New Mexico and Arizona Land Co
Filed March 30, 1998

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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. -1-


New Mexico & Arizona Land Co (NZ) AMEX
FYE December 31, 1997

INDEXED 10-K for the Fiscal Year Ended December 31, 1997

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PART I
Item 1. Business

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III
Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Signatures
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- -2-
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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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-3- 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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-4- 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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-5- 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. -6-
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Year Encumbrance Location Description acquired Acres (in thousands) -------------------------------------------------------------------------------------------------------------------------- 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) ------------------------------------------------------------------------------------------- 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.
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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 -7- 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.
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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. -8-
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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: -------------------------------------------------------------------------- 1997 1996 HIGH LOW High Low -------------------------------------------------------------------------- 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
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ITEM 6: SELECTED FINANCIAL DATA Years ended December 31, (in thousands, except per share, shareholder, and employee data) 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------------------- 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 -9- 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.
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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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-10- 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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-11- 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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-12- 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
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-13- 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
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-14- 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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-15- 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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-16- 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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-17- 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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-18- ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS:
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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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-19- 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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-20- 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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-21- 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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-22- 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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-23- 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. -24-
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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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-25- 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- 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) ------------------------------------------------------------------------------------------------------
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$ 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.
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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,
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-27- (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.
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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-
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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- $1,548 $3,200 $3,629 ============================================================================================== -30-
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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.
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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- 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.
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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-
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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.
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-33- 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- 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 ========
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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- 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.
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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-
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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-
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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- (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- 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- (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 ======================================================================
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None
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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. -42- 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.
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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.
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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.
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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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-43- PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The consolidated financial statements and schedules are included in Part III, Item 8: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Statements of Shareholders Equity Notes to Consolidated Financial Statements Schedule III - Real Estate and Accumulated Depreciation Schedule IV - Mortgage Loans on Real Estate Exhibits: Exhibit 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. -44-
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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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-45- 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. EXHIBIT 3 RESTATED ARTICLES OF INCORPORATION OF NEW MEXICO AND ARIZONA LAND COMPANY (as of May 16, 1997) Pursuant to Section 10-1006 and 10-1007, Arizona Revised Statutes, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is NEW MEXICO AND ARIZONA LAND COMPANY. 2. Attached hereto as Exhibit A, is a copy of the articles of incorporation of the corporation fully restated to include all amendments to the articles of incorporation through the date of filing of this document. 3. The restatement does contain an amendment requiring shareholder approval. The amendment does not provide for an exchange, reclassification or cancellation of issued shares. 