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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, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the transition period from ___ to ___
Commission File Number 0-497
New Mexico and Arizona Land Company
(Exact name of registrant as specified in its charter)
Arizona 43-0433090
(State of incorporation) (I.R.S. Employer Identification No.)
3033 North 44th Street, Suite 270, Phoenix, Arizona 85018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/952-8836
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Common stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 3, 1998 was approximately $18,068,000 based upon the
closing price on the American Stock Exchange of $13.125 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 the Registrant's Common Stock outstanding as of March 3, 1998 was
3,847,982 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 1998 Annual Meeting of Shareholders.
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PART I
ITEM 1: BUSINESS
BUSINESS OVERVIEW
New Mexico and Arizona Land Company (the "Company" or "NZ") was
organized in 1908 as an Arizona corporation. The Company has 25 full-time
employees and conducts business in Arizona, Colorado, New Mexico, and Oklahoma.
The Company has five wholly-owned subsidiaries: NZ Development Corporation, NZ
Properties, Inc., NZU Inc., Bridge Financial Corporation and Great Vacations
International, Inc. The Company owns various urban and rural real estate
properties as well as extensive mineral rights. In 1997, the Company entered the
specialty real estate lending business.
This document may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. Such forward-looking statements involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in such forward-looking statements. See "Significant Activities" in
this Item 1 - "Business", and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of important
factors that could cause actual results to differ from the forward-looking
statements.
SIGNIFICANT ACTIVITIES
REAL ESTATE
ARIZONA. In 1995, the Company, through a wholly-owned limited liability
company, entered into a partnership (the "Partnership") to purchase 132
undeveloped acres located near Sedona, Arizona (the "Sedona Project").
Development plans include an 18-hole golf course and 300 two-bedroom timeshare
units. Architectural design, engineering work, and construction plans are
complete. Construction drawings for the golf course have been finalized,
including engineering of the irrigation and water distribution system. The
revised master plan of the Sedona Project has been approved by planning and
zoning authorities of Yavapai County. The Company has a 93% ownership interest
in the partnership and is the managing partner. The Company initially had a 90%
ownership interest and was not the managing partner, but assumed management
control during 1996 pursuant to the terms of the partnership agreement. The
Company's ownership percentage has increased due to the Company continuing to
fund development costs for the Sedona Project, while the Company's partner has
not made its pro-rata contribution for such costs. In 1996, a dispute arose
between the Company and its partner concerning certain aspects of the
Partnership and the Sedona Project. In 1997, the Company's partner filed a
lawsuit with respect to the prior disagreements regarding the partner's
performance and "earn-up" potential in the project. See Item 3 - "Legal
Proceedings" for more information regarding the lawsuit. This dispute and
litigation slowed the pace of the Sedona Project and eventually caused active
development to be temporarily suspended in late 1997.
In conjunction with the Sedona Project, the Company formed a
wholly-
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owned subsidiary, Great Vacations International, Inc., to market the
timeshare units. Great Vacations International, Inc. is presently dormant
pending the outcome of the dispute between the Company and its partner and the
resumption of active development work. The Company continues to evaluate
development and marketing strategies for the entire Sedona Project, including
finding a joint venture partner which could add value by providing development
capital and expertise in the timeshare industry.
In 1996, NZ purchased a parcel of land, totaling 635 acres, located
near Cottonwood, Arizona, which is zoned for the development of residential
lots. This property is currently in escrow to be sold.
The Company has recreational land sales programs in which land is sold
primarily in 40-acre parcels. The southern Arizona program sold 2,065 acres from
1993 through 1996. All of this land was sold by December 31, 1996. The
northeastern Arizona program was initiated in 1980 and over the last 16 years
has sold some 77,000 acres of NZ's rural land. As of December 31, 1997, this
program had approximately 2,180 acres remaining in inventory to be sold. All the
parcels in both programs are or were typically sold on installment contracts,
with 10 to 20% down payments with the balance of the contract carried over 15
years.
The Company still owns over 150,000 acres of rural land located in
northeastern Arizona and New Mexico which were derived from 19th century
railroad land grants. The Company is currently evaluating whether a 40-acre
parcel sales program or bulk sales opportunities will provide the greatest value
to shareholders over the long term.
COLORADO. In 1996, NZ purchased an approximate 10,000 acre ranch
located in Fremont County, Colorado. This property contains a sizeable uranium
deposit, which is discussed further under "Minerals". This property is suitable
for subdivision into recreational lots, among other uses. The surface rights on
this property are listed for sale. A contract for the sale of approximately
2,800 such acres is currently being negotiated.
NEW MEXICO. The Company owns a 75% interest in two joint ventures
located in Albuquerque, New Mexico. One of the joint ventures, Brown/NZD
(Development) Joint Venture ("7-Bar") develops and sells residential lots to
home builders. In 1997 and 1996, 117 and 145 lots were sold respectively by the
joint venture. The joint venture had 99 finished lots in inventory as of
December 31, 1997. All of those lots are under contract to local builders. The
Venture has about 238 lots remaining to be developed.
The other joint venture, Brown/NZ (Investment) Joint Venture, holds
approximately 8 acres that will be developed into lots.
During 1997, the Company sold its 75% interest in a third
joint-venture, Manzano Mesa Limited Partnership ("MMLP"). MMLP develops and
sells residential lots to home builders. The Company sold its interest because
the project was not meeting the Company's performance expectations. The venture
interest was sold for a pre-tax gain of $257,000.
Also in New Mexico, NZ owns and operates four apartment complexes,
totaling 342 units, located in four New Mexico communities. These units have
federally-subsidized rent contracts designed for the elderly or handicapped.
They maintain essentially full occupancy. These apartments are currently listed
for sale and as of March 10, 1998 a contract is being negotiated with a
potential purchaser of the apartment complexes.
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TEXAS. In 1995, the Company purchased a majority interest in a limited
liability company, Texas Elm Fork Land Co., L.C. ("Elm Fork"), that had a 20
year lease with the University of Dallas (the "University") on 160 acres in
Irving, Texas. Although the University had represented ownership of the entire
parcel, they did not own a key 3 acre parcel bisecting the property. To protect
its interests, Elm Fork commenced litigation against the University in 1996. In
1997 Elm Fork was compensated for its damages and recovered its investment in a
confidential out-of court settlement with the University.
MINERALS
NZ owns over one million acres of mineral rights in Arizona and New
Mexico which originated, like the rural lands, from 19th century railroad land
grants. The Company also owns mineral rights in Colorado and Oklahoma, including
a royalty interest in a dozen producing oil and gas wells.
In New Mexico, NZU, Inc. ("NZU"), a wholly-owned subsidiary, owns the
mineral rights to two delineated deposits of uranium, the Crownpoint and Crown
Mesa deposits. The Crownpoint deposit is leased to a uranium production company.
The lease provides for NZU to receive a production royalty payment of 10% of
gross revenues, or product in-kind, at NZU's discretion. Production from this
deposit is not expected for several years regardless of market conditions. Under
current market conditions, production is not presently economically feasible.
NZU is also working on access, design, and permitting issues associated
with development of a solution mine on the Crown Mesa deposit. The permitting
process could take several years once baseline data is complete. Under current
market conditions, production is not presently economically feasible.
In 1996, the Company acquired an approximate 10,000 acre ranch located
in Fremont County, Colorado that contains a sizeable and well defined uranium
deposit known as the Hansen Orebody. NZU is researching various mining
strategies to mine the Hansen deposit. Under current market conditions,
production is not presently economically feasible
In addition, the Company previously identified a large deposit of
industrial grade limestone on its fee lands in New Mexico. The Company has
leased this land to an operator who may mine the limestone. In addition to
annual rental payments, the lease provides for royalty payments should this
limestone ever be mined. During 1997 the lessee produced a small test batch. The
results of the test are not yet known.
Revenue received from all of the Company's mineral activities does not
constitute a material portion of the Company's consolidated revenue.
SPECIALTY REAL ESTATE LENDING
In 1997, the Company formed a new wholly-owned subsidiary, Bridge
Financial Corporation ("Bridge" or "BFC"), which acquired a portfolio of
commercial real estate loans from RRH Financial ("RRH"). Through BFC, the
Company participates in the commercial real estate lending business by providing
short-term gap and participating loans to qualified borrowers who provide
suitable real estate projects as collateral. (See Item 7 - "Management's
Discussion and Analysis - New Business Activity and Change of Principal Business
Emphasis").
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Bridge acquired from RRH a portfolio of loans under management valued
at $24.6 million of which $16.6 million was participated with other lenders. The
remaining non-participated balance of $7.6 million(net of undisbursed loan
proceeds of $.4 million)was the amount recorded by the Company and included,
together with new loans, in "Commercial real estate loans, net" in the
accompanying consolidated balance sheet of the Company at December 31, 1997 (See
Item 8 - "Financial Statements and Supplementary Data"). At year-end the Company
transferred substantially all loans receivable secured by real estate on its
books to BFC. This was done to concentrate all significant lending operations in
BFC. This transfer, together with new loan originations, provided Bridge with a
1997 year-end portfolio under management of approximately $34.0 million, of
which $17.8 million was participated and $15.3 million (net of an allowance for
bad debts of $.3 million and undisbursed loan proceeds of $.6 million) is
included in "Commercial real estate loans, net" in the Company's 1997 year-end
consolidated balance sheet. As of March 19,1998, Bridge has a loan portfolio
under management of $52.5 million, of which $31.7 million is participated and
$19.9 million(net of an allowance for bad debts of $.3 million and undisbursed
loan proceeds of $.6 million) is recorded in the Company's books.
