1 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTON 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 2001
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from:
Commission file number: 0-16508
Registrant: USA Real Estate Investment Trust
(Exact Name of Registrant as specified in its Charter)
California 68-0109347
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
PMB 314, P.O. Box 255427, Sacramento, California 95865-5427
(Address of registrant's principal executive offices) (Zip Code)
(800) 308-4532
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Shares of Beneficial Interests
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
/ X/ Yes / / No
The aggregate market value of the voting shares of beneficial interest
(the "shares") held by nonaffiliates of the registrant outstanding at December
31, 2001, was $14,109,483. This calculation is based on the book value
because there is no active public trading market for the shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
USA REAL ESTATE INVESTMENT TRUST
Table of Contents
Page
PART I.
ITEM 1. Business ................................... 3
ITEM 2. Properties ................................. 6
ITEM 3. Legal Proceedings .......................... 6
ITEM 4. Submission of Matters to a Vote
of Security Holders ...................... 6
PART II.
ITEM 5. Market for Registrant's Equity Securities
and Related Security Holder Matters ...... 6
ITEM 6. Selected Financial Data .................... 7
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................ 8
ITEM 8. Financial Statements and Supplementary
Data ..................................... 10
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ..................... 20
PART III.
ITEM 10. Directors and Executive Officers
of the Registrant ........................ 21
ITEM 11. Executive Compensation ..................... 22
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management ......... 23
ITEM 13. Certain Relationships and
Related Transactions ..................... 23
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K .................. 24
3 PART I.
ITEM 1. BUSINESS
GENERAL
USA Real Estate Investment Trust (the "Trust") is a California business
trust that was formed on October 7, 1986, for the primary purpose of engaging
in the business of acquiring, owning and financing real property investments.
The Trust commenced operations on October 19, 1987, upon the sale of the
minimum offering amount of shares of beneficial interest ("shares").
The purpose of the Trust is to provide investors with an opportunity to
own, through transferable shares, an interest in diversified real estate
investments. The Trust invests primarily in income producing real properties
in accordance with the investment objectives and policies of the Trust.
Through such investments, the Trust seeks to provide investors with an
opportunity to participate in a portfolio of professionally managed real
estate investments in the same way a mutual fund affords investors an
opportunity to invest in a professionally managed portfolio of stocks, bonds
and other securities.
The Trust has operated and intends to continue to operate in a manner
intended to qualify as a "real estate investment trust" (REIT) under Sections
856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). A
qualified REIT is relieved, in part, from federal income taxes on ordinary
income and capital gains distributed to its shareholders. State tax benefits
also may accrue to a qualified REIT. Pursuant to Code requirements, the Trust
distributes to its shareholders at least 90 percent of its taxable income and
100 percent of the net capital gain from the sale of Trust properties.
The Trust will terminate 21 years after the death of the last survivor of
persons listed in the Trust's Declaration of Trust. The Trust may also be
terminated at any time by the majority vote or written consent of shareholders
or by a majority vote of the Trustees.
The office of the Trust is located at One Scripps Drive, in Sacramento,
California.
INVESTMENT OBJECTIVES
The Trust has acquired a diversified portfolio of income producing real
property investments. Subject to certain limitations, the Declaration of
Trust gives the Trustees discretion to allocate the Trust's investments
without the prior approval of shareholders.
4
INVESTMENT GUIDELINES
Acquisition Policies. The Trustees have adopted investment guidelines
for the purpose of selecting the Trust's investments. Pursuant to the
guidelines, the allocation of Trust assets among income producing real
property investments depends principally upon the following factors:
1. The number of properties available for acquisition which show current
income and potential for appreciation in value;
2. The availability of funds for investment;
3. The laws and regulations governing investment in and the subsequent
sale of real estate investments by a REIT; and
4. The applicable federal and state income tax, securities, and real
estate laws and regulations.
The guidelines may vary from time to time, at the sole discretion of the
Trustees, in order to adapt to changes in real estate markets, federal income
tax laws and regulations and general economic conditions. The Trustees also
have discretion to acquire an investment not meeting these guidelines if the
Trustees determine that other circumstances justify the acquisition in a
particular case.
Portfolio Turnover. The Trustees have set general guidelines for the
disposition of properties in its portfolio which take into consideration
certain regulatory restrictions and federal income tax laws regarding REIT
portfolio turnover. Income tax regulations preclude the Trust from holding
any property (other than foreclosure property) primarily for sale to customers
in the ordinary course of the Trust's trade or business, but provide a "safe
harbor" for property held for at least four years from the date of
acquisition. Portfolio turnover policy also depends on whether a favorable
sales price can be realized by the Trust, primarily a function of the
capitalization rate applied to similar types of property in similar markets.
The Trust may elect to hold property as long as is reasonably necessary to
provide an attractive sales price.
OTHER INFORMATION
The Trust has no employees. It is administered by its Trustees and by
its Chairman, and by independent contractors who work under the supervision
thereof as a self-administered real estate investment trust.