4. The amendment was approved by the shareholders on May 16, 1997. There is one voting group entitled to vote separately on the amendment. The designation and number of outstanding shares in each voting group entitled to vote separately on the amendment, the number of votes entitles to be cast by each, the number of votes of each such voting group represented at the meeting at which the amendment was adopted and the votes cast for and against the amendment were as follows: The voting group consisting of 3,012,886 outstanding shares of common stock is entitled to 3,012,886 votes. There were 2,592,011 votes present at the meeting. The voting group cast 2,571,613 votes for and 9,894 votes against approval of the amendment adding a new Article Eighth as set forth on Exhibit A. 10,504 votes abstained from voting for or against approval of the amendment. DATED as of the 16th day of May, 1997. NEW MEXICO AND ARIZONA LAND COMPANY By /s/ ------------------------------------------------------- Sr. Vice President, Treasurer and Secretary EXHIBIT A RESTATED ARTICLES OF INCORPORATION OF NEW MEXICO AND ARIZONA LAND COMPANY (as of May 16, 1997) KNOW ALL MEN BY THESE PRESENTS that we, whose hands are hereunto affixed, do hereby associate ourselves together for the purpose of forming a corporation under the laws of the State of Arizona and, to that end, do adopt the following articles of incorporation: FIRST: The name of the corporation shall be NEW MEXICO AND ARIZONA LAND COMPANY. SECOND: This corporation is organized for the purpose of transacting any or all lawful business for which corporations may be incorporated under the laws of the State of Arizona, as amended from time to time. The corporation is presently engaged in the business of holding and managing land for investment purposes, leasing real property and interests therein, and developing mineral resources. THIRD: The corporation shall have authority to issue a total of forty million (40,000,000) shares of capital stock, consisting of: (1) Thirty million (30,000,000) shares of common stock, no par value per share; and (2) Ten million (10,000,000) shares of serial preferred stock, no par value per share. Each issued and outstanding share of common stock will entitle the holder thereof to one (1) vote on any matter submitted to a vote of or for consent of shareholders. Issued and outstanding shares of serial preferred stock will entitle the holders thereof only to those votes, if any, which may expressly be fixed as hereinafter provided for the respective series thereof and to voting rights on certain matters, and in certain circumstances, as set forth in this Article. The Board of Directors is authorized to provide from time to time for the issuance of shares of serial preferred stock in series and to fix from time to time before issuance the designation, preferences, privileges and voting powers of the shares of each series of serial preferred stock and the restrictions or qualifications thereof, including, without limiting the generality of the foregoing, the following: a) The serial designation and authorized number of shares; b) The dividend rate, the date or dates on which such dividends will be payable, and the extent to which such dividends may be cumulative; c) The amount or amounts to be received by the holders in the event of voluntary or involuntary dissolution or liquidation of the Corporation; d) The price or prices at which shares may be redeemed and any terms, conditions and limitations upon such redemption; e) Any sinking fund provisions for redemption or purchase of shares of such series; and f) The terms and conditions, if any, on which shares may be converted into shares of 1 other capital stock, or of other series of serial preferred stock of the Corporation. Each series of serial preferred stock, in preference to the common stock, may be entitled to dividends, from funds or other assets legally available therefor, at such rates, payable at such times and cumulative to such extent as may be fixed by the Board of Directors pursuant to the authority herein conferred upon it. In the event of dissolution or liquidation of the Corporation, voluntary or involuntary, the holders of the serial preferred stock, in preference to the common stock, may be entitled to receive such amount or amounts as may be fixed by the Board of Directors pursuant to the authority herein conferred upon it. Preferred stock of any series redeemed, converted, exchanged, purchased or otherwise acquired by the Corporation shall be cancelled by the Corporation and returned to the status of authorized but unissued preference stock. All shares of any series of serial preferred stock, as between themselves, shall rank equally and be identical except as set forth in resolutions of the board of directors authorizing the issuance of the series. FOURTH: All directors of the corporation must be shareholders of the corporation. The number of directors of the corporation shall be set by the Board of Directors from time to time; provided, however, that the number of directors so designated shall be no less than five (5) nor more than nine (9). The Board of Directors shall consist of Class A directors and Class B directors. The Class A directors shall be elected for a term of two (2) years at the annual meeting of shareholders of the corporation held in every odd numbered year. The Class B directors shall be elected for a term of two (2) years at the annual meeting of shareholders of the corporation held in every even numbered year. When an even number of directors has been set by the Board of Directors, there shall be an even number of Class A and Class B directors. When an odd number of directors has been set by the Board of Directors, there shall be one more Class B director than there are Class A directors. FIFTH: The Board of Directors may, from time to time, cause the corporation to purchase its own shares to the extent of the unreserved and unrestricted capital surplus of the corporation. SIXTH: Elizabeth M. Bedewi, Senior Vice President, Treasurer and Secretary of New Mexico and Arizona Land Company, 3033 North 44th Street, Suite 270, Phoenix, Arizona 85018-7228, is hereby appointed statutory agent for the corporation for the State of Arizona. SEVENTH: The liability of a director or former director to the corporation or its shareholders shall be eliminated to the fullest extent permitted by Section 10-202.B.1 of the Arizona Revised Statutes. If the Arizona Business Corporation Act is amended to authorize corporate action further eliminating or limiting the liability of directors, the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Arizona Business Corporation Act, as amended. Any repeal or modification of this Article Seventh shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission
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2 occurring prior to or at the time of such repeal or modification. The provisions of the Article Seventh shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of the Article Seventh. EIGHTH: The Corporation shall indemnify any and all of its existing and former directors and officers to the fullest extent permitted by Section 10-202b.2 of the Arizona Business Corporation Act. If the Arizona Business Corporation Act is amended to authorize corporate action further permitting indemnification of directors or officers, the Corporation shall indemnify its existing and former directors and officers to the fullest extent permitted by the Arizona Business Corporation Act, as amended. Any repeal or modification of this Article Eighth shall not adversely affect any right or protection of existing or former directors or officers existing hereunder with respect to any act or omission occurring prior to or at the time of such repeal or modification.
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3 BYLAWS OF NEW MEXICO AND ARIZONA LAND COMPANY Amended and Restated as of May 16, 1997 AMENDED AND RESTATED BYLAWS OF NEW MEXICO AND ARIZONA LAND COMPANY I. REFERENCES TO CERTAIN TERMS AND CONSTRUCTION 1.01 Certain References. Any reference herein made to law will be deemed to refer to the law of the State of Arizona, including any applicable provision of Chapters 1 through 17 of Title 10 of the Arizona Revised Statutes, or any successor statute, as from time to time amended and in effect (sometimes referred to herein as the "Arizona Business Corporation Act"). Any reference herein made to the corporation's Articles will be deemed to refer to its Articles of Incorporation and all amendments thereto as at any given time on file with the Arizona Corporation Commission. Except as otherwise required by law and subject to any procedures established by the corporation pursuant to Arizona Revised Statutes Section 723, the term "shareholder" as used herein shall mean one who is a holder of record of shares of the corporation. References to specific sections of law herein made shall be deemed to refer to such sections, or any comparable successor provisions, as from time to time amended and in effect. 1.02. Seniority. The law and the Articles (in that order of precedence) will in all respects be considered senior and superior to these Bylaws, with any inconsistency to be resolved in favor of the law and such Articles (in that order of precedence), and with these Bylaws to be deemed automatically amended from time to time to eliminate any such inconsistency which may then exist. 1.03. Computation of Time. The time during which an act is required to be done, including the time for the giving of any required notice herein, shall be computed by excluding the first day or hour, as the case may be, and including the last day or hour. II. OFFICES 2.01. Principal Office. The principal office of the corporation shall be located at any place either within or outside the State of Arizona as designated in the corporation's most current Annual Report filed with the Arizona Corporation Commission or in any other document executed and delivered to the Arizona Corporation Commission for filing. If a principal office is not so designated, the principal office of the corporation shall mean the known place of business of the corporation. The corporation may have such other offices, either within or without the State of Arizona, as the Board of Directors may designate or as the business of the corporation may require from time to time. 2.02. Known Place of Business. A known place of business of the corporation shall be located within the State of Arizona and may be, but need not be, the address of the statutory agent of the corporation. The corporation may change its known place of business from time to time in accordance with the relevant provisions of the Arizona Business Corporation Act. III. SHAREHOLDERS 3.01. Annual Shareholder Meeting. The annual meeting of the shareholders shall be held on or before June 30th in each year, at such time and place, either within or without the State of Arizona, as shall be fixed by the Board of Directors or, in the absence of action by the Board, as set forth in the notice given or waiver signed with respect to such meeting pursuant to Section 3.03 below, for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. If any annual meeting is for any reason not held on the date determined as aforesaid; a
