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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, 2000.
[ ] 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
NZ Corporation
(Exact name of registrant as specified in its charter)
Arizona 43-0433090
(State of incorporation) (I.R.S. Employer Identification No.)
333 North 44th Street, Suite 420, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/952-8836
New Mexico and Arizona Land Company
3033 N. 44th Street, Suite 270
Phoenix, Arizona 85018
[Registrant's former name and address]
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 February 28, 2001 was $7,636,983 based upon the closing price
on the American Stock Exchange of $3.77 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 February
28, 2001 was 6,816,936 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 2001 Annual Meeting of Shareholders.
NZ Corporation 2000/Page 1
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PART I
ITEM 1: BUSINESS
NZ Corporation (the "Company," "NZ" or "we") was organized in 1908 as an Arizona
corporation under the name New Mexico and Arizona Land Company. We changed our
name to NZ Corporation in June 2000. We operate under our own name or that of
our wholly-owned subsidiaries: Bridge Financial Corporation, NZ Development
Corporation, NZ Properties, Inc., and NZU, Inc. Great Vacations International,
Inc., another wholly-owned subsidiary, is not active. We began operating under
the trade name NZ/Bridge Financial in 1998. NZ employed 10 full-time employees
at December 31, 2000. NZ has over 90 years of experience as a real estate
manager, real estate developer and real estate owner in the southwestern United
States. NZ owns over a million acres of mineral rights containing known deposits
of uranium, limestone, petroleum, petrified wood and other mineral deposits.
In late 1997, we began to transition our core business from real estate to
short-term commercial real estate lending. We created a wholly-owned subsidiary,
Bridge Financial Corporation ("Bridge" or "BFC") to conduct the lending
business. The transition business plan includes the sale of most of our
historical fee real estate holdings. We have generated significant real estate
sales over the past three years. At December 31, 2000, the major groups of
unsold real estate planned for disposal were over 100,000 acres of our rural
lands in northeastern Arizona, the Seven Canyons Project, and urban and suburban
land in New Mexico.
The Company reports 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 Exchange Act of 1934. Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that
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 our actual results to differ from the forward-looking statements.
Operating Segments
SHORT-TERM COMMERCIAL REAL ESTATE LENDING
Bridge provides time-sensitive, short-term and participating loans to qualified
borrowers throughout California and the southwestern United States. The
borrowers must provide suitable real estate projects as collateral for the loan.
Typically a mortgage loan is 65% or less of the value of the property mortgaged.
The loans are generally made to successful, small to medium size developers and
others in the real estate business. The loans typically range in size from
$500,000 to $5,000,000. These borrowers often need to respond to a real estate
opportunity on a quick and flexible basis. Traditional real estate lenders and
banks often cannot provide this expedited service or do not finance these
assets. By providing individuality and focus, we earn a premium return on loans
by charging relatively higher loan fees and interest rates than traditional
lenders.
We believe an underserved niche exists in the real estate market for this type
of financing. We believe providing a superior level of service and responding
more quickly and individually to borrower requests allows us to compete with
larger competitors. We believe our extensive real estate history and experience
makes us more sensitive to our borrower's needs.
We target a low-to-moderate loan portfolio risk profile using diversification
and management strategies. We diversify our lending activities geographically in
California and the Southwest and by real estate type. Clearly defined
underwriting criteria and stringent portfolio management techniques are
maintained. Additionally, we closely monitor real estate projects and the
general real estate market, maintain contact with our borrowers, and use a
participant to co-fund some loans. We believe all of these strategies mitigate
the risk associated with any particular loan.
Loan maturities may be extended in accordance with the original terms of the
loan or for other acceptable reasons. We consider extensions a routine and
integral part of our lending business. Generally, an extension fee is charged to
the borrower.
NZ Corporation 2000/Page 2
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When a loan is 90 days past due, in accordance with its original terms, the loan
is placed on a non-accrual status. If a delinquency cannot be cured we may take
any combination of the following actions: negotiate a consensual purchase of the
property securing a loan, accept a deed in lieu of foreclosure, take legal
action to collect on the underlying note, or bid for the property at a
foreclosure sale. Foreclosure can result in the temporary ownership, operation
or improvement of repossessed property.
In some instances, the relevant accounting literature requires loans to be
accounted for as joint ventures. Our managed loan portfolio may include loans
accounted for this way. Revenue associated with these loans is recognized under
joint venture accounting. Generally speaking, this means we do not recognize
revenue from interest income and points over the term of the loan but instead
recognize this income after all principal has been repaid. Any loans accounted
for as a joint venture are included in "Investments in joint ventures" in our
consolidated balance sheets. We do not intend that a partnership relationship
with our borrowers exist under applicable state law for loans accounted for in
this way.
Our managed loan portfolio and the lending segment includes receivables
generated from our 40-acre recreational land sales program. You can find
additional details on the sales program under the heading "Real Estate" below in
this section of this Report. The sale of the land is accounted for in the real
estate segment. The collection of the note, including principal and interest, is
accounted for in the lending segment. By moving the receivables to the lending
segment we concentrate recurring lending activities in one segment.
Bridge had a loan portfolio under management as of December 31, 2000 of
approximately $50.1 million, of which $11.7 million was participated and $34.5
million (net of an allowance for bad debts of $.7 million and undisbursed loan
proceeds of $.9 million) was recorded in the Company's books in "Commercial real
estate loans, net" and $2.3 million was recorded in "Investments in joint
ventures." This compares to a portfolio under management as of December 31, 1999
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." (See Item 8 - "Financial Statements and
Supplementary Data").
The decrease in the managed portfolio is primarily due to two items. In 2000,
the Company completed a foreclosure on a hotel property, and the Company
acquired certain land located in Arizona from a borrower. The acquisition was
paid for by the extinguishment of indebtedness and cash. On each loan, the
Company had a participant. The participant is now a co-owner of the properties
with the Company, in the same proportion as in the loan participations. The
Company's portion of the assets continues to be recorded in investments in joint
ventures as it was prior to the acquisitions, but is not included in the managed
portfolio.
As of February 28, 2001, Bridge had a loan portfolio under management of $50.4
million, of which $11.7 million was participated and $34.7 million (net of an
allowance for bad debts of $.7 million and undisbursed loan proceeds of $.9
million) was recorded in the Company's books in "Commercial real estate loans,
net" and $2.4 million was recorded in the Company's books in "Investments in
joint ventures."
REAL ESTATE
Historically, we have engaged in various real estate activities: management and
leasing commercial and industrial buildings, leasing rural land, development and
sale of commercial lands, residential and recreational lots, and the sales or
exchanges of land and income properties. Many of these activities are winding
down as we continue our transition to the lending business. We plan to maintain
and manage a portfolio of industrial buildings.
The sale of real estate often includes notes receivable generated in connection
with the sale. These receivables are an extension of the real estate function
and are included in the real estate segment.
Rental Properties
As of December 31, 2000, we owned and operated five office/industrial warehouse
complexes in the metropolitan Phoenix area. Four buildings are multi-tenant and
one building is leased to a single tenant. Generally, the leases are triple net
with a five-year term. A triple net lease means the tenant pays a pro rata share
of all costs to operate the property, including property taxes, insurance and
maintenance. All five buildings have a positive cash flow.
Rural Land
The Company leases approximately 72,800 acres of its rural land under various
grazing leases.
NZ Corporation 2000/Page 3
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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 homebuilders. In 2000, 104 lots were sold and in 1999, 290
lots were sold by the joint venture. The joint venture had three developed lots
in inventory as of December 31, 2000. As of February 28, 2001, one lot remained
unsold. We expect to wind-up the joint venture in 2001.
Recreational Lot Programs
We began a recreational lot sales program in 1980. The program is to sell
recreational parcels of our rural land located in northeastern Arizona. The
parcels are a minimum size of 36 acres and are typically sold on installment
contracts with down payments of 10% to 20%. The balance of the contract is
carried over 15 years at interest rates ranging from 11% to 12%. An independent
real estate brokerage company handles the marketing and sales program. During
2000 we sold 102 parcels and in 1999 we sold 95 parcels. As of December 31,
2000, we had approximately 30,600 acres allocated to the sales program. We plan
to place an additional 6,000 acres into the program in 2001. The receivables
generated by the recreational lot sales are included in the short-term
commercial real estate lending segment.