The Trust is involved in only one industry segment: acquiring, operating
and holding for investment income-producing real properties. Revenues, net
income and assets from this industry segment are included in the Trust's
financial statements which appear at Item 8 of Part II.
5
The Trust's results of operations will depend on the availability of
suitable opportunities for investment and the comparative yields available
from time to time on real estate and other investments, as well as market
conditions affecting leasing and sale of real estate in the areas in which the
Trust's investments are located. These factors, in turn, are influenced to a
large extent by the type of investment involved, financing available for real
estate investment, the nature and geographic location of the property,
competition and other factors, none of which can be predicted with certainty.
The real estate investment market is highly competitive. The Trust
competes for acceptable investments with other financial institutions,
including banks, insurance companies, savings and loan associations, pension
funds and other real estate investment trusts and partnerships. Many of
these competitors have greater resources than the Trust. The number of such
competitors and funds available for investment in properties of the type
suitable for investment by the Trust may increase, resulting in increased
competition for such investments and possibly increased costs and thus
reduced income for the Trust.
The rules and regulations adopted by various agencies of federal, state
or local governments relating to environmental controls and the development
and operation of real property may operate to reduce the number of investment
opportunities available to the Trust or may adversely affect the properties
currently owned by it. While the Trust does not believe environmental
controls have had a material impact on its activities, there can be no
assurance that the Trust will not be adversely affected thereby in the future.
TAX LEGISLATION
The Trust has elected to be treated as a real estate investment trust
under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Trust expects to operate and to invest in a manner that will
maintain its qualification for real estate investment trust taxation. The
Code requirements for such qualification are complex. While no assurance can
be given that the Trust qualified for taxation as a real estate investment
trust for past taxable years, the Trust nevertheless believes that it has so
qualified and will endeavor to continue to qualify for its current year and
future years.
The business of the Trust is uniquely sensitive to tax legislation.
Changes in tax laws are made frequently. There is no way for the Trust to
anticipate when or what changes in the tax laws may be made in the future, or
how such changes might affect the Trust.
The Internal Revenue Service ("IRS") has not yet issued regulations to
carry out numerous provisions enacted as part of the tax legislation passed
since 1986. Nor has the IRS addressed the issues relating to the application
of some of the new tax rules to entities such as real estate investment
trusts. Until such regulations are issued by the IRS, it is difficult to
gauge what impact, if any, such new legislation may have on entities such as a
real estate investment trust.
6
ITEM 2. PROPERTIES
The Trust owns four properties all of which are located in California.
The Trustees believe that the properties are quality income producing
properties that are well suited for their current uses. Most of the
properties are leased under long term leases at competitive rates for the
areas in which they are located. The lease terms provide for rental
adjustments on a periodic basis.
Title insurance and liability and property damage insurance in amounts
deemed appropriate by the Trust have been obtained for the properties referred
to above. The Trust does not carry flood insurance on said properties except
One Scripps Drive in Sacramento, California. Because of the high cost of
premiums, excessive deductibles, and limited coverage, the Trust does not
carry earthquake insurance on said properties except 19401 Parthenia Street
in Northridge, California.
For additional information concerning the aforesaid properties, see Notes
1 and 3 of the Notes to Financial Statements and Schedule III.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Trust's security holders
during the last quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
The Trust has one class of authorized and outstanding equity consisting
of shares of beneficial interest, par value $1.00 per share. The Trust
engaged in a continuous best efforts public offering from May 20, 1987, until
May 20, 1992. Since 1995 the Trust has repurchased 7,916 shares from 9,133
shareholders at a cost of $3,852,276. Repurchased shares revert to authorized
but unissued shares and result in closing shareholders' accounts.
The Trust executed a one-for-thirty reverse share split in 1998 and a one-
or-four share split in 2000. After each reverse share split the Trust
eliminated all fractional shares when the shareholder account held less than one
share. As of December 31, 2001, the Trust had 26,898 shares outstanding to
3,661 shareholders of record.
No active public trading market presently exists for the shares of the
Trust. The Trust does not anticipate that an active public trading market will
exist within the foreseeable future. Occasional trades in the shares of the
7
Trust take place without the participation of the Trust on the Over-the-
Counter Bulletin Board (www.otcbb.com).
ITEM 6. SELECTED FINANCIAL DATA
The following represents selected financial data for the Trust for the
five years ended December 31, 2001. The data should be read in conjunction
with the financial statements and related notes included elsewhere herein.
Years Ended December 31
(Amounts in thousands, except for per share data)
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Operating Results:
Revenues $ 3,184 3,310 3,313 $ 3,290 $ 2,978
Net income 1,071 1,062 1,176 1,314 1,181
Net cash provided by
operating activities 1,610 1,657 1,812 1,899 1,679
Total Assets 20,750 24,476 26,222 25,658 26,097
Long-term obligations 3,756 6,354 6,535 6,000 6,145
Net income
per share $ 39.51 36.76 $ 37.80 $ 40.29 $ 36.00
Cash distributions
per share $ 63.36 63.36 $ 60.48 $ 56.40 $ 50.40
Per share data has been restated to reflect the impact of the one-for-thirty
reverse share split which the Trust executed in 1998 and the one-for-four
reverse share split which the Trust executed in 2000.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Rent revenues decreased $86,125 or 3 percent in 2001 compared to 2000
primarily due to the sale of 3090 Sunrise Boulevard in Rancho Cordova,
California in July 2000, the sale of 7390 Greenback Lane in Citrus Heights,
California in July 2001 and reduced occupancy at 4350 Pell Drive in
Sacramento, California in 2001.
