in principal payments on these land sale contracts.
-27-
28
Allowance for bad debts
- -----------------------
From time to time commercial real estate loans and/or recreational land
sale loans may be delinquent or in default. Allowance for bad debts increased to
$555,000 at December 31, 1999 from $275,000 at December 31, 1998. The increase
reflects growth in the Company's commercial real estate loans portfolio. The
allowance for bad debts is periodically reviewed for adequacy considering
economic conditions, collateral values and credit quality indicators, including
charge-off experience and levels of past due loans. It is management's judgment
that the allowance for bad debts is adequate to provide for potential credit
losses. The allowance for bad debts is intended to provide for future events,
which by their nature are uncertain. Therefore, changes in economic conditions
or other events affecting specific obligors or industries may necessitate
additions or deductions to the allowance for bad debts.
Activity related to allowance for bad debts is summarized below:
Years ended December 31,
(in thousands) 1999 1998
Balance at beginning of the year $ 275 $ 275
Additions 280 --
Deductions -- --
Charge-offs -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of the year $ 555 $275
=========================================================================================================================
Allowance for bad debts to commercial real estate loans
(net of undisbursed loan proceeds) 1.81% 1.32%
- -------------------------------------------------------------------------------------------------------------------------
NOTE 4 - RECEIVABLES
Receivables consist of the following at December 31,
(in thousands) 1999 1998
Mortgage notes receivable $2,798 $3,828
Other notes receivable 2,614 678
Accounts receivable 825 455
- -------------------------------------------------------------------------------------------------------------------------
Receivables $6,237 $4,961
=========================================================================================================================
In 1999 the Company sold parcels of land in exchange for cash and
$1,744,462 in notes receivable. As of December 31, 1999 $113,992 of the profit
on these sales is deferred.
Mortgage notes receivable as of December 31,1999 consists primarily of
five separate notes receivable the Company took back from the purchasers of one
parcel of land the Company owned in Apache County, Arizona and one parcel of
land the Company owned in Fremont County, Colorado, one parcel of land the
Company owned in Navajo County, Arizona one parcel of the land the Company owned
in Cottonwood, Arizona, and one parcel of land the Company owned in Green
Valley, Arizona. The notes bear interest at rates ranging from 8% to 11% and
have terms ranging from 3 to 15 years. At December 31, 1999 these notes had
outstanding balances of $77,000, $1,000,000, $146,000, $705,000 and $867,000
respectively. The notes are secured by mortgages on the property sold.
Other notes receivable consist of four subordinate tax-exempt municipal
bonds the Company received in connection with the sale of the four apartment
complexes in New Mexico. The bonds pay interest semi-annually at the rate of
8.75% per annum and have terms ranging from 15 to 30 years from the date of
issue. The bonds are subordinate to two other bonds
-28-
29
issued in connection with the sales and principal on the bond is payable out of
the excess cash flow from the future operations of the apartment. One such bond
did not pay the semi-annual interest payment due on December 15, 1999. The
Company is engaged in conversations with the obligor on this bond concerning
payment of interest. The Company does not expect to record any material loss in
its financial statements with respect to this bond.
Accounts receivable consists primarily of interest receivable in
connection with the notes described above and rents receivable.
NOTE 5 - NOTES PAYABLE AND LINES OF CREDIT
Notes payable and lines of credit consist of the following at December 31,
(dollars in thousands)
Maturity Interest
date rate (%) Payment 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Apartment complexes $ - $ 4,721
Commercial buildings 2006-2018 7.3%-9.125% monthly P&I 15,444 2,044
Undeveloped land - 1,715
Development and construction loans 2000 prime(1) monthly Int 515 1,647
Revolving lines of credit 2000 prime(1)(2) monthly Int 4,870 3,800
Other loans 2004 7.60% semi-annual P&I 154 337
==============================================================================================================================
Notes payable and lines of credit $ 20,983 $ 14,264
==============================================================================================================================
(1) Certain loans are at variable rates of prime to prime +0.25%. Prime
rate at December 31, 1999 was 8.50%.
(2) Certain loans are at 30-day LIBOR plus 250 basis points to 30-day LIBOR
plus 475 basis points. 30-day LIBOR at December 31, 1999 was 6.49%.
