-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/+bbSShdXBR5qaiyX9bmKgGFABEdwyTZAUsBCOb1/nNfac6NhCSqxOSxbT9F3BL 5bKR96QGqG5M5ZNwoo861w== 0000950147-98-000238.txt : 19980331 0000950147-98-000238.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950147-98-000238 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARIZONA LAND INCOME CORP CENTRAL INDEX KEY: 0000830748 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 860602478 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-09900 FILM NUMBER: 98579811 BUSINESS ADDRESS: STREET 1: 2999 N 44TH ST STE 100 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 6029526800 MAIL ADDRESS: STREET 2: 2999 N 44TH STREET SUITE 100 CITY: PHOENIX STATE: AZ ZIP: 85018 10KSB40 1 10-KSB405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-KSB (Mark One) [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 OR [ ] 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 1-9900 ------ ARIZONA LAND INCOME CORPORATION - -------------------------------------------------------------------------------- (Exact name of small business issuer in its charter) Arizona 86-0602478 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2999 North 44th Street, Suite 100, Phoenix, Arizona 85018 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (602) 952-6800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Title or class Name of each exchange on which registered -------------------------- ----------------------------------------- Common Stock, no par value American Stock Exchange -------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title or Class) Page 1 of 20 pages Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the fiscal year ended December 31, 1997 were $719,324. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the average of the high and the low prices of the registrant's Series A Common Stock as reported by the American Stock Exchange on March 19, 1998 was approximately $8,858,430. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily conclusive. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 2,360,080 shares of Class A Common Stock outstanding on March 19, 1998 100 shares of Class B Common Stock outstanding on March 19, 1998 - ------------------------------------------------------------------------------ DOCUMENTS INCORPORATED BY REFERENCE Materials from the registrant's Proxy Statement relating to the 1998 Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by reference into Part III, Items 9, 10, 11 and 12. Transitional Small Business Disclosure Format Yes [ ] No [X] Exhibit Index at page 17 Total pages 20 2 TABLE OF CONTENTS
Page ---- PART I ..........................................................................................4 ITEM 1. DESCRIPTION OF BUSINESS.................................................4 ITEM 2. DESCRIPTION OF PROPERTY.................................................8 ITEM 3. LEGAL PROCEEDINGS.......................................................8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ................................................................................8 PART II ..........................................................................................9 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................................9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............................................................10 ITEM 7. FINANCIAL STATEMENTS...................................................14 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................15 PART III .........................................................................................15 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT....................................................................15 ITEM 10. EXECUTIVE COMPENSATION.................................................15 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................................15 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................16 PART IV .........................................................................................17 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................................17 SIGNATURES........................................................................................19
3 PART I ITEM 1. DESCRIPTION OF BUSINESS. Background. Arizona Land Income Corporation (the "Company") is a real estate investment trust organized as an Arizona corporation on March 10, 1988. On that same date, the Company issued 100 shares of the Company's Class B Common Stock to YSP Holdings, Inc., the Company's sponsor, in return for an initial capital contribution of $1,000. Operations of the Company commenced on June 13, 1988. In June of 1988, the Company began investing in first mortgage loans on unimproved real property located in the metropolitan Phoenix area. Such loans included mortgage loans secured or collateralized by first mortgages, first deeds of trust and real property subject to agreements for sale and subdivision trusts ("First Mortgage Loans"). From its inception until December 31, 1991, the Company purchased interests totaling $34,120,000 in twenty First Mortgage Loans. Since January 1, 1992, the Company has not purchased any additional interests in any First Mortgage Loans, and has had to institute foreclosure proceedings with respect to certain properties securing such loans. See "Investment Objectives and Criteria" below. See also Note 4 to the financial statements included in Item 7 for additional information concerning the Company's First Mortgage Loans. The Company's goal has been to pay distributions of available cash to shareholders and to preserve and protect shareholders' net capital investment. The Company pays extraordinary cash distributions to its shareholders when such distributions are warranted based upon the Company's cash reserves at the time of the distribution as well as the Company's projected need for operating capital. During the 1997 fiscal year, the Company declared and paid two cash distributions. The first distribution of $.25 per share was paid on September 15, 1997 to shareholders of record on September 1, 1997. The second distribution of $.13 per share was paid on December 31, 1997 to shareholders of record on December 17, 1997. Potential Dissolution. As disclosed in the Company's prospectus used in connection with the Company's 1988 initial public offering, the Company's intent at the time of the public offering was to dissolve within approximately eight years after the date of such offering. The Company currently has no immediate plans to dissolve and may not voluntarily dissolve anytime in the immediate future. Any decision by the Company to dissolve will be determined by the Company's Board of Directors and will depend upon market conditions and other pertinent factors. The Company's Board of Directors possesses the discretion to (i) continue to operate the Company and hold such First Mortgage Loans or real property until the Company's