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ITEM 2: PROPERTIES
The following are schedules of properties owned by the Company at
December 31, 1997:
Year
acquired/ Encumbrance
Location Description developed (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
RENTAL PROPERTIES
ARIZONA
Tempe 12th Place Building
37,908-square foot building
on 2.7 acres 1983 $ 788
Tempe Grove Commons Industrial Park
113,730 square foot building
on 7.13 acres (partially completed) 1997-1998 --
NEW MEXICO
Albuquerque Brentwood Gardens Apartments(6)
122-unit complex on 7.5 acres 1985 2,865
Airpark Building(1)(7)
40,000-square foot office
building on 2.5 acres 1985-1986 --
Farmington Apple Ridge Apartments(6)
80-unit complex on 5.7 acres 1985 1,894
Las Cruces Montana Meadows Apartments(6)
80-unit complex on 6.1 acres 1985 1,797
Roswell Wildewood Apartments(6)
60-unit complex on 4.3 acres 1985 1,295
PROPERTIES UNDER DEVELOPMENT
ARIZONA
Sedona Rancho del Oro Development Joint Venture(2)(4)(5)
Timeshare/golf course development
(Seven Canyons of Sedona)planned for
300 timeshare units and an 18-hole
golf course. Design, engineering and
construction plans are complete.
Golf course construction drawings are
finalized. Entitlements have been
perfected with Yavapai County. 1995-2008 --
NEW MEXICO
Albuquerque Brown/NZD (Development) Joint Venture(3) Residential
lot development (Seven Bar North) 903 lots planned,
238 lots remain to be developed. At year end there
were 99 finished lots in inventory, all
of which were under contract. 1995-1999 $735
(1) The property is owned by a general partnership of which the Company owns
50%.
(2) The property is owned by a general partnership of which the Company owns
93%.
(3) The property is owned by a general partnership of which the Company owns
75%.
(4) See Item 3 - "Legal Proceedings" for more information.
(5) Includes 4.6 acres owned by the Company outside of the partnership.
(6) This property is for sale. As of March 25,1998 a contract is being
negotiated with a possible buyer.
(7) This property is in escrow to be sold.
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Year Encumbrance
Location Description acquired Acres (in thousands)
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UNDEVELOPED URBAN PROPERTIES
ARIZONA
Gilbert Cooper and Warner Roads 1986 11.95 $ 332
Mesa Greenfield Road and Dorsey Lane 1989 56.74 --
Chandler Ray and McClintock Roads 1986 14.66 51
Scottsdale Carefree Highway and 104th Street(2) 1995 107.91 419
Green Valley Continental and Frontage Roads 1986 6.50 --
Cottonwood Near Cottonwood Airport(2) 1996 635.00 2,287
Flagstaff Zuni and Walapai Streets(2) 1981 10.00 --
NEW MEXICO
Albuquerque Menaul and Broadway Roads 1986 17.70 --
Albuquerque Spain Road and Juan Tabo Blvd.(2) 1985 5.89 --
Albuquerque Seven Bar Loop and Ellison Roads(1) 1993 7.90 --
Las Cruces Mesilla Hills 1990 309.96 --
(1) Owned by a general partnership of which the Company owns 75%.
(2) This property is in escrow to be sold.
RURAL AND MINERAL PROPERTIES
Acres
---------------
Encumbrance
County State Surface Mineral (in thousands)
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Apache Arizona 75,688 146,600 $ --
Coconino Arizona 21,191 --
Mohave Arizona 46,602 --
Navajo Arizona 80,467 474,966 --
Catron New Mexico 11,346 --
Cibola New Mexico 5,312 225,185 --
McKinley New Mexico 160 117,238 40
San Juan New Mexico 5,040 --
Socorro New Mexico 2,399 --
Valencia New Mexico 43,285 --
Fremont Colorado 9,889(1) 4,565 --
Various Oklahoma 337 --
(1) A contract for the sale of approximately 2,800 acres of this property is
being negotiated.
The Company is lessor on grazing and mineral leases covering
approximately 158,000 and 6,060 acres, respectively, and owns working interests
in various oil and gas joint ventures located in New Mexico, acquired from 1986
through 1988.
The Company's executive offices occupy approximately 3,340 square feet
in an office building in Phoenix, Arizona pursuant to a lease agreement with an
initial term expiring in March, 2000.
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the
ordinary course of business. While it is not feasible to predict the ultimate
disposition of these matters, it is the opinion of management that their outcome
will not have a material adverse effect on the financial
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condition of the Company.
In addition to routine legal matters, the Company is involved in a
lawsuit concerning the Sedona Project. Sedona Creekside No. 2, L.L.C. ("SC 2"),
the Company's minority partner in the Sedona Project, was named, together with
certain of its affiliates and principals, as a defendant in a lawsuit filed in
the Superior Court of Maricopa County, Arizona on June 16,1997 by Richard T.
Sonberg, et al., to whom SC 2 and certain of its principals and or affiliates
were allegedly indebted. Sonberg seeks, among other relief, to foreclose on a
collateral assignment of SC 2's partnership interest in Rancho del Oro
Development Joint Venture ("RDO"), which was allegedly given by SC 2 as security
for the debt. RDO is the partnership through which the Company, by its
subsidiary NZ Development II, L.L.C. ("NZD II"), is developing the Sedona
Project. The Company was given permission to intervene as a defendant in this
lawsuit in order to attempt to prevent the foreclosure of the assignment,
because the terms of the RDO partnership agreement expressly prohibit such
assignments and the Company did not want to be forced to accept a new partner.
On November 10, 1997, SC 2 filed a crossclaim against the Company, and
added as crossdefendants certain directors and an officer of the Company. The
crossclaim relates to a dispute between the Company and SC 2 concerning the
prior removal of SC 2 as managing partner of RDO. The crossclaim against the
Company and the individuals includes counts for breach of contract, an
accounting, declaratory judgment, and injunction. The Company and the individual
defendants have filed a countercrossclaim against SC2, including counts for
breach of contract, breach of fiduciary duty, fraud, violation of Arizona RICO,
declaratory judgment, and injunction. The Company believes that the claims in
the lawsuit against the Company and the individual defendants are without merit
and the Company intends to vigorously defend against the allegations made and to
vigorously pursue the countercrossclaim.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There were 3,847,982 shares of the Company's no par value common stock
("Common Stock") issued and outstanding at December 31, 1997. The Common Stock
is traded on the American Stock Exchange under the symbol "NZ". Shareholders of
record at February 3, 1998, totaled 801. The Board of Directors declared a 10%
stock dividend on May 16, 1997 and on May 20, 1996, with payments made on July
18, 1997 and July 18, 1996, respectively.
The Company has authority to issue up to 10,000,000 shares of serial
preferred stock. At December 31, 1997, no preferred shares were issued.
The following table sets forth, for the periods indicated, the high and
low closing price of Common Stock as reported by the American Stock Exchange.
THE MARKET PRICE RANGE BY QUARTER:
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1997 1996
HIGH LOW High Low
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1st quarter $15 5/8 $10 1/4 $18 $11 5/8
2nd quarter 14 3/4 11 15/16 16 1/2 12 1/2
3rd quarter 17 5/8 13 1/4 14 11 1/2
4th quarter 16 1/2 13 7/8 13 3/4 11
ITEM 6: SELECTED FINANCIAL DATA
Years ended December 31,
(in thousands, except per share, shareholder,
and employee data)
1997 1996 1995 1994 1993
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SUMMARY OF OPERATIONS:
Gross revenue from
operations $16,904 $23,660 $22,062 $21,440 $10,337
Net income 2,340 4,846 5,500 3,936 1,282
Income per share(1)
Basic 0.69 1.46 1.67 1.19 0.39
Diluted 0.69 1.46 1.67 1.19 0.39
SUMMARY OF FINANCIAL POSITION:
Total assets $69,511 $66,328 $57,682 $52,307 $46,622
Notes payable and lines
of credit 12,503 16,036 14,080 14,546 15,268
Shareholders' equity 43,466 35,628 30,721 25,127 21,153
OTHER SUPPLEMENTAL INFORMATION:
Weighted average number of
common shares outstanding(1)
Basic 3,394 3,309 3,302 3,302 3,302
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Diluted 3,394 3,309 3,302 3,302 3,302
Number of shareholders
of record 805 847 887 925 970
Number of full time employees 25 24 21 19 19
(1) Prior years restated to reflect a 10% stock dividend paid July 18, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NEW BUSINESS ACTIVITY AND CHANGE OF PRINCIPAL BUSINESS EMPHASIS
In 1997, the Company formed a new wholly-owned subsidiary, Bridge
Financial Corporation ("Bridge" or "BFC"), which acquired a portfolio of
commercial real estate loans from RRH Financial ("RRH"). Through BFC, the
Company participates in the commercial real estate lending business by providing
short-term gap and participating loans to qualified borrowers who provide
suitable real estate projects as collateral.