Other Significant Land Holdings and Activity
We own over 110,000 acres of rural land located in northeastern Arizona and New
Mexico. These lands were originally derived from 19th Century railroad land
grants. Some of these acres are suitable for and have been allocated to the
recreational lot sales program. The remaining acres are continually evaluated
for sale or other opportunities that will provide value to our shareholders.
Our most significant single identifiable land holding is 136 acres of
undeveloped land located in Yavapai County near Sedona, Arizona (the "Seven
Canyons Project" or "The Sedona Project"). The Seven Canyons Project is approved
for an 18-hole golf course and 300 two-bedroom timeshare units. A development
agreement has been entered into with Yavapai County, and the plat for Phase I
has been recorded. We have begun development work on the project in order to
meet certain regulatory deadlines for completion of the work that is under the
jurisdiction of the United States Army Corps of Engineers. This work will be
completed in June 2001. Additional work is being performed concurrently and will
be completed by November 2001. The project has been for sale and is currently in
escrow. The sale is scheduled to close in March 2001, although the buyer has
certain contractual rights to extend the closing for 30 days by agreeing to
forfeit all earnest money. The buyer is contractually obligated to reimburse us
for all development expenditures we incur from January 1, 2001 through the date
of closing. The buyer also has certain rights to cancel the purchase prior to
closing. If the buyer chooses to exercise these rights, the buyer will forfeit
some of the earnest money.
The Company has begun site work on 14.4 acres of undeveloped urban property
located at Menaul and Broadway in Albuquerque, New Mexico. The property is zoned
for commercial/industrial use and has been subdivided into 13 commercial tracts.
The property is platted and approved by the City of Albuquerque. The 13
commercial tracts are listed for sale.
During 2000, we sold the following properties: approximately 14.6 acres at Ray
and McClintock in Chandler, Arizona; approximately 11 acres at Cooper and Warner
in Gilbert, Arizona; approximately 1,100 acres of rural land in Cibola County,
New Mexico; and, approximately 6,500 acres of recreational lots.
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. Approximately 6,100 of the mineral acres are leased to others
for possible development of limestone, clay and uranium. Market conditions now
and for the foreseeable future indicate that production from most of the
Company's mineral acres is not economically feasible. Recently we have
experienced an increase in revenue from this segment due to the completion of
new wells in Oklahoma and higher petroleum prices.
NZ Corporation 2000/Page 4
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ITEM 2: PROPERTIES
The schedule below shows the properties owned by the Company at December 31,
2000.
YEAR ENCUMBRANCE
LOCATION DESCRIPTION ACQUIRED (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
Rental Properties
Arizona
Tempe 12TH PLACE BUILDING
37,908 square foot building on 2.7 acres 1983 $ 689
Tempe GROVE COMMONS INDUSTRIAL PARK
113,806 square feet in 4 buildings on 7.1 acres 1997 4,893
Gilbert EL DORADO COMMERCE CENTER
112,786 square foot building on 7.8 acres 1999 4,342
Chandler ASPEN BUSINESS CENTER
105,757 square foot building on 6.2 acres 1999 3,355
Phoenix WATKINS DISTRIBUTION CENTER
76,800 square foot building on 4.4 acres 1999 1,898
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. 871 lots sold and 1 lot under contract as of
February 28, 2001. 1995 --
Albuquerque MENAUL AND BROADWAY ROADS(3) 1986 --
13 tracts zoned for commercial/industrial use on
14.4 acres.
(1) This property is in escrow.
(2) This property is owned by a general partnership. The Company is a 75% owner
in the partnership.
(3) This property is for sale.
NZ Corporation 2000/Page 5
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Undeveloped Urban Properties
YEAR ENCUMBRANCE
LOCATION DESCRIPTION ACQUIRED ACRES (IN THOUSANDS)
- -------- ----------- -------- ----- --------------
NEW MEXICO
Las Cruces Mesilla Hills(1) 1990 310.00 --
(1) This property is for sale.
Rural and Mineral Properties
ACRES ENCUMBRANCE
COUNTY STATE SURFACE MINERAL (IN THOUSANDS)
- ------ ----- ------- ------- --------------
Apache Arizona 64,514(1) 145,692 $ --
Coconino Arizona 21,191 --
Mohave Arizona 46,602 --
Navajo Arizona 45,199(2) 478,300 --
Catron New Mexico 11,346 --
Cibola New Mexico 3,844 223,818 --
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 --
(1) Approximately 24,000 acres are allocated to the recreational lot sales
program.
(2) Approximately 6,600 acres are allocated to the recreational lot sales
program.
The Company's executive offices occupy 5,446 square feet of leased space in an
office building in Phoenix, Arizona. We believe our property and equipment are
generally well maintained, in good operating condition and adequate for our
present needs.
ITEM 3: LEGAL PROCEEDINGS
We are from time to time a party to legal proceedings. All of the legal
proceedings we are currently involved in are ordinary and routine. The outcome
of the legal proceedings is uncertain until they are completed. We believe that
the results of the current proceedings will not have a material adverse effect
on our business or financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
NZ Corporation 2000/Page 6
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Executive Officers of the Registrant
The information below shows, as of December 31, 2000, the names, ages, positions
and last five years experience of the executive officers of the Company who are
not also continuing directors of the Company.
NAME AND AGE OFFICE AND EXPERIENCE
Jerome L. Joseph, 42 Treasurer, Secretary and Controller. Mr. Joseph has
served in his current position since January 1998.
Prior to joining NZ, Mr. Joseph worked with both
public and private companies in compliance,
reporting, capital formation and cash management. He
previously served as Vice President and Treasurer of
Unison HealthCare Corporation for one year and
Manager of Finance for UDC Homes, Inc. for three
years.
J. D. Sphar, 59 Vice President. Mr. Sphar joined the Company as Chief
Geologist in 1971 after discovering the Ruby Well and
Crownpoint uranium trends on NZ's mineral lands. He
was promoted to his current position in 1973. Mr.
Sphar has generated over $8 million in leasehold
payments from mineral leases, sold over $30 million
worth of produced uranium, and initiated sales and
trades of 200,000 acres of fee minerals with the
federal government. Currently, he manages the
Company's rural lands and mineral assets.
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".
This table shows the high and low closing price of our common stock as reported
by the American Stock Exchange during the periods indicated:
THE MARKET PRICE RANGE BY QUARTER:
2000 1999
-------------------------------- ------------------------
HIGH LOW High Low
------ ------ ------ ------
1st quarter $5.625 $4.875 $9.750 $7.250
2nd quarter 5.375 4.875 7.875 7.000
3rd quarter 5.000 4.250 7.500 4.500
4th quarter 4.688 2.938 5.625 4.750
We declared no cash dividends in 2000 or 1999. The payment of cash dividends is
at the discretion of the Board of Directors of the Company. The Company used its
earnings in the business in 2000 and 1999. It is likely we will continue to use
the earnings in the business in the foreseeable future. NZ had 614 shareholders
of record as of February 28, 2001.
