UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 0-16508
USA REAL ESTATE INVESTMENT TRUST
| California | 68-0420085 |
| | I.R.S. Employer Identification No. |
| | |
425 Fairgate Road, Sacramento, California 95825
(916) 761-4992
COMMONWEALTH EQUITY TRUST USA
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. Yesx Noo
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Not applicable.
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yeso Noo
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's common equity, as of November 19, 2008: 18,007
Transitional Small Business Disclosure Format (Check One): Yeso Nox
PART I. FINANCIAL INFORMATION
USA REAL ESTATE INVESTMENT TRUST
Balance Sheet
(Unaudited)
| | | September 30, | |
| | | 2008 | |
| Assets | | | |
| | | | |
| Real estate loans, net | | $ | 7,385,833 | |
| Interest receivable | | | 1,244,883 | |
| Cash | | | 1,189,284 | |
| Total assets | | $ | 9,820,000 | |
| | | | | |
| Shareholders' Equity | | | | |
| | | | | |
| Shareholders' equity: | | | | |
Shares of beneficial interest, par value $1 per share; 62,500 shares authorized; 18,007 shares outstanding | | | 18,007 | |
| Additional paid-in capital | | | 26,355,335 | |
| Distributions in excess of cumulative net income | | | (16,553,342 | ) |
| Total shareholders’ equity | | $ | 9,820,000 | |
See notes to financial statements.
USA REAL ESTATE INVESTMENT TRUST
Statements of Income
(Unaudited)
| | | Three Months Ended September 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| Revenues: | | | | | | |
| Interest income | | $ | (90,381 | ) | | $ | 412,177 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| General and administrative expense | | | 70,680 | | | | 58,877 | |
| | | | | | | | | |
| Net (loss) income | | $ | ( 161,061 | ) | | $ | 353,300 | |
| | | | | | | | | |
| | | | | | | | | |
| Net (loss) income per share | | $ | ( 8.94 | ) | | $ | 19.62 | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted-average number of shares outstanding | | | 18,007 | | | | 18,007 | |
| | | | | | | | | |
| | | | | | | | | |
| Dividends per share | | $ | 16.00 | | | $ | 16.00 | |
| | | | | | | | | |
| | | | | | | | | |
| See notes to financial statements. | | | | | | | | |
USA REAL ESTATE INVESTMENT TRUST
Statements of Income
(Unaudited)
| | | Nine Months Ended September 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| Revenues: | | | | | | |
| Interest income | | $ | 766,562 | | | $ | 1,061,169 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| General and administrative expense | | | 216,635 | | | | 188,458 | |
| | | | | | | | | |
| Net income | | $ | 549,927 | | | $ | 872,711 | |
| | | | | | | | | |
| | | | | | | | | |
| Net income per share | | $ | 30.54 | | | $ | 43.75 | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted-average number of shares outstanding | | | 18,007 | | | | 19,949 | |
| | | | | | | | | |
| | | | | | | | | |
| Dividends per share | | $ | 48.00 | | | $ | 36.00 | |
| | | | | | | | | |
| | | | | | | | | |
| See notes to financial statements. | | | | | | | | |
USA REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(Unaudited)
| | | Nine Months Ended September 30, | |
| | | 2008 | | | 2007 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income | | $ | 549,927 | | | $ | 872,711 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Amortization of loan fees | | | (27,667 | ) | | | ( 37,167 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Increase in interest receivable | | | ( 275,455 | ) | | | (626,497 | ) |
| Decrease in other assets | | | 2,915 | | | | 849 | |
| Decrease in accounts payable | | | -- | | | | (6,108 | ) |
| | | | | | | | | |
| Net cash provided by operating activities | | | 249,720 | | | | 203,788 | |
| | | | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Investments in real estate loans | | | (303,927 | ) | | | ( 8,088,380 | ) |
| Receipt of loan fees | | | -- | | | | 94,000 | |
| Collections on real estate loans | | | 1,991,161 | | | | -- | |
| | | | | | | | | |
| Net cash provided by (used in) investing activities | | | 1,687,234 | | | | ( 7,994,380 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Redemption of shares | | | -- | | | | ( 2,885,021 | ) |
| Dividends paid | | | ( 864,353 | ) | | | (672,570 | ) |
| | | | | | | | | |
| Net cash used in financing activities | | | ( 864,353 | ) | | | (3,557,591 | ) |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | 1,072,602 | | | | (11,348,183 | ) |
| | | | | | | | | |
| CASH AT BEGINNING OF PERIOD | | | 116,682 | | | | 11,999,804 | |
| | | | | | | | | |
| CASH AT END OF PERIOD | | $ | 1,189,284 | | | $ | 651,621 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| See notes to financial statements. | | | | | | | | |
USA REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
September 30, 2008
Unaudited
| 1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
USA Real Estate Investment Trust (the “Trust”) was organized under the laws of the State of California pursuant to a Declaration of Trust dated October 7, 1986. The Trust commenced operations on October 19, 1987, upon the sale of the minimum amount of shares of beneficial interest. The Trust is a self-administered, self-managed, real estate investment trust.
In the opinion of the trustees, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
REAL ESTATE LOANS: The Trust carries its real estate loans at their unpaid principal balances net of unamortized loan fees unless it is probable that they are impaired. A loan is considered impaired when the Trust determines that it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Trust measures impairment of a loan based upon the fair value of the collateral. If the measurement of impairment for the loan is less than the recorded investment in the loan, a valuation allowance is established with a corresponding charge to the provision for loan losses.
CASH: Cash consists of demand deposits with financial institutions.
DISTRIBUTIONS IN EXCESS OF CUMULATIVE NET INCOME: The Trust has a general policy of distributing cash to its shareholders in an amount that approximates taxable income plus non-cash charges such as depreciation and amortization. As a result, distributions to shareholders exceed cumulative net income.