One of the Company's majority-owned partnerships has obtained a
development line of credit from a commercial bank. The line, which is secured by
the real property being developed by the partnership, expires in May 2000 and
has an aggregate commitment amount of $925,000. At December 31, 1999, the
outstanding balance was $515,000. The interest rate is at the bank's prime rate
plus 1/4%. At December 31, 1999 the rate on the line was 8.75%.
The Company has a $15,000,000 partially secured revolving line of
credit from a commercial bank that may be used for general corporate purposes.
The line bears interest at the prime rate (8.50% as of December 31, 1999) and
expires July 3, 2000. At December 31, 1999 there was an outstanding balance of
$3,850,000. This loan contains financial covenants which require the Company to
maintain a specified minimum ratio of net notes receivable (as defined) to the
outstanding loan balance; a specified minimum excess of current assets over
current liabilities (as defined); and a specified minimum tangible net worth. At
December 31, 1999 the Company was in compliance with these financial covenants.
Additionally, BFC has a $25,000,000 warehouse line of credit with a
large non-bank commercial lender to finance certain portions of BFC's real
estate lending activities. The line bears interest at rates ranging from 30-day
LIBOR plus 250 basis points to 30-day LIBOR plus 300 basis points and expires
August 31, 2000. As amounts are drawn, the line will be secured by certain loan
assets of the Company. At December 31, 1999 the outstanding balance was
$1,020,000. This loan contains financial covenants which require BFC to maintain
a minimum tangible net worth; a specified maximum ratio of debt to tangible net
worth; and a specified minimum ratio of liquid assets to tangible net worth. At
December 31, 1999 Bridge Financial Corporation was in compliance with these
financial covenants. The line of credit is guaranteed by the Company.
In October 1999, BFC entered into a loan agreement with a different
large non-bank commercial lender to provide a revolving $20,000,000 warehouse
line of credit to finance certain portions of BFC's real estate lending
activities. As amounts are drawn, the line will be secured by certain loan
assets of the Company. The line bears interest at 30-day LIBOR plus 475
-29-
30
basis points and expires October 1, 2001. At December 31, 1999 there was no
outstanding balance. This loan contains financial covenants that require BFC to
maintain a minimum tangible net worth and a minimum interest coverage ratio. As
of December 31, 1999, BFC was in compliance with these financial covenants. The
line of credit is guaranteed by the Company.
Principal payments due on all notes payable and lines of credit are as
follows: $5,678,000 in 2000; $323,000 in 2001; $350,000 in 2002; $379,000 in
2003; $409,000 in 2004; and $13,844,000 in later years. Interest paid in 1999,
1998 and 1997 amounted to $1,827,000, $1,499,000 and $1,344,000, respectively,
of which $109,000, $154,000 and $297,000 was capitalized. Interest cost incurred
in 1999, 1998 and 1997, was $1,652,000, $1,489,000 and $1,317,000, respectively.
NOTE 6 - INCOME TAXES
Income tax expense is comprised of the following:
(in thousands) 1999 1998 1997
Current:
Federal $2,008 $2,899 $1,321
State 462 762 352
Deferred:
Federal 601 (831) (106)
State 73 (370) (19)
- -----------------------------------------------------------------------------------------------------------------------------------
$3,144 $2,460 $1,548
===================================================================================================================================
The reconciliation of the computed statutory income tax expense to the effective
income tax expense follows:
(in thousands) 1999 1998 1997
Statutory Federal income tax expense $2,678 $2,087 $1,322
State income taxes, net of Federal benefit 353 263 220
Other 113 110 6
- -----------------------------------------------------------------------------------------------------------------------------------
$3,144 $2,460 $1,548
===================================================================================================================================
-30-
31
The effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
(in thousands) 1999 1998
Deferred tax assets:
Properties, principally due to
valuation allowances, depreciation
and amortization of costs $1,588 $418
Investments in joint ventures,
principally due to capitalization and amortization of costs 217 161
Other 215 376
- ------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,020 955
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Properties, principally due to basis
differences upon acquisition $(7,108) $(5,071)
Commercial real estate loans/deferred revenue,
principally due to installment sales 261 (44)
Other (7) --
- ------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (6,854) (5,115)
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(4,834) $(4,160)
==================================================================================================================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon these factors, management believes that it is more likely than not that the
Company will realize the deferred tax assets existing at December 31, 1999.