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1 deferred annual meeting may thereafter be called and held in lieu thereof, at which the same proceedings may be conducted. If the day fixed for the annual meeting shall be a legal holiday in the State of Arizona such meeting shall be held on the next succeeding business day. 3.02. Special Shareholder Meetings. Special meetings of the shareholders may be held whenever and wherever, either within or without the State of Arizona, called for by or at the direction of the Chairman of the Board, the President, or the Board of Directors. 3.03. Notice of Shareholders Meetings. (a) Required Notice. Notice stating the place, day and hour of any annual or special shareholders meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting by or at the direction of the person or persons calling the meeting, to each shareholder entitled to vote at such meeting and to any other shareholder entitled to receive notice of the meeting by law or the Articles. Notices to shareholders shall be given in accordance with, and shall be deemed to be effective at the time and in the manner described in, Arizona Revised Statutes Section 10-141. If no designation is made of the place at which an annual or special meeting will be held in the notice for such meeting, the place of the meeting will be at the principal place of business of the corporation. (b) Adjourned Meeting. If any shareholders meeting is adjourned to a different time, or place, notice need not be given of the new date, time, and place, if the new date, time, and place is announced at the meeting before adjournment. But if a new record date for the adjourned meeting is fixed or must be fixed in accordance with law or these Bylaws, then notice of the adjourned meeting shall be given to those persons who are shareholders as of the new record date and who are entitled to such notice pursuant to Section 3.03(a) above. (c) Waiver of Notice. Any shareholder may waive notice of a meeting (or any notice of any other action required to be given by the Arizona Business Corporation Act, the corporation's Articles, or these Bylaws), at any time before, during, or after the meeting or other action, by a writing signed by the shareholder entitled to the notice. Each such waiver shall be delivered to the corporation for inclusion in the minutes or filing with the corporate records. Under certain circumstances, a shareholder's attendance at a meeting may constitute a waiver of notice, unless the shareholder takes certain actions to preserve his/her objections as described in the Arizona Business Corporation Act. (d) Contents of Notice. The notice of each special shareholders' meeting shall include a description of the purpose or purposes for which the meeting is called. Except as required by law, this Section 3.03(d), or the corporation's Articles, the notice of an annual shareholders' meeting need not include a description of the purpose or purposes for which the meeting is called. 3.04. Fixing of Record Date. For the purpose of determining shareholders of any voting group entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive any distribution or dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date. Such record date shall not be more than seventy (70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is so fixed by the Board of Directors, the record date for the determination of shareholders shall be as provided in the Arizona Business Corporation Act. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any 2 adjournment thereof, unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. 3.05. Shareholder List. The corporation shall make a complete record of the shareholders entitled to notice of each meeting of shareholders thereof, arranged in alphabetical order, listing the address and the number of shares held by each. The list shall be arranged by voting group and within each voting group by class or series of shares. The shareholder list shall be available for inspection by any shareholder, beginning two (2) business days after notice of the meeting is given for which the list was prepared and continuing through the meeting. The list shall be available at the corporation's principal office or at another place identified in the meeting notice in the city where the meeting is to be held. Failure to comply with this section shall not affect the validity of any action taken at the meeting. 3.06. Shareholder Quorum and Voting Requirements. (a) If the Articles or the Arizona Business Corporation Act provide for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group. (b) If the Articles or the Arizona Business Corporation Act provide for voting by two (2) or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. (c) Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the Articles or the Arizona Business Corporation Act provide otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. (d) Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is or must be set for that adjourned meeting. (e) If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles or the Arizona Business Corporation Act require a greater number of affirmative votes. (f) Voting will be by ballot on any question as to which any person demands a ballot vote prior to the time the voting begins entitled to vote on such question; otherwise, a voice vote will suffice. No ballot or change of vote will be accepted after the polls have been declared closed following the ending of the announced time for voting. 3.07. Manner of Bringing Business Before Meetings. (a) At any annual or special meeting of shareholders only such business shall be conducted as shall have been properly brought before the meeting. In order to be properly brought before the meeting, such business must be a proper subject for shareholder action and must have been (i) specified in the written notice of the meeting (or any supplement thereto) given to shareholders who were shareholders on the record date for such meeting by or at the direction of the Board of Directors, (ii) brought before the meeting at the direction of the Board of Directors or the Chairman of the meeting, selected as provided in Section 3.12 hereof, or (iii) specified in a written notice given by or on behalf of
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3 a shareholder who was a shareholder on the record date for such meeting entitled to vote thereat or a duly authorized proxy for such shareholder, in accordance with Section 3.07(b) and (c) hereof. (b) A shareholder notice referred to in Section 3.07(a)(iii) hereof must be delivered personally to, or mailed to and received at, the principal executive office of the corporation, addressed to the attention of the Secretary, not more than ten (10) days after the date of the initial notice referred to in Section 3.07(a)(i) hereof, in the case of business to be brought before a special meeting of shareholders, and not less than thirty (30) days prior to the anniversary date of the initial notice referred to in Section 3.07(a)(i) hereof with respect to the previous year's annual meeting, in the case of business to be brought before an annual meeting of shareholders. (c) A shareholder notice referred to in Section 3.07(a)(iii) hereof shall set forth: (i) a full description of each item of business proposed to be brought before the meeting and the reasons for conducting such business at such meeting; (ii) the name and address of the person proposing to bring such business before the meeting; (iii) the class and number of shares held of record, held beneficially, and represented by proxy by such person as of the record date for the meeting, if such date has been made publicly available, or as of a date not later than thirty (30) days prior to the delivery of the initial notice referred to in Section 3.07(a)(i) hereof, if the record date has not been made publicly available; (iv) if any item of business involves a nomination for director, all information regarding each such nominee that would be required to be set forth in a definitive proxy statement filed with the Securities and Exchange Commission pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, or any successor thereto, and the written consent of each such nominee to serve if elected; (v) any material interest of