Board of Directors determines that it is the Company's best interest to dispose of such investments; (ii) sell such First Mortgage Loans or real property on or about the dissolution date, in which case the sale proceeds in excess of monies owed by the Company to creditors will be distributed to the shareholders on a pro rata basis, or (iii) issue to the shareholders participating interests in such First Mortgage Loans or real property 4 on a basis proportionate to their respective stock ownership interests in the Company. In the event the Company issues to its shareholders participating interests in a First Mortgage Loan, the Advisor (defined below) will continue to act as servicing agent for the First Mortgage Loan and will be paid a quarterly servicing fee equal to 1/16 of 1% of the aggregate outstanding loan balance of the First Mortgage Loan until the First Mortgage Loan is sold or repaid. Qualification as a Real Estate Investment Trust. The Company has attained real estate investment trust ("REIT") status for all tax years since its inception, and management and the Company's Board of Directors believe that the Company has completed the necessary steps to permit the Company to elect, if it so chooses, REIT status for the tax year ended December 31, 1997. REIT status allows the Company to deduct from its federal taxable income (and not pay taxes upon) dividends paid to its shareholders. See Item 6 - Management's Discussion and Analysis or Plan of Operation. Generally, if the Company is to maintain its REIT status, it must: (i) restrict its investments principally to assets that produce interest from mortgage loans collateralized by real estate or which produce rental income; (ii) pay out at least 95% of its taxable income (excluding capital gains) to its shareholders; (iii) pay taxes at corporate tax rates on capital gains or distribute at least 95% of capital gains as dividends to its shareholders; (iv) realize less than 30% of its gross income from the sale of certain securities and real estate assets (excluding real property acquired through the foreclosure proceeding) held for less than four years; (v) hold less than 10% of the voting securities of any single issuer; and (vi) have an independent manager or advisor for its assets. If the Company fails to maintain its status as a REIT, the Company would not be entitled to deduct from its federal taxable income (and not pay federal tax upon) dividends paid to shareholders. Investment Objectives and Criteria. In evaluating potential investments, the Company has historically considered such factors as: (i) the borrower's cash investment in the real property securing the First Mortgage Loan; (ii) the loan-to-value ratio of the First Mortgage Loan; (iii) the maturity date of the First Mortgage Loan; (iv) the appraised value, if any, or past purchase prices of the real property securing the First Mortgage Loan; (v) the existence, if any, of significant debt junior to the first lien; (vi) the potential that the real property will appreciate in value; (vii) the identity, financial strength and payment history (if any) of the borrower under the First Mortgage Loan; (viii) the growth, tax and regulatory environment of the communities in which the properties are or will be located; (ix) the location and condition of the real property; (x) the supply of, and demand for, properties of similar type in the vicinity; (xi) the prospects for liquidity through the sale or foreclosure of the real property; and (xii) such other factors that become relevant in the course of the Company's evaluation process. The Company's historical investment objective was to locate First Mortgage Loans which satisfied the foregoing investment criteria. Due to generally poor economic conditions in Arizona and in metropolitan Phoenix during the early 1990's, the Company has not acquired any additional 5 First Mortgage Loans since 1989 (other than refinancings or restructuring of existing First Mortgage Loans). Although general economic and real estate market conditions in such areas have improved, the Company does not anticipate acquiring any additional First Mortgage Loans. Management Arrangements. The Company has no employees. The Company's affairs are managed by its non-salaried officers and Board of Directors. The Company and ALI Advisor, Inc. (the "Advisor") entered into an advisory and servicing agreement (the "Advisory Agreement") at the time of the Company's incorporation. The Advisory Agreement has expired by its own terms; however, the Company and the Advisor have agreed to continue to operate as if the terms and conditions of the Advisory Agreement are still in effect. Pursuant to the Advisor's agreement with the Company, the Advisor is authorized to: (i) purchase First Mortgage Loans, subject to review and ratification by the Company's Board of Directors; (ii) serve as exclusive investment and financial advisor and provide research, economic and statistical data in connection with investments and financial policies; (iii) investigate, select and conduct relations with accountants, attorneys, brokers, investors, and others as necessary; (iv) maintain bank accounts and records deemed appropriate or requested by the Company's Board; (v) perform or obtain accounting and other services; (vi) collect and remit principal and interest payments due on the First Mortgage Loans; and (vii) perform such other services as set forth in the Advisory Agreement. The Company has agreed to pay the Advisor a servicing fee for servicing the Company's First Mortgage Loans. The servicing fee is payable quarterly and equals 1/16 of 1% of the sum of (i) the aggregate outstanding loan balance of the First Mortgage Loans in the Company's mortgage loan portfolio, and (ii) the recorded value of property acquired by the Company through foreclosure, as of the first day of each fiscal quarter. During 1997 and 1996, the Company paid the Advisor a servicing fee of $41,269 and $53,425, respectively. The Company also agreed to pay the Advisor a management fee for aiding the Company in developing investment policies and analyzing and recommending investments to the Company. The management fee will be paid for each quarter the shareholders' cumulative return on capital investment as of the end of such quarter exceeds 12.7%, and will equal 30% of the Company's available cash in excess of that necessary to provide shareholders with a cumulative return on capital investment in excess of 12.7%. The Company did not accrue or pay a management fee to the Advisor in 1997 or 1996. The Company also agreed to reimburse the Advisor quarterly for other expenses incurred in servicing the Company's First Mortgage Loans, such as legal, accounting and transfer agent fees and copying and mailing costs incurred in preparing and mailing periodic reports to shareholders. The Company did not reimburse the Advisor for any such expenses in 1997 or 1996. 