Income taxes paid in 1999, 1998 and 1997 amounted to $2,345,000,
$3,732,000 and $1,395,000, respectively.
NOTE 7 - RETIREMENT PLANS
Pension Plan:
- ------------
The Company previously maintained a defined benefit retirement plan
which covered substantially all full-time employees. The benefits were based on
employment commencement date, years of service and compensation. The Plan was
"frozen" on December 31, 1996 which stopped the accumulation of benefits under
the plan. During 1997 the Company elected to terminate the defined benefit plan
and plan assets were distributed in July of 1998.
The net periodic pension benefit is computed as follows for years ended
December 31,
(in thousands) 1999 1998 1997
Service cost $ -- $ -- $ --
Interest cost -- 48 47
Return on assets
Actual -- (34) (292)
Deferred gain -- 36 191
Amortization of unrecognized net transition asset -- (25) (26)
Return of assets to the Company -- 359 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ -- $384 $ (80)
===================================================================================================================================
-31-
32
401(k) Savings Plan:
- --------------------
The Company has a 401(k) Savings Plan for all of its employees. The
Company matches up to 3% of the employee's salary contributed. Total expense for
the Company under this plan was $22,496, $16,800 and $19,400 for 1999, 1998 and
1997, respectively.
NOTE 8 - RESTRICTED STOCK PLAN
In 1988 the Company adopted a Restricted Stock Plan (the "Restricted
Plan") to distribute shares of stock to senior executives at no cost. There were
100,000 shares of common stock authorized for awards during the Plan's ten-year
term, which has expired. No shares were awarded in 1999, 1998 and 1997. A total
of 31,400 shares were awarded under the Restricted Plan. Compensation expense is
recorded for the awards of stock under the Restricted Plan in each period in
which services are performed. The Company recognized compensation expense of $0,
$0 and $100 related to these awards for the years ended December 31, 1999, 1998
and 1997, respectively.
On October 27, 1997, the Company's Board of Directors approved the New
Mexico and Arizona Land Company 1997 Stock Incentive Plan (the "Plan"). On May
8, 1998, the plan was approved by a vote of the shareholders. The Plan provides
that the following types of awards (collectively, "Awards") may be granted under
the Plan: stock appreciation rights ("SARs"); incentive stock options ("ISOs");
non-qualified stock options ("NQSOs"); restricted stock awards; unrestricted
stock awards; and performance share awards which entitle recipients to acquire
shares upon the attainment of specified performance goals. Under the Plan,
Awards may be granted with respect to a maximum of 500,000 shares of the
Company's Common Stock, subject to adjustment in connection with certain events
such as a stock split, merger or other recapitalization of the Company. Due to
stock dividends and stock splits since the inception of the plan there are
presently 900,000 shares for which awards may be granted. As of December 31,
1999, thirteen persons were eligible to participate in the Plan.
During 1999 the Board granted to R. Randy Stolworthy options under the
Plan to purchase up to 26,047 shares of the Company's common stock. The earliest
permitted exercise date of the options is December 1, 2000. The options expire
December 1, 2009. No compensation expense was recognized in 1999 because the
exercise price was equal to the price of the common stock of the Company at date
of the grant.
During 1999, each Director on the Board was granted options under the
Plan to purchase up to 6,977 shares of the Company's common stock. The
earliest permitted exercise date of the options is December 1, 2000. The
options expire December 1, 2009. No compensation expense was recognized in
1999 because the exercise price was equal to the price of the Common Stock of
the Company at date of the grant.
Effective as of January 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". As
permitted under SFAS No. 123, the Company continues to measure stock-based
compensation expense as the excess of the market price at the grant date over
the amount the employee must pay for the stock.
-32-
33
SFAS No. 123 requires disclosure of pro forma net income and pro forma
net income per share as if the fair value based method had been applied in
measuring compensation expense.