Bridge acquired from RRH a portfolio of loans under management valued
at $24.6 million, of which $16.6 million was participated with other lenders.
The remaining non-participated balance of $7.6 million(net of undisbursed loan
proceeds of $.4 million) was the amount recorded by the Company and included,
together with new loans, in "Commercial real estate loans, net" in the
accompanying consolidated 1997 balance sheet of the Company. At year-end 1997,
the Company transferred substantially all loans receivable secured by real
estate on its books to BFC. This was done to concentrate all significant lending
in BFC. This transfer, together with new loan originations, provided Bridge with
a 1997 year-end loan portfolio under management of approximately $34.0 million,
of which $17.8 million was participated and $15.3 million (net of an allowance
for bad debts of $.3 million and undisbursed loan proceeds of $.6 million) is
included in "Commercial real estate loans, net" in the Company's 1997 year-end
consolidated balance sheet. As of March 19,1998, Bridge has a loan portfolio
under management of $52.5 million, of which $31.7 million is participated and
$19.9 million(net of an allowance for bad debts of $.3 million and undisbursed
loan proceeds of $.6 million) is recorded in the Company's books.
Real estate lending as a principal business focus marks a new direction
for the Company. Historically, the Company has been a real estate lender to some
extent, but that lending was incidental to and in conjunction with the Company's
real estate development and sales business. The Company's management believes,
however, that an under-served niche exists in the real estate lending industry
which merits the devotion of substantial Company resources. This niche, on which
Bridge will focus, consists of successful small to medium sized developers and
others in the real estate business with a need to borrow $500,000 to $5,000,000
on a short-term basis, secured by a low-ratio mortgage (typically a mortgage
loan which is 65% or less than the value of the property mortgaged) on
commercial real estate. By providing a quick, responsive service management
believes that BFC will be able to earn a premium return on loans it extends to
these borrowers while maintaining a low-to-moderate risk profile. The key
reasons management believes it will be able provide a superior level of service
and to be successful in this niche are that over time management expects the
Company to be able to secure lower cost and more consistent capital sources than
other, smaller lenders that operate in this segment of the lending industry, and
management expects to be able to maintain lower levels of general and
administrative expense compared
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to other larger competitors.
Management expects the lending business to provide more stable earnings
patterns for the Company when compared to the Company's historical pattern. This
is because the earnings pattern in the real estate development and sales
industry is very dependent upon the occurrence of large and sometimes isolated
transactions, which are not readily predictable. Furthermore, an increase in
real estate assets does not necessarily translate into a concurrent increase in
revenue or earnings; such increases are often deferred until the asset is
liquidated. The lending business is, on the other hand, more likely to have a
predictable stream of interest income from a portfolio of assets. The assets
begin to contribute to earnings immediately upon acquisition; consequently loan
portfolio growth has a direct and immediate impact on earnings.
It is management's intention to shift the Company's principal business
focus away from real estate development and sales and toward commercial real
estate lending. Most of the Company's real estate assets are either in escrow or
are being actively marketed for sale. (See Item 2 - "Properties"). A large
number of these sales are expected to close within the next 12 to 18 months,
creating cash for re-investment. As these assets are sold, management intends to
invest the proceeds principally in the real estate lending business. However,
since for Federal income tax purposes the Company has a very low basis in many
of its properties, management may opt to defer payment of income tax upon the
sale of such properties by exchanging the property for other income or
development property. The apportionment of the proceeds from sale of property
between investment in BFC and investment in other real estate will be determined
case by case, based primarily on the amount of income tax liability and the
Company's cash needs, considered together with other business factors.
The formation of BFC and the acquisition of a loan portfolio from RRH
occurred late in the 1997 fiscal year. Consequently, the contribution of BFC to
the earnings of the Company for 1997 are not material. Management believes that
the contribution to be made by BFC to the Company's results of operations in
future time periods will be material. Because of the anticipated increasing
materiality of the BFC activity, management believes that the results of
operations and other financial information presented for 1997 and prior years
may not be indicative of the operating results for years subsequent to 1997.
RESULTS OF OPERATIONS
The following table summarizes the Company's revenues and earnings for
the indicated periods:
Fiscal Years Ended December 31:
(in thousands, except share data) 1997 1996 1995
------- ------- -------
Revenue $16,904 $23,660 $22,062
Earnings per share of common stock(1)
Basic $ 0.69 $ 1.46 $ 1.67
Diluted $ 0.69 $ 1.46 $ 1.67
(1) Prior years restated to reflect a 10% stock dividend paid July 18, 1997.
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
Earnings decreased in 1997 by approximately 52%, from $4,846,000 in
1996 to $2,340,000 in 1997. The major reason for the decrease in earnings was
the
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decrease in sales of real estate in fourth quarter 1997 compared to fourth
quarter 1996. The presence of one large transaction which occurred in fourth
quarter 1996, with no comparable transaction in 1997, accounted for
approximately 90% of the decline in earnings and revenue.
Rental properties continued to produce steady gross profits and cash
flows of just under $2,000,000 per year in 1997. The majority of the rental
property cash flow is from the four federally-subsidized apartment complexes
that NZ owns. The subsidy contracts are scheduled to expire; one during fourth
quarter 1998 and the other three in the first half of 1999. The Company believes
that these contracts will be renewed, but that the level of subsidy is likely be
lower than under the current contracts. The Company does not believe that the
expected lower subsidy level will have a significant effect on the Company with
respect to its apartment complex located in Albuquerque; however, the lower
subsidy level could be significant with respect to the Company's apartment
complexes located in other areas of New Mexico. The Company is unable to
determine the precise effect of the renewal rates until certain regulations are
finally promulgated by the Secretary of Housing and Urban Development ("HUD").
All four apartment complexes are currently listed for sale and as of March 10,
1998 a contract is being negotiated.
The 1997 increase in general and administrative expense of $252,000, or
approximately 14%, is due primarily to an increase in personnel costs and other
costs related to the restructuring of the Company's business activity and
personnel to accommodate the integration of Bridge Financial Corporation into
the Company's operations.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Although property sales generated about $1,600,000 more in gross profit
in 1996 than in 1995, earnings decreased in 1996 by about 12%, from $5,500,000
in 1995 to $4,846,000 in 1996. The major reason for the decrease in income was
the sale of a note receivable and the sale of a joint venture property that
produced over $2,700,000 in before-tax income in 1995.
Rental properties continued to produce steady gross profits and cash
flows of about $2,000,000 for the 1996 fiscal year. The majority of the cash
flow was from the four federally-subsidized apartment complexes that NZ owns.
The subsidy contracts are scheduled to expire, one at the end of 1998 and the
other three in 1999. As of the end of the 1996 fiscal year it was not possible
to determine whether HUD would renew these contracts. If HUD does not renew the
contracts when they expire, the Company may have to adjust its rental rates. The
Company does not believe that this would have an adverse effect on the Company
with respect to its apartment complex located in Albuquerque; however, the lack
of federal subsidies in the rural areas of New Mexico could have an adverse
effect on the Company.
Investment income decreased by about $400,000. A note receivable was
paid off in 1995, thereby reducing interest income in 1996. Also average cash
available for investment in 1996 was down from 1995, due to the purchase of
properties. The increase in general and administrative expense was due primarily
to an increase in officers' and directors' bonuses of about $145,000 and
increased legal fees.
Cash flow from operating activities increased by over $7,000,000 and
cash flow from investing activities decreased by essentially the same amount.
The Company sold two commercial corners for about $6,300,000 in cash and the
Company purchased two properties, a 10,000 acre ranch in Colorado and a 635 acre
parcel in Arizona.
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Cash on hand at December 31, 1996 was $7,100,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs have typically been for real estate
development projects and to fund working capital. The sources of these funds
have been internally generated cash from property sales and rental operations,
lines of credit and joint venture financing. Historically, these sources have
been sufficient to meet the Company's needs for cash.
The real estate lending business will require large amounts of capital
in order for the Company to be an effective competitor in the market. Management
estimates that during the 1998 fiscal year, approximately $80 million of
principal will be required to fund anticipated loan volume. In addition, the
Company will require cash for working capital, for continuing development work
on existing real estate projects and for projects that may be acquired through
tax-deferred exchanges. (See "New Business Activity and Change of Principal
Business Emphasis", above.)
The Company expects to generate a substantial amount of cash from the
sale of real estate over the next 12 to 18 months. This cash will be re-deployed
into the lending or development business. Cash will also be generated from
principal repayments on maturing loans in the Company's existing loan portfolio.
In addition, the Company now uses and intends to continue to use participants or
other joint funding sources on certain real estate loans.
The Company currently has a $3 million unsecured revolving line of
credit from a commercial bank, which can be used for general corporate purposes.
The line bears interest at the prime rate and expires in December, 1998. At
December 31, 1997 the entire line was undrawn and available. As of February 27,
1998 the line had an outstanding balance of $2 million. This loan contains
financial covenants which require the Company to maintain a specified minimum
ratio of current assets to current liabilities; a specified minimum excess of
current assets over current liabilities; and a specified maximum ratio of total
liabilities to tangible net worth. At December 31, 1997 the Company was in
compliance with these financial covenants. Negotiations are underway with the
bank to increase the size of the line to $10 million, of which $3 million would
likely continue to be unsecured. The balance would be secured by certain real
estate and loan assets of the Company.