ITEM 6: SELECTED FINANCIAL DATA
Years ended December 31,
(in thousands, except per share and shareholder data)
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS:
Gross revenue from operations $ 20,587 $ 36,570 $ 21,985 $ 16,904 $ 23,660
Net income 4,224 4,731 3,679 2,340 4,846
Earnings per share of common stock(1)
Basic 0.61 0.68 0.53 0.36 0.76
Diluted 0.61 0.68 0.53 0.36 0.76
NZ Corporation 2000/Page 7
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SELECTED FINANCIAL DATA (CONTINUED)
Years ended December 31,
(in thousands, except per share and shareholder data)
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
SUMMARY OF FINANCIAL POSITION:
Total assets $93,210 $87,218 $74,385 $69,511 $66,328
Notes payable and lines of credit 25,189 20,983 14,264 12,503 16,036
Shareholders' equity 55,649 51,876 47,145 43,466 35,628
OTHER SUPPLEMENTAL INFORMATION:
Weighted average number of common
shares outstanding(1)
Basic 6,874 6,926 6,926 6,472 6,387
Diluted 6,875 6,928 6,934 6,472 6,387
(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 2000 or 1999.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Change of Principal Business Emphasis
In November 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 the
past three years we have continued to reposition our historical static assets
from real estate development and sales into commercial real estate lending. We
have entered the final phase of our plan to dispose of our real estate and
mineral assets. The Company currently maintains and plans to continue to
maintain a small high-quality industrial building portfolio located in the
Phoenix metropolitan area. At December 31, 2000 the major portions of unsold
real estate were over 100,000 acres of our rural lands in northeastern Arizona,
the Seven Canyons Project, and urban and suburban land in New Mexico.
The Company continually reviews the best available use of the
cash raised from sales of real estate and mineral assets. Evaluation of the
strategic alternatives available to the Company may result in investment in
lines of business in which the Company is not currently engaged. The Company is
not a party to any binding agreements representing the acquisition of, or
investment in, new businesses or lines of business. We believe that the sale of
these assets, for which the realization of value may otherwise be years in the
future, and the subsequent acquisition of other assets or enterprises which earn
a current return, will be in the best interests of the shareholders. The
strategic alternatives available to the Company if it is holding a substantial
amount of its net worth in cash should be significant, perhaps allowing the
Company to participate in sectors that have demonstrated more growth potential
than real estate lending.
RESULTS OF OPERATIONS
The following table summarizes the Company's consolidated revenues and earnings
for the indicated periods:
Years Ended December 31:
(in thousands, except share data) 2000 1999 1998
---------- ---------- ----------
Revenue $ 20,587 $ 36,570 $ 21,985
Net Income $ 4,224 $ 4,731 $ 3,679
Earnings per share of common stock(1)
Basic $ .61 $ .68 $ .53
Diluted $ .61 $ .68 $ .53
(1) Prior years restated to reflect 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.
NZ Corporation 2000/Page 8
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The following discussion and analysis of financial conditions should
be read in conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements. Both are contained in Item 8 of this Form
10-K.
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999
Consolidated discussions represent data of the Company as presented
in the Consolidated Statements of Income included in Item 8 of this Report.
Segment discussions represent data as reported by segment in Note 12 to the
Consolidated Financial Statements.
Consolidated
Net income decreased by approximately 11% from $4,731,000 in 1999 to $4,224,000
in 2000. Pre-tax earnings from property sales decreased approximately 48% from
$8,858,000 in 1999 to $4,598,000 in 2000. The decrease directly relates to the
timing of the sale of real estate and the gross margin associated with the
properties sold. Operating income from property rentals increased 121% from
$666,000 in 1999 to $1,470,000 in 2000. The increase is primarily attributable
to increases in two items, partially offset by decreases in two items. We owned
five industrial buildings at higher occupancy rates for the entire year of 2000
compared to three industrial buildings owned for part of the year in 1999 with
lower occupancy rates. These increases were partially offset by an operating
loss of approximately $541,000 from real estate owned and operating revenue
included in 1999 from apartments in New Mexico before they were sold that year.
Revenues from commercial real estate lending increased 24% from $4,576,000 in
1999 to $5,661,000 in 2000. The increase is primarily attributable to increased
revenues as a result of a 29% increase in the loan portfolio in 2000 than in
1999. The loan portfolio held by the Company and recorded in the financial
statements increased, even though the size of the managed portfolio decreased.
The decrease in the managed portfolio is primarily due to two items. In 2000,
the Company completed a foreclosure on a hotel property, and the Company
acquired certain land located in Arizona from a borrower. The acquisition was
paid for by the extinguishment of indebtedness and cash. On each loan, the
Company had a participant. The participant is now a co-owner of the properties
with the Company, in the same proportion as in the loan participations. The
Company's portion of the assets continues to be recorded in investments in joint
ventures as it was prior to the acquisitions, but is not included in the managed
portfolio.
General and administrative expense decreased $1,259,000 or 33% from
$3,844,000 in 1999 to $2,585,000 in 2000. The decrease is primarily due to
decreases in three items. Approximately $735,000 or 58% of the decrease is due
to decreased legal fees, attributable to the settlement of the Sedona Project
litigation in the fourth quarter of 1999. Approximately $180,000 or 14% of the
decrease is due to a decrease in the allowance for bad debts. The allowance for
bad debts was increased by $100,000 in 2000 compared to an increase of $280,000
in 1999. The increase to the allowance for bad debts is based on management's
analysis of the current loan portfolio, including economic conditions,
collateral values and credit quality indicators, including charge-off experience
and levels of past due loans. Approximately $200,000 of the decrease or 16% is
primarily due to changes in staffing, mostly related to the close of our
Albuquerque office. Interest expense increased $918,000 or 59% from $1,552,000
in 1999 to $2,470,000 in 2000. The increase is primarily attributable to
increases in two items. Approximately 68% of the increase is due to increased
interest expense for some of the lines of credit due to higher balances in 2000
than in 1999. Approximately 29% of the increase is due to increased interest
expense for the industrial buildings owned for an entire year in 2000 compared
to part of a year in 1999 together with apartment buildings owned in 1999 but
not owned in 2000.
Real Estate Segment
Revenues decreased 59% from $31,193,000 in 1999 to $12,812,000 in
2000. The decrease is due to fewer real estate sales in 2000 than in 1999
partially offset by an increase in revenue from property rentals. While rental
properties provide relatively stable operating results from period to period,
our revenues are affected by the nature and timing of sales of property and
non-strategic assets. Sales of assets are difficult to predict and are generally
subject to negotiations and contingencies. These factors tend to "bunch" income
in particular periods rather than producing a more even pattern throughout the
year. Gross margins may vary significantly due to the cost basis of the
properties sold in any particular period.
Income before income taxes decreased 25% from $5,857,000 in 1999 to
$4,417,000 in 2000. The decrease is primarily attributable to the volume and mix
of real estate sales and a decrease in legal costs primarily associated with the
settlement of the Sedona Project litigation in the fourth quarter of 1999. These
two decreases are partially offset by an increase in interest expense.
NZ Corporation 2000/Page 9
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The decline in identifiable assets from $46,914,000 in 1999 to
$42,799,000 in 2000 is primarily due to the disposition of real estate.
Short-term Commercial Real Estate Lending Segment
Revenues increased 35% from $5,241,000 in 1999 to $7,093,000 in
2000. Approximately 59% of the increase is due to an increase in lending
revenues and approximately 38% is an increase in revenue from real estate owned.
The lending increase is primarily the result of a growth in the commercial real
estate loan portfolio. The real estate owned increase is due to two factors.
Real estate owned includes residential lots in New Mexico and a hotel located in
Phoenix, Arizona. The residential lots were acquired in 1999 from one of our
borrowers. The lots are being sold back to the borrower under a rolling option
agreement. We sold 56 lots in 2000 compared to 26 lots in 1999. The hotel was
acquired through foreclosure in 1998. The hotel underwent extensive
refurbishment and was re-opened for operations in May 1999. Revenues from the
hotel include the entire year of 2000 compared to a partial year in 1999.
Income before income taxes increased 1% from $1,893,000 in 1999 to
$1,912,000 in 2000. The increase is primarily attributable to increased revenues
from lending activities and real estate owned.
The increase in identifiable assets from $39,489,000 in 1999 to
$49,608,000 in 2000 is primarily due to the growth of the loan portfolio.
Other Segment
Revenues and income before income taxes increased significantly in
2000 compared to 1999. The increase is primarily attributable to the completion
of new wells in Oklahoma and higher petroleum prices. Additionally, we sold
petrified wood rights in 2000 for approximately $200,000 with no comparable sale
in 1999.
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 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. In 1999, the Company
continued the transition, begun in November, 1997, 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 four 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 proceeds from the sales of the apartments were
used to acquire industrial buildings; however, the industrial 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 in 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.