Reported and pro forma net income and earnings per share amounts for the years
ended December 31, (in thousands, except per share data)
1999 1998 1997
Reported:
Net income $4,731 $3,679 $2,340
Basic earnings per share $0.68 $0.53 $0.36
Diluted earnings per share $0.68 $0.53 $0.36
Pro forma:
Net income $4,349 $3,479 $2,218
Basic earnings per share $0.63 $0.50 $0.34
Diluted earnings per share $0.63 $0.50 $0.34
The fair values of the options granted were estimated on the date of
their grant using the Black-Scholes option pricing model based on the following
weighted average assumptions:
1999 1998 1997
Risk free interest rate 6.53% 5.204% 5.521%
Expected life (in years) 3.5 5 5
Expected volatility 48% 44% 34%
Expected dividend yield 0 0 0
Stock options outstanding at December 31, 1999 were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------
Weighted Average
Remaining
Range of Exercise Number of Options Contractual Life Weighted Average Number of Options Weighted Average
Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$8.33-$13.11 571,500 6.76 $10.54 247,500 $10.47
$5.125 74,886 9.67 $5.125 -- --
-33-
34
Activity related to the stock option plan is summarized as below:
Years Ended December 31,
1999 1998 1997
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
Of shares Price of shares Price of shares Price
Options outstanding at the beginning of the year 571,500 $10.54 450,000 $10.55 -- --
Granted 74,886 $5.13 121,500 $9.66 450,000 $10.55
Exercised -- -- -- -- -- --
Expired/cancelled -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding the end of the year 646,386 571,500 450,000
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at the end of the year 247,500 108,000 --
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year $2.10 $2.42 $2.54
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 9 - DIRECTOR STOCK AWARDS
In December 1997 the Board of Directors awarded 350 shares of common
stock of the Company to each director. The shares were valued at fair market
value on the date of the grant. A total of 2,450 shares was issued on December
31, 1997. The shares contain a restrictive legend as required under Rule 144 of
the Securities Act of 1933. In addition a cash award of $2,048 was paid to each
director.
Compensation expense of $50,000 in 1997 was recorded as a result of the
above award.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the
ordinary course of business. While the ultimate disposition of these matters is
uncertain, it is the opinion of management that their outcome will not have a
material adverse effect on the financial condition or results of operations of
the Company.
-34-
35
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the years ended
December 31, 1999 and 1998 is presented below:
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter Total
1999
Revenue $10,714 $5,313 $8,914 $11,629 $36,570
Net income $1,226 $ 763 $1,418 $1,324 $ 4,731
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share(1)
Basic $0.18 $0.11 $0.20 $0.19 $0.68
Diluted $0.18 $0.11 $0.20 $0.19 $0.68
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Revenue $5,687 $5,793 $2,760 $7,745 $21,985
Net income $ 517 $1,211 $ 517 $1,434 $ 3,679
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share(1)
Basic $ 0.07 $ 0.17 $ 0.07 $0.22 $ 0.53
Diluted $ 0.07 $ 0.17 $ 0.07 $0.22 $ 0.53
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes the effect of a 20% stock dividend paid July 10, 1998 and a 3
for 2 stock split paid January 15, 1999 to shareholders of record on
December 31, 1998.
NOTE 12 - SEGMENTS
The Short-term Commercial Real Estate Lending segment, conducted
through BFC, is primarily engaged in providing direct, short-term gap and
participating loans to qualified borrowers throughout California and the
southwestern United States who provide suitable real estate projects as
collateral. Lending functions include originations, acquisitions and servicing
of commercial loans which are not held for sale, but are held to maturity or
other disposition. This includes any actions or procedures necessary to
foreclose on delinquent loans and take possession of collateral including
disposal. Disposal of the collateral may involve the temporary operation or
improvement of the repossessed property. If management identifies repossessed
assets that would be appropriate for the Company to own/operate on a long-term
basis, such assets would become a part of the real estate segment. The short
term Commercial Real Estate Lending segment also includes any loans which, under
the relevant accounting literature, are required to be accounted for as Joint
Ventures. The short term commercial real estate lending segment also includes
any loans which, under the relevant accounting literature, are required to be
accounted for as Joint Ventures. The Short-term Commercial Real Estate Lending
segment also includes loans made in connection with the Company's recreational
land sales. The notes receivable from these land sales, due over fifteen years,
bear interest at rates ranging from 11% to 12%, and are secured by the
properties sold.
BFC seeks to maintain a high quality portfolio using clearly defined
underwriting criteria and stringent portfolio management techniques. Bridge
diversifies its lending activities geographically in the southwest and among a
range of real estate.