Interest revenues decreased $39,433 or 73 percent in 2001 compared to
2000 and $25,668 or 32 percent in 2000 compared to 1999 due to lower
average notes receivable balances.
Interest expense decreased $39,941 or 5 percent in 2001 compared to
2000 primarily due to lower interest rates.
Interest expense increased $175,581 or 30 percent in 2000 compared to
1999 primarily due to higher average levels of outstanding debt during 2000
compared to 1999.
Depreciation and amortization expense increased $94,301 or 13 percent
primarily due to the write off of unamortized loan fees in connection with
the sale of 845 Harbor Boulevard in West Sacramento, California.
Depreciation and amortization expense increased $71,775 or 11 percent
in 2000 compared to 1999 due to the purchase of 845 Harbor Boulevard in
West Sacramento, California in May 1999.
The 2001 gain on sale of properties was attributed to the sale of 7390
Greenback Lane in Citrus Heights, California and 845 Harbor Boulevard in West
Sacramento, California in July 2001 and December 2001, respectively.
The 2000 gain on sale of properties was attributed to the sale of 3090
Sunrise Boulevard in Rancho Cordova, California.
The 1999 loss on sale of properties was attributed to the sale of
170-174 West Shaw Avenue in Clovis, California.
Net income was $1,071,107 or $39.51 per share in 2001, $1,061,966 or
$36.76 per share in 2000 and $1,175,630 or $37.80 per share in 1999.
The Trust paid distributions per share of $63.36, $63.36 and $60.48 in
2001, 2000 and 1999, respectively.
9
LIQUIDITY AND CAPITAL RESOURCES
The Trust meets its liquidity requirements through net cash provided by
operating activities, along with traditional debt alternatives available to it
and proceeds from the sale of properties. Cash provided by operating
activities is distributed to shareholders in the form of dividends.
Accordingly, capital outlays for renovations, principal payments on long-term
notes payable and share repurchases require additional sources of capital.
The expected additional sources of capital are cash in the bank, debt, and
proceeds from the sale of properties.
In 2001 the Trust collected $75,000 on an outstanding note receivable
and received $4,209,791 from the sale of 7390 Greenback Lane in Citrus
Heights, California and 845 Harbor Boulevard in West Sacramento, California.
The Trust used this capital plus draws on its lines of credits to fund share
repurchases, renovations and principal payments of long-term notes payable.
In March 2001 the Trust obtained a new line of credit with a new bank
that matures in March 2004 and paid off the old line of credit that matured
in March 2001. A second line of credit is also available that matures in
June 2003.
The Trust's capital requirements in 2002 will depend upon the level of
improvements and redevelopment of its existing properties. The sources of
funding will be cash in the bank, draws on its lines of credit, collection
of the remaining balance of its note receivable or additional debt. In
addition, the Trust has identified certain properties that may be sold as
a source of funding, if the Trust's sale prices are met.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust's primary financial market risk is the fluctuation in interest
rates. At December 31, 2001, the Trust had $2,824,285 of variable rate debt.
Based upon this balance of variable debt, if interest rates increased one
percent, the Trust's net income and cash flows would decrease by $28,243.
If interest rates decreased one percent, the Trust's net income and cash
flows would increase by $28,243. The Trust believes that the change in the
fair value of its financial instruments resulting from a foreseeable
fluctuation in interest rates would be immaterial to its assets and
liabilities.
IMPACT OF INFLATION
The Trust's operations have not been materially affected by inflation.