NZ Corporation 2000/Page 10
11
Real Estate Segment
Income before income taxes increased 67% from $3,509,000 in 1998 to
$5,858,000 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 before income taxes decreased 24% from $2,505,000 in 1998 to
$1,893,000 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 increase in corporate overhead allocation is attributable to an
increase in the lending segment's total assets as a proportion of consolidated
assets.
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.
We expect to generate cash from the sale of our remaining real
estate assets. Cash will also be generated from principal repayments on maturing
loans in the Company's existing loan portfolio and collections from property
rentals. 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 2000, operating activities provided $7,185,000 of net cash flows.
Operating cash inflows were primarily generated from property sales and cash
received from leases. Operating cash flows outflows were primarily used to pay
interest, income taxes and other operating activities. In 2000, investing
activities used $11,080,000 of net cash flows. Investing cash inflows were
primarily generated from the collections of principal on commercial real estate
loans. Investing cash outflows were primarily used for additions to commercial
real estate loans and contributions to joint ventures. The contributions to
joint ventures are primarily commercial real estate loans accounted for as a
joint venture. In 2000, financing activities provided $3,217,000 of net cash
flows. Financing cash inflows were primarily generated from additional
borrowings. Financing cash outflows were primarily used to partially repay
outstanding borrowings and repurchase treasury stock.
The Company intends to negotiate additional or modified lines of
credit, as business circumstances require. The Company's goal in these
negotiations will be to improve the effectiveness and cost of available capital
and to obtain lines of credit of a size appropriate for the Company's expected
needs. A principal outcome 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 or changed financing
arrangement will likely have a material effect upon the Company's margins in its
lending business and on the size of the managed loan portfolio. If the Company
is not successful in negotiating such financing, the principal effect will be
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 $13,000,000 partially secured line of
credit from a commercial bank, of which $10,000,000 is a revolving line for
general corporate purposes, and $3,000,000 of which is a back-up facility for a
letter of assurance the bank has provided to Yavapai County, Arizona, in
connection with development costs for the Seven Canyons Project. The line bears
interest at the prime rate (9.50% as of December 31, 2000) and expires July 17,
2001. At December 31, 2000 there was an outstanding balance of $7,275,000. As of
February 28, 2001 the line had an outstanding balance of $6,275,000. 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
NZ Corporation 2000/Page 11
12
specified maximum ratio of debt to net worth; and a specified minimum tangible
net worth. At December 31, 2000 the Company was in compliance with these
financial covenants.
BFC has a $10,000,000 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, 2001.
As amounts are drawn, the line will be secured by certain loan assets of the
Company. At December 31, 2000 and February 28, 2001 the outstanding balance was
$2,737,500. 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 liquidity. At December 31, 2000, Bridge was in
compliance with these financial covenants. The line of credit is guaranteed by
the Company.
Additionally, BFC has a revolving $20,000,000 warehouse line of
credit from a different large non-bank commercial lender 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, 2000 and February 28, 2001 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, 2000, 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, reduces
the Company's risk by sharing it with another party, and gives 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 2000 operations and knows of no conditions which would
cause the Company to believe that such items could have a material effect on
2001 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
As of January 1, 2001 we adopted 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 in current earnings unless specific hedge accounting criteria are
met. Currently, we do not use derivative instruments nor did we identify any
imbedded derivatives in other contracts. Upon adoption of SFAS No. 133, there
was no material effect on the financial position or results of operations of the
Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This Report contains statements about future events and expectations
that constitute "forward-looking statements" within the meaning of Federal
securities laws. Forward-looking statements are based on management's beliefs,
assumptions, and expectations of our future economic performance, taking into
account the information currently available to management. These statements are
not statements of historical fact. Forward-looking statements involve risks and
uncertainties that may cause our actual results, performance, or financial
condition to differ materially from the expectations we express or imply in any
forward-looking statement. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including but not limited to those set forth below.
REAL ESTATE MARKET. The Company will continue to be linked to the
real estate market, particularly the markets in California and the southwestern
United States. A downturn in any of those markets could adversely affect the
Company's performance. The Company expects to generate significant amounts of
cash 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. The market for some of our rural
land located in northeastern Arizona is limited, particularly for the portion of
land that may not be suitable for inclusion in our recreational lot sales
program. A downturn in
NZ Corporation 2000/Page 12
13
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.
The Company intends generally to hold loans that it funds in its
loan portfolio, although it may occasionally sell a loan or 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 generally 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 tends 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. If 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 may become 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 sometimes 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
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.
By participating loans BFC is generally able to originate larger loans than it
could 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, 2000,
approximately 63% of the
NZ Corporation 2000/Page 13
14
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.
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. Management believes that a major factor that will
allow the Company to effectively compete with other lending 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.
NZ Corporation 2000/Page 14
15
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
NZ Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of NZ
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedules II, III and IV listed in Item 14.
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 auditing standard generally
accepted in the United States of America. 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 consolidated financial statements present fairly,
in all material respects, the financial position of NZ Corporation and
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such 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 2, 2001
NZ Corporation 2000/Page 15
16
NZ Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands) 2000 1999
-------- --------
ASSETS
Properties, net $ 42,376 $ 46,351
Commercial real estate loans, net 34,521 26,773
Receivables 5,868 6,237
Investments in joint ventures 6,688 3,134
Cash and cash equivalents 2,983 3,661
Other 774 1,062
-------- --------
Total assets $ 93,210 $ 87,218
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and lines of credit $ 25,189 $ 20,983
Accounts payable and accrued liabilities 1,082 2,014
Deferred income taxes 3,319 4,834
Deferred revenue 7,927 6,951
-------- --------
Total liabilities 37,517 34,782
-------- --------
Non-controlling interests 44 560
-------- --------
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 shares issued 35,341 35,341
Treasury stock, at cost, 89,200 shares (451) --
Retained earnings 20,759 16,535
-------- --------
Total shareholders' equity 55,649 51,876
-------- --------
Total liabilities and shareholders' equity $93,210 $87,218
======= =======
See accompanying Notes to Consolidated Financial Statements.
NZ Corporation 2000/Page 16
17
NZ Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
(In thousands, except per share data) 2000 1999 1998
-------- -------- --------
REVENUE:
Property sales $ 10,215 $ 28,608 $ 14,251
Property rentals 3,497 2,428 2,905
Commercial real estate lending 5,661 4,576 3,701
Investment income 475 604 427
Other 739 354 701
-------- -------- --------
20,587 36,570 21,985
-------- -------- --------
EXPENSES:
Cost of property sales 5,617 19,750 9,796
Rental property 2,027 1,762 1,067
General and administrative 2,585 3,844 3,222
Writedown of properties -- 700 --
Interest 2,470 1,552 1,335
Depreciation, depletion and amortization 883 665 650
-------- -------- --------
13,582 28,273 16,070
-------- -------- --------
Income Before Joint Ventures, Non-controlling
Interests and Income Taxes 7,005 8,297 5,915
Equity in (losses)/earnings of joint ventures (17) -- 546
Non-controlling interests (22) (422) (322)
-------- -------- --------
INCOME BEFORE INCOME TAXES 6,966 7,875 6,139
Income taxes 2,742 3,144 2,460
-------- -------- --------
Net Income $ 4,224 $ 4,731 $ 3,679
======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK (1)
Basic $ 0.61 $ 0.68 $ 0.53
Diluted $ 0.61 $ 0.68 $ 0.53
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (1)
Basic 6,874 6,926 6,926
Diluted 6,875 6,928 6,934
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
(1) All years include the effect of a 20% stock dividend paid July 10, 1998 and
a 3 for 2 stock split on January 15, 1999 to shareholders of record on
December 31, 1998.