such shareholder in the specified business; (vi) whether or not such shareholder is a member of any partnership, limited partnership, syndicate, or other group pursuant to any agreement, arrangement, relationship, understanding, or otherwise, whether or not in writing, organized in whole or in part for the purpose of acquiring, owning, or voting shares of the corporation; and (vii) all other information that would be required to be filed with the Securities and Exchange Commission, if, with respect to the business proposed to be brought before the meeting, the person proposing such business was a participant in a solicitation subject to Section 14 of the Securities Exchange Act of 1934, as amended, or any successor thereto. No business shall be brought before any meeting of the shareholders of the corporation otherwise than as provided in the Section 3.07. (d) Notwithstanding the provisions of this Section 3.07, the Board of Directors shall not be obligated to include information as to any shareholder nominee for director or any other shareholder proposal in any proxy statements or other communication sent to shareholders. (e) The Chairman of the meeting may, if the facts warrant, determine that any proposed item of business was not brought before the meeting in accordance with the provisions of this Section 3.07, and if he or she should so determine, he or she shall so declare to the meeting and the defective item of business shall be disregarded. 4 3.08. Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy duly executed in writing by the shareholder or the shareholder's duly authorized attorney-in-fact. Such proxy shall comply with law and shall be filed with the Secretary of the corporation or other person authorized to tabulate votes before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. The burden of proving the validity of any undated, irrevocable, or otherwise contested proxy at a meeting of the shareholders will rest with the person seeking to exercise the same. A facsimile appearing to have been transmitted by a shareholder or by such shareholder's duly authorized attorney-in-fact may be accepted as a sufficiently written and executed proxy. 3.09. Voting of Shares. Unless otherwise provided in the Articles or the Arizona Business Corporation Act, each outstanding share entitled to vote shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of shareholders. 3.10. Voting for Directors. Unless otherwise provided in the Articles, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present at the time of such vote. As provided by law, shareholders shall be entitled to cumulative voting in the election of directors. 3.11. Election Inspectors. The Board of Directors, in advance of any meeting of the shareholders, may appoint an election inspector or inspectors to act at such meeting (and at any adjournment thereof). If an election inspector or inspectors are not so appointed, the chairman of the meeting may, or upon request of any person entitled to vote at the meeting will, make such appointment. If any person appointed as an inspector fails to appear or to act, a substitute may be appointed by the chairman of the meeting. If appointed, the election inspector or inspectors (acting through a majority of them if there be more than one) will determine the number of shares outstanding, the authenticity, validity, and effect of proxies, the credentials of persons purporting to be shareholders or persons named or referred to in proxies, and the number of shares represented at the meeting in person and by proxy; will receive and count votes, ballots, and consents and announce the results thereof; will hear and determine all challenges and questions pertaining to proxies and voting; and, in general, will perform such acts as may be proper to conduct elections and voting with complete fairness to all shareholders. No such election inspector need be a shareholder of the corporation. 3.12. Organization and Conduct of Meetings. Each meeting of the shareholders will be called to order and thereafter chaired by the Chairman of the Board of Directors if there is one, or, if not, or if the Chairman of the Board is absent or so requests, then by the President, or if both the Chairman of the Board and the President are unavailable, then by such other officer of the corporation or such shareholder as may be appointed by the Board of Directors. The corporation's Secretary or in his or her absence, an Assistant Secretary will act as secretary of each meeting of the shareholders. If neither the Secretary nor an Assistant Secretary is in attendance, the chairman of the meeting may appoint any person (whether a shareholder or not) to act as secretary for the meeting. After calling a meeting to order, the chairman thereof may require the registration of all shareholders intending to vote in person and the filing of all proxies with the election inspector or inspectors, if one or more have been appointed (or, if not, with the secretary of the meeting). After the announced time for such filing of proxies has ended, no further proxies or changes, substitutions, or revocations of proxies will be accepted. If directors are to be elected, a tabulation of the proxies so filed will, if any person entitled to vote in such election so requests, be announced at the meeting (or adjournment thereof) prior to the closing of the election polls. Absent a showing of bad faith on his or her part, the chairman of a meeting will, among other things, have absolute authority to fix the period of time allowed for the registration of shareholders and the filing of proxies, to determine the order of business to be conducted at such meeting, and to establish reasonable 5 rules for expediting the business of the meeting and preserving the orderly conduct thereof (including any informal, or question and answer portions thereof). 3.13. Shareholder Approval or Ratification. The Board of Directors may submit any contract or act for approval or ratification of the shareholders at a duly constituted meeting of the shareholders. Except as otherwise required by law, if any contract or act so submitted is approved or ratified by a majority of the votes cast thereon at such meeting, the same will be valid and as binding upon the corporation and all of its shareholders as it would be if it were the act of its shareholders. 3.14. Informalities and Irregularities. All informalities or irregularities in any call or notice of a meeting of the shareholders or in the areas of credentials, proxies, quorums, voting, and similar matters, will be deemed waived if no objection is made at the meeting. 3.15. Shareholder Action by Written Consent. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if one (1) or more consents in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. The consents shall be delivered to the corporation for inclusion in the minutes or filing with the corporate record. Action taken by consent is effective when the last shareholder signs the consent, unless the consent specifies a different effective date, except that if, by law, the action to be taken requires that notice be given to shareholders who are not entitled to vote on the matter, the effective date shall not be prior to ten (10) days after the corporation shall give such shareholders written notice of the proposed action, which notice shall contain or be accompanied by the same material that would have been required if a formal meeting had been called to consider the action. Consent signed under this section has the effect of a meeting vote and may be described as such in any document. V. BOARD OF DIRECTORS 4.01. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors. 4.02. Number, Tenure, and Qualification of Directors. Unless otherwise provided in the Articles of Incorporation, the authorized number of directors shall be neither less than five (5) nor more than nine (9). The number of directors in office from time to time shall be within the limits specified above, as prescribed from time to time by resolution adopted by either the shareholders or the Board of Directors. The Board of Directors shall consist of Class A Directors and Class B Directors. The Class A directors shall be elected for a term of two years at the annual meeting of shareholders of the corporation held in every odd numbered year. The Class B directors shall be elected for a term of two years at the annual meeting of shareholders of the corporation held in every even numbered year. When an uneven number of directors has been set by the Board of Directors, there shall be an even number of Class A directors and Class B directors. All directors of the corporation shall be shareholders of the corporation and no person who has attained the age of seventy (70) years shall be eligible for election or appointment to the Board of Directors. 4.03. Regular Meetings of the Board of Directors. A regular annual meeting of the Board of Directors is to be held as soon as practicable after the adjournment of each annual meeting of the shareholders, either at the place of the shareholders meeting or at such other place as the directors elected at the shareholders meeting may have been informed of at or prior to the time of their election. Additional regular meetings may be held at regular intervals at such places and at such times as the Board of Directors may determine.