The same commercial bank has made a construction loan to the Company to
finance development of the Grove Commons project. The construction loan is for a
one year term expiring December 31, 1998, and bears interest at the prime rate.
As of December 31, 1997 the loan had a zero balance. As of February 27, 1998 the
loan had an outstanding balance of $513,000. From a different commercial bank,
one of the Albuquerque joint ventures has loan facilities to be utilized for lot
development. At December 31, 1997 the aggregate outstanding balance under these
loan facilities was $735,000. As of February 27, 1998, there was $524,000
borrowed against these lines of credit.
The Company also has $1,000,000 revolving line of credit from a
commercial bank which is secured by certain real estate. The line bears interest
at the prime rate and is scheduled to expire on April 1,1998. The Company does
not intend to renew this line of credit. At December 31, 1997 there was no
amount outstanding on this line.
In addition to bank lines, the Company is engaged in preliminary
discussions with a large non-bank commercial lender to provide a warehouse
- -13-
14
line of credit and/or joint funding arrangement, either or both of which would
be available to finance the Company's real estate lending activities.
Discussions have not proceeded far enough to characterize any likely loan
agreement, other than to say that it will probably be a secured revolving
facility. The Company expects to negotiate other similar credit facilities
during the 1998 fiscal year. The proceeds of any such facilities would be used
to fund the Company's real estate lending business.
The Company also intends to seek qualified joint venture partners to
finance large real estate development projects. The use of joint venture
partners provides a source of development capital, mitigates 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.
The principal outcomes of the Company's discussions with potential
lenders will be to determine how rapidly the Company will be able to grow its
new commercial real estate lending business. The terms of any new financing
arrangement will likely have a material effect upon the Company's margins in its
lending business. If the Company is not successful in negotiating such
financing, the principal effect will be a modest 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.
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 1997 operations and knows of no conditions which would cause
the Company to believe that such items could have a material effect on 1998
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
Statement of Financial Accounting Standards ("SFAS") No. 123 -
"Accounting for Stock-Based Compensation" allows companies to elect to account
for stock-based compensation plans using a method based upon fair value or
continuing to measure compensation expense for those plans using the intrinsic
value method prescribed by Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees". Companies electing to continue to
use the intrinsic value method must make pro-forma disclosures in calendar 1997
of net earnings per share as if the fair value method had been used. The Company
will continue to use the intrinsic value method prescribed by APB 25; therefore
SFAS 123 will have no effect on the Company's results of operations or financial
position.
In February, 1997 the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share," which specifies the computation,
presentation, and disclosure of earnings per share for entities with
publicly-held common stock. This statement is effective for the Company for the
calendar year 1997. This standard requires the presentation of basic and diluted
earnings per share.
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure" to consolidate existing disclosure
requirements. This statement is effective for the Company for the calendar
-14-
15
year 1997. This statement contains no change in disclosure requirements for the
Company.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
The FASB has issued new pronouncements that have not yet been adopted
by the Company.
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," to establish standards for reporting and display of comprehensive
income (all changes in equity during a period except those resulting from
investments by and distributions to owners) and its components in financial
statements. This new standard will be effective for the Company for the year
ending December 31, 1998. Based on the current financial structure and
operations of the Company, SFAS No. 130 is not expected to have a significant
impact on the Company's consolidated financial statements.
In June, 1997 the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information," to establish standards for reporting
about operating segments in annual financial statements, selected information in
interim financial reports and disclosures about products and services,
geographic areas and major customers. This new standard, which will be effective
for the Company for the year ending December 31, 1998, may require the Company
to report financial information on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments, which may result in more detailed information in the notes to the
Company's consolidated financial statements than is currently required and
provided.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Certain information presented in this Report includes "forward-looking
statements" within the meaning of Federal securities laws. Forward looking
statements involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth below,
which may have an effect on the Company's future results and financial
condition.
REAL ESTATE MARKET. The Company will continue to be linked to the
fortunes of the real estate market. A downturn in that market could adversely
affect the Company's performance. The Company is expecting to generate
significant amounts of cash and earnings over the next 12 to 18 months through
the sale of several real estate assets. While the real estate markets are
generally healthy in the areas where the Company currently owns real estate,
there is no assurance that the markets will continue to be favorable over the
disposition period of these assets. A downturn in the real estate market could
have an adverse impact on the Company's ability to sell its real estate assets
at a profit or at all, and an adverse impact on the Company's ability to attract
joint venture funding for any future development projects, including the Sedona
Project. 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 have an effect on 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, 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.
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16
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 interest rate spread on loans held for sale, and the amount of
gain or loss on the sale of loans.
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 sell participations in its loans to pension funds and
other institutional investors. The Company's net interest income is the
difference between the interest income it earns on loans held in its portfolio
(generally based on long-term interest rates) and the interest it pays on its
borrowings (generally based on short-term interest rates). To the extent
short-term interest rates are lower than long-term interest rates, the Company
earns net interest income from the difference, or the spread, during the time
the mortgage loans are held by the Company. To the extent this spread narrows,
the Company's results of operations could be adversely affected. In addition,
the Company's net interest income will be affected by borrowing costs other than
interest expense associated with its borrowings.
DELINQUENCY, FORECLOSURE AND OTHER CREDIT RISKS; LIABILITIES UNDER
REPRESENTATIONS AND WARRANTIES. Economic downturns can have a negative impact on
a real estate lender's profitability as the frequency of loan defaults tend to
increase. From the time that the Company funds the loans it originates, to the
time the loan is repaid (or is earlier sold by the Company), the Company is
generally at risk for any loan defaults. Once the Company sells the loans it
originates (or sells participations in such loans), the risk of loss from loan
defaults and foreclosures passes to the purchaser of the loans. However, in the
ordinary course of business, the Company makes certain representations and
warranties to the purchasers of loans and to loan participants. These
representations and warranties generally relate to the origination and servicing
of loans. If a loan defaults and there has been a breach of these
representations or warranties, the Company becomes liable for the unpaid
principal and interest on the defaulted loan. In such a case, the Company may be
required to repurchase the loan (or the loan participation) and bear any
subsequent loss on the loan.
LOAN PARTICIPATIONS. Bridge Financial Corporation occasionally retains
only a portion of originated loans in its own portfolio and works with a
participating lender to place the other portion of the loans in the portfolio of
the participating lender. Most of the participations have been with pension
funds who manage significantly larger funds than BFC. The participants typically
take a position senior to the Company's position with respect to payment of the
principal portion of the loans. The participants also typically receive the same
interest income and points as does BFC. BFC normally receives an origination fee
and a servicing fee on the participant's portion of the loan. Generally, by
participating loans BFC is able to originate larger loans than it would normally
originate without participants, but results in the Company assuming 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
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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 may 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 of financing available to the Company during the next 6 to 18 months will
have a material effect upon how rapidly the Company will be able to increase its
lending activities.
The Company is currently negotiating with certain lenders to provide a
$25 million revolving warehouse facility. 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 new financing, it may
have to curtail its loan origination activities.
CONCENTRATION OF BUSINESS. A significant portion of the Company's
commercial lending business is conducted in Arizona. At December 31, 1997, all
of the Company's outstanding loans were secured by commercial 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 make the
transition to the lending business and to grow that business depends to a
significant degree upon management's ability to originate loans in new markets
in 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 effect 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
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significant expansions of operations, such as the Company's expansion into its
new commercial real estate lending line of business. Management believes that a
major factor that will allow the Company to effectively compete with larger
financial institutions in the Southwestern United States is its ability to
originate loans at lower overall costs than many of its competitors. The
principal cost categories that must be closely managed are: (1) capital cost and
(2) overhead cost. The ability of management to control these costs is critical
to achieving profitability as it expands into new markets.
DEPENDENCE ON KEY INDIVIDUAL. R. Randy Stolworthy has been the chief
architect of the Company's transition from a real estate business to a lending
business. The Company has no employment agreement with Mr. Stolworthy. If the
Company were to lose Mr. Stolworthy's services for any reason, significant time
and money would be expended to try to identify, recruit and employ replacement
personnel to continue the transition, with no guarantees that such a person
could be found.
YEAR 2000. The Company has developed an internal plan to address the
Year 2000 issue and management believes that the Company is Year 2000 compliant.
The Year 2000 problem is the result of computer programs being written in code
which uses two digits rather than four digits to identify the applicable year.
The Company's total cost of becoming compliant was insignificant. Because the
Company's business operations and related business routines are generally
dependent upon date-specific information, the Company may experience operational
interruptions due to Year 2000 issues if its customers and suppliers are not
Year 2000 compliant. The Company is in the process of communicating with its
significant suppliers and customers to determine the extent to which the Company
may be adversely impacted by those third parties' Year 2000 issues.