NZ Corporation 2000/Page 17
18
NZ Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands) 2000 1999 1998
-------- -------- --------
Cash Flows provided by (used in) Operating Activities:
Net income $ 4,224 $ 4,731 $ 3,679
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 883 665 650
Deferred revenue 371 3,008 617
Deferred income taxes (1,515) 674 (1,201)
Allowance for bad debts 100 280 --
Write down of properties -- 700 --
Equity in losses (earnings) from joint ventures 17 -- (546)
Non-controlling interests 22 422 322
Net change in:
Receivables 369 (1,276) (4,868)
Properties under development 924 1,641 (11)
Other properties 2,434 8,297 4,353
Other assets 288 (317) 79
Accounts payable and accrued liabilities (932) 606 (239)
-------- -------- --------
Net cash provided by operating activities 7,185 19,431 2,835
-------- -------- --------
Cash Flows provided by (used in) Investing Activities:
Additions to properties (266) (14,286) (1,479)
Contributions to joint ventures (3,084) -- --
Distribution from investment in joint ventures 13 -- 946
Collections of principal on commercial real estate loans 17,238 16,691 11,415
Additions to commercial real estate loans (24,981) (27,812) (16,599)
-------- -------- --------
Net cash (used in) investing activities (11,080) (25,407) (5,717)
-------- -------- --------
Cash Flows provided by (used in) Financing Activities:
Proceeds from debt 24,957 42,393 7,464
Payments of debt (20,751) (35,674) (5,703)
Distribution to non-controlling partners (538) (1,751) (226)
Purchase of treasury stock (451) -- --
-------- -------- --------
Net cash provided by financing activities 3,217 4,968 1,535
-------- -------- --------
Net (decrease) in cash and cash equivalents (678) (1,008) (1,347)
Cash and cash equivalents at beginning of year 3,661 4,669 6,016
-------- -------- --------
Cash and cash equivalents at end of year $ 2,983 $ 3,661 $ 4,669
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid during the year for:
Interest (net of amount capitalized) $ 2,440 $ 1,836 $ 1,499
Income taxes 4,961 2,090 3,732
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Conversion of real estate loan to joint venture accounting $ 500 $ 3,122
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements.
NZ Corporation 2000/Page 18
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NZ Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Share-
Common stock Treasury stock Retained holders'
(in thousands) Shares Amount Shares Amount earnings Equity
----- -------- -------- -------- -------- --------
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 2,308
----- -------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1998 6,925 35,341 -- -- 11,804 47,145
----- -------- -------- -------- -------- --------
Net income 4,731 4,731
----- -------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1999 6,925 35,341 -- -- 16,535 51,876
----- -------- -------- -------- -------- --------
Net income 4,224 4,224
Purchase of treasury stock 89 (451) (451)
----- -------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 2000 6,925 $ 35,341 89 $ (451) $ 20,759 $ 55,649
----- -------- -------- -------- -------- --------
See accompanying Notes to Consolidated Financial Statements.
NZ Corporation 2000/Page 19
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NZ Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
NZ Corporation provides time-sensitive, short-term and participating commercial
real estate loans to qualified borrowers throughout California and the
southwestern United States. Our wholly-owned subsidiary, Bridge Financial
Corporation ("BFC") conducts the lending business. Both directly and through our
other subsidiaries, we develop, manage and sell real estate and hold various
mineral rights in the Southwest. The Company's operations are subject to a
number of risks and uncertainties including but not limited to a downturn in the
real estate market, interest rate fluctuations, and availability of funding
sources.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of NZ
Corporation, its wholly-owned subsidiaries, and investees over 50% owned. The
income and equity portion of a consolidated entity, which is not 100% owned by
us is shown as non-controlling interest on our statements of income and
consolidated balance sheets. The Company prepares its financial statements in
accordance with accounting principles generally accepted in the United States of
America. All significant intercompany transactions have been eliminated in
consolidation.
Properties and Deferred Costs
Properties are stated at the lower of cost or estimated fair value. Operating
properties and properties held for long-term investment are written-down to
estimated fair value when a property's estimated undiscounted future cash flow,
before interest charges, is less than its book value. Properties held for sale
are written down to estimated fair value when the Company determines the
carrying cost exceeds the estimated selling price, less costs to sell.
Management makes this evaluation on a property-by-property basis. The evaluation
of fair value and future cash flows from individual properties requires
significant judgment. It is reasonably possible that a change in economic or
market conditions could result in a change in management's estimate of fair
value.
The transition of our core business from real estate to lending has led to the
sale, or holding for sale, of properties previously held for long-term
investment.
Depreciation on rental properties and other assets is provided over the
estimated useful lives of the assets. Depreciation is computed using the
straight-line method. Buildings and improvements are depreciated using lives
between 4 and 35 years. Furniture and equipment are depreciated using lives
ranging between 3 and 10 years.
Commercial Real Estate Loans and Allowance for Bad Debts
Commercial real estate 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 and the
value of collateral, 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 bad debts through a charge
to bad debt expense. Interest accrual stops when a loan becomes 90 days past
due. Subsequently, cash receipts on impaired loans are applied to reduce the
principal amount of such loans until the loan is no longer impaired or until the
principal has been recovered, and are recognized as interest income thereafter.
Investments in Joint Ventures
Investments in joint ventures may include loans that, under the relevant
accounting literature, are required to be accounted for as joint ventures, in
addition to real estate joint ventures. The term "joint venture" as used with
respect to those loans does not mean that a partnership relationship exists
under applicable law. Joint venture investments are generally accounted for
using the equity method, but in some instances the cost method is appropriate.
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.
NZ Corporation 2000/Page 20
21
Property Sales and Deferred Revenue
The Company follows Statement of Financial Accounting Standards ("SFAS") No. 66,
Accounting for Sales of Real Estate. SFAS No. 66 stipulates certain conditions
must be met to recognize profit from the sale of real estate using the full
accrual method. These conditions include minimum down payments and annual
investments by the buyer, and reasonable assurance the related receivable is
collectible. We recognize revenue from the sale of properties using the full
accrual method when the required conditions are met.
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, other land sales recorded on the installment basis, and rents
collected in advance.
The Company capitalizes construction and development costs as required by
Statement of Financial Accounting Standards ("SFAS") No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects. The relative sales
value method is used to determine cost of sales for residential lots. Cost of
sales for the recreational lots are determined by allocating development costs
pro-rata by acre. Costs associated with financing or leasing projects are
capitalized and amortized over the period benefited by those expenditures.
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.
Earnings Per Share
Basic earnings per share is determined by dividing net income 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 shares and dilutive potential common shares (which reflect the effect of
in-the-money stock options) outstanding for the period.
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 general
policy is to 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).
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 judgment 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 may pay or receive in actual market transactions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Standards
As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that all derivative instruments,
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 in current earnings unless specific hedge accounting criteria are
met. Currently, the Company does not use derivative instruments nor did the
Company's evaluation identify any imbedded
NZ Corporation 2000/Page 21
22
derivatives in other contracts. Upon adoption of SFAS No. 133 there was no
material effect on the financial position or results of operations of the
Company.
Reclassifications
Certain financial statement items from prior years have been reclassified to be
consistent with the current year financial statement presentation.
NOTE 2: PROPERTIES, NET
Properties, net are comprised of the following:
In thousands at December 31, 2000 1999
-------- --------
Rural lands and unimproved urban properties (1) $ 3,133 $ 9,077
Land under development 12,370 13,006
Rental properties (2) 21,433 21,167
Other real estate owned (3) 6,934 7,409
Other 1,737 1,737
Accumulated depreciation, depletion and amortization (2,731) (2,145)
Valuation allowance (4) (500) (3,900)
-------- --------
$ 42,376 $ 46,351
======== ========
(1) The property held as of December 31, 2000 is for sale.
(2) As of December 31, 2000, the Company owned five office/industrial
warehouse complexes. Four buildings were multi-tenant and one building
was leased to a single tenant. The leases are primarily triple net with
a five-year term. As of December 31, 2000, accumulated depreciation for
rental properties was $1,516,159. The future rentals on non-cancelable
operating leases related to the Company's rental properties and certain
mineral leases are as follows: $2,222,283 in 2001; $1,586,321 in 2002;
$932,319 in 2003; $771,080 in 2004; $583,036 in 2005; and $1,244,532 in
later years.