The Real Estate segment is primarily engaged in the sale of developed
residential lots, the sales or exchanges of land, rental income from commercial
and industrial buildings, and rental income from leasing rural land. Real estate
assets are assessed individually and measured against performance goals. All
areas of real estate are assessed using the same performance criteria, not
functionality, and looked upon as a whole. Notes receivable included in this
segment are the result of real estate land sales and reflect a temporary and
natural consequence of the real estate segment.
-35-
36
The Other Business segments primarily includes the Company's mineral
rights in Arizona, New Mexico, Colorado, and Oklahoma, including small working
and royalty interests in oil and gas wells. Approximately 6,079 of the mineral
acres have been leased to operators. Presently, and for the foreseeable future,
market conditions are such that production from most of the Company's mineral
acres is not economically feasible. Revenue from the minerals does not
constitute a material part of the Company's consolidated revenue.
Reconciliation of Segment Information to Consolidated Amounts
Management evaluates the performance of each segment based on income
after allocations and identifiable assets. Income after allocations is income
before joint ventures, non-controlling interests and income taxes, including
allocations of corporate overhead expenses. Prior to 1998, there was no
allocation of corporate overhead to the short-term commercial real estate
lending segment or other segment. For 1997, amounts included in income before
joint ventures, non-controlling interests and taxes include only expenses
specifically attributable to each segment. Identifiable assets include assets
employed in the generation of income for each segment.
Information for the Company's reportable segments reconciles to the
Company's consolidated totals as follows:
REVENUES:
December 31,
(in thousands) 1999 1998 1997
Real Estate $31,193 $18,106 $15,627
Short-term Commercial Real Estate Lending 5,241 3,752 1,120
Other 136 127 157
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated total $36,570 $21,985 $16,904
==================================================================================================================================
INCOME AFTER ALLOCATIONS:
December 31,
(in thousands) 1999 1998 1997
Real Estate $6,280 $3,288 $3,572
Short-term Commercial Real Estate Lending 1,892 2,505 1,060
Other 125 122 139
- ----------------------------------------------------------------------------------------------------------------------------------
Income before joint ventures, non-controlling interests and income taxes $8,297 $5,915 $ 4,771
==================================================================================================================================
IDENTIFIABLE ASSETS:
December 31,
(in thousands) 1999 1998
Real Estate $46,914 $48,134
Short-term Commercial Real Estate Lending 39,489 25,428
Other 815 823
- ------------------------------------------------------------------------------------------------------------------
Consolidated total $87,218 $74,385
==================================================================================================================
The Company has no single customer that accounts for 10% or more of
revenue.
The Short-term Commercial Real Estate Lending segment includes
investment income of $35,105 and $44,408 and
-36-
37
interest expense of $504,885 and $216,916 for the years ended 1999 and 1998,
respectively. Interest income and interest expense were insignificant in 1997.
The Real Estate segment includes investment income of $568,995,
$382,574, $219,767 and interest expense of $1,047,372, $1,118,089, and
$1,019,582 for the years ended 1999, 1998 and 1997, respectively.
The Real Estate segment employed 8, 21, and 22 full-time employees and
the Short-term Commercial Real Estate Lending segment employed 5, 4 and 3
full-time employees the for the years ended 1999, 1998 and 1997, respectively.