6 1997 Transactions and Loan Modifications. Set forth below is a review of the transactions and modifications which affect the First Mortgage Loans and which occurred during the 1997 fiscal year. The mortgage loan numbers referred to below are identifiers for those loans on the books and records of the Company. Additionally, these numbers are identified in the Company's initial offering prospectus dated June 6, 1988 and in Notes 4 and 5 to the Company's financial statements set forth in Item 7 hereof. The Company had five land sales during the 1997 fiscal year, which in the aggregate generated a $452,000 gain on sale of property. The first sale was a 15 acre parcel of property located in Phoenix, Arizona, which the Company acquired through foreclosure on Loan No. 10. Proceeds to the Company from this sale were $878,000 cash and a note receivable for $956,000. The second sale was an 8 acre parcel which had secured Loan No. 17 and was received through foreclosure by the Company. Proceeds to the Company from this sale were $992,000 cash. The third sale was a 3.36 acre parcel of property which the Company acquired through foreclosure on Loan No. 17. Proceeds to the Company from this sale were $623,000 in cash. The fourth sale was of a 2 acre parcel of property located in Phoenix, Arizona, which the Company acquired through foreclosure on Loan No. 17. The Company received $448,000 in cash from the sale of this property. The fifth sale was a 2.42 acre parcel of property located in Pinal County, Arizona, which the Company acquired through foreclosure on Loan No. 6. Proceeds from this sale to the Company were $5,000 in cash. In summary, the Company had five land sales during the 1997 fiscal year which produced $2,946,000 cash, and $956,000 receivables. In addition to the above-referenced land sales, the Company closed sales subsequent to year end on two parcels of land that were in escrow. On January 14, 1998, the Company closed the sale of a one acre parcel of land resulting from foreclosure on Loan No. 17. The Company received $456,694 in cash from this sale. On February 6, 1998, the Company closed the sale of a 635 acre parcel of land which the Company acquired from foreclosure on Loan No. 3. The Company received a note for $1,066,605 and $188,867 in cash from this sale. In January of 1998, the Company received a cash payoff of $557,473 on Loan No. 3. This collection was in addition to periodic collections of principal on other notes. Common Stock Purchases. On March 15, 1994, the Company's Board of Directors authorized the repurchase of shares of the Company's Common Stock in open market transactions. Since authorizing the repurchase of shares of Common Stock, the Company has repurchased 249,920 shares of Common Stock. No shares were repurchased during the 1997 fiscal year. The Company intends to continue to periodically make open market purchases of its Common Stock. 7 ITEM 2. DESCRIPTION OF PROPERTY. The Company's principal offices are located at the offices of Peacock, Hislop, Staley and Given ("PHS&G"), 2999 North 44th Street, Suite 100, Phoenix, Arizona, 85018. Messrs. Peacock, Hislop, Staley and Given are officers and/or directors of the Company, and Messrs. Peacock, Hislop and Staley are the shareholders of ALI Advisor. The Company does not pay for the use of PHS&G's facilities. Information regarding the status of real property acquired by the Company pursuant to the foreclosure of certain First Mortgage Loans is set forth in Note 5 to the Company's financial Statements contained in Item 7. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE COMPANY. Barry W. Peacock, age 60, has served as the Company's President from its inception in 1988. Mr. Peacock is Chairman of the Board of Peacock, Hislop, Staley and Given ("PHS&G"), a position he has held since the inception of that Company in June 1989. Mr. Peacock served as a senior executive with Young, Smith & Peacock, Inc. ("YSP") from 1964 until June 1989, and most recently as Managing Director--Municipal Bonds. Larry P. Staley, age 55, has served as the Company's Vice President from the Company's inception. Mr. Staley is Vice-Chairman of the Board of PHS&G, a position he has held since June 1989. Prior to that date, Mr. Staley served in various capacities with YSP, where he was employed from 1973 until he joined PHS&G in 1989. David W. Miller, age 49, has served as Secretary of the Company since his election to such office on September 22, 1988. Mr. Miller has served as Senior Vice President, Chief Financial Officer and a member of the Board of Directors of PHS&G since June 1989. Prior to that date, Mr. Miller served in various capacities with YSP, where he was employed from 1971 until he joined PHS&G. 8 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company has two classes of common equity securities, Class A Common Stock and Class B Common Stock. All 100 shares of the Company's Class B Common Stock were purchased by YSP Holdings, Inc. ("YSP Holdings"), the Company's sponsor, in connection with the formation of the Company and are currently owned by YSP Holdings. The Company's Class B Common Stock is not traded on any exchange. On March 15, 1994, the Company's Board of Directors authorized the repurchase of shares of the Company's Common Stock in open market transactions. Since authorizing the repurchase of shares of Common Stock, the Company has repurchased 249,920 shares of Common Stock. No shares were repurchased during the 1997 fiscal year. The Company's Class A Common Stock is listed for trading on the American Stock Exchange ("AMEX"). As of March 19, 1998, there were approximately 81 holders of record of the Class A Common Stock. In the Company's estimation, based upon reliable information available to the Company, there are over 600 beneficial owners of the Company's Class A Common Stock. The market price of Class A Common Stock at the close of trading on March 19, 1998 was $5.375 per share. The following table sets forth the high and low prices on AMEX of the Class A Common Stock for each quarterly period in 1996 and 1997 and the cash distributions paid per share of Class A Common Stock for such periods. Sales Price Dividends/Distributions --------------------- Declared Per Share of Calendar Quarter High Low Class A Common Stock(1)(2) - ---------------- ---- --- -------------------------- 1996 ---- First Quarter 6 4 3/4 -0- Second Quarter 5 5/16 4 7/8 .30 Third Quarter 5 1/2 4 7/8 -0- Fourth Quarter 6 1/4 4 7/16 1.00 1997 ---- First Quarter 5 7/8 4 5/8 -0- Second Quarter 5 5/16 4 1/4 -0- Third Quarter 5 3/4 4 7/8 .25 Fourth Quarter 5 5/8 5 3/16 .13 9 ----------------- (1) See Note 7 to the financial statements included in Item 7. (2) The Company pays extraordinary cash distributions to its shareholders when such distributions are warranted based upon the Company's cash reserves at the time of the distribution as well as the Company's projected need for operating capital. During the 1997 fiscal year, the Company declared and paid two cash distributions. The first distribution of $.25 per share was paid on September 15, 1997 to shareholders of record on September 1, 1997. The second distribution of $.13 per share was paid on December 31, 1997 to shareholders of record on December 17, 1997. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. RESULTS OF OPERATIONS Year Ended December 31, 1997 vs. 1996. The Company had total income before the sale of properties of approximately $719,000 or $.30 per share of Class A Common Stock, for the year ended December 31, 1997, compared to total income before the sale of properties of approximately $649,000 or $.26 per share of Class A Common Stock, for the year ended December 31, 1996. The Company had net income of approximately $784,000 or $.33 per share of Class A Common Stock, for the year ended December 31, 1997, compared to net income of approximately $503,000 or $.20 per share of Class A Common Stock, for the year ended December 31, 1996. The increase in the total income before the sale of properties and net income for the year ended December 31, 1997, is primarily attributable to an increase in interest income from temporary investments, a decrease in property taxes, and an increase in gain of sale of property. Interest income from First Mortgage Loans decreased to $384,000 in 1997 from $476,000 in 1996. However, due partly to larger cash balances held by the Company during 1997, interest income from temporary investments increased to $279,000 in 1997 from $128,000 in 1996. Included in the Company's 1997 interest income from temporary investments are the proceeds of a bridge loan funded by the Company during 1997 to a non-affiliated third party. The Company received interest income from such bridge loan in the amount of $75,000, and as consideration for making the loan also received 15,000 shares of restricted stock of a NASDAQ listed company, which the Company values at $87,000. The Company's property taxes decreased to $29,000 in 1997 from $106,000 in 1996. Gain on the sale of property increased to $452,000 in 1997 from $138,000 in 1996. 10 The Company had other income of $56,000 compared to other income of $44,000 in 1996. The other income received by the Company in 1997 and 1996 is primarily attributable to lease rentals on land received by the Company through foreclosure actions. The Company's expenses decreased in the aggregate to $179,000 in 1997, compared to $283,000 in 1996. This decrease of $104,000 is primarily attributable to decreases in property taxes. The Company did not record a loan loss reserve in 1997 because of the stabilization of the Phoenix real estate market. Net cash provided by operating activities was $270,000 in 1997 compared to net cash provided by operating activities of $508,000 in 1996. Net cash provided by investing activities in 1997 and 1996 was $2,681,000 and $3,386,000, respectively. Net cash used in financing activities in 1997 and 1996 was $897,000 and $4,094,000, respectively. OUTLOOK. Forward-Looking Statements. The following discussion contains forward-looking statements, as well as a discussion of risks and uncertainties that could affect the Company. Due to the risks and uncertainties, the Company's actual results may differ materially from the results discussed in the forward-looking statements. Year 2000 Impact. The Company has not yet completed its evaluation of the impact the Year 2000 computer problem may have on its business. However, the Company does not expect the costs to address the problem to be material and it does not expect the consequences of incomplete or untimely resolution of the problem to materially impact the operation of its business. Real Estate Investment Outlook. Refinancing of the loan or sale of the underlying real property serves as a principal method for borrowers to repay mortgage loans on unimproved real property such as the Company's First Mortgage Loans. In Arizona in general, and in metropolitan Phoenix in particular, a number of factors have combined to negatively impact borrowers' ability to refinance their loans on unimproved real property or sell the underlying property during the early 1990's. First, the shortage of available financing for real estate development and improvement reduced the demand for unimproved real property, causing a lack of liquidity in the market for unimproved property. Second, real estate values in metropolitan Phoenix during the early 1990's were in decline and have begun to stabilize in the last two to three years. Third, the lack of liquidity and decline in values resulted in a large number of defaults on mortgage loans on unimproved real property. In turn, this resulted in the acquisition of large real 11 estate portfolios by Arizona financial institutions. These financial institutions, some of which are under government supervision, have contributed to the illiquidity in the market by holding their portfolios for extended periods of time. The Company believes these and other factors have negatively impacted borrowers' ability to pay on their First Mortgage Loans. Because interest payments on First Mortgage Loans constitute the Company's primary source of income, borrowers' failure to pay on their First Mortgage Loans have had a significant adverse impact on the Company's operating results. In appropriate circumstances, the Company has modified a First Mortgage Loan at the request of the borrower. These modifications have included the deferral by the Company of principal due, the deferral of interest and, in certain instances, a decrease in the interest rate paid by the borrower. In other circumstances, the Company has instituted foreclosure and other legal proceedings to protect its interest in the First Mortgage Loan and the underlying property. As a result, the Company now owns, and is attempting to sell, a number of properties. See also Notes 4 and 5 to the financial statements, included in Item 7 for additional information concerning the Company's First Mortgage Loans and for information regarding properties held for sale. The Company believes that the market for unimproved real property in Phoenix has begun to improve as evidenced by the number of land sales for the Company during 1996 and 1997. The Company sold five parcels of land in 1997, and anticipates that additional parcels will be sold in 1998. However, no assurance can be made that such sales will occur. Potential Dissolution. As disclosed in the Company's prospectus used in connection with the Company's 1988 initial public offering, the Company's intent at the time of the public offering was to dissolve within approximately eight years after the date of such offering. The Company currently has no immediate plans to dissolve and may not voluntarily dissolve anytime in the immediate future. Any decision by the Company to dissolve will be determined by the Company's Board of Directors and will depend upon market conditions and other pertinent factors. The Company's Board of Directors possesses the discretion to (i) continue to operate the Company and hold such First Mortgage Loans or real property until the Company's Board of Directors determines that it is the Company's best interest to dispose of such investments; (ii) sell such First Mortgage Loans or real property on or about the dissolution date, in which case the sale proceeds in excess of monies owed by the Company to creditors will be distributed to the shareholders on a pro rata basis, or (iii) issue to the shareholders participating interests in such First Mortgage Loans or real property on a basis proportionate to their respective stock ownership interests in the Company. In the event the Company issues to its shareholders participating interests in a First Mortgage Loan, the Advisor will continue to act as servicing agent for the First Mortgage Loan and will be paid a quarterly servicing fee equal to 1/16 of 1% of the aggregate outstanding loan balance of the First Mortgage Loan until the First Mortgage Loans is sold or repaid. 