(3) As of December 31, 2000 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. The hotel is located in
Phoenix, Arizona and re-opened for operations May 9, 1999. The New
Mexico lots are being sold back to the Company's borrower under a
rolling option agreement.
(4) The valuation allowance pertains to properties held for sale as of
December 31, 2000 and 1999.
NOTE 3: COMMERCIAL REAL ESTATE LOANS, NET
Commercial real estate loans, net consist of the following:
In thousands at December 31, 2000 1999
-------- --------
Managed portfolio $ 50,082 $ 60,112
Less participations (11,688) (28,540)
-------- --------
Commercial real estate loans 38,394 31,572
Less: Allowance for bad debts (655) (555)
Undisbursed loan proceeds (887) (1,122)
Loans accounted for as joint ventures (2,331) (3,122)
-------- --------
$ 34,521 $ 26,773
======== ========
Except for loans made in connection with the recreational land sales program,
which are discussed below, these loans bear interest at rates ranging from 11.5%
to 13.5% with initial terms ranging from 6 to 24 months. 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.
NZ Corporation 2000/Page 22
23
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, 2000 and 1999, mortgage notes receivable
relating to these sales totaled $5,998,000 and $5,535,000, respectively. The
Company sold recreational land for mortgage notes receivable in the amount of
$1,700,000 and $1,040,000 during the years ended December 31, 2000 and 1999,
respectively. In 2000 and 1999, the Company collected $975,000 and $1,136,000,
respectively, in principal payments on these notes.
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
$655,000 at December 31, 2000 from $555,000 at December 31, 1999. 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 current
conditions in the loan portfolio. 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:
In thousands for Years Ended December 31, 2000 1999
---- ----
Balance at beginning of the year $555 $275
Additions 100 280
Deductions -- --
Charge-offs -- --
---- ----
Balance at end of the year $655 $555
==== ====
Allowance for bad debts to commercial real estate loans (1) 1.86% 2.03%
==== ====
(1) Net of undisbursed loan proceeds and loans accounted for as joint
ventures.
As of December 31, 2000, two loans in the amount of $1,645,000 were on
non-accrual status. As of December 31, 2000, there was no specific reserve
allocated to any one loan or group of loans.
The borrower on one of the non-accrual loans is involved in a bankruptcy. The
Company is the only significant creditor in the bankruptcy. The principal amount
of the loan is $1,370,000. The Company believes the value of the collateral
significantly exceeds the principal amount of the loan and that the borrower's
bankruptcy will not have a material adverse effect on the Company's results of
operations or financial position.
NZ Corporation 2000/Page 23
24
NOTE 4: RECEIVABLES
Receivables consist of the following:
In thousands at December 31, 2000 1999
------ ------
Mortgage notes receivable (1) $2,605 $2,798
Other notes receivable (2) 2,614 2,614
Accounts receivable (3) 649 825
------ ------
$5,868 $6,237
====== ======
(1) Mortgage notes receivable as of December 31, 2000 consist primarily of
five separate notes receivable the Company took back from the sale of
land. The notes bear interest at rates ranging from 8% to 11% and have
terms ranging from 3 to 15 years. At December 31, 2000, these notes had
outstanding balances ranging from $74,000 to $1,000,000. The notes are
secured by mortgages on the property sold. One loan in the amount of
$74,000 is on non-accrual status as of December 31, 2000.
(2) 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 which the Company previously owned.
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 issued in connection with the
sales. Principal on the bonds is payable out of the excess cash flow
from the future operations of the apartments. All four bonds are on
non-accrual status as of December 31, 2000. The Company's currently
negotiating with the debtor to restructure or repay the bonds. The
Company believes it will be paid a discounted amount from the face
value. The Company believes the effect of any discounted repayment
would be immaterial because revenue recognition on these bonds is fully
deferred.
(3) Accounts receivable consists primarily of rents receivable and interest
receivable in connection with the notes described above.
NOTE 5: NOTES PAYABLE AND LINES OF CREDIT
Notes payable and lines of credit consist of the following:
Maturity Interest
Dollars in thousands at December 31, date rate (%) Payment 2000 1999
- ------------------------------------ ---- -------- ------- ---- ----
Mortgage loans:
Commercial buildings (3) 2006-2018 7.3%-9.125% monthly p&i $15,177 $15,444
Development and construction loans 2001 prime(1) monthly interest -- 515
Revolving lines of credit 2001 prime(1)(2) monthly interest 10,012 4,870
Other loans 2004 7.60% various p&i -- 154
------- -------
$25,189 $20,983
======= =======
(1) Certain loans are at variable rates of prime to prime plus 0.25%. Prime
rate at December 31, 2000 was 9.50%.
(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, 2000 was 6.565%.
(3) These loans are collateralized by first mortgages and related security
documents on the Company's rental properties.
One of the Company's majority-owned partnerships obtained a development line of
credit from a commercial bank to fulfill certain regulatory requirements with
respect to the development of the property. The line, which is secured by the
real property being developed by the partnership, expires on July 16, 2001 and
has an aggregate commitment amount of $54,034. At December 31, 2000 there was no
outstanding balance. The interest rate is at the bank's prime rate plus -1/4%.
This loan is guaranteed by the Company. The Company does not expect the joint
venture to draw against the line.
The Company has a $13,000,000 partially secured line of credit from a commercial
bank, of which $10,000,000 is a revolving line for general corporate purposes,
and $3,000,000 of which is a back-up facility for a letter of assurance the bank
has provided to Yavapai County in connection with development costs for the
Seven Canyons Project. The line bears interest at the prime rate (9.50% as of
December 31, 2000) and expires July 17, 2001. At December 31, 2000, there was an
outstanding balance of $7,275,000. 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 maximum
ratio of debt to net worth; and a specified minimum tangible net worth. At
December 31, 2000, the Company was in compliance with these financial covenants.
NZ Corporation 2000/Page 24
25
BFC has a $10,000,000 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, 2001. As amounts are
drawn, the line will be secured by certain loan assets of the Company. At
December 31, 2000, the outstanding balance was $2,737,500. 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
liquidity. At December 31, 2000, Bridge Financial Corporation was in compliance
with these financial covenants. The line of credit is guaranteed by the Company.
Additionally, BFC has a revolving $20,000,000 warehouse line of credit with a
different large non-bank commercial lender 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, 2000, 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. At December 31, 2000, BFC was in compliance with these financial
covenants. The line of credit is guaranteed by the Company.
The principal payment requirements (in thousands) on debt for the years ending
December 31 are as follows:
2001 $10,307
2002 319
2003 345
2004 374
2005 406
Thereafter 13,438
-------
$25,189
=======
NOTE 6: INCOME TAXES
Income tax expense is comprised of the following:
In thousands for Years Ended December 31, 2000 1999 1998
- ----------------------------------------- ---- ---- ----
Current:
Federal $3,445 $2,008 $2,899
State 812 462 762
Deferred:
Federal (1,227) 601 (831)
State (288) 73 (370)
------ ------ ------
$2,742 $3,144 $2,460
====== ====== ======
The reconciliation of the computed statutory income tax expense to the effective
income tax expense follows:
In thousands for Years Ended December 31, 2000 1999 1998
- ----------------------------------------- ---- ---- ----
Statutory Federal income tax expense $2,368 $2,678 $2,087
State income taxes, net of Federal benefit 346 353 263
Other 28 113 110
------ ------ ------
$2,742 $3,144 $2,460
====== ====== ======
NZ Corporation 2000/Page 25
26
The effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities:
In thousands at December 31, 2000 1999
- ---------------------------- ---- ----
Deferred tax assets:
Properties, principally due to valuation allowances, depreciation
and amortization of costs $ 434 $ 1,588
Investments in joint ventures, principally due to capitalization
and amortization of costs 134 217
Commercial real estate loans/deferred revenue, principally due
to installment sales 815 261
Other 244 215
------- -------
Total gross deferred tax assets 1,627 2,281
------- -------
Deferred tax liabilities:
Properties, principally due to basis differences upon acquisition (4,859) (7,108)
Other (87) (7)
------- -------
Total gross deferred tax liabilities (4,946) (7,115)
------- -------
Net deferred tax liability $(3,319) $(4,834)
======= =======
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, 2000.