REVENUE RECOGNITION: Interest income is accrued on the outstanding principal amounts of the real estate loans. When the Trust determines that a loan is impaired, income recognition is suspended if full recovery of interest and principal appears uncertain. Cash receipts will be allocated to interest income except when the Trust believes the loan is not fully recoverable. Loan fees are recognized as interest income over the lives of the related real estate loans using the straight-line method.
INCOME TAXES: The Trust has elected to be taxed as a real estate investment trust. Accordingly, the Trust does not pay income taxes on income because distributions to shareholders are at least equal to the greater of 90 percent of its taxable income or 100 of its capital gains.
NET INCOME PER SHARE: Net income per share is computed based on the weighted average number of shares outstanding during the three months and nine months ended September 30, 2008 and 2007.
RECLASSIFICATIONS: Certain items in the 2007 financial statements have been reclassified to conform to the 2008 presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including Amendment of FASB Statement No. 115. This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. The Trust does not intend to make this fair value election.
As of September 30, 2008, the Trust had two real estate loans, net totaling $7,385,833, which consist of gross real estate loans of $7,400,000 less unamortized loan fees of $14,167.
As of September 30, 2008, $6,785,833 and $600,000 of the outstanding balance of the Trust’s real estate loans mature in 2009 and 2010, respectively.
As of September 30, 2008, the real estate loans had a weighted-average interest rate of 19.19%. The contract rate and the pay rate on the $6,785,833 real estate loan is 20.00% and 10.00% respectively. The accrued and unpaid 10.00% is payable on the earlier of the payoff of the loan or March 1, 2009. The 10.00% pay rate is payable quarterly.
As of September 30, 2008, 91.88% and 8.12% of the outstanding balance of the Trust’s real estate loans were collateralized by properties in Mississippi and California, respectively.
The fair market value of the real estate loans approximated their carrying value at September 30, 2008 due to current market rates of real estate loans and their near term maturity.
| ITEM 2 | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND |
| | RESULTS OF OPERATIONS |
CRITICAL ACCOUNTING POLICIES
The Trust carries its real estate loans at their unpaid principal balances net of unamortized loan fees unless it is probable that they are impaired. If it is probable that a real estate loan is impaired, the Trust would record an impairment loss of the amount by which the carrying value exceeds the expected discounted cash flows estimated to be generated from the collateral.
RESULTS OF OPERATIONS
In August 2008, the $2,591,161.00 loan made by the Trust and collateralized by a marina located at 4350 Riverside Boulevard in Sacramento, California was paid in full. Payment consisted of cash in the sum of $1,991,161.00, and a new loan in the principal sum of $600,000.00. The new $600,000.00 loan is personally guaranteed by the principal members of the borrower, and is also secured by a deed of trust and security agreement against the hotel and marina located at 4350 Riverside Boulevard in Sacramento, California, subordinate to another loan on the same property. The new $600,000.00 loan bears interest at 10% per annum, payable in monthly installments of interest only, with the $600,000.00 principal balance due August 2010. Interest payments on the new loan are current.
The Trust is the owner and beneficiary of a $6,800,000.00 loan secured by 121 acres of real property located in Wiggins, Mississippi, plus personal guarantees from the former and current managing members of the borrowing entity. The Trust believes that the value of the 121 acres of real property exceeds the amount necessary to pay the loan in full, including principal, interest, late charges, and costs. However, actual results could differ from these estimates based on the circumstances noted below.
Though development of the real property security for commercial users is continuing, the borrower is not now current with its required interest payments to the Trust. The Trust has therefore commenced a foreclosure and sale of the securing real property, and collection under the personal guarantees of the managing members.
Under Mississippi law, the Trust is permitted to hold a foreclosure sale after twenty-one days notice. If the proceeds from the foreclosure sale are not sufficient to pay the Trust’s loan in full, action will be continued against the guarantors for the balance owed.
Commencement of the foreclosure process does not preclude a work-out agreement with the borrower, on terms satisfactory to the Trust, prior to the sale date.
As a result of the above matters, the Trust has determined that this loan is impaired at September 30, 2008 because the borrower is currently past due three scheduled interest payments and because of the pending foreclosure proceedings. The Trust has suspended accrual of interest on the loan for those interest payments that were contractually due as of July 1, 2008 and has also reversed $330,000 of interest accrued in the first and second quarters of 2008 related to scheduled payments that have not been paid. As a result, the Trust reported negative interest income for the three months ended September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Trust expects to meet its short-term liquidity requirements through cash on hand, net cash provided by operations and collections on real estate loans.
OFF-BALANCE SHEET ARRANGEMENTS
The Trust has no off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES
The Trust has no contractual obligations or contingent liabilities.
| ITEM 4 | CONTROLS AND PROCEDURES |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to us to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of Gregory Crissman, the Trust's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, Gregory Crissman concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
PART II. OTHER INFORMATION
Exhibit 31.1 Section 302 Certifications filed by the Chief Executive Officer and Chief Financial Officer pursuant to SEC Release No. 33-8212 and 34-37551.
Exhibit 32 Section 906 Certifications as furnished by the Chief Executive Officer and the Chief Financial Officer pursuant to SEC Release No. 33-8212 and 34-47551.
USA REAL ESTATE INVESTMENT TRUST
Signatures
Pursuant to the requirement 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.
| | | | | |
| | November 19, 2008 | | /s/ Gregory Crissman | |
| | Date | | Gregory Crissman, | |
| | | | Chairman | |
| | | | | |
| | | | | |
| | | | | |
| | November 19, 2008 | | /s/ Benjamin Diaz | |
| | Date | | Benjamin Diaz, | |
| | | | Trustee | |