While the rate of inflation has been relatively low since the Trust commenced
operations in October, 1987, even if the rate of inflation were to rise, the
Trust anticipates that it would be able to offset most of the impact of higher
operating expenses through rent escalation clauses and lease clauses that pass
on most of the operating expenses to tenants.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report .............................. 11
Balance Sheets
As of December 31, 2001 and 2000 ........................ 12
Statements of Income
Years Ended December 31, 2001, 2000 and 1999 ............ 13
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999 ............ 14
Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999 ............ 15-16
Notes to Financial Statements ............................. 17-20
Schedule III
Real Estate and Accumulated Depreciation ................ 25-29
11
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
USA Real Estate Investment Trust
We have audited the accompanying balance sheets of USA Real Estate Investment
Trust as of December 31, 2001 and 2000 and the related statements of income,
changes in shareholders' equity, and cash flows for the years ended
December 31, 2001, 2000 and 1999. In connection with our audits of the
financial statements, we also have audited the financial statement schedule
listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with accounting principles generally
accepted in the United States of America. 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
evaluation of 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 USA Real Estate Investment
Trust as of December 31, 2001 and 2000 and the results of its operations and
its cash flows for the years ended December 31, 2001, 2000 and 1999 in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Burnett + Company LLP
Rancho Cordova, California
January 30, 2002
12
USA REAL ESTATE INVESTMENT TRUST
Balance Sheets
December 31, December 31,
2001 2000
----------- -----------
ASSETS
Rental properties, less accumulated
depreciation of $4,562,374 and
$4,109,853 in 2001 and 2000,
respectively $ 19,554,997 $ 23,774,370
Note receivable 150,000 225,000
---------- -----------
19,704,997 23,999,370
Cash and cash equivalents 737,709 90,600
Other assets 307,263 386,127
----------- -----------
Total assets $ 20,749,969 $ 24,476,097
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable $ 3,755,977 $ 6,354,029
Lines of credit 2,824,285 3,030,000
Lease deposits 53,301 58,502
Accounts payable 6,923 0
----------- -----------
Total liabilities 6,640,486 9,442,531
----------- -----------
Shareholders' Equity:
Shares of beneficial interest, par value
$1 a share; authorized 62,500 shares;
26,898 and 27,459 shares outstanding
in 2001 and 2000, respectively 26,898 27,459
Additional paid-in capital 30,834,227 31,110,030
Distributions in excess of net income (16,751,642) (16,103,923)
----------- -----------
Total shareholders' equity 14,109,483 15,033,566
----------- -----------
Total liabilities and shareholders' equity $ 20,749,969 $ 24,476,097
=========== ===========
See notes to financial statements.
13
USA REAL ESTATE INVESTMENT TRUST
Statements of Income
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Revenues:
Rent $ 3,169,227 3,255,352 $ 3,233,365
Interest 14,792 54,225 79,893
----------- ----------- -----------
3,184,019 3,309,577 3,313,258
----------- ----------- -----------
Expenses:
Operating expenses 337,583 322,366 297,473
Property taxes 208,107 222,686 216,062
Property management fees 52,800 52,800 52,800
Interest 713,811 753,752 578,171
Depreciation and amortization 813,180 718,879 651,058
General and administrative 213,957 223,083 258,412
----------- ----------- -----------
2,339,438 2,293,566 2,053,976
----------- ----------- -----------
Net income before gain (loss)
on sale of rental properties 844,581 1,016,011 1,259,282
Gain (loss) on sale of rental
properties 226,526 45,955 (83,652)
----------- ----------- -----------
Net income $ 1,071,107 1,061,966 $ 1,175,630
=========== =========== ===========
Net income per share of
beneficial interest $ 39.51 36.76 $ 37.80
=========== =========== ===========
Weighted average number of shares 27,108 28,890 31,100
=========== =========== ===========
See notes to financial statements.
14
USA REAL ESTATE INVESTMENT TRUST
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999
Distribu- Total
Shares of Additional tions in Share-
Beneficial Interest Paid-in Excess of holders'
Number Amount Capital Net Income Equity
--------- --------- ----------- ------------- -----------
December 31,
1998 128,056 $ 128,056 $33,363,866 $(14,630,764) $18,861,158
Repurchases
of shares (7,072) (7,072) (865,501) - (872,573)
Net income - - - 1,175,630 1,175,630
Distributions
($60.48 per
share) - - - (1,880,166) (1,880,166)
--------- --------- ---------- ----------- ----------
December 31,
1999 120,984 $ 120,984 $32,498,365 $(15,335,300) $17,284,049
--------- --------- ---------- ----------- ----------
Repurchases
of shares (11,340) (11,340) (1,470,520) - (1,481,860)
One-for four
reverse
share split (82,185) (82,185) 82,185 - -
Net income - - - 1,061,966 1,061,966
Distributions
($63.36 per
share) - - - (1,830,589) (1,830,589)
--------- --------- ---------- ----------- ----------
December 31,
2000 27,459 $ 27,459 $31,110,030 $(16,103,923) $15,033,566
--------- --------- ---------- ----------- ----------
Repurchases
of shares (561) (561) (275,803) - (276,364)
Net income 1,071,107 1,071,107
Distributions
($63.36 per
share) - - - (1,718,826) (1,718,826)
--------- --------- ---------- ----------- ----------
December 31,
2001 26,898 $ 26,898 $30,834,227 $ 16,751,642 $14,109,483
========= ========= ========== =========== ==========
See notes to financial statements.