NOTE 7: RETIREMENT PLANS
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 $16,968, $22,496 and $16,800 for 2000, 1999 and
1998, respectively.
NOTE 8: STOCK OPTION PLAN
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,
2000, ten persons were eligible to participate in the Plan.
During 2000, each Director on the Board was granted options under the Plan to
purchase up to 6,000 shares of the Company's common stock. The earliest
permitted exercise date of the options is November 20, 2001. The options expire
November 20, 2010. No compensation expense was recognized in 2000 because the
exercise price was equal to the market price of the common stock 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.
SFAS No. 123 requires disclosure of pro forma net income and pro forma earnings
per share as if the fair value based method had been applied in measuring
compensation expense.
NZ Corporation 2000/Page 26
27
Reported and pro forma net income, in thousands, and earnings per share amounts
for the years ended December 31, 2000, 1999 and 1998 are set forth below:
2000 1999 1998
---- ---- ----
Reported:
Net income $ 4,224 $ 4,731 $ 3,679
Basic earnings per share $ 0.61 $ 0.68 $ 0.53
Diluted earnings per share $ 0.61 $ 0.68 $ 0.53
Pro forma:
Net income $ 4,119 $ 4,349 $ 3,479
Basic earnings per share $ 0.60 $ 0.63 $ 0.50
Diluted earnings per share $ 0.60 $ 0.63 $ 0.50
The fair values of the options granted were estimated on the dates of their
grant using the Black-Scholes option pricing model based on the following
assumptions:
2000 1999 1998
---- ---- ----
Risk free interest rate 4.681% 6.53% 5.204%
Expected life (in years) 2.5 3.5 5
Expected volatility 50% 48% 44%
Expected dividend yield 0 0 0
Stock options outstanding at December 31, 2000 were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Number of Average Remaining Weighted Number of Weighted
Options Contractual Life Average Options Average
Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------- -------------- ----------- --------------
$8.33 - $13.11 517,500 8.85 $ 10.53 337,500 $ 10.50
$5.125 74,886 8.92 5.13 74,886 5.13
$4.25 36,000 10.00 4.25 -- --
Activity related to stock options is summarized as follows:
Years Ended December 31,
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Options outstanding, beginning of year 646,386 $ 9.91 571,500 $ 10.54 450,000 $ 10.55
Granted 36,000 4.25 74,886 5.13 121,500 9.66
Exercised -- -- -- -- -- --
Expired/cancelled (54,000) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 628,386 646,386 571,500
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 412,386 247,500 108,000
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during year $ 1.45 $ 2.10 $ 2.42
- ----------------------------------------------------------------------------------------------------------------------------------
NZ Corporation 2000/Page 27
28
NOTE 9: CAPITAL STOCK
The Company's Board of Directors approved a stock buy-back program in September
1999. The buy-back program authorized the repurchase of up to 500,000 shares of
the Company's common stock in the open market over the 12-month period ended
September 30, 2000. In August 2000 the Board of Directors extended the buy-back
program to September 30, 2001. As of December 31, 2000, the Company had
purchased 89,200 shares at an average price of $4.90.
NOTE 10: COMMITMENTS AND CONTINGENCIES
From time to time the Company is a party to legal proceedings. All of the legal
proceedings the Company is currently involved in are ordinary and routine. The
outcome of the legal proceedings is uncertain until they are completed. The
Company believes that the results of the current proceedings will not have a
material adverse effect on our business or financial condition or results of
operations.
NOTE 11: UNAUDITED QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the years ended December
31, 2000 and 1999 is presented below:
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
2000
Net Sales $5,713 $5,512 $3,966 $4,182
Expenses 2,380 2,476 913 1,875
------ ------ ------ ------
Gross Profit 3,333 3,036 3,053 2,307
====== ====== ====== ======
Net income $1,318 $1,200 $ 916 $ 790
====== ====== ====== ======
Earnings per share(1)
Basic $0.19 $0.17 $0.13 $0.12
Diluted $0.19 $0.17 $0.13 $0.12
====== ====== ====== ======
1999
Net Sales $10,484 $5,045 $8,674 $11,409
Expenses 6,500 2,429 5,098 7,485
------ ------ ------ ------
Gross Profit 3,984 2,616 3,576 3,924
====== ====== ====== ======
Net income $1,226 $ 763 $1,418 $1,324
====== ====== ====== ======
Earnings per share(1)
Basic $0.18 $0.11 $0.20 $0.19
Diluted $0.18 $0.11 $0.20 $0.19
====== ====== ====== ======
(1) Includes the effect of a 20% stock dividend paid July 10, 1998 and a 3
for 2 stock split on 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 loans made in connection with the Company's
NZ Corporation 2000/Page 28
29
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. BFC
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 sale or exchange 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.
The Other Business segment 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. Recently the Company has experienced an increase in
revenue from this segment due to the completion of new wells in Oklahoma and
higher petroleum prices. There can be no assurance that existing or new wells
will continue to be productive or that petroleum prices will remain at their
current level.
Reconciliation of Segment Information to Consolidated Amounts
Management evaluates the performance of each segment based on income before
income taxes and identifiable assets. Income before income taxes includes
allocations of corporate overhead expenses. Identifiable assets include assets
employed in the generation of income for each segment.
The basis of measurement of segment income reported below differs from the
measurement used in prior years' reports. Management previously evaluated
segment performance based on income before joint ventures, non-controlling
interests and income taxes. Beginning with reports for periods ending on or
after March 31, 2000, management now evaluates performance of segments based on
income after joint ventures and non-controlling interests, but before income
taxes. Prior period amounts have been reclassified for comparative purposes.
Information for the Company's reportable segments reconciles to the Company's
consolidated totals as follows:
REVENUES:
Years Ended December 31,
(in thousands) 2000 1999 1998
- -------------- ---- ---- ----
Real Estate $12,812 $31,193 $18,106
Short-term Commercial Real Estate Lending 7,093 5,241 3,752
Other 682 136 127
------- ------- -------
Consolidated total $20,587 $36,570 $21,985
======= ======= =======
INCOME AFTER ALLOCATIONS:
Years Ended December 31,
(in thousands) 2000 1999 1998
- -------------- ---- ---- ----
Real Estate $ 4,417 $ 5,857 $ 3,510
Short-term Commercial Real Estate Lending 1,912 1,893 2,505
Other 637 125 124
------- ------- -------
Income before income taxes $ 6,966 $ 7,875 $ 6,139
======= ======= =======
NZ Corporation 2000/Page 29
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IDENTIFIABLE ASSETS:
December 31,
(in thousands) 2000 1999
- -------------- ---- ----
Real Estate $42,799 $46,914
Short-term Commercial Real Estate Lending 49,608 39,489
Other 803 815
------- -------
Consolidated total $93,210 $87,218
======= =======
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 $18,109, $35,105 and $44,408 and interest expense of $1,901,004, $504,885 and
$216,916 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Real Estate segment includes investment income of $452,091, $568,995,
$382,574 and interest expense of $568,865, $1,047,372, and $1,118,089 for the
years ended December 31, 2000, 1999 and 1998, respectively.