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6 4.04. Special Meetings of the Board of Directors. Special meetings of the Board of Directors may be held whenever and wherever called for by the Chairman of the Board or, at the request of three members of the Board of Directors, by the Secretary. 4.05. Notice of, and Waiver of Notice for, Directors Meetings. No notice need be given of regular meetings of the Board of Directors. Notice of the time and place of any special directors meeting shall be given at least 48 hours prior thereto. Notice shall be given in accordance with and shall be deemed to be effective at the time and in the manner described in Arizona Revised Statutes Section 10-141. Any director may waive notice of any meeting and any adjournment thereof at any time before, during, or after it is held. Except as provided in the next sentence below, the waiver must be in writing, signed by the director entitled to the notice, and filed with the minutes or corporate records. The attendance of a director at or participation of a director in a meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting (or promptly upon his/her arrival) objects to holding the meeting or transacting business at the meeting, and does not thereafter vote for or assent to action taken at the meeting. 4.06. Director Quorum. A majority of the number of directors prescribed according to Section 4.02 above, or if no number is so prescribed, the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, unless the Articles require a greater number. 4.07. Directors, Manner of Acting. (a) If a quorum is present when a vote is taken, the affirmative vote of a majority of the directors present shall be the act of the Board of Directors unless the Articles require a greater percentage. (b) Unless the Articles provide otherwise, any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. (c) A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless: (1) the director objects at the beginning of the meeting (or promptly upon his/her arrival) to holding it or transacting business at the meeting; or (2) his/her dissent or abstention from the action taken is entered in the minutes of the meeting; or (3) he/she delivers written notice of his/her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation before 5:00 p.m. on the next business day after the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 4.08. Director Action Without a Meeting. Unless the Articles provide otherwise, any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if the action is taken by unanimous written consent of the Board of Directors as evidenced by one (1) or more written consents describing the action taken, signed by each director and filed with the minutes or corporate records. Action taken by consent is effective when the last director signs the consent, unless the consent specifies a different effective date. A signed consent has the effect of a meeting vote and may be described as such in any document. 7 4.09. Removal of Directors by Shareholders. The shareholders may remove one (1) or more directors at a meeting called for that purpose if notice has been given that a purpose of the meeting is such removal. The removal may be with or without cause unless the Articles provide that directors may only be removed with cause. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in a shareholder vote to remove him. If less than the entire Board of Directors is to be removed, a director may not be removed if the number of votes sufficient to elect the director under cumulative voting is voted against the director's removal. 4.10. Board of Director Vacancies. (a) Unless the Articles provide otherwise, if a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors, either the shareholders or the Board of Directors may fill the vacancy. (b) If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the shareholders. (c) A vacancy that will occur at a specific later date (by reason of resignation effective at a later date) may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. (d) The term of a director elected to fill a vacancy expires at the next shareholders meeting at which directors are elected. 4.11. Director Compensation. Unless otherwise provided in the Articles by resolution of the Board of Directors, each director may be paid his/her expenses, if any, of attendance at each meeting of the Board of Directors or any committee thereof, and may be paid a stated salary as director or a fixed sum for attendance at each meeting of the Board of Directors or any committee thereof, or both. No such payment shall preclude any director from serving the corporation in any capacity and receiving compensation therefor. 4.12. Director Committees. (a) Creation of Committees. In addition to the committees set forth in this Article IV and unless the Articles provide otherwise, the Board of Directors may create one (1) or more other committees and appoint members of the Board of Directors to serve on them. Each committee shall have one (1) or more members, who serve at the pleasure of the Board of Directors. (b) Selection of Members. The creation of a committee and appointment of members to it shall be approved by the greater of (1) a majority of all the directors in office when the action is taken or (2) the number of directors required by the Articles to take such action. (c) Required Procedures. Sections 4.03 through 4.08 of this Article IV, which govern meetings, action without meetings, notice and waiver of notice, and quorum and voting requirements of the Board of Directors, apply to committees and their members. (d) Authority. Unless limited by the Articles, each committee may exercise those aspects of the authority of the Board of Directors which the Board of Directors confers upon such committee in the resolution creating the committee, provided, however, that a committee may not: (1) authorize distributions; (2) approve or propose to shareholders action that requires shareholder approval 8 under the Arizona Business Corporation Act; (3) fill vacancies on the Board of Directors or on any of its committees; (4) amend the Articles of Incorporation without shareholder action as provided by law; (5) adopt, amend or repeal these Bylaws; (6) approve a plan of merger not requiring shareholder approval; (7) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; (8) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except within limits specifically prescribed by the Board of Directors; or (9) fix the compensation of directors for serving on the Board of Directors or any committee of the Board of Directors. 4.13. Executive Committee. The Board of Directors shall appoint an executive committee, consisting of at least three directors, including the Chairman of the Board, who shall be the chairman of the Committee. The committee shall have and exercise all lawfully delegable powers of the Board of Directors while the Board is not in session, except as such delegation of powers may be limited from time to time by resolution of the Board of Directors. 4.14. Audit Committee. The Board of Directors shall appoint an audit committee, consisting of at least two directors, provided, however, that directors who are also officers of the corporation shall not be eligible for membership on the committee. The audit committee shall: (a) recommend the auditors; (b) review the overall scope of the audit and the final opinion of the external auditors; (c) review the financial and accounting policies and procedures used by the corporation; (d) approve the organization and procedures of the internal accounting and auditing departments; (e) prepare a report of the Board of Directors; (f) assure compliance with ethical standards. 4.15. Compensation and Nominating Committee. The Board of Directors shall appoint a compensation and benefits committee, consisting of at least two non-officer directors. The committee shall recommend to the Board candidates for membership on the Board of Directors, and shall be empowered to make recommendations to the Board of Directors concerning the following: a) employees' salaries and bonuses; b) the company's Restricted Stock Plan; c) the company's Incentive Bonus Plan; d) all other company compensation and benefit plans. 4.16. Retirement Plan Administrative Committee. The Board of Directors shall appoint an administrative committee consisting of three individuals to establish and maintain the corporation's funding policy for its Retirement Plan and Trust for Salaried Employees, the corporation's 401(k) Plan and to act as fiduciary thereunder. Individuals may be eligible for membership on the administrative committee without being directors or officers of the corporation. 4.17. Director Resignations. Any director or committee member may resign from his or her office at any time by written notice delivered to the Board of Directors, the Chairman of the Board, or the corporation at its known place of business. Any such resignation will be effective upon its receipt unless some later time is therein fixed, and then from that time. The acceptance of a resignation will not be required to make it effective.