15 USA REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
OPERATING ACTIVITIES: ---------- ---------- ----------
Net income $ 1,071,107 $ 1,061,966 $ 1,175,630
---------- ---------- ----------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation & amortization 740,259 712,906 647,124
Amortization of loan fees 72,921 5,973 3,934
(Gain)loss on sale of properties (226,526) (45,955) 83,652
Changes in other assets & liabilities:
Increase in other assets (49,469) (73,760) (92,476)
Increase(decrease)in accounts payable 6,923 0 (5,460)
Decrease in lease deposits (5,201) (3,781) 0
---------- ---------- ----------
Total adjustments to net income 538,907 595,383 636,774
---------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,610,014 1,657,349 1,812,404
---------- ---------- ----------
INVESTING ACTIVITIES:
Collections on notes receivable 75,000 851,000 0
Purchases and improvements to
properties (448,739) (181,425) (1,174,541)
Proceeds from sale of properties 4,209,791 495,955 2,686,576
Increase in other assets 0 0 (70,074)
---------- ---------- ----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 3,836,052 1,165,530 1,441,961
---------- ---------- ----------
FINANCING ACTIVITIES:
Borrowings (payments) on
lines of credit, net (205,715) 689,000 1,611,000
Redemption of shares (276,364) (1,481,860) (872,573)
Payments on long-term notes payable (2,598,052) (180,509) (2,065,044)
Distributions paid (1,718,826) (1,830,589) (1,880,166)
---------- ---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (4,798,957) (2,803,958) (3,206,783)
---------- ---------- ----------
NET INCREASE IN CASH 647,109 18,921 47,582
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 90,600 71,679 24,097
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 737,709 $ 90,600 $ 71,679
========== ========== ==========
INTEREST PAID $ 713,811 $ 753,752 $ 574,237
========== ========== ==========
(Continued on Page 16)
16
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1999 the Trust received a $350,000 promissory note as a portion of the
consideration received on the sale of 170-174 West Shaw Avenue in Clovis,
California, and purchased 845 Harbor Blvd. in West Sacramento, California,
utilizing debt of $2,600,000.
See notes to financial statements.
17
USA REAL ESTATE INVESTMENT TRUST
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: 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 offering amount of shares of beneficial interest.
Effective August 31, 1994, the Trust terminated its agreements with its former
advisor and its former property manager and became a self-administered real
estate investment trust. At the Trust's 1994 Annual Meeting of Shareholders
held on December 29, 1994, the Trust's shareholders approved an amendment to
the Trust's Declaration of Trust which changed the name of the Trust from
Commonwealth Equity Trust USA to its current name.
CASH EQUIVALENTS: For purposes of the statement of cash flows, all
certificates of deposit with original maturities of ninety days or less are
considered cash equivalents.
RENTAL PROPERTIES: The Trust carries its rental properties at
depreciated cost unless the asset is determined to be impaired. In
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, which was adopted by the Trust on January 1, 1997, the Trust
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the expected
undiscounted cash flows estimated to be generated by those assets are less
than the related carrying amounts. If a rental property is determined to be
impaired, the impairment would be measured based upon the excess of the
asset's carrying value over the fair value.
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over five to forty years.
LEASING COSTS AND LOAN COSTS: Costs incurred in obtaining leases are
amortized on the straight-line method over the terms of the related leases.
Costs incurred in obtaining loans are amortized on the straight-line method
over the terms of the related debt.
DISTRIBUTIONS IN EXCESS OF NET INCOME: The Trust has a general policy of
distributing cash to its shareholders in an amount that approximates taxable
income plus noncash charges such as depreciation and amortization. As a
result, distributions to shareholders exceed cumulative net income.
REVENUE RECOGNITION: All the Trust's leases are classified as operating
leases. Minimum rents are recognized on a straight-line basis over the terms
of the related leases. Percentage rents, which represent additional rents
based on gross tenant sales, are recognized at the end of the lease year or
other period in which tenant sales' volumes have been reached and the
percentage rents are due. Property taxes, common area maintenance, and
insurance reimbursements are recognized on the accrual basis over the
periods in which the expenses occurred.
18
REVERSE SHARE SPLIT: The Trust executed a one-for-thirty reverse share
split in 1998 and a one-for-four reverse share split in 2000. All references
to the number of shares and per share amounts have been restated to reflect
the impact of said reverse share splits.
INCOME TAXES: The Trust has elected to be taxed as a real estate
investment trust. Accordingly, the Trust does not pay income tax on income
because income distributed to shareholders is at least equal to 90 percent of
its taxable income.
NET INCOME PER SHARE: The net income per share is computed based on the
weighted-average number of shares of 27,108, 28,890 and 31,100 during 2001,
2000 and 1999, respectively.
CONCENTRATION OF CREDIT RISK: The Trust operates in one industry
segment. The Trust's properties and the collateral for its note receivable
are all located in California.
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.
RECLASSIFICATION: Certain amounts in prior years' financial statements
have been reclassified to conform with the current year presentation.
2. NOTE RECEIVABLE
The note receivable as of December 31, 2001 and 2000 is collateralized
by a property in Rocklin, California. As of December 31, 2001 the note bears
interest at 10 percent per annum. The January 2001 scheduled principal
payment of $75,000 was made, but other scheduled 2001 principal payments
have not been made. The interest is current.
The fair market value of the note approximates its carrying value at
December 31, 2001 and 2000.