NZ Corporation 2000/Page 30
31
NZ Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2000
(In thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning of costs and other end of
Description period expenses accounts Deductions period
- ----------- ------ -------- -------- ---------- ------
Year ended December 31, 1998
Allowances on properties held for sale $(3,480) -- -- $ -- $(3,480)
Year ended December 31, 1999
Allowances on properties held for sale (3,480) (500) -- 80 (3,900)
Year ended December 31, 2000
Allowances on properties held for sale (3,900) -- -- 3,400 (500)
NZ Corporation 2000/Page 31
32
NZ Corporation and Subsidiaries
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(in thousands) Cost
capital-
Initial cost ized sub- Gross amount at which
To Company sequent carried at close
------------------ to of period(1)
acqui- ---------------------------- Accum-
Bldgs sition Buildings ulated
and im- ------ and depre-
Encum- prove- Improve- improve- Total ciation Date
brances Land ments ments Land ments (a)(2) (b)(4) acquired
------- ---- ----- ----- ---- ----- ------ ------ --------
UNIMPROVED PROPERTIES
Arizona and New Mexico $ -- $ 880 $ -- $ 476 $ 1,356 $ -- $ 1,356 $ -- various
PROPERTIES UNDER DEVELOPMENT
Arizona and New Mexico(3) -- 1,788 -- 166 1,954 -- 1,954 -- 1992-1995
Sedona, Arizona -- 8,003 -- 4,208 12,211 -- 12,211 -- 1995-1997
RENTAL PROPERTIES
Commercial Buildings
Tempe, Arizona 689 462 714 152 462 866 1,328 504 1986
Tempe, Arizona 4,893 1,087 1,737 3,520 1,087 5,257 6,344 545 1997
Phoenix, Arizona 1,898 770 1,964 -- 770 1,964 2,734 93 1999
Gilbert, Arizona 4,342 1,181 4,240 392 1,181 4,632 5,813 211 1999
Chandler, Arizona 3,355 878 4,281 54 878 4,335 5,213 163 1999
Hotel, Phoenix, Arizona -- 1,023 2,292 2,436 1,023 4,728 5,751 234 1998
------- ------- ------- ------- ------- ------- ------- ------- ---------
$15,177 $16,072 $15,228 $11,404 $20,922 $21,782 $42,704 $ 1,750
======= ======= ======= ======= ======= ======= ======= ======= =========
(1) Tax basis: $30,891,000
(2) A valuation allowance in the amount of $500,000 was recorded in prior
years against property under development located in Sedona, Arizona.
The allowance reflects the Company's estimated realizable value upon
ultimate disposition of the property. Additionally, a hotel located in
Phoenix, Arizona was written down by $200,000 in prior years. The
write-down was the amount by which the Company estimated the carrying
amount of the asset exceeded the fair value.
(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.
NZ Corporation 2000/Page 32
33
(a) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 2000 1999 1998
- -------------- ---- ---- ----
Balance at beginning of year $ 49,558 $ 49,485 $ 53,899
Additions during year:
Acquisitions through foreclosure -- 4,709 1,023
Other acquisitions 260 4,229 123
Improvements 3,045 12,729 5,176
Deductions during year:
Cost of real estate sold (10,159) (21,594) (10,736)
-------- -------- --------
Balance at close of year $ 42,704 $ 49,558 $ 49,485
======== ======== ========
(b) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 2000 1999 1998
- -------------- ---- ---- ----
Balance of accumulated depreciation at beginning of year $ 1,322 $ 3,844 $ 4,761
Additions during year:
Current year's depreciation 615 480 544
Deductions during year:
Real estate sold (187) (3,002) (1,461)
-------- -------- --------
Balance at close of year $ 1,750 $ 1,322 $ 3,844
======== ======== ========
NZ Corporation 2000/Page 33
34
NZ Corporation and Subsidiaries
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 2000
(In thousands)
Principal
amount of
loans
subject
Face Carrying to delin-
amount amount of quent
Final Periodic of mort- principal
Interest maturity payment mort- gages or
Description rate date terms gages (3)(a) interest
----------- ---- ---- ----- ----- ------ --------
Mortgages on:
Unimproved Land Sales:
Arizona (predominately 40-acre parcel sales) 10%-12% 2000-2015 $6,216 $6,216 $ 538
Colorado 10% 2003 Quarterly(5) 1,000 1,000
Residential Land under Development - Arizona 8%-12.5% 2001-2002 Variable(2)(4) 1,324 1,324
Commercial Land under Development:
Arizona 10%-13% 2000-2004 Variable(2) 1,755 1,755
Arizona 12% 2001 Monthly(2) 1,998 1,998
California 12.5% 2001 Monthly(1)(2) 1,297 1,297
Mixed Land Use Unimproved - Arizona 12%-13.5% 2001 Variable(1)(2) 1,634 1,634
Operating Properties:
Arizona 11.5%-12.5% 2000-2001 Monthly(1)(2) 1,948 1,948
Tucson, Arizona 11.5% 2001 Monthly(2) 1,224 1,224
New Mexico 11% 2001 Monthly (2) 289 289 289
Operating Agriculture - California 12% 2001 Monthly(2) 1,940 1,940
Commercial Land Unimproved:
Arizona 12.75% 2001 Monthly(1)(2) 1,214 1,214
Arizona 13% 2000 Monthly(2) 1,461 1,461 1,461
Residential Land Unimproved:
Arizona 12.75% 2001 Quarterly(2) 4,899 4,899
Arizona 12%-12.875% 2001-2002 Monthly(2) 1,456 1,456
Arizona 13.5% 2001 Monthly(2) 1,831 1,831
California 13% 2001 Monthly(2) 413 413
California 12% 2001 Monthly(2) 4,426 4,426
New Mexico 12.5% 2001 Monthly(2) 1,275 1,275
Allowance for bad debts (655)
- -------------------------------------------- -------- --------- -------------- ------- ------- ------
$37,600 $36,945 $2,288
============================================ ======== ========= ============== ======= ======= ======
NZ Corporation 2000/Page 34
35
(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)
2000 1999 1998
---- ---- ----
Balance at beginning of period $ 29,567 $ 21,757 $ 15,287
Additions during period:
New mortgage loans 24,956 30,335 18,793
Valuation allowance change (100) (280) --
Deduction during period:
Collections of principal (17,278) (22,031) (12,186)
Forfeitures on installment contracts (200) (214) (137)
-------- -------- --------
Balance at close of year $ 36,945 $ 29,567 $ 21,757
======== ======== ========
NZ Corporation 2000/Page 35
36
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 2001 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 2001
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 2001
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 2001
Proxy Statement under the heading "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
NZ Corporation 2000/Page 36
37
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 - December 31, 2000 and 1999
Consolidated Statements of Income - For the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows - For the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Shareholders Equity - For the Years Ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - December 31, 2000, 1999
and 1998
Schedule II - Valuation and Qualifying Accounts - For the Years Ended
December 31, 2000, 1999 and 1998
Schedule III - Real Estate and Accumulated Depreciation - December 31,
2000
Schedule IV - Mortgage Loans on Real Estate - December 31, 2000
Exhibits:
Exhibit 3.1 Articles of Incorporation
Exhibit 3.2 By-Laws
Exhibit 21 Subsidiaries of the Company
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.
NZ Corporation 2000/Page 37
38
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.
NZ Corporation
(Registrant)
/s/R. Randy Stolworthy /s/Jerome L. Joseph
- ----------------------------- -----------------------------
R. Randy Stolworthy Jerome L. Joseph
President Controller and Treasurer
(Principal Executive Officer) (Principal Financial Officer)
Dated: March 26, 2001
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, Jr.
- ---------------------------- ------------------------------
Stephen E. Renneckar Robert R. Hensler, Jr.
Chairman Director
/s/William A. Pope /s/Arnold L. Putterman
- ---------------------------- ------------------------------
William A. Pope Arnold L. Putterman
Director Director
/s/Ronald E. Strasburger /s/R. Randy Stolworthy
- ---------------------------- ------------------------------
Ronald E. Strasburger R. Randy Stolworthy
Director Director
Dated: March 26, 2001
NZ Corporation 2000/Page 38
39
NZ CORPORATION
10-K EXHIBIT INDEX
FOR THE YEAR ENDED DECEMBER 31, 2000
EXHIBITS FILED
Exhibit No. Description
3.1 Amended and restated Articles of Incorporation of the Registrant
(composite incorporates all changes in effect as of June 9,
2000).
3.2 Amended and restated By-Laws of the Registrant (composite
incorporates all changes in effect as of August 21, 1998).
In addition to those Exhibits shown above, the Company hereby incorporates the
following Exhibits by reference to the filings set forth below:
Exhibit No. Description
21 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21 to Registrant's Report on Form 10-K for the year ended
December 31, 1999.
1