-37-
38
New Mexico and Arizona Land Company and Subsidiaries
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
Cost
(in thousands) capital-
ized sub-
Initial cost sequent
To Company to
-------------------------- acqui-
Bldgs sition
and im- ----------
Encum- prove- Improve-
brances Land ments ments
Unimproved Properties
Arizona and New Mexico $155 $6,243 $ -- $ 241
Chandler, Arizona -- 3,245 -- 425
Properties Under Development
40-acre lots, Arizona -- 178 -- --
Albuquerque, New Mexico(3) 515 479 -- 430
Sedona, Arizona -- 7,500 -- 3,892
Rental Properties
Commercial Buildings
Tempe, Arizona 725 462 714 152
Tempe, Arizona 4,950 1,087 1,737 3,520
Phoenix, Arizona 1,933 770 1,964 --
Gilbert, Arizona 4,408 1,181 4,240 180
Chandler, Arizona 3,427 878 4,281 --
Hotel, Phoenix, Arizona -- 1,023 2,292 2,617
- ---------------------------------------------------------------------------------
$16,113 $23,046 $15,228 $11,457
=================================================================================
(in thousands)
Gross amount at which
carried at close
of period(1)
---------------------------------------- Accum-
Buildings ulated
and depre-
improve- Total ciation Date
Land ments (a) (2) (b)(4) acquired
Unimproved Properties
Arizona and New Mexico $6,147 $ 337 $6,484 $ 71 various
Chandler, Arizona 3,245 425 3,670 117 1986
Properties Under Development
40-acre lots, Arizona 178 -- 178 -- 1908
Albuquerque, New Mexico(3) 479 430 909 -- 1992-1995
Sedona, Arizona 11,392 -- 11,392 -- 1995
Rental Properties
Commercial Buildings
Tempe, Arizona 462 866 1,328 483 1986
Tempe, Arizona 1,087 5,257 6,344 397 1997
Phoenix, Arizona 770 1,964 2,734 38 1999
Gilbert, Arizona 1,181 4,420 5,601 82 1999
Chandler, Arizona 878 4,281 5,159 41 1999
Hotel, Phoenix, Arizona 1,023 4,909 5,932 93 1998
- ----------------------------------------------------------------------------------------------
$26,842 $22,889 $49,731 $1,322
=============================================================================================
-38-
39
(1) Tax basis: $23,299,000
(2) A valuation allowance in the amount of $700,000 was established in the
current year and an allowance of $3,480,000 was established in prior
years to reflect the Company's estimated realizable value upon ultimate
disposition of certain of its properties, principally unimproved urban
real estate.
(3) Certain properties are owned by partnerships of which the Company has a
75% ownership.
(4) Life on which depreciation in the latest income statements is computed:
5 to 35 years.
(a) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 1999 1998 1997
Balance at beginning of year $49,459 $53,886 $54,836
Additions during year:
Acquisitions through foreclosure 3,929 2,003 --
Other acquisitions 4,229 123 3,648
Improvements 13,708 4,183 5,529
Deductions during year:
Cost of real estate sold (21,594) (10,736) (10,127)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at close of year $49,731 $49,459 $53,886
====================================================================================================================================
(b) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 1999 1998 1997
Balance of accumulated depreciation
at beginning of year $3,844 $4,761 $4,586
Additions during year:
Current year's depreciation 480 544 431
Deductions during year:
Real estate sold (3,002) (1,461) (256)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at close of year $1,322 $3,844 $4,761
====================================================================================================================================
-39-
40
New Mexico and Arizona Land Company and Subsidiaries
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
Final Periodic
Interest maturity payment
Description rate terms
==========================================================================================================================
Mortgages on:
Unimproved land sales - Arizona,
(predominately 40-acre parcel sales) 10% - 12% 1999-2015
Unimproved land sales - Colorado 10% 2003 Quarterly(5)
Residential Land under Development - New Mex 12% 2000 Monthly(2)
Residential Land under Development - Arizona 8% 2002 Semi Annual (4)
Commercial Land under Development - Calif. 12.5% 2000 Monthly(1)(2)
Commercial Land under Development - Arizona 10% - 12% 2000-2004 Variable(2)
Mixed Land Use Unimproved - Arizona 13.125%-18% 1999-2000 Variable(1)(2)
Operating Properties - Arizona 11% - 12.5% 1999-2001 Monthly(1)(2)(4)
Operating Properties - New Mexico 11% 2000 Monthly (2)
Operating Properties - California 12.5% 2000 Monthly(2)
Operating Agriculture - California 12% 2000 Monthly(2)
Operating Properties - Tucson, Arizona 11.5% 2000 Monthly(2)
Commercial Land Unimproved - Arizona 12.75-13.5% 1999-2000 Monthly(1)(2)
Commercial Land Unimproved - Arizona 12.875% 2000 Monthly(2)
Commercial Land Unimproved - Utah 12.75% 2001 Monthly(2)
Residential Land Unimproved.-Arizona 12.75% 2001 Monthly(2)
Residential Land under Development - Arizona 13.5% 2001 Monthly(2)
Residential Land under Develop-California. 12% 2001 Monthly(2)
Valuation allowance
==========================================================================================================================
Principal
amount of
loans
subject
Face Carrying to delin-
amount amount of quent
of mort- principal
mort- gages or
Description gages (3)(a) interest
====================================================================================================================
Mortgages on:
Unimproved land sales - Arizona,
(predominately 40-acre parcel sales) $7,758 $5,758 $289
Unimproved land sales - Colorado 1,000 1,000
Residential Land under Development - New Mex 415 415
Residential Land under Development - Arizona 705 705
Commercial Land under Development - Calif. 785 785
Commercial Land under Development - Arizona 902 902
Mixed Land Use Unimproved - Arizona 1,353 1,353
Operating Properties - Arizona 1,461 1,461 483
Operating Properties - New Mexico 271 271
Operating Properties - California 3,086 3,086
Operating Agriculture - California 1,611 1,611
Operating Properties - Tucson, Arizona 1,183 1,183
Commercial Land Unimproved - Arizona 1,870 1,870
Commercial Land Unimproved - Arizona 1,654 1,654
Commercial Land Unimproved - Utah 1,161 1,161
Residential Land Unimproved.-Arizona 1,814 1,814
Residential Land under Development - Arizona 1,576 1,576
Residential Land under Develop-California. 3,517 3,517
Valuation allowance (555)
- ------------------------------------------------------------------------------------------------------------------------------
$30,122 $29,567 $772
===============================================================================================================================
-40-
41
(1) The company's participant in these loans has a preferential right to
repayment of principal.