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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
New Mexico and Arizona Land Company:
We have audited the accompanying consolidated balance sheets of New
Mexico and Arizona Land Company and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the years in the three-year period ended
December 31, 1997. In connection with our audits of the consolidated financial
statements, we also have audited financial statement schedules III and IV for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New Mexico
and Arizona Land Company and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
KPMG Peat Marwick LLP
Phoenix, Arizona
February 20, 1998
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New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Properties, net $46,853 $47,478
Commercial real estate loans, net 15,287 9,648
Receivables, net 93 200
Investments in joint ventures 411 416
Cash and cash equivalents 6,016 7,142
Other 851 1,444
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $69,511 $66,328
==================================================================================================================================
Liabilities and Shareholders' Equity
Notes payable and lines of credit $12,503 $16,036
Accounts payable and accrued liabilities 1,646 1,542
Deferred revenue 4,742 5,002
Deferred income taxes 5,361 5,685
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,252 28,265
- ----------------------------------------------------------------------------------------------------------------------------------
Non-controlling interests 1,793 2,435
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, none issued
Common stock, no par value; 30,000,000 shares authorized; 3,847,982 and
3,012,886 shares issued and outstanding at December 31,
1997 and 1996, respectively 24,572 14,705
Retained earnings 18,894 20,923
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,466 35,628
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $69,511 $66,328
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
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New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Property sales $12,005 $18,964 $15,910
Property rentals 3,065 3,044 2,989
Commercial real estate lending 159 -- --
Investment income 1,178 1,236 1,678
Other 497 416 1,485
- -----------------------------------------------------------------------------------------------------------------------------------
16,904 23,660 22,062
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Cost of property sales 7,319 10,569 9,159
Property rentals 1,187 1,007 1,089
Commercial real estate lending 58 -- --
General and administrative 2,025 1,773 1,518
Interest 1,020 963 946
Depreciation, depletion and amortization 524 450 487
- -----------------------------------------------------------------------------------------------------------------------------------
12,133 14,762 13,199
Income before joint ventures, non-
controlling interests and income taxes 4,771 8,898 8,863
Gain from joint ventures -- 20 1,582
Non-controlling interests (883) (872) (1,316)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,888 8,046 9,129
Income taxes 1,548 3,200 3,629
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,340 $ 4,846 $ 5,500
===================================================================================================================================
Net Income per share of common stock(1)
Basic $ .69 $ 1.46 $ 1.67
===================================================================================================================================
Diluted $ .69 $ 1.46 $ 1.67
===================================================================================================================================
Weighted Average Number of Common Shares(1)
Basic 3,394 3,309 3,302
===================================================================================================================================
Diluted 3,394 3,309 3,302
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
(1) Prior years restated to reflect a 10% stock dividend paid July 18, 1997.
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New Mexico and Arizona Land Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 2,340 $4,846 $5,500
Gain from sales of investment properties (338) (3,963) (891)
Gain from sale of partnership interest (257) -- --
Non-cash items included above:
Depreciation, depletion and amortization 524 450 487
Deferred revenue (812) (853) (1,234)
Deferred income taxes (324) 1,497 465
Gain from joint ventures -- (20) (1,582)
Non-controlling interests 883 872 1,316
Employee restricted stock plan -- 1 13
Director stock awards 36 65 84
Net change in:
Receivables 107 46 1,279
Commercial real estate loans 1,958 321 325
Properties under development 1,417 (969) (6,789)
Other assets 593 (489) 131
Accounts payable and accrued liabilities 98 538 (1,169)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by(used in)operating activities 6,225 2,342 (2,065)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to properties (4,878) (7,709) (3,635)
Proceeds from sale of properties 2,790 6,040 4,933
Acquisition of commercial real estate loans (1,578) -- --
Distribution from joint ventures 5 13 1,627
Proceeds from sale of partnership interest 895 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by(used in)investing activities (2,766) (1,656) 2,925
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt 1,168 8,615 3,664
Payments of debt (4,701) (6,659) (4,130)
Distribution to non-controlling partners (1,055) (841) (1,443)
Capital contribution by non-controlling partners 3 40 1,239
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by(used in)financing activities (4,585) 1,155 (670)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,126) 1,841 190
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 7,142 5,301 5,111
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $6,016 $7,142 $5,301
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
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New Mexico and Arizona Land Company 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, 1994 2,480 $ 8,741 12 $(92) $ 16,478 $ 25,127
========================================================================================================================
Net income 5,500 5,500
10% stock dividend 248 2,239 (2,242) (3)
Employee restricted
stock plan 13 13
Director stock award 7 24 (7) 60 84
- ------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1995 2,735 $11,017 5 $(32) $ 19,736 $ 30,721
========================================================================================================================
Net income 4,846 4,846
10% stock dividend 273 3,622 (5) 32 (3,659) (5)
Employee restricted
stock plan 1 1
Director stock award 5 65 65
- ------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 3,013 $14,705 -- -- $ 20,923 $ 35,628
========================================================================================================================
Net income 2,340 2,340
10% stock dividend 301 4,364 (4,369) (5)
Director stock award 2 36 36
Issue of common stock 532(1) 5,467 5,467
- ------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 3,848 $24,572 -- -- $ 18,894 $ 43,466
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
(1) See Note 3 - Commercial real estate loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Business
New Mexico and Arizona Land Company was organized in 1908 as an Arizona
corporation and is conducting business in Arizona, New Mexico, Colorado, and
Oklahoma. The Company owns and develops urban real estate. The Company also owns
extensive rural real estate and mineral rights. In 1997, the Company began
business in real estate specialty lending. The Company's results of operations
and financial condition can be adversely affected by several factors, including
a downturn in the real estate market, interest rate fluctuations, and
availability of funding sources.
Principles of Consolidation
The consolidated financial statements include the accounts of New
Mexico and Arizona Land Company, its wholly-owned subsidiaries, and
majority-owned partnerships (the "Company"). All material intercompany
transactions have been eliminated in consolidation. Certain financial statement
items from prior years have been reclassified to be consistent with the current
year financial statement presentation.
Properties
Properties are recorded at cost net of valuation allowances.
Depreciation on rental properties is provided over the estimated useful lives of
the assets, ranging from 5 to 35 years, using the straight-line method.
Maintenance and repairs are charged to income as incurred and renewals or
betterments are capitalized.
Investments in Joint Ventures
The Company's investments in joint ventures are accounted for using the
equity method.
Property Sales and Deferred Revenue
Profits on property sales are recognized, subject to the assessment of
collectibility of the related receivables, when the buyer's investment amounts
to at least 20% of the sales price and when development is to commence within a
two year period, or 25% of the sales price on all other sales. In all instances
the buyer remains obligated to increase this investment by a minimum amount
annually. Profits on sales that do not meet these requirements are recognized on
the installment basis provided minimum down payments are received.
Deferred revenue consists principally of land sales recorded on the
installment basis and rents collected in advance. Rents collected in advance
represent annual rental payments made in advance of the lease year and are
considered earned ratably over the lease year for financial statement purposes.
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25
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.
Income Per Share
Basic income per share is computed by dividing the income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted income per share reflects the potential dilution that
could occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the income of the Company. There were no securities or other
instruments outstanding which could have been converted into common stock as of
the end of each of the years ended December 31, 1997, 1996, and 1995. Diluted
income per share and basic income per share are therefore the same for each of
the years specified.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held in trust,
money market accounts, and temporary investments, with an original maturity of
three months or less.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that a company disclose estimated fair values for its financial
instruments. The carrying amounts of the Company's commercial real estate loans
and notes payable and lines of credit approximate the estimated fair value
because they are at interest rates comparable to market rates, given the terms
and maturities. The carrying amounts of the Company's cash equivalents,
receivables, accounts payable and accrued liabilities approximate the fair value
of these instruments due to their short term maturities. Considerable judgement
is required in interpreting market data to develop the estimates of fair value.
Accordingly, these fair value estimates are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Commercial Real Estate Loans
These loans are recorded at cost, less an allowance for bad debts and
undisbursed loan proceeds. Management, considering current information and
events regarding the borrowers' ability to repay their obligations, considers a
loan to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted
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at the loan's effective interest rate. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense. Cash
receipts on impaired loans are applied to reduce the principal amount of such
loans until the principal has been recovered and are recognized as interest
income thereafter.
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be disposed of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net undiscounted
cash flows expected to be generated by that asset. If such assets are considered
to be impaired, the amount of the impairment to be recognized is measured by the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or the fair value less costs to sell. Adoption of this Statement did not
have a material impact on the Company's financial position, results of
operations, or liquidity.
Year 2000
The Company has developed an internal plan to address the Year 2000
issue and management believes that the Company is Year 2000 compliant. The Year
2000 problem is the result of computer programs being written in code which uses
two digits rather than four digits to identify the applicable year.
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 over the amount the employee must pay for the stock. The
Company's policy is to generally grant stock options at fair market value at the
date of grant, so no compensation expense is recognized. As permitted, the
Company has elected to adopt the disclosure provisions only of SFAS No. 123,
"Accounting for Stock-Based Compensation" (see Note 7).
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the amounts of revenue and
expenses at the date of the financial statements. Actual results could differ
from those estimates.
NOTE 2: - PROPERTIES
Properties are comprised of the following at December 31,
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------
Rural lands and unimproved
urban properties $ 23,757 $ 23,429
Properties under development 12,451 14,555
-26-
27
Rental properties 17,678 16,852
Other 1,844 1,639
Accumulated depreciation,
depletion and amortization (5,397) (5,292)
Valuation Allowance (3,480) (3,705)
- ------------------------------------------------------------------------------------------------------
$ 46,853 $ 47,478
======================================================================================================
The future rentals on non-cancelable operating leases related to the
Company's rental properties, but excluding its four apartment complexes, are as
follows: $454,000 in 1998; $439,000 in 1999; $436,000 in 2000; $378,000 in 2001;
$356,000 in 2002; and $480,000 in later years. The four apartment complexes,
which are federally subsidized under the U.S. Department of Housing and Urban
Development Section 8 Housing-Assistance-Payments Program, have contributed
revenue of $2,455,000 in 1997, $2,437,000 in 1996 and $2,412,000 in 1995.
