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Note 1
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Basis of Presentation
- The financial statements have been prepared by Arizona Land Income Corporation (the “Company” or “AZL”) without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-QSB. In the opinion of the Company, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The results of operations for the three months and nine months ended September 30, 2007 are not necessarily indicative of
the results to be expected for the full year.
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Note 2
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Summary of Significant Accounting Policies
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Cash
and Cash Equivalents
: Investments with an original maturity of less than 90 days when purchased are considered cash equivalents. On occasion, the Company may have deposits with financial institutions in excess of governmental insured limits.
Marketable Securities:
U.S. Treasury Notes and debt securities of other governmental agencies with original maturities of 120 days
or more are classified as trading securities upon acquisition and recorded at fair value. Gains and losses are included in income on trading securities in the accompanying statements of operations. Substantially all income from trading securities
for the three months ended September 30, 2007 and 2006 resulted from interest earned on securities. The Company’s available for sale securities are reported at fair value with unrealized gains or losses excluded from earnings and reported
as a separate component of shareholders’ equity.
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 certain qualifying distributions made to shareholders and
reduce or eliminate any potential income taxes. This distribution deduction must be at least 90% of the REIT’s taxable income. The Company has met the distribution requirement for all periods presented, and thus has not recorded any income tax
provision in the accompanying statements of operations.
For income tax purposes, certain expenses or reserves for financial reporting
purposes are not allowed as current tax deductions. Similarly, the Company may take certain current deductions for tax purposes that are not current expenses for financial reporting purposes.
On July 13, 2006, the FASB issued Interpretation No. 48.
Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109
(“Fin 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes
and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the Company has not recognized
any change to the January 1, 2007 balance in retained earnings. At January 1, 2007 and September 30, 2007, the Company had no unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate in
future periods. The adoption of FIN 48 did not impact our consolidated financial condition, results of operations or cash flows.
The
Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrued interest or penalties at January 1, 2007 and no accrued interest or penalties at
September 30, 2007.
The Company is subject to taxation in the U.S.
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Note 3
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Available for Sale Securities
– The following is a summary of the Company’s Available for Sale Securities as of September 30, 2007:
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Cost
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$
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1,803,504
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Gross unrealized holding gains
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6,496
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Gross unrealized holding losses
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(12,970
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)
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Fair market value
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$
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1,797,030
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Note 4
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Mortgage Note Receivable
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The mortgage note
receivable which totaled $3,516,852 at December 31, 2006 was received as partial consideration for the Company’s sale of the property associated with Loan No. 6. The Company sold its remaining holdings of approximately 280 acres in
Maricopa County, Arizona on May 10, 2004.
In February 2007, the Company sold its interest in the note receivable to a related party
for $3,411,346 and invested the proceeds from that sale in trading securities. As of December 31, 2006, the Company recorded an impairment reserve for loss on sale of $105,506, resulting in no gain or loss for the nine months ended
September 30, 2007.
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Note 5
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Other Comprehensive Income (Loss)
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Unrealized gains
and losses on investments are excluded from net income but are reported as comprehensive income on the Balance Sheets under Shareholders’ equity. The following table illustrates the effect on net income (loss) if the Company had recognized
comprehensive income:
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Nine months ended
September 30, 2007
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Nine months ended
September 30, 2006
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Net income (loss)
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$
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(122,998
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)
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$
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3,783,120
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Comprehensive loss from the unrealized loss on marketable securities
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(6,474
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)
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—
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Comprehensive income (loss)
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$
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(129,472
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)
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$
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3,783,120
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Item 2.
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Management’s Discussion and Analysis or Plan of Operation
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Arizona Land Income Corporation (the “Company” or “AZL”) is an Arizona corporation which has elected to be treated as a real estate investment trust (a “REIT”) under the Internal Revenue
Code of 1986. The statements of operations filed herewith cover the periods from January 1, 2007 through September 30, 2007, and January 1, 2006 through September 30, 2006.
Potential Dissolution/Transaction with Pacific Office
As disclosed in the Company’s prospectus used in connection with the Company’s 1988 initial public offering and in its subsequent annual reports on Form 10-KSB, the Company’s intent at the time of the public offering was to
dissolve within approximately eight years after the date of such offering.
For the
past several years, we have been liquidating our loan and land holdings and returning capital to our shareholders through regular and special dividends. In the second quarter ended June 30, 2004, we sold our remaining holdings (with the
exception of a small parcel of approximately 1/100
th
of an acre) of approximately 280 acres related to Loan No. 6. As partial consideration for the
Company’s sale of the property associated with Loan No. 6, the Company received a mortgage note receivable which totaled $3,516,852 at December 31, 2006. In February 2007, the Company sold its interest in the note receivable to a
related party for $3,411,346 and invested the proceeds from that sale in trading securities.