(2) Level payments of interest
(3) Tax basis is $28,949,000
(4) Level payments of principal and interest.
(5) Level payments of principal plus interest on the unpaid balance.
(a) NOTE TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
Years ended December 31,
(In thousands)
1999 1998 1997
Balance at beginning of period $21,757 $15,287 $9,648
Additions during period:
New mortgage loans 30,335 18,793 9,517
Valuation allowance change (280) -- (200)
Deduction during period:
Collections of principal (22,031) (12,186) (3,396)
Forfeitures on installment contracts (214) (137) (282)
- --------------------------------------------------------------------------------------------------
Balance at close of year $29,567 $21,757 $15,287
==================================================================================================
-41-
42
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the Company's directors is set forth in
the Company's proxy statement for its 2000 annual meeting of shareholders under
the headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information required under this item is contained in the Company's 2000
Proxy Statement, under the heading "Executive Compensation", and is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the Company's 2000
Proxy Statement, under the heading "Voting Securities, Principal Shareholders,
and Management Ownership" and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the Company's 2000
Proxy Statement, under the heading "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
-42-
43
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The consolidated financial statements and schedules are included in Part III,
Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders Equity
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
Exhibits:
Exhibit 21 Subsidiaries of the Company
Exhibit 23.1 Consent of KPMG LLP
Exhibit 23.2 Consent of Deloitte & Touche LLP
Exhibit 27.1 Financial Data Schedule
All other exhibits are omitted because they are inapplicable, contained
elsewhere in the report or have been previously filed with the Securities and
Exchange Commission.
A report on Form 8-K was filed on November 24, 1999 announcing a
settlement agreement on a non-routine lawsuit concerning the Sedona Project.
-43-
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NEW MEXICO AND ARIZONA LAND COMPANY
(Registrant)
/s/R. Randy Stolworthy /s/Jerome L. Joseph
- ---------------------- -------------------
R. Randy Stolworthy Jerome L. Joseph
President (Principal Controller and Treasurer
Executive Officer) (Principal Financial Officer)
Dated: March 24, 2000
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. Randy Stolworthy and Jerome L. Joseph
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and file the same, with exhibits thereto and any other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
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 and on the date indicated.
/s/Stephen E. Renneckar /s/Robert R. Hensler
- ------------------------------ --------------------
Stephen E. Renneckar Robert R. Hensler
Chairman Director
/s/William A. Pope /s/Arnold L. Putterman
- --------------------------------- ----------------------
William A. Pope Arnold L. Putterman
Director Director
/s/Ronald E. Strasburger /s/Richard A. Wessman
- ------------------------------ ---------------------
Ronald E. Strasburger Richard A. Wessman
Director Director
/s/R. Randy Stolworthy
- ------------------------------
R. Randy Stolworthy
Director
Dated: March 24, 2000
-44-
45
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
Exhibit 21 Subsidiaries of the Company
Exhibit 23.1 Consent of KPMG LLP
Exhibit 23.2 Consent of Deloitte & Touche LLP
Exhibit 27.1 Financial Data Schedule