3. LONG-TERM NOTES PAYABLE
Long-term notes payable are collateralized by two properties in
California. As of December 31, 2001, the long-term note payable bears
interest at 8.6 percent per annum and matures in 2017. As of December
31, 2000, the long-term notes payable bear interest at rates ranging from
7.0 percent to 8.6 percent and mature in 2014 and 2017. Principal payments
during each of the next five years are as follows: $122,311, $133,254,
$145,176, $157,040 and $171,091, respectively, and in aggregate $3,027,105,
thereafter. The aggregate fair value of the notes approximate their carrying
value as of December 31, 2001 and 2000. Rates currently available to the
Trust for debt with similar terms and maturity were used to estimate the fair
value of the notes.
19
4. LINES OF CREDIT
At December 31, 2001 the Trust had available two lines of credit with
different financial institutions, one with interest at prime per annum, and
the other at prime plus 0.25 percent, payable monthly. Available credit
lines are $2,000,000 and $1,516,400, and expire on June 2003 and March 2004,
respectively. Both lines are secured by real property.
At December 31, 2000 the Trust had available two lines of credit with
different financial institutions, one with interest at prime plus 0.75
percent per annum, and the other at prime, payable monthly. The credit
lines were for $2,000,000 each and one expired on March 31, 2001 and the
other expires on June 30, 2003. Both lines were secured by real property.
At December 31, 2001 and December 31, 2000 there were aggregate
outstanding balances of $2,824,285 and $3,030,000, respectively, on the
lines of credit. The weighted-average interest rates for the lines of
credit were 7.37 percent and 9.87 percent for 2001 and 2000, respectively.
5. DISTRIBUTIONS
Cash distributions per share of beneficial interest for federal income
tax purposes for the past three years were: 57 percent of the distributions
paid in 2001 were ordinary income, 36 percent were nontaxable and 7 percent
were capital gains; 63 percent of the distributions paid in 2000 were
ordinary income, 34 percent were nontaxable and 3 percent were capital
gains; 36 percent of the distributions paid in 1999 were ordinary
income and 64 percent were nontaxable.
6. RENT UNDER OPERATING LEASES
The Trust is the lessor of real properties under operating leases
expiring in various years through 2017. Noncancelable operating leases
provide for minimum rent during each of the next five years of $2,282,566,
$1,394,322, $1,035,498, $797,840 and $778,340, respectively, and in
aggregate $7,583,334 thereafter. The above assumes that all leases which
expire are not renewed, therefore neither renewal rent nor rent from
replacement tenants is included.
7. CREDIT RISK
1590 Sycamore Drive in Hercules, California which represents more than
20 percent of the Trust's total assets, is occupied solely by Albertson's,
Inc. The following is condensed financial information in millions of
Albertson's, Inc. a publicly held company.
Current assets and total assets at February 1, 2001 and February 3,
2000 were $4,300 and $16,078 and $4,591 and $15,719, respectively. Current
liabilities and total liabilities at February 1, 2001 and February 3, 2000
were $3,395 and $10,384 and $4,069 and $10,017, respectively. Shareholders'
equity at February 1, 2001 and February 3, 2000 was $5,694 and $5,702,
respectively.
20
Sales and gross profit for the years ended February 1, 2001,
February 3, 2000 and January 28, 1999 were $36,762 and $10,426; $37,478 and
$10,314; and $35,872 and $9,716, respectively. Net income for the years
ended February 1, 2001, February 3, 2000 and January 28, 1999 was $765,
$404 and $801, respectively.
8. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment of Long-Lived Assets (SFAS No. 144).
SFAS No. 144 established accounting and reporting standards for the
impairment on disposal of long-lived assets and this statement supercedes
FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Management does not expect the
adoption of SFAS No. 144, which is effective for the Trust on January 1,
2002 will have a material impact on its results of operations or
financial position.
9. QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results of operations for 2001
and 2000:
Quarters Ended
March 31 June 30 Sept 30 Dec 31 Total
-------- -------- -------- -------- ----------
2001:
Revenues $808,844 $790,836 $780,105 $804,234 $3,184,019
Operating income 235,425 250,926 257,073 101,157 844,581
Net income:
Income 235,425 250,926 376,304 208,452 1,071,107
Income per share $ 8.67 $ 9.25 $ 13.91 $ 7.68 $ 39.51
2000:
Revenues $848,007 $838,595 $811,055 $811,920 $3,309,577
Operating income 287,143 277,174 275,555 176,139 1,016,011
Net income:
Income 287,143 277,174 321,510 176,139 1,061,966
Income per share $ 9.94 $ 9.59 $ 11.13 $ 6.10 $ 36.76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The Trust has no employees. It is administered by its Trustees
and by its Chairman, and by independent contractors who work under the
supervision thereof.
THE TRUSTEES
The trustees of the Trust are as follows:
Trustee
Name Age Since Office
---- --- ------- ------
Gregory E. Crissman 50 1986 Trustee and Chairman and
Chief Financial Officer
Benjamin A. Diaz 68 1988 Trustee and Secretary
Joyce A. Marks 65 1986 Trustee
The following is a brief description of the background and business
experience of each Trustee.