In January 2005, we engaged Peacock,
Hislop, Staley & Given, Inc., a financial advisor (“PHS&G”) to assist in developing and evaluating strategic alternatives available to the Company to enhance shareholder value. Alternatives that were being considered included
a change of business plan for the Company, a merger or sale of the Company, a combination of these, or the decision to take no action other than the completion of the liquidation of the Company. We issued a press release on January 24, 2005
announcing our engagement with PHS&G and the purpose of the engagement. Our Board of Directors believed that PHS&G’s historic relationship with, and long knowledge of, the Company put it in a unique position to assist in determining the
best course of action for the Company to take.
Our engagement of PHS&G has entailed an effort by PHS&G to locate a possible
merger, partner or acquirer for the Company that would result in enhanced shareholder value. Our agreement with PHS&G calls for the Company to pay PHS&G a fee of 4% of the transaction value (but in no event more than $250,000) only upon the
successful completion of its efforts.
In connection with PHS&G’s receipt of certain offers from interested parties relating to a
potential transaction with the Company, our Board met in March 2005 for the purpose of forming a special committee composed of qualified independent directors (the “Special Committee”). The Special Committee was tasked with investigating
and negotiating a potential business disposition, liquidation or other strategic transaction regarding the Company. We announced on October 3, 2006 that we had entered into a Master Formation and Contribution Agreement (as subsequently amended,
the “Master Agreement”) with POP Venture, LLC, a Delaware limited liability company (“Pacific Office Contributor”), as described in our annual report on Form 10-KSB for the fiscal year ended December 31, 2006 (see “Item
1. Description of Business—Proposed Transactions with Pacific Office Contributor” in that Form 10-KSB). Pursuant to the Master Agreement, the Company will form an umbrella partnership (“UPREIT”) in which the Company is the sole
general partner. Upon consummation of the transactions contemplated by the Master Agreement (the “Closing”), the UPREIT will acquire ownership interests in up to nine office properties (the “Contributed Properties”), which
comprise approximately 2.4 million square feet of office space, in consideration for common units and convertible preferred units in the UPREIT with a value equal to the net asset value of the interests in the Contributed Properties at Closing.
This value is estimated to be approximately $163.5 million.
Results of Operations
For the quarter ended September 30, 2007, the Company had total income of approximately $46,000 compared to $107,000 for the quarter ended
September 30, 2006. This decrease was primarily attributable to a decrease of approximately $72,000 in interest on mortgages and an increase of approximately $11,000 in interest on temporary investments. During the first quarter of 2007, the
Company sold its mortgage note receivable and invested the proceeds in temporary investments.
The Company’s expenses for the quarter
ended September 30, 2007 were approximately $69,000 compared to $63,000 for the quarter ended September 30, 2006. The Company’s fees for professional services increased to approximately $58,000 for the quarter ended September 30,
2007 from approximately $32,000 for the same period of 2006. The increase in fees for professional services can be attributed to expenses associated with the proposed transaction between the Company
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and Pacific Office Contributor, pursuant to the Master Agreement. The Company’s administration and general expenses decreased to approximately $4,000
for the quarter ended September 30, 2007, from approximately $21,000 for the quarter ended September 30, 2006.
The Company
reported a net loss of approximately $23,000 for the quarter ended September 30, 2007 compared to net income of approximately $3,604,000 for the quarter ended September 30, 2006, due to the gain on sale of properties.
The Company reported a net loss of approximately $123,000 for the nine-month operating period ended September 30, 2007, compared to net income of
$3,783,000 for the same period during fiscal 2006. This decrease resulted from a decrease of approximately $234,000 in interest on mortgages and an increase of approximately $68,000 in interest on temporary investments. In addition, the Company
recorded a gain on sale of $3,568,000 during the nine months ended September 30, 2006.
For the nine-month operating period ended
September 30, 2007, the Company reported expenses of approximately $299,000 compared to approximately $118,000 for the same period during fiscal year 2006. This increase resulted from an increase in fees for professional services of
approximately $133,000 and an increase of approximately $50,000 in administration and general expenses.
Liquidity and Capital Resources
The Company currently has no commitments for any material capital expenditures and does not anticipate any such expenditures in the foreseeable future.
The Company has agreed under the Master Agreement not to declare or pay any further dividends prior to the consummation of the
transactions contemplated by the Master Agreement, except for a special dividend to address compliance with annual income distribution requirements for real estate investment trusts for 2007.
Critical Accounting Estimates
The Company estimates
the carrying value of its land held for sale and certain other investments. At September 30, 2007, the Company had made no provisions for impairment on any of its assets.
Note Regarding Forward-Looking Statements
Our disclosure and analysis in this Report on Form 10-QSB
contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which include information relating to future events, future financial performance, strategies, expectations, risks and uncertainties.
From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. These forward-looking statements include, without limitation, statements regarding: projections,
predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements regarding strategic transactions such as mergers or acquisitions or a possible dissolution of the
Company; and statements of management’s goals and objectives and other similar expressions. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as
“believe,” “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “plan,” “anticipate,” “estimate,”
“expect,” “intend,” “objective,” “seek,” “strive” and similar expressions, as well as statements in future tense, identify forward-looking statements.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on
related subjects in our Form 10-KSB, Forms 10-QSB and 8-K reports to the Securities and Exchange Commission.
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