NOTE 3 - COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans consist of the following at December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
Managed portfolio $ 34,028 $ 9,723
Less participations (17,863) --
- ---------------------------------------------------------------------------------------------------------
Commercial real estate loans 16,165 9,723
Less allowance for bad debts (275) (75)
Undisbursed loan proceeds (603) --
- ---------------------------------------------------------------------------------------------------------
Commercial real estate loans, net $ 15,287 $ 9,648
=========================================================================================================
All loans are secured by mortgages. 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.
On November 6, 1997 the Company, through its subsidiary Bridge
Financial Corporation, acquired a portfolio of commercial real estate loans from
RRH Financial in a purchase transaction. The Company paid $1,578,000 cash,
issued 531,714 shares of common stock valued at $5,467,000, and assumed certain
liabilities in exchange for certain mortgage loans owned by RRH Financial, which
had a fair value approximating the purchase price. The results of operations
related to that loan portfolio have been included in operations since November
6, 1997. The following unaudited summary presents the consolidated results of
operations of the Company as if the commercial loan portfolio of RRH financial
was purchased on January 1, 1996, with consideration given to various pro-forma
adjustments. The pro-forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that would
have actually been achieved had the combination been in effect on the dates
indicated for the years ended December 31,
-27-
28
(in thousands, except share data) 1997 1996
(unaudited)
Revenue $18,113 $25,433
======= =======
Net income $ 3,067 $ 5,909
======= =======
Net income per share $ .80 $ 1.54
======= =======
The portfolio consisted of several loans secured by first priority
mortgages on real property in Arizona. The managed portfolio acquired was
$24,633,000, of which $16,653,000 was participated with other lenders. The
remaining non-participated balance of $7,558,000 (net of undisbursed loan
proceeds of $422,000) was the amount recorded by the Company. From November 6,
1997 through December 31, 1997 the size of the managed portfolio increased by
new loans originated in the gross amount of $2,770,000, of which $2,216,000 was
participated with other lenders and $373,000 (net of undisbursed loan proceeds
of $181,000) was recorded by the Company. These loans bear interest at rates
ranging from 11.25% to 15.00% with terms ranging from 6 to 36 months.
The managed portfolio also includes loans made in connection with the
Company's recreational land sales. The mortgage notes receivable from these land
sales, due over ten to fifteen years, bear interest at rates ranging from 10% to
12%, and are secured by the properties sold. At December 31, 1997 and 1996
mortgage notes receivable relating to these sales totaled $6,680,000 and
$7,557,000, respectively. The Company sold land for mortgage notes receivable in
the amount of $1,635,000 and $1,910,000 during the years ended December 31, 1997
and 1996 respectively. In 1997 and 1996 the Company collected $1,395,000 and
$1,429,000 in principal payments on these land sale contracts.
One material loan in the Company's portfolio is delinquent and is in a
default status. The amount recorded by the Company for this loan is $460,000;
the total size of the loan under management is $2,225,000 and the participant's
share is $1,765,000. The Company has filed a notice of trustee's sale against
the underlying property. The Company does not expect to incur any loss with
respect to this loan. From time to time certain loans in the Company's portfolio
related to sales of 40 acre parcels may be delinquent or in default. None of
those certain loans individually nor all such loans collectively are material.
As of December 31, 1997 the aggregate amount of such loans was $253,000.
NOTE 4 - NOTES PAYABLE AND LINES OF CREDIT
Notes payable consist of the following at December 31,
(in thousands) Maturity Interest
date rate (%) Payment 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Apartment complexes 2009 8.375 monthly P&I $ 7,851 $ 8,233
Commercial buildings 2006 9.125 monthly P&I 788 1,607
Undeveloped land 2000-2001 9.25-10.25 annual P&I 2,706 3,394
Development loans 1998-1999 prime(1) monthly Int 735 2,200
Other loans 1998-2004 7.125-7.6 various P&I 423 602
- ---------------------------------------------------------------------------------------------------------------------
$12,503 $16,036
=====================================================================================================================
(1)Prime rate at December 31, 1997 was 8.5%
The Company and its partner guarantee development lines of credit for
one of its majority-owned partnerships. These lines, which are secured by the
-28-
29
real property, expire in August 1998, June 1999, and August 1999, and have an
aggregate commitment amount of $5,300,000. At December 31, 1997, the aggregate
outstanding balance was $735,000. The interest rate is at the bank's prime rate,
8.5% at December 31, 1997.
The Company has a obtained a construction loan for one of its projects
from a commercial bank. The loan is secured by the property. The loan bears
interest at the prime rate and expires December 31, 1998. At December 31, 1997
there was no outstanding balance on this loan.
The Company has a $3,000,000 unsecured revolving line of credit from a
commercial bank that may be used for general corporate purposes. The line bears
interest at the prime rate and expires December 31, 1998. At December 31, 1997
there was no outstanding balance on this loan. This loan contains financial
covenants which require the Company to maintain a specified minimum ratio of
current assets to current liabilities; a specified minimum excess of current
assets over current liabilities; and a specified maximum ratio of total
liabilities to tangible net worth. At December 31, 1997 the Company was in
compliance with these financial covenants.
The Company also has a secured $1,000,000 revolving line of credit from
a commercial bank that may be used for general corporate purposes. This line is
secured by certain real estate assets of the Company. The line bears interest at
the prime rate and expires April 1, 1998. At December 31, 1997 there was no
outstanding balance on this loan. The Company does not expect to renew this
loan.
Principal payments due on all notes payable and lines of credit are as
follows: $1,716,000 in 1998; $1,633,000 in 1999; $1,277,000 in 2000; $1,176,000
in 2001; $657,000 in 2002; and $6,044,000 in later years. Interest paid in 1997,
1996 and 1995, amounted to $1,344,000, $1,360,000 and $1,316,000, respectively.
Interest cost incurred in 1997, 1996 and 1995, was $1,317,000, $1,470,000 and
$1,286,000, respectively, of which $297,000, $507,000 and $340,000 was
capitalized.
NOTE 5 - INCOME TAXES
Income tax expense is comprised of the following:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------
Current:
Federal $ 1,321 $1,362 $2,531
State 352 341 633
Deferred
Federal (106) 1,198 368
State (19) 299 97
- --------------------------------------------------------------------
$ 1,548 $3,200 $3,629
=====================================================================
The reconciliation of the computed statutory income tax expense to the
effective income tax expense follows:
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Statutory Federal income tax expense $1,322 $2,736 $3,104
Reconciling items:
State income taxes, net of Federal benefit 220 422 474
Other 6 42 51
- ----------------------------------------------------------------------------------------------
-29-
30
$1,548 $3,200 $3,629
==============================================================================================
-30-
31
The effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------
Deferred tax assets:
Properties, principally due to
valuation allowances, depreciation
and amortization of costs $ 621 $ 1,040
Investments in joint ventures,
principally due to valuation allowances 649 167
Other 5 103
- -------------------------------------------------------------------------------------
Total gross deferred tax assets $ 1,275 $ 1,310
- -------------------------------------------------------------------------------------
Deferred tax liabilities:
Properties, principally due to basis
differences upon acquisition $(4,926) $(5,317)
Commercial real estate loans/deferred revenue,
principally due to installment sales (1,629) (1,606)
Other (81) (72)
- -------------------------------------------------------------------------------------
Total gross deferred tax liabilities (6,636) (6,995)
- -------------------------------------------------------------------------------------
Net deferred tax liability $(5,361) $(5,685)
=====================================================================================
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 benefits of these deductible differences at December
31, 1997.
Income taxes paid in 1997, 1996 and 1995 amounted to $1,395,000,
$1,418,000 and $3,596,000, respectively.
NOTE 6 - RETIREMENT PLANS
Pension Plan:
The Company's defined benefit retirement plan covers substantially all
full-time employees. The benefits are based on employment commencement date,
years of service and compensation. Plan restatement to conform with TRA86 and
subsequent changes was completed in December 1994. In accordance with Statement
of Financial Accounting Standards No. 87 Employers' Accounting for Pensions
(FAS87), the effect of the restatement was recognized in 1995. No additional
post-employment benefits are provided and plan assets are invested in various
mutual funds. The Plan was "frozen" on December 31, 1996. No gain or loss was
recognized by the Company. The "freeze" puts a stop on future benefit accruals.
The net periodic pension benefit is computed as follows for years ended
-31-
32
December 31,
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Service cost $-- $ 43 $ 39
Interest cost 47 47 41
Return on assets
Actual (292) (175) (333)
Deferred gain 191 106 251
Amortization of unrecognized net transition asset (26) (26) (26)
- -------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (80) $ (5) $ (28)
=================================================================================================
Through December 31, 1997, the Company accrued retirement benefits
based on an independent actuarial valuation for the plan. The discount rate and
the rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations were 7% and 0%,
respectively, at December 31, 1997, 1996 and 1995. The expected long-term rate
of return on plan assets was 7% for 1997, 1996 and 1995.