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9 V. OFFICERS 5.01. Number of Officers. The officers of the corporation shall be a President, a Secretary, and a Treasurer, each of whom shall be appointed by the Board of Directors. Such other officers and assistant officers as may be deemed necessary, including any Vice Presidents, may be appointed by the Board of Directors. If specifically authorized by the Board of Directors, an officer may appoint one (1) or more other officers or assistant officers. The same individual may simultaneously hold more than one (1) office in the corporation. 5.02. Appointment and Term of Office. The officers of the corporation shall be appointed by the Board of Directors for a term as determined by the Board of Directors. The designation of a specified term grants to the officer no contract rights, and the Board of Directors can remove the officer at any time prior to the termination of such term. If no term is specified, an officer of the corporation shall hold office until he or she resigns, dies, or until he or she is removed in the manner provided by law or in Section 5.03 of this Article V. The regular election or appointment of officers will take place at each annual meeting of the Board of Directors, but elections of officers may be held at any other meeting of the Board. 5.03. Resignation and Removal of Officers. An officer may resign at any time by delivering written notice to the corporation at its known place of business. A resignation is effective when the notice is delivered unless the notice specifies a later effective date or event. Any officer may be removed by the Board of Directors at any time, with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer shall not of itself create contract rights. 5.04. Duties of Officers. Officers of the corporation shall have authority to perform such duties as may be prescribed from time to time by law, in these Bylaws, or by the Board of Directors, the President, or the superior officer of any such officer. Each officer of the corporation (in the order designated herein or by the Board) will be vested with all of the powers and charged with all of the duties of his or her superior officer in the event of such superior officer's absence, death, or disability. 5.05. Bonds and Other Requirements. The Board of Directors may require any officer to give a bond to the corporation (with sufficient surety and conditioned for the faithful performance of the duties of his or her office) and to comply with such other conditions as may from time to time be required of him or her by the Board of Directors. 5.06. Chairman of The Board. The Chairman shall be appointed by the Board of Directors and shall preside at all meetings of the shareholders and of the Board of Directors. He shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Unless he also serves as the Chief Executive Officer, the Chairman shall not be considered an employee of the corporation. 5.07. Chief Executive Officer. The Chief Executive Officer shall be appointed by the Board of Directors and shall be responsible for the general supervision of the business and property of the corporation. He shall possess the same power as the president to sign all documents authorized by the Board of Directors, unless restricted by law. In the absence of the Chairman, the Chief Executive Officer shall preside at meetings of the shareholders and of the Board. He shall have the power, subject to the authority of the Board of Directors, to appoint and discharge all officers (except those required by these bylaws to be appointed by the Board), employees, and agents; to define their duties, and to fix their compensation, provided that any compensation over $50,000 per year must first be approved by the Board. In the absence of the Chairman, or the President, or both, the Chief Executive Officer shall
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10 undertake those duties and responsibilities, if so directed by the Board. The Chief Executive Officer shall have such other powers and responsibilities as may be assigned to him by the Board. 5.08. President. Unless otherwise specified by resolution of the Board of Directors, the President, subject to the control of the Board of Directors, shall supervise and control all of the business and affairs of the corporation and the performance by all of its other officers of their respective duties and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. The President shall, when present, and in the absence of a Chairman of the Board and the Chief Executive Officer, preside at all meetings of the shareholders and of the Board of Directors. The President will be a proper officer to sign on behalf of the corporation any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, evidence of indebtedness, application, consent (to service of process or otherwise), agreement, indenture, contract, or other instrument, except in each such case where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. The President may represent the corporation at any meeting of the shareholders or members of any other corporation, association, partnership, joint venture, or other entity in which the corporation then holds shares of capital stock or has an interest, and may vote such shares of capital stock or other interest in person or by proxy appointed by him or her, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. 5.09. Chief Operating Officer. Unless otherwise specified by resolution of the Board of Directors, the Chief Operating Officer, subject to control of the Board of Directors, shall supervise and control all of the business and affairs of the corporation and the performance by all of its other officers of their respective duties and in general shall perform all duties incident to the office of Chief Operating Officer and such other duties as may be prescribed by the President or the Board of Directors from time to time. The Chief Operating Officer shall, when present, and in the absence of the Chairman of the Board, the Chief Executive Officer, and President, preside at all meetings of the shareholders and of the Board of Directors. The Chief Operating Officer will be a proper officer to sign on behalf of the corporation any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, evidence of indebtedness, application, consent (to service of process or otherwise), agreement, indenture, contract, or other instrument, except in each such case where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. The Chief Operating Officer shall have such other powers and responsibilities as may be assigned to him by the President or the Board of Directors. 