GREGORY E. CRISSMAN. Mr. Crissman is the Chairman and Chief Financial
Officer of the Trust. He has over 20 years of experience in real estate,
accounting, auditing, and taxation. He also served as Chairman of the Board
of California Real Estate Investment Trust, a New York Stock Exchange listed
real estate investment trust, and was its Chief Financial Officer from 1989
until 1993. Mr. Crissman was an Executive Vice President of B&B Property
Investment, Development and Management Company, Inc. ("B&B"), from 1983 until
1990 and from 1992 until 1993. In addition, Mr. Crissman was a director of
B&B and was President of B&B from 1990 until 1992. From 1976 to 1979 Mr.
Crissman worked at Bowman & Company, an accounting firm in Stockton,
California. In 1976 Mr. Crissman received his BS degree with honors from the
California State University at Sacramento and is a Certified Public
Accountant. Mr. Crissman is also a member of the American Institute of
Certified Public Accountants.
BENJAMIN A. DIAZ. The Honorable Benjamin A. Diaz is a retired judge of
the Superior Court of California. He served as a judge of the Sacramento
County Superior Court from April, 1976, to May, 1986. He has been engaged in
private practice in Sacramento, California, as a partner in the law firm of
Grossfield and Diaz from June, 1986, to September, 1987, and in the law firm
of Diaz & Gebers, specializing in real estate transactions, general practice,
litigation, business law, and personal injury matters from October, 1987 to
December, 1991. From January, 1992, to the present, Judge Diaz has been
engaged in pro tem judging, arbitration, mediation and consulting services.
Mr. Diaz received his Juris Doctor degree from the University of Pacific,
McGeorge School of Law, Sacramento, California, in 1966. Prior to serving on
the bench, Mr. Diaz had extensive tax and auditing experience with the State
22
of California Franchise Tax Board, dealing with large corporate unitary tax
audits, and with the California State Board of Equalization.
JOYCE A. MARKS. Ms. Marks has been employed by the Bank of America for
more than forty years. During her career with Bank of America, Ms. Marks had
extensive experience with land development and subdivision financing,
including construction and take-out financing for commercial properties. Ms.
Marks was for many years active in the Building Industry Association of
Sacramento and from 1976 to 1983 served as a board member of, and in 1983 as
President of, its Associate Counsel. Ms. Marks received Bank of America's
Award for Excellence in 1985. Her most recent positions include Senior Sales
Training Specialist, Marketing Officer, Branch Manager and Credit
Administrator at one of Bank of America's Regional Headquarters.
Trustees of the Trust are elected annually by the Trust's shareholders
and hold office until their successors are duly elected and qualified. No
family relationship exists between any Trustee and any other Trustee. No
arrangement exists or existed between any Trustee and any other person or
entity pursuant to which the Trustee was selected as a Trustee or nominee.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
During 2001, the Trust was managed by its Trustees as a self-
administered, self-managed real estate investment trust. The Trust has the
following officers: Chairman, Chief Financial Officer, and Secretary. No
officer except Gregory E. Crissman is compensated by the Trust in his
capacity as an officer. During 2001, none of the Trust's officers received
compensation in excess of $69,300.
Summary Compensation Table
Total Long-Term
Name and Officer Annual and other
Principal Position Year Compensation Compensation Compensation
- ----------------------------- ---- ------------ ------------ ------------
Gregory E. Crissman, Chairman 2001 $52,800 $69,300 (1) None
(1) Includes fees for each meeting of the Trustees attended for a
total of $16,500.
23
COMPENSATON OF TRUSTEES
Each Trustee receives $1,375 or $345 for each Trustees' meeting attended
plus direct expenses incurred in connection with such attendance. There are
currently no plans to alter this compensation schedule. No Trustee received
compensation under any other arrangement during 2001. The Trust does not
maintain a nominating or compensation committee or any other standing
committee. However, the Trustees have authority to establish such committees
and to compensate committee members as appropriate for their service. During
2001, the Trust had twelve regular meetings and one special meeting of its
Trustees. All Trustees attended all of the meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2001, the number of
shares owned by each person who is known by the Trust to own beneficially more
than 5 percent of its outstanding shares and the Trustees and officers of the
Trust as a group. No Trustee beneficially owns any shares of the Trust except
as set forth below. The Trust has been advised that all of such shares are
beneficially owned and the sole investment and voting power is held by the
persons named:
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership of Class
------------------------------------ -------------------- --------
Mitchell Partners, L.P. and James E. Mitchell 1,531.000 5.6886
3187-D Airway Avenue
Costa Mesa, California 92626
Gregory E. Crissman, Chairman and Trustee 46.000 .1710
2561 Fulton Square Lane, #55
Sacramento, CA 95821
All Trustees and officers as a group 46.000 .1710
During 2001, based upon a review of the Forms 3, 4 and 5 on file with the
Trust, it does not appear that any officer or trustee failed to file such a
required report on a timely basis.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
24 PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS Page
----
Independent Auditors' Report ...................... 11
Balance Sheets as of December 31, 2001 and 2000 ... 12
Statements of Income for Years Ended
December 31, 2001, 2000 and 1999 ................ 13
Statements of Changes in Shareholders' Equity for
Years Ended December 31, 2001, 2000 and 1999 .... 14
Statements of Cash Flows for Years Ended
December 31, 2001, 2000 and 1999 ................ 15-16
Notes to Financial Statements ..................... 17-20
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule III - Real Estate and Accumulated
Depreciation .................................... 25-29
The statements and schedules referred to above should be read in
conjunction with the financial statements and notes thereto included in Part
II of this Form 10-K. Schedules not included in this item have been omitted
because they are not applicable or because the required information is
presented in the financial statements or notes thereto.