The following is the funded status of the Plan at December 31,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $ 689 $ 675
Nonvested benefits 0 0
- --------------------------------------------------------------------------------------
Accumulated and projected benefit obligation 689 675
Fair value of plan assets (1,737) (1,464)
- --------------------------------------------------------------------------------------
Excess of assets over projected benefit obligation (1,048) (789)
Unrecognized net gain 331 146
Unrecognized net transition asset 332 358
- --------------------------------------------------------------------------------------
Prepaid pension asset $ (385) $ (285)
======================================================================================
401(k) Savings Plan:
The Company has a 401(k) Savings Plan for all of its employees. The
Company matches up to 3% of the employee's salary contributed. Total expense for
the Company under this plan was $19,400, $19,700 and $19,800 for 1997, 1996 and
1995, respectively.
NOTE 7 - RESTRICTED STOCK PLAN
In 1988 the Company adopted a Restricted Stock Plan (the "Restricted
Plan") to distribute shares of stock to senior executives at no cost. There are
100,000 shares of common stock authorized for awards during the Plan's ten year
term. No shares were awarded in 1997, 1996 and 1995. A total of 31,400 shares
have been awarded since inception of the Restricted Plan. Forfeiture
restrictions lapse on the third, fourth and fifth anniversary after award. In
1995 special dispensation was given, due to internal restructuring, and
restrictions were lifted on 4,507 shares. Restrictions were lifted on the
remaining 733 shares in 1997. Compensation expense is recorded for the awards of
stock under the Restricted Plan in each period in which services are performed.
The Company recognized compensation expense of $100, $1,000 and $13,000 related
to these awards for the years ended December
-32-
33
31, 1997, 1996 and 1995, respectively.
On October 27, 1997, the Company's Board of Directors approved the New
Mexico and Arizona Land Company 1997 Stock Incentive Plan (the "Plan"). 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.
As of the date of this report, the Board has granted to R. Randy
Stolworthy, the Company's President and Chief Executive Officer, options under
the Plan to purchase up to 250,000 shares of the Company's Common Stock. Such
option has been divided into five equal exercise price category units of
50,000 shares for exercise price purposes, with the first unit being
exercisable at $15 per share, with the exercise price of each subsequent unit
being increased by 12% (i.e., at exercise prices of $16.80, $18.82, $21.07 and
$23.60). One fifth of the shares in each price category unit vested and became
exercisable on February 19,1998 and an additional one-fifth will vest on each
of the four subsequent anniversaries of that date. As of the date of this
report, approximately eleven persons were eligible to participate in the Plan.
No compensation expense was recognized in 1997 because the exercise price at
the date of grant was higher than the price of the Common Stock of the Company
at December 31, 1997. The Plan is to be voted on by the Shareholders of the
Company at the May 8, 1998 Annual Meeting.
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 will continue 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 proforma
net income per share as if the fair value based method had been applied in
measuring compensation expense for awards granted in fiscal 1997.
-33-
34
Reported and pro forma net income, in thousands, and net income per
share amounts for the year ended December 31, 1997 are set forth below:
1997
-------
Reported:
Net income $2,340
Basic net income per share $0.69
Diluted net income per share $0.69
Pro forma:
Net income $2,218
Basic net income per share $0.65
Diluted net income per share $0.65
The fair values of the options granted were estimated on the date of
their grant using the Black-Scholes option pricing model based on the following
weighted average assumptions:
1997
-----
Risk free interest rate 5.521%
Expected life (in years) 5.0
Expected volatility 34%
Expected dividend yield 0
Stock options outstanding at December 31, 1997 were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number of Contractual Average Number of Average
Exercise Options Life Exercise Options Exercise
Prices Outstanding (in years) Price Exercisable Price
- ------------- ----------- ----------- ----------- ----------- -----------
$15.00-$23.60 250,000 12.14 $19.06 -- --
-34-
35
Activity related to the stock option plan is summarized below:
Year ended December 31, 1997
-------------------------------------
Number of Shares Weighted
Average
Exercise Price
---------------- ---------------
Options outstanding beginning of year -- --
Granted during the year 250,000 $19.06
Exercised during the year -- --
Expired/cancelled during the year -- --
-------- ------
Options outstanding end of year 250,000
========
Options exercisable end of year -- --
========
Weighted-average fair value of options granted during the year
$ 4.58
========
NOTE 8 - DIRECTOR STOCK AWARDS
In December, 1997 the Board of Directors awarded 350 shares of common
stock of the Company to each director. The shares were valued at fair market
value on the date of the grant. A total of 2,450 shares was issued on December
31, 1997. The shares contain a restrictive legend as required under Rule 144 of
the Securities Act of 1933. In addition a cash award of $2,048 was paid to each
director.
In November, 1996 the Board of Directors awarded 750 shares of common
stock of the Company to each director. The shares were valued at the fair market
value on the date of the grant. A total of 5,250 shares was issued on December
30, 1996. The shares contain a restrictive legend as required under Rule 144 of
the Securities Act of 1933. In addition a cash award of $3,750 was paid to each
director.
In December, 1995, the Board of Directors awarded 1,000 shares of
common stock of the Company to each director. It was determined that the stock
used for these awards would be treasury stock. Of the Company's 11,908 shares of
treasury stock, 7,000 shares were reissued at 1,000 shares to each director, on
December 28, 1995. The shares were valued at the fair market value on the grant
date. The reissued shares contain a restrictive legend as required under Rule
144 of the Securities Act of 1933. In addition a cash award of $4,750 was paid
to each director.
Compensation expense of $50,000 in 1997, $92,000 in 1996, and $116,000
in 1995 was recorded as a result of the above awards.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the
ordinary course of business. While it is not feasible to predict the ultimate
disposition of these matters, it is the opinion of management that their outcome
will not have a material adverse effect on the financial condition of the
Company.
-35-
36
The Company and certain of its directors and an officer have been named
as defendants in a lawsuit brought by the Company's minority partner in a joint
venture of which the Company is the managing partner. The plaintiffs' suit
includes counts for breach of contract, an accounting of the partnership,
declaratory judgment and injunction. The suit arises out of a dispute between
the Company and its partner concerning the prior removal of the partner as
managing partner by the Company. The Company believes the lawsuit against the
Company and the individuals is without merit and will vigorously defend against
the allegations made. The outcome of the suit is not expected to have a material
adverse effect on the financial condition of the Company.
NOTE 10 - RELATED PARTY TRANSACTIONS
On April 22, 1997, the Company purchased an industrial park consisting
of one partially leased 31,077 square foot multi-tenant industrial building on
7.1 acres of land in Tempe, Arizona. The Company purchased the property from R.
Randy Stolworthy, who was Executive Vice President of the Company at the time.
The cash purchase price of $2.8 million was based upon an MAI appraisal that was
prepared for the Company by an independent appraiser. The property had been
identified by the Company as a potential acquisition in late 1996.
-36-
37
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the years ended
December 31, 1997, and 1996 is presented below:
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------
1997
Revenue $3,124 $3,428 $5,823 $ 4,529 $16,904
===================================================================================================================
Net income $ 484 $ 476 $ 781 $ 599 $ 2,340
===================================================================================================================
Net income per share
Basic $ 0.14 $ 0.14 $ 0.23 $ 0.18 $ 0.69
Diluted $ 0.14 $ 0.14 $ 0.23 $ 0.18 $ 0.69
===================================================================================================================
1996
Revenue $4,608 $3,121 $4,690 $11,241 $23,660
===================================================================================================================
Net income $ 837 $ 551 $ 762 $ 2,696 $ 4,846
===================================================================================================================
Net income per share(1)
Basic $ 0.25 $ 0.17 $ 0.23 $ 0.81 $ 1.46
Diluted $ 0.25 $ 0.17 $ 0.23 $ 0.81 $ 1.46
===================================================================================================================
(1) Restated to reflect a 10% stock dividend paid July 18, 1997.
-37-
38
New Mexico and Arizona Land Company and Subsidiaries
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997 Cost
(in thousands) capital-
ized sub- Gross amount at which
Initial cost sequent carried at close
To Company 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)(5) acquired
- --------------------------------------------------------------------------------------------------------------------------------
Unimproved Properties
Arizona and New Mexico(3) $ 751 $12,029 $ -- $ 656 $12,587 $ 98 $12,685 $ 77 various
Colorado -- 2,751 -- 14 2,765 -- 2,765 -- 1996
Cottonwood, Arizona 2,287 4,584 -- 55 4,639 -- 4,639 -- 1996
Chandler, Arizona 51 3,245 -- 423 3,245 423 3,668 117 1986
Properties Under Development
40-acre lots, Arizona -- 4 -- -- 4 -- 4 -- 1908
Albuquerque, New Mexico(3) 735 832 -- 1,745 832 1,745 2,577 -- 1992-1995
Sedona, Arizona(4) -- 7,500 -- 2,370 9,870 -- 9,870 -- 1995
Rental Properties
Commercial Buildings
Phoenix, Arizona 788 1,549 2,451 1,402 1,549 3,853 5,402 497 1986
Apartments
New Mexico 7,851 1,187 10,665 424 1,187 11,089 12,276 4,070 1985
- --------------------------------------------------------------------------------------------------------------------------------
$12,463 $33,681 $13,116 $ 7,089 $36,678 $17,208 $53,886 $ 4,761
================================================================================================================================
-38-
39
(1) Tax basis: $33,000,000
(2) A valuation allowance in the amount of $3,480,000 was established in prior
years to reflect the Company's estimated realizable value upon ultimate
disposition of certain of its properties, principally unimproved urban real
estate.