12 LIQUIDITY AND CAPITAL RESOURCES. The Company believes that the funds generated from the payment of First Mortgage Loans as well as the sale of its properties will be sufficient to meet the Company's working capital requirements and to finance any additional investments. No other arrangements, such as lines of credit, have been made to obtain external sources of liquidity. However, the Company believes that such arrangements could be obtained by the Company, if necessary. The Company currently has no commitments for any material capital expenditures and does not anticipate any such expenditures in the foreseeable future. DIVIDENDS. During the 1996 fiscal year the Company declared and paid two extraordinary cash distributions. The first distribution was for $.30 per share and was paid on April 15, 1996 to shareholders of record on April 1, 1996. The second distribution was for $1.00 per share and was paid on December 16, 1996 to shareholders of record on December 2, 1996. During the 1997 fiscal year the Company declared and paid two extraordinary cash distributions. The first distribution was for $.25 per share and was paid on September 15, 1997 to shareholders of record on September 1, 1997. The second distribution was for $.13 per share and was paid on December 31, 1997 to shareholders of record on December 17, 1997. In order for the Company to maintain its status as a qualified REIT, it must, among other requirements, pay out in the form of dividends at least 95% of its taxable income (excluding capital gains) to shareholders and must pay taxes at corporate tax rates on capital gains or distribute at least 95% of capital gains as dividends to shareholders. If the Company fails to maintain its status as a REIT, the Company would no longer be entitled to deduct from its federal taxable income (and not pay federal taxes on) dividends paid to shareholders. 13 Item 7. FINANCIAL STATEMENTS ARIZONA LAND INCOME CORPORATION FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 14 INDEX Page Report of Independent Public Accountants F-2 Financial Statements- Balance Sheet - December 31, 1997 F-3 Statements of Operations - For the Years Ended December 31, 1997 and 1996 F-4 Statements of Stockholders' Equity - For the Years Ended December 31, 1997 and 1996 F-5 Statements of Cash Flows - For the Years Ended December 31, 1997 and 1996 F-6 Notes to Financial Statements - December 31, 1997 F-7 Certain schedules are omitted as the information is not required. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Arizona Land Income Corporation: We have audited the accompanying balance sheet of ARIZONA LAND INCOME CORPORATION (an Arizona corporation) as of December 31, 1997, and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of Arizona Land Income Corporation as of December 31, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Phoenix, Arizona, January 30, 1998. F-2 ARIZONA LAND INCOME CORPORATION BALANCE SHEET DECEMBER 31, 1997 ASSETS ASSETS: Cash and cash equivalents $ 3,246,825 ------------ Investments- Accrued interest receivable 255,061 Mortgage notes receivable (Note 4) 5,119,885 Investment in partnership 378,755 Other investments 87,188 Land held for sale (Note 5) 7,176,410 ------------ 13,017,299 Less- Reserve for losses (1,513,953) ------------ Total investments, net 11,503,346 ------------ $ 14,750,171 ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and other liabilities $ 68,718 Accrued property taxes 37,211 Deferred tax liability (Note 2) 120,000 ------------ Total liabilities 225,929 ------------ COMMITMENTS AND CONTINGENCIES (Note 2) STOCKHOLDERS' EQUITY (Notes 1 and 8): Class A common stock, $.10 stated value, 10,000,000 shares authorized, 2,360,080 shares issued and outstanding 236,008 Class B common stock, $.10 stated value, 10,000 shares authorized, 100 shares issued and outstanding 10 Additional paid-in capital 23,791,072 Distributions in excess of earnings (9,502,848) ------------ Total stockholders' equity 14,524,242 ------------ $ 14,750,171 ============ The accompanying notes are an integral part of this balance sheet. F-3 ARIZONA LAND INCOME CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- INCOME: Interest on mortgages $ 384,203 $ 476,215 Interest on temporary investments 278,825 128,194 Other income 56,296 44,216 ---------- ---------- Total income before sale of properties 719,324 648,625 ---------- ---------- EXPENSES: Property taxes 28,709 106,476 Professional services 56,138 61,849 Advisory fees to related party (Note 6) 41,269 53,425 Administration and general 28,275 32,874 Directors' fees 22,400 23,200 Interest expense 2,662 5,287 ---------- ---------- Total expenses before sale of properties 179,453 283,111 ---------- ---------- INCOME BEFORE GAIN ON SALE OF PROPERTIES 539,871 365,514 GAIN ON SALE OF PROPERTIES, net 451,666 137,860 ---------- ---------- NET INCOME BEFORE TAXES 991,537 503,374 PROVISION FOR INCOME TAXES 207,300 -- ---------- ---------- Net income $ 784,237 $ 503,374 ========== ========== INCOME PER COMMON SHARE $ .33 $ .20 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,360,080 2,521,160 ========== ==========
The accompanying notes are an integral part of these statements. F-4 ARIZONA LAND INCOME CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Common Stock Additional Distributions Total ----------------------- Paid-in in Excess Stockholders' Shares Amount Capital of Earnings Equity ----------- ----------- -------------- ------------- -------------- Balance, December 31, 1995 2,532,680 $ 253,268 $ 24,585,170 $ (6,611,273) $ 18,227,165 Dividends paid - - - (3,282,356) (3,282,356) Purchase and retirement of Class A common stock (172,500) (17,250) (794,098) - (811,348) Net income - - - 503,374 503,374 ----------- ----------- -------------- ------------- -------------- Balance, December 31, 1996 2,360,180 236,018 23,791,072 (9,390,255) 14,636,835 Dividends paid - - - (896,830) (896,830) Net income - - - 784,237 784,237 ----------- ----------- -------------- ------------- -------------- Balance, December 31, 1997 2,360,180 $ 236,018 $ 23,791,072 $ (9,502,848) $ 14,524,242 =========== =========== ============== ============= ==============