(a)(3) LIST OF EXHIBITS
3.1(1) Form of Amended and Restated Declaration of Trust of
Commonwealth Equity Trust USA
3.2(1) Form of Bylaws of the Board of Trustees
3.4(2) Amendments to Sections 2.3.1, 2.3.7, 2.3.8, 2.4.2 and
2.4.3 of the Amended and Restated Declaration of Trust
of Commonwealth Equity Trust USA (adopted on August 29,
1988 at the 1988 Annual Meeting)
4.1(1) Article VIII of Exhibit 3.1
4.2(1) Form of Share Certificate
(b) REPORTS ON FORM 8-K
None.
25
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Page 1, Part A
------------------ ------------ ---------------------------
Column A Column B Column C
------------------ ------------ ---------------------------
---Initial Cost to Trust--
Buildings
Improvements,
& Personal
Description Encumbrances Land Property
------------------ ------------ ------------ ------------
19401 Parthenia
Street, Northridge,
California - 5,770,000 3,100,000
1590 Sycamore,
Hercules,
California 3,755,977 1,310,000 5,912,015
4350 Pell Drive,
Sacramento,
California - 1,500,000 2,213,325
One Scripps Drive,
Sacramento,
California - 650,000 2,274,888
------------ ------------ ------------
$ 3,755,977 $ 9,230,000 $ 13,500,228
============ ============ ============
26
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Page 1, Part B
- ------------------ -----------------------------
Column A Column D
- ------------------ -----------------------------
Cost Capitalization
Subsequent to
---------Acquisition---------
Description Improvements Carrying Cost
- ------------------ ------------ -------------
19401 Parthenia
Street, Northridge,
California 2,526,595 -
1590 Sycamore,
Hercules,
California 28,761 -
4350 Pell Drive,
Sacramento,
California 1,264,092 -
One Scripps Drive,
Sacramento,
California 1,820,695 -
------------- -------------
$ 5,640,143 $ -
============= =============
27
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Page 1, Part C
- ------------------ ---------------------------------------------------------
Column A Column E
- ------------------ ---------------------------------------------------------
Gross Amount at Which
----------------Carried at Close of Period---------------
Valuation
Buildings & Write
Description Land Improvements Down Total
- ------------------ ------------ ------------ ----------- ------------
19401 Parthenia
Street, Northridge,
California 5,770,000 5,626,595 3,483,000 7,913,595
1590 Sycamore,
Hercules,
California 1,310,000 5,940,776 - 7,250,776
4350 Pell Drive,
Sacramento,
California 1,500,000 3,477,417 - 4,977,417
One Scripps Drive,
Sacramento,
California 650,000 4,095,583 770,000 3,975,583
------------ ------------ ------------ ------------
$ 9,230,000 $ 19,140,371 $ 4,253,000 $ 24,117,371
============ ============ ============ ============
28
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Page 1, Part D
- ------------------ ------------ ------------ ------------ ------------
Column A Column F Column G Column H Column I
- ------------------ ------------ ------------ ------------ ------------
Life
on Which
Depreciation
in Latest
Accumulated Date of Date Statement is
Description Depreciation Construction Acquired Computed
- ------------------ ------------ ------------ ----------- ------------
19401 Parthenia
Street, Northridge,
California 1,898,834 1973 11/90 40 years
1590 Sycamore,
Hercules,
California 716,581 1989 05/97 40 years
4350 Pell Drive,
Sacramento,
California 919,634 1975 09/92 40 years
One Scripps Drive,
Sacramento,
California 1,027,325 1972 09/92 40 years
------------
$ 4,562,374
============
29
Footnote to Schedule III
Balance at beginning of period $ 27,884,223
Additions during period:
Acquisitions through foreclosure $ 0
Other acquisitions 0
Improvements 448,739
Other 0
-----------
Deductions during period:
Cost of real estate sold 4,215,591
Other 0
-----------
4,215,591
-----------
Balance at end of period: $ 24,117,371
===========
30
USA REAL ESTATE INVESTMENT TRUST
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2002 USA Real Estate Investment Trust
--------------------
Gregory E. Crissman
By: -------------------------------
Gregory E. Crissman as
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Dated: March 29, 2002 Gregory E. Crissman
------------------- By: -------------------------------
Gregory E. Crissman
Chairman
Dated: March 29, 2002 Benjamin A. Diaz
------------------- By: -------------------------------
Benjamin A. Diaz
Trustee
Dated: March 29, 2002 Joyce A. Marks
------------------- By: -------------------------------
Joyce A. Marks
Trustee