(3) Certain properties are owned by partnerships of which the Company has a 75%
ownership.
(4) Owned by a partnership in which the Company has a 93% ownership.
(5) Life on which depreciation in the latest income statements is computed: 5 to
35 years.
(a) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $ 54,836 $48,970 $39,861
Additions during year:
Acquisitions(1) 3,648 7,459 10,614
Improvements 5,529 5,613 6,081
Deductions during year:
Cost of real estate sold (10,127) (7,206) (7,586)
- --------------------------------------------------------------------------------
Balance at close of year $ 53,886 $54,836 $48,970
================================================================================
(1) Includes real estate acquired from an officer of the Company for $2,824,000
cash.
(b) NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Years ended December 31,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
Balance of accumulated depreciation
at beginning of year $4,586 $4,188 $3,764
Additions during year:
Current year's depreciation 431 398 447
Deductions during year:
Real estate sold (256) -- (23)
- ----------------------------------------------------------------------------------
Balance at close of year $4,761 $4,586 $4,188
==================================================================================
-39-
40
New Mexico and Arizona Land Company and Subsidiaries
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
(In thousands)
Principal
amount of
loans
subject to
Face Carrying delinquent
Final Periodic amount amount of principal
Interest maturity payment of mortgages or
Description rate date terms mortgages (3)(a) interest
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgages on:
Unimproved land sales in Arizona
and New Mexico (predominately
40-acre parcel sales) 10%-12% 1997-2012 $ 6,680 $ 6,680 $253
Mineral Rights--Arizona 11% 2001 Quarterly(6) 100 100
Unimproved property--Arizona 12.625-13.25% 1998-2000 (1) 2,083 2,083
Improved operating property--Arizona 12.75-15% 1998-1999 (1) 579 579
Car wash--Chandler, Arizona 11.25% 1998 Monthly (5) 605 605
Hotel--Phoenix, Arizona 13% 1998 Monthly (1)(2) 526 526
Hotel--Scottsdale, Arizona 12.625% 1998 Monthly (1)(2) 1,567 1,567
Unimproved property-Buckeye, Arizona 13.125% 1998 Monthly (1)(2) 393 393
Unimproved property-Chandler, Arizona 13.25% 1998 Monthly (2) 850 850
Unimproved property-Gilbert, Arizona 13.5% 1998 Monthly (2) 915 915
Unimproved property-Scottsdale, Arizona 13.25% 1997 Monthly (1)(2) 460 460 460(4)
Unimproved lots JV partnership sale-Alb,NM 10% 2000 Variable 804 804
Valuation allowance (275)
- ------------------------------------------------------------------------------------------------------------------------------------
$15,562 $15,287 $713
====================================================================================================================================
(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 $15,562,000
(4) The company has filed a notice of trustee's sale on the delinquent loan
(5) Level payments of principal and interest.
(6) Level payments of principal plus interest on the unpaid balance.
-40-
41
(a) NOTE TO SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
Years ended December 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Balance at beginning of period 9,648 9,464 8,688
Additions during period:
New mortgage loans 9,517 1,910 2,045
Deduction during period:
Collections of principal (3,596) (1,453) (946)
Forfeitures on installment contracts (282) (273) (323)
- ----------------------------------------------------------------------
Balance at close of year $15,287 $9,648 $9,464
======================================================================
-41-
42
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the Company's executive officers and
other key employees is set forth below. Certain information concerning the
Company's directors is set forth in the Company's proxy statement for its 1998
annual meeting of shareholders under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference.
R. RANDY STOLWORTHY, CHIEF EXECUTIVE OFFICER, BRIDGE FINANCIAL
CORPORATION AND PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEW MEXICO AND ARIZONA
LAND COMPANY
Mr. Stolworthy, age 41, came to the Company from R.R.Stolworthy, Inc.,
a company he founded to manage and control the development of several large
parcels of real estate in the Phoenix metropolitan area. Before that, he was
co-founder and President of Voicelink Data Service, a large credit and marketing
service company in Redmond, Washington. Voicelink Data Services merged with
Digital Systems International in 1991.
Mr. Stolworthy gained investment and business experience as a General
Partner and Manager of the Seattle office of FBS Venture Capital Company, where
he successfully invested in early-stage growth companies and participated as an
active board member.
PAUL SARGENT, PRESIDENT, BRIDGE FINANCIAL CORPORATION
Mr. Sargent, age 43, is experienced in short-term commercial real
estate lending. Until its acquisition by the Company, he had directed the growth
of RRH Financial from the ground up. During his tenure at RRH Financial, the
company originated nearly $100 million of loan transactions in total.
Prior to forming RRH Financial, Mr. Sargent obtained experience at
Chase Bank in Arizona and New York, and earlier in his career, at Mellon
Financial Services and Pickrell Mortgage Company in Phoenix. Over the past
decade, he has placed loans with over 46 different institutions, ranging in
amounts from $125,000 to $35-million.
JEROME L. JOSEPH, CONTROLLER, TREASURER AND SECRETARY
Mr. Joseph, age 40, has acquired an in-depth knowledge of the
specialized finance and accounting needs of entrepreneurial real estate
development companies and early-stage companies. He has worked with both public
and private companies in compliance, reporting, capital formation and cash
management.
He came to the Company from Unison HealthCare Corporation, where he was
Vice President and Treasurer. Before Unison, he served three years at UDC Homes
Inc. as Manager of Finance, and ten years at Homes by Dave Brown, the last four
years as Senior Vice President-Finance and Treasurer. He has also worked in
various consulting capacities in management and finance.
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SUZANNE DRAKE, VICE PRESIDENT, REAL ESTATE
Ms. Drake, age 41, draws on her extensive background in development,
asset management, acquisitions and dispositions and loan workouts in all facets
of real estate. She is responsible for the Company's new development efforts.
Prior to joining the Company, she was Regional Manager for Transamerica
Real Estate, where she managed an office that handled a portfolio of real estate
and loans totaling more than $500 million in book value. This portfolio of
loans, master-planned communities, office and industrial buildings and land
parcels, required loan workouts and development efforts, as well as legal
dispute reconciliation and disposition.
J. D. SPHAR, VICE PRESIDENT, MINERALS
Mr. Sphar, age 57, joined the Company as Chief Geologist in 1971. He
was promoted to his current position in 1973. He manages the Company's mineral
assets and assists in the management of the Company's vast rural acres. Mr.
Sphar's efforts have generated over $8 million in leasehold payments to the
Company. He has been the principal negotiator for uranium sales of $30 million
and he has initiated sales and trades of 200,000 acres of fee minerals with the
federal government.
Prior to joining the Company, Mr. Sphar was Southwest District
Geologist for Western Nuclear, Inc for two years and Mine Geologist for
Kerr-McGee Corporation for two years.
ITEM 11: EXECUTIVE COMPENSATION
Information required under this item is contained in the Company's 1998
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 1998
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 1998
Proxy Statement, under the heading "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
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PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The consolidated financial statements and schedules are included in
Part III, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders Equity
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
Exhibits:
Exhibit 3 Articles of Incorporation of Registrant amended May 16, 1997
and By-laws of Registrant amended May 16, 1997.
Exhibit 4.1 1997 Stock Incentive Plan, incorporated by reference to
Form S-8 filed January 9, 1998.
Exhibit 21 Subsidiaries of the Company
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedule
All other exhibits are omitted because they are inapplicable, contained
elsewhere in the report or have been previously filed with the Securities and
Exchange Commission.
No Form 8-K was filed in 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEW MEXICO AND ARIZONA LAND COMPANY
(Registrant)
/s/R. Randy Stolworthy /s/Jerome L. Joseph
- ------------------------------ ---------------------------------
R. Randy Stolworthy Jerome L. Joseph
President (Principal Controller and Treasurer
Executive Officer) (Principal Financial Officer)
Dated: March 26, 1998
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/John C. Lucking
- ------------------------------ ---------------------------------
Stephen E. Renneckar John C. Lucking
Chairman Director
/s/William A. Pope /s/Arnold L. Putterman
- ------------------------------ ---------------------------------
William A. Pope Arnold L. Putterman
Director Director
/s/Ronald E. Strasburger /s/Richard A. Wessman
- ------------------------------ ---------------------------------
Ronald E. Strasburger Richard A. Wessman
Director Director
Dated: March 26, 1998
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EXHIBITS INDEX
Exhibit 3 Articles of Incorporation of Registrant amended May 16, 1997
and By-laws of Registrant amended May 16, 1997.
Exhibit 4.1 1997 Stock Incentive Plan, incorporated by reference to
Form S-8 filed January 9, 1998.
Exhibit 21 Subsidiaries of the Company
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedule
All other exhibits are omitted because they are inapplicable, contained
elsewhere in the report or have been previously filed with the Securities and
Exchange Commission.