5.10. The Vice President. If appointed, in the absence of the President or in the event of his/her death or disability, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any such designation, then in the order of their appointment) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. If there is no Vice President or in the event of the death or disability of all Vice Presidents, then the Treasurer shall perform such duties of the President in the event of his or her absence, death, or disability. Each Vice President will be a proper officer to sign on behalf of the corporation any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, evidence of indebtedness, application, consent (to service of process or otherwise), agreement, indenture, contract, or other instrument, except in each such case where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. Any Vice President may represent the corporation at any meeting of the shareholders or members of any other corporation, association, partnership, joint venture, or other entity in which the 11 corporation then holds shares of capital stock or has an interest, and may vote such shares of capital stock or other interest in person or by proxy appointed by him or her, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. A Vice President shall perform such other duties as from time to time may be assigned to him/her by the President or by the Board of Directors. 5.11 The Secretary. The Secretary shall: (a) keep the minutes of the proceedings of the shareholders and of the Board of Directors and any committee of the Board of Directors and all unanimous written consents of the shareholders, Board of Directors, and any committee of the Board of Directors in one (1) or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of any seal of the corporation; (d) when requested or required, authenticate any records of the corporation; (e) keep a register of the address of each shareholder which shall be furnished to the Secretary by such shareholder; and (f) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him/her by the President or by the Board of Directors. Except as may otherwise be specifically provided in a resolution of the Board of Directors, the Secretary will be a proper officer to take charge of the corporation's stock transfer books and to compile the voting record pursuant to Section 3.05 above, and to impress the corporation's seal, if any, on any instrument signed by the President, any Vice President, or any other duly authorized person, and to attest to the same. In the absence of the Secretary, a secretary pro tempore may be chosen by the directors or shareholders as appropriate to perform the duties of the Secretary. 5.12. The Treasurer. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such bank, trust companies, or other depositories as shall be selected by the Board of Directors or any proper officer; (c) keep full and accurate accounts of receipts and disbursements in books and records of the corporation; and (d) in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him/her by the President or by the Board of Directors. The Treasurer will render to the President, the directors, and the shareholders at proper times and account of all his or her transactions as Treasurer and of the financial condition of the corporation. The Treasurer shall be responsible for preparing and filing such financial reports, financial statements, and returns as may be required by law. 5.13. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries and the Assistant Treasurers, when authorized by the Board of Directors, may sign with the President or a Vice President certificates for shares of the corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors. 5.14. Salaries. The salaries of the officers of the corporation may be fixed from time to time by the Board of Directors or (except as to the President's own) left to the discretion of the President. No officer will be prevented from receiving a salary by reason of the fact that he or she is also a director of the corporation. 5.15. Additional Appointments. In addition to the officers contemplated in this Article V, the Board of Directors may appoint other agents of the corporation with such authority to perform such duties as may be prescribed from time to time by the Board of Directors.
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VI. EXECUTION OF DOCUMENTS 12 6.01. Contracts, Etc. All contracts, conveyances, leases or other corporate instruments shall be executed on behalf of the corporation by the Chairman of the Board, by the President, the Executive Vice President, the Sr. Vice President, or by such other officer or officers of the corporation to whom the Chairman of the Board, the President or the Board of Directors may delegate such authority, subject to the following: (a) No loan greater than $1,000,000 shall be contracted on behalf of the corporation unless authorized by the Board of Directors. (b) No real property of the corporation may be sold for more than $1,000,000, nor exchanged for other property valued at more than $1,000,000 unless authorized by the Board of Directors. (c) A capital expenditure in excess of $1,000,000 for any one purpose or project shall be authorized by the Board of Directors. (d) In matters of auction bidding for property or property rights, no bids totalling over $1,000,000 per auction shall be made without the authorization of the Board of Directors. The Chairman or President shall report to the Board the total capital expenditures, the total dollar amount of sales or exchanges, and the total dollar amount of auction bids made, which did not require Board approval. 6.02. Proxies. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board may in the name and on behalf of the corporation appoint an attorney or attorneys, agent or agents of the corporation (who may be or include himself or herself), in the name and on behalf of the corporation to cast the votes which the corporation may be entitled to cast as a shareholder or otherwise in any other corporation any of whose shares or other securities may be held by the corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by such other corporation, may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name of, on behalf of, and under the corporate seal of, the corporation all written proxies or other instruments as may be necessary or proper to evidence the appointment of such attorneys and agents. VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER 7.01. Certificates for Shares. (a) Content. Certificates representing shares of the corporation shall, at a minimum, state on their face the name of the issuing corporation and that it is formed under the laws of the State of Arizona, the name of the person to whom issued, and the number and class of shares and the designation of the series, if any, the certificate represents. Such certificates shall be signed (either manually or by facsimile to the extent allowable by law) by one or more officers of the corporation, as determined by the Board of Directors, or, if no such determination is made, by any of the Chairman of the Board (if any), the President, any Vice President, the Secretary, or the Treasurer of the corporation, and may be sealed with a corporate seal or a facsimile thereof. Each certificate for shares shall be consecutively numbered or otherwise identified and will exhibit such information as may be required by law. If a supply of unissued certificates bearing the facsimile signature of a person remains when that person ceases to hold the office of the corporation indicated on such certificates, they may still be countersigned, registered,