The accompanying notes are an integral part of these statements. F-5 ARIZONA LAND INCOME CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 784,237 $ 503,374 Adjustments to reconcile net income to net cash provided by operating activities- Gain on sale of properties (451,666) (137,860) Unrealized gain on investments and other non-cash income (87,188) -- Changes in certain assets and liabilities affecting operating activities- Decrease in other assets, net -- 64,418 (Increase) decrease in accrued interest receivable (48,397) 96,815 Increase (decrease) in accounts payable and other liabilities 6,578 (33,271) (Decrease) increase in accrued property taxes (53,085) 14,437 Increase in deferred tax liability 120,000 -- ----------- ----------- Net cash provided by operating activities 270,479 507,913 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Partnership investments -- (72,000) Principal payments received under mortgage notes receivable 199,954 2,360,026 Proceeds from sales of properties 2,946,295 1,375,610 Land improvements (464,926) (284,064) Purchase of bonds -- (906,959) Proceeds from redemption of bonds -- 913,674 ----------- ----------- Net cash provided by investing activities 2,681,323 3,386,287 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (896,830) (3,282,356) Repurchase of Class A common stock -- (811,348) ----------- ----------- Net cash used in financing activities (896,830) (4,093,704) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,054,972 (199,504) CASH AND CASH EQUIVALENTS, beginning of year 1,191,853 1,391,357 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 3,246,825 $ 1,191,853 =========== =========== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: New mortgages related to sales of properties $ 956,171 $ -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 2,662 $ 5,287 Income taxes paid $ 87,300 $ --
The accompanying notes are an integral part of these statements. F-6 ARIZONA LAND INCOME CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) ORGANIZATION AND OPERATIONS: Arizona Land Income Corporation (the Company) was incorporated in the State of Arizona on March 10, 1988 as a wholly owned subsidiary of YSP Holdings, Inc. and completed an initial public offering on June 13, 1988. The net proceeds of the initial public offering of $25,808,600 were used to acquire and originate mortgage loans secured by unimproved real property located in the Phoenix metropolitan area. The Company has two classes of common stock, Class A and Class B. The Class A shares are listed for trading on the American Stock Exchange. The current capitalization of the Company and minimal cash flow requirements afford the Company the ability to hold the properties and to finance future sales with a cash downpayment and terms. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents Investments with an original maturity of less than 90 days when purchased are considered cash equivalents. At December 31, 1997, cash equivalents consist of U.S. Treasury Notes of $3,195,173 which matured in February 1998. Mortgage Notes Receivable Mortgage notes receivable are presented at cost in the accompanying balance sheet. It is the Company's policy to discontinue the accrual of interest for notes in default as of the default date. In management's opinion, mortgage notes receivable are stated at amounts not in excess of net realizable value. Investment in Partnership During 1991, the Company purchased a 21.6% limited partnership interest in Pinnacle Peak Office/Resort Investors, the borrower on Loan 1. The Company's semi-annual contributions are netted with the portion of interest income related to the Company's ownership of Pinnacle Peak Office/Resort Investors. The net amount invested in 1997 and 1996 was $0 and $64,448, respectively. F-7 Revenue Recognition Revenue from land sales is recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sale of Real Estate, when the parties to the sale are bound by the terms of a contract, an adequate downpayment is received, a reasonable likelihood exists that any related receivable will be collected and all conditions precedent to the closing have been performed. Income Taxes and REIT Status The Company has elected treatment as a real estate investment trust (REIT) under Internal Revenue Code (IRC) Sections 856-860. A REIT is taxed in the same manner as any corporation except that it may deduct and not pay income taxes on distributions made to shareholders. This distribution deduction must be at least 95% of the REIT's taxable income. For all years presented, the Company has met the 95% distribution requirement. The Company previously elected to treat certain qualified property as foreclosure property under IRC Section 856(e)(5). Accordingly, current federal income tax of $87,300 has been provided and paid at a rate of 35% on the 1997 net gains on an income tax basis from sales of foreclosure property. During 1997, an additional $120,000 federal income tax provision was recorded to reflect the cumulative book to tax difference on foreclosure property sales through December 31, 1997. Approximately $50,000 of this provision was recorded to reflect this change in estimate, when it was determined during 1997 that sales in 1996 would be taxable. For income tax purposes, certain expenses for financial reporting purposes are not allowed as tax deductions. The Company may take certain deductions related to their investment in Pinnacle Peak Office/Resort Investors (see Note 2) that are not expenses for financial reporting purposes. In addition, the Company recognized gain on the sale of property for financial reporting purposes which is in excess of the current taxable gain on the sales. Accordingly, 1997 taxable income totaled approximately $777,000 and the taxable income for 1996 was approximately $474,000. Net operating losses for federal income tax purposes available to offset future taxable income totaled $2,243,089 at December 31, 1997, and all benefits from these losses will expire through the year ending 2010. The balance of $120,000 at December 31, 1997 in deferred income taxes represents the estimated future tax to be paid when the gains are reflected in the income tax returns. Income Per Common Share Income per common share is computed based upon the weighted average number of shares of common stock outstanding during the year. There are no stock options, warrants or other common stock equivalents. F-8 Use of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Long-Lived Assets SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, was adopted by the Company in fiscal 1996, and did not have a material effect on the Company's financial position or its results of operations. (3) CONCENTRATIONS OF CREDIT RISK: The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of short-term investments and mortgage notes receivable. The Company's short-term investments are in high-quality securities placed with a major bank. The Company's investment policy limits its exposure to concentrations of credit risk. The Company's mortgage notes receivable result primarily from the sale of property to a broad base of borrowers although several loans are a significant portion of total assets (see Note 4). (4) MORTGAGE NOTES RECEIVABLE: Management determines the rate and related terms on its individual mortgage notes receivable based on the underlying collateral, the quality of the borrower, and the down payment received. The majority of the mortgage notes receivable outstanding at December 31, 1997, were originated within the last 2-4 years and in management's opinion, the factors used to determine the rates and related terms have not changed significantly. Based on this, management believes that the fair market values of its mortgage notes receivable approximate their carrying amounts. As of December 31, 1997, the majority of the loans are current, and all noncurrent loans are stated at amounts not in excess of net realizable value. Therefore, no additional adjustment for impairment is necessary. F-9 Mortgage notes receivable consist of the following at December 31, 1997:
The Company's Participation Interest as a The Company's Original Final of Current Participation at Loan Collateral, Property Stated Maturity Periodic Principal December 31, Number Location and Size Interest Rate Date Payment Terms Balance 1997 - -------- ------------------------ ----------------- --------- ----------------------------------- ------------- ---------------- 3) 70 acres - West side of 8.25% 08/05/04 On October 29,1996, the loan was 76.36% $ 557,473 Hawes Road (84th modified for the borrower to make Street) - 1/2 mile monthly interest and principal north of Thomas Road payments of $15,000 until the 1996 Mesa, Arizona annual payment of $125,550 is paid in full. Interest on the modified payments is accruing at 11%. On January 29, 1997, another modifica- tion was made to further change the payment schedule to add biweekly interest and principal payments of $5,000 until the 1996 payment is paid in full. Interest is accruing at 15% on this second modification. Loan is current according to this latest modification. 5) 18.8 acres - 1/2 mile 9.00% 02/01/99 Semi-annual principal payments of 100% 571,664 east of Pima Road and $25,000 plus accrued interest 1/4 mile South of Bell through August 1, 1998. Balloon Road - Scottsdale, payment consisting of the unpaid Arizona principal plus accrued interest due February 1, 1999. Loan is current. 6) 29 lots in Hidden 9.00% - 12.30% 05/01/98 Multiple borrowers (36) - monthly 85.29% 114,457 Valley Ranch, Pinal 07/01/05 payments of principal and interest County, Arizona. 12 of varying payment amounts. parcels in either Approximately $74,000 of these Bellflower Ranch or loans are late or in default. Butterfield Ranch in Cochise County, Arizona 9) 19.24 acres - Southwest 7.50% 03/30/02 Annual payments of principal 81.35% 295,533 corner of Union Hills and interest of $83,221. Loan is Drive and 91st Avenue - current. Peoria, Arizona 10) 7.47 acres - 16th Street 6.0% until 4/1/98 4/02/01 Annual principal payments of 80% 956,170 and Bell Road 7.5% until 4/2/99 $341,761 and accrued interest. Phoenix, Arizona 8.5% until 4/2/00 Loan is current. 9.5% until 4/2/01 15) 50.85 acres - South of 8.00% 08/30/00 Quarterly payments of principal and 100% 535,931 the Southwest Corner interest of $18,700 through May 30, of Hawes and Brown 2000. Balloon payment consisting Road - Mesa, Arizona of the unpaid principal plus accrued interest due August 30, 2000. Loan is current. 16) 20 acres - West side of 9.00% 09/12/02 Annual payments of principal and 100% 200,305 I-17; approximately interest of $20,583 through 2-3/4 miles north of September 12, 2001. Balloon Happy Valley Road - payment consisting of unpaid Maricopa County, principal plus accrued interest Arizona due September 12, 2002. Loan is current. 17-1) .95 acres (Lot 6, Phoenix 9.00% 03/01/08 Monthly payments of principal and 100% 52,839 International Science interest of $659. Loan is current. Center) I-17 and Deer Valley Road, Phoenix, Arizona 17-3) 2.11 acres (Lots 4 and 5, 8.00% 04/15/08 Monthly payments of principal and 100% 84,641 Phoenix International interest of $993. Loan is current. Science Center) I-17 and Deer Valley Road, Phoenix, Arizona 18) 153.63 acres - Southwest 7.00% 03/27/10 Annual payments of principal and 100% 1,750,872 Corner of Pecos Road interest of $144,258 through March and Val Vista Drive - 27, 2009. Balloon payment Maricopa County, consisting of unpaid principal Arizona plus accrued interest due March 27, 2010. Loan is current. ------------ $ 5,119,885 ============
F-10 Scheduled principal repayments of mortgage notes receivable at December 31, 1997 are as follows: Year Amount ----------- -------------- 1998 $ 611,564 1999 999,664 2000 831,719 2001 392,203 2002 396,559 Thereafter 1,888,176 -------------- $ 5,119,885 In January 1998, loan 3 was paid in full. (5) LAND HELD FOR SALE: The Company has received land as a result of foreclosures on several loans. Interest accrual ceases at the date of default. The mortgage receivable balance, related accrued interest and foreclosure costs are transferred to land held for sale at cost on the date the title is transferred. In management's opinion, land held for sale is stated at amounts not in excess of net realizable value. The following land is owned by the Company at December 31:
Original The Company's Loan Participation Number Interest 1997 - ------------- ------------- -------------- 2) 33.5 acres - Queen Creek and Gilbert Roads - Chandler, Arizona. 91.15% $ 982,295 3) 635 acres - Section 9, Township 6 South Range 3 East of the Gila and Salt River Base and Meridian - Pinal County, Arizona. 76.36% 925,691 6) 354.5 acres - Southwest corner of Warner and Sossaman Roads - Maricopa County, Arizona 85.29% 3,023,531 54.58 acres - Pinal County. 85.29% 96,376 11) 8.4 acres - Corner of 95th and Olive Avenues - Peoria, Arizona. 100.00% 693,565
F-11
Original The Company's Loan Participation Number Interest 1997 - ----------- ------------- -------------- 17) 1.01 acres - Southwest corner of I-17 and Deer Valley Road - Phoenix, Arizona. 100.00% 547,580 19) 9.11 acres - Lots 4, 5, and 7, Paradise Valley Auto Park at 20th Street and Bell Road - Phoenix, Arizona. 100.00% 907,372 -------------- Total $ 7,176,410 ==============