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13 issued, and delivered by the corporation's transfer agent and/or registrar thereafter, as though such person had continued to hold the office indicated on such certificate. (b) Legend as to Class or Series. If the corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series) shall be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge. (c) Shareholder List. The name and address of the person to whom shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. (d) Lost Certificates. In the event of the loss, theft, or destruction of any certificate representing shares of the corporation or of any predecessor corporation, the corporation may issue (or, in the case of any such shares as to which a transfer agent and/or registrar have been appointed, may direct such transfer agent and/or registrar to countersign, register, and issue) a new certificate, and cause the same to be delivered to the registered owner of the shares represented thereby; provided that such owner shall have submitted such evidence showing the circumstances of the alleged loss, theft, or destruction, and his, her, or its ownership of the certificate, as the corporation considers satisfactory, together with any other facts that the corporation considers pertinent; and further provided that, if so required by the corporation, the owner shall provide a bond or other indemnity in form and amount satisfactory to the corporation (and to its transfer agent and/or registrar, if applicable). 7.02. Registration of the Transfer of Shares. Registration of the transfer of shares of the corporation shall be made only on the stock transfer books of the corporation. In order to register a transfer, the record owner shall surrender the shares to the corporation for cancellation, properly endorsed by the appropriate person or persons with reasonable assurances that the endorsements are genuine and effective. Unless the corporation has established a procedure by which a beneficial owner of shares held by a nominee is to be recognized by the corporation as the owner, the corporation will be entitled to treat the registered owner of any share of the capital stock of the corporation as the absolute owner thereof and, accordingly, will not be bound to recognize any beneficial, equitable, or other claim to, or interest in, such share on the part of any other person, whether or not it has notice thereof, except as may expressly be provided by applicable law. 7.03. Shares Without Certificates. The Board of Directors may authorize the issuance of uncertificated shares by the corporation and may prescribe procedures for the issuance and registration of transfer thereof and with respect to such other matters as the Board of Directors shall deem necessary or appropriate. VIII. INDEMNIFICATION OF DIRECTORS AND OFFICERS 8.01. Indemnification. Unless otherwise provided by these bylaws, the corporation shall hold harmless and indemnify each of its directors and officers ("indemnities") to the fullest extent permitted by Arizona law. 8.02. Effect of Repeal. No repeal or amendment of this Article shall diminish indemnities' right to indemnification for acts taken before the date of repeal or amendment. 14 IX. DISTRIBUTIONS 9.01. Distributions. Subject to such restrictions or requirements as may be imposed by applicable law or the corporation's Articles or as may otherwise be binding upon the corporation, the Board of Directors may from time to time declare, and the corporation may pay or make, dividends or other distributions to its shareholders. X. CORPORATE SEAL 10.01. Corporate Seal. The Board of Directors may provide for a corporate seal of the corporation that will have inscribed thereon any designation including the name of the corporation, Arizona as the state of incorporation, the year of incorporation, and the words "Corporate Seal." XI. EXEMPTION 11.02. Exemption From The Arizona Corporate Takeover Act. The corporation, pursuant to the provisions of ARS 10-1211(A)(2) and 10-1223(A)(2), and pursuant to the approval of the shareholders on May 10, 1991, has chosen to exempt itself from the provisions of ARS 10-1211 through 10-1223, concerning Control Share Acquisitions and Business Combinations. This amendment does not apply to any "control share acquisition" as defined in ARS 10-1201(9) made on or before May 10, 1991, or to any "business combination" as defined in ARS 10-1201(10) whose "share acquisition date" as defined in ARS 10-1201(14) is on or before May 10, 1991. XII. AMENDMENTS 12.01. Amendments. The corporation's Board of Directors may amend or repeal the corporation's Bylaws unless: (a) the Articles or the Arizona Business Corporation Act reserve this power exclusively to the shareholders in whole or part; or (b) the shareholders in adopting, amending, or repealing a particular Bylaw provide expressly that the Board of Directors may not amend or repeal that Bylaw. The corporation's shareholders may amend or repeal the corporation's Bylaws even though the Bylaws may also be amended or repealed by its Board of Directors. I certify that the foregoing is a true and correct copy of the bylaws of New Mexico and Arizona Land Company as last amended. DATED as of this 16th day of May, 1997. /s/ ---------------------------------- Secretary 15 EXHIBIT 21 NZ SUBSIDIARIES ------------------------------------------------------------------------------------------------------ SUBSIDIARY OF REGISTRANT STATE OF INCORPORATION DBA: NAMES ------------------------------------------------------------------------------------------------------ NZ Development Corporation Arizona NZ Development Corporation ------------------------------------------------------------------------------------------------------ NZ Properties, Inc. Arizona NZ Properties, Inc., Brentwood Gardens Apartments, Apple Ridge Apartments, Montana Meadows Apartments, Wildwood Apartments ------------------------------------------------------------------------------------------------------ NZU Inc. New Mexico NZU Inc. ------------------------------------------------------------------------------------------------------ Bridge Financial Corporation Arizona Bridge Financial Corporation ------------------------------------------------------------------------------------------------------ Great Vacations International, Inc. Arizona Great Vacations International, Inc., Seven Canyons of Sedona ------------------------------------------------------------------------------------------------------
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EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors New Mexico and Arizona Land Company: We consent to incorporation by reference in the Registration Statement (No. 33-44017) on Form S-8 of New Mexico and Arizona Land Company of our report dated February 20, 1998, relating to the consolidated balance sheets of New Mexico and Arizona Land Company and its subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, cash flows and shareholders' equity and related financial statement schedules for each of the years in the three-year period ended December 31, 1997 which appears in the December 31, 1997 annual report on Form 10-K of New Mexico and Arizona Land Company. Phoenix, Arizona March 24, 1998
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