In January 1998, the Company sold one acre of the Original Loan Number 17 land for book value totaling $491,694. (6) RELATED PARTY TRANSACTIONS: The Company is a party to the following agreements with affiliates: Affiliate Agreement ALI Advisor, Inc. Management fees of 30% of available cash, as defined, will be paid in any quarter when the cumulative return to investors is in excess of 12.7%. A servicing fee for servicing loans of 1/16 of 1% of total assets, as defined, will be paid quarterly. In addition, certain other overhead expenses will also be paid. PHS Mortgage, Inc. All loans made after the initial purchase at June 13, 1988 have been originated by the mortgage company and origination fees were paid by the borrowers. Peacock, Hislop, Staley The Company utilizes PHS&G on certain & Given (PHS&G) investment transactions involving excess cash. No fees are paid for such services. (7) DIVIDENDS PAID: Distributions related to Class A dividends for 1997 are as follows: Amount Date Declared Record Date Date Paid Per Share Total Amount ------------- ----------- ------------- ------------- ---------------- 08/11/97 09/1/97 09/15/97 $.25 $ 590,020 12/09/97 12/17/97 12/31/97 .13 306,810 ---- -------------- $.38 $ 896,830 ==== ============== F-12 Approximately 87% of the dividends per share in 1997 represent distributions of ordinary taxable income. The remaining distributions represent a return of capital or capital gain income. Distributions related to Class A dividends for 1996 are as follows: Amount Date Declared Record Date Date Paid Per Share Total Amount - -------------- ---------------- ------------- ------------- --------------- 03/21/96 04/01/96 04/15/96 $.30 $ 759,774 10/28/96 12/02/96 12/16/96 1.00 2,522,582 ---- --------------- 1.30 $ 3,282,356 ==== =============== Dividends per share in 1996 represent a return of capital or capital gain income. (8) RETIREMENT OF CLASS A COMMON STOCK: During 1996, the Company paid $811,348 to repurchase 172,500 shares of its Class A common stock which were then retired. F-13 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. Information responsive to this item is incorporated herein by reference to the "Information Concerning Directors and Nominees" section contained in the Company's Proxy Statement relating to its 1998 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of 1934 (the "1998 Proxy Statement"). With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-KSB Report, the Company's 1998 Proxy Statement is not being filed as a part hereof. Information respecting executive officers of the Company who are not continuing directors or nominees is set forth at Part I of this Report. No disclosure is required with respect to Item 405 of Regulation S-B, "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 10. EXECUTIVE COMPENSATION. The Company did not compensate its executive officers for their services in the fiscal year ending December 31, 1997. Additional information responsive to this item is incorporated herein by reference to the "Executive Compensation" section of the Company's 1998 Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning the Class A Common Stock beneficially owned by each director of the Company, by all officers and directors of the Company as a group and by each shareholder known by the Company to be the beneficial owner of more than 5% of the outstanding Class A Common Stock is incorporated herein by reference to the "Security Ownership of Principal Shareholders and Management" section of the Company's 1998 Proxy Statement. 15 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information responsive to this item is incorporated herein by reference to the "Certain Transactions and Relationships" section of the Company's 1998 Proxy Statement. 16 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. The following is a list of the financial statements of Arizona Land Income Corporation included at Item 7 of Part II. Financial Statements. Page or Method of Filing ] ---------------- Report of Independent Public Accountants Page F-2 Financial Statements: Balance Sheet - December 31, 1997 Page F-3 Statements of Operations - For the Years Ended December Page F-4 31, 1997 and 1996 Statements of Stockholders' Equity - For the Years Ended Page F-5 December 31, 1997 and 1996 Statements of Cash Flows - For the Years Ended Page F-6 December 31, 1997 and 1996 Notes to Financial Statements - December 31, 1997 Page F-7 (a) Exhibits.
Exhibit Page or Number Description Method of Filing ------ ----------- ---------------- 3-A Articles of Incorporation of the Company, as amended. Incorporated by Reference to Exhibit 3-A to Amendment No. 3 to S-18 No. 33-20625. 3-B Bylaws of the Company, as amended. Incorporated by Reference to Exhibit 3-B to Amendment No. 3 to S-18 No. 33-20625.
17
Exhibit Page or Number Description Method of Filing ------ ----------- ---------------- * 10-A June 13, 1988 Advisory and Servicing Agreement Incorporated by between ALI Advisor, Inc. and the Company. Reference to Exhibit 10-A to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10-B January 17, 1989 Stock Purchase and Sale Agreement Incorporated by between Young, Smith & Peacock Holdings, Inc., reference from the Young, Smith & Peacock, Inc., Barry W. Peacock, Company's Report on Thomas R. Hislop and Larry P. Staley. Form 8-K dated January 30, 1989. 10-C Modification of Loan Document dated July 21, 1990, Incorporated by between ALI Advisor, Inc. and Pinnacle Peak reference to Exhibit Office/Resort Investors Limited Partnership, an 10-E to the Arizona limited partnership (Loan 1). Company's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). 10-D Modification of Loan Documents dated July 1, 1990, Incorporated by between ALI Advisor, Inc. and North Scottsdale reference to by Horseman's Park Limited Partnership III, an Arizona 10-F to the 1990 limited partnership (Loan 5b). Form 10-K. * 10-E(1) Indemnification Agreement dated May 12, 1992 Incorporated by between Arizona Land Income Corporation and Robert Reference to Exhibit Blackwell. 10-L to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. * 10-E(2) Indemnification Agreement dated October 1, 1991 Incorporated by between Arizona Land Income Corporation and Burton reference to the Freireich. Company's Annual Report on Form 10-K for the year ended December 31, 1994. 24 Powers of Attorney See Signature Page 27 Financial Data Schedule Filed Herewith
* Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-KSB (b) Reports on Form 8-K During the last quarter of 1997, the Company filed no reports on Form 8-K. 18 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized, this 27th day of March, 1998. ARIZONA LAND INCOME CORPORATION By: /s/ Thomas R. Hislop ---------------------------- Thomas R. Hislop Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Barry W. Peacock, Thomas R. Hislop and Larry P. Staley, and each of them, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-KSB Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-KSB has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- /s/ Barry W. Peacock President March 27, 1998 - ------------------------------ Barry W. Peacock /s/ Thomas R. Hislop Chairman of the Board, Vice March 27, 1998 - ------------------------------ President, Treasurer, Chief Executive Thomas R. Hislop Officer and Chief Financial Officer /s/ Larry P. Staley Vice President March 27, 1998 - ------------------------------ Larry P. Staley /s/ Robert Blackwell Unaffiliated Director March 27, 1998 - ------------------------------ Robert Blackwell /s/ Burton P. Freireich - ------------------------------ Burton P. Freireich Unaffiliated Director March 27, 1998
19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 3,247 87 0 1,514 13,017 3,502 0 0 14,750 226 0 0 0 236 0 14,750 0 719 0 0 0 0 0 992 207 784 0 0 0 784 0.33 0.33
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