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, 2002
/ / 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)
2443 Fair Oaks Boulevard., #314, Sacramento, California 95825-7684
(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, 2002, was $13,473,773. 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 ..................... 19
PART III.
ITEM 10. Directors and Executive Officers
of the Registrant ........................ 20
ITEM 11. Executive Compensation ..................... 21
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management ......... 22
ITEM 13. Certain Relationships and
Related Transactions ..................... 22
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K .................. 23
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, Suite 201, in
Sacramento, California.
INVESTMENT OBJECTIVES
The Trust owns and manages three real properties and one promissory
note collateralized by real property in order to produce income. 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 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, holding for investment and disposing of 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 three real properties and one promissory note
collateralized by real property all of which are located in California.
The Trustees believe that the properties are income producing properties
that are well suited for their current uses. The properties are leased
at competitive rates for the areas in which they are located. One
property is undergoing substantial renovations.
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 Note
1 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 2002.
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 8,529 shares from 9,262
shareholders at a cost of $4,140,758. 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-
for-four reverse 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, 2002, the Trust had 26,285 shares outstanding to
3,506 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, 2002. 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)
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Operating Results:
Revenues $ 2,325 $ 3,184 $ 3,310 $ 3,313 $ 3,290
Net income 1,334 1,071 1,062 1,176 1,314
Net cash provided by
operating activities 1,203 1,610 1,657 1,812 1,899
Total Assets 13,512 20,750 24,476 26,222 25,658
Long-term obligations 0 3,756 6,354 6,535 6,000
Net income
per share $ 50.25 $ 39.51 $ 36.76 $ 37.80 $ 40.29
Cash distributions
per share $ 63.36 $ 63.36 $ 63.36 $ 60.48 $ 56.40
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 $857,591 or 27 percent in 2002 compared to
2001 primarily due to the sale of 1590 Sycamore Drive in Hercules,
California and 845 Harbor Boulevard in West Sacramento, California in July
2002 and December 2001, respectively and reduced occupancy at 19401
Parthenia in Northridge, California.
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 expense decreased $460,039 or 64 percent in 2002 compared to
2001 due to lower average levels of outstanding debt and lower interest
rates.
Interest expense decreased $39,941 or 5 percent in 2001 compared to
2000 primarily due to lower interest rates.
Depreciation and amortization expense decreased $196,368 or 24 percent
in 2002 compared to 2001 due to the sale of 1590 Sycamore Drive in Hercules,
California and 845 Harbor Boulevard in West Sacramento, California, in
July 2002 and December 2001, respectively.
Depreciation and amortization expense increased $94,301 or 13 percent
in 2001 compared to 2000 primarily due to the write off of unamortized loan
fees in connection with the sale of 845 Harbor Boulevard in West Sacramento,
California.
The 2002 gain on sale of properties was attributed to the sale of
1590 Sycamore Drive in Hercules, California in July 2002.
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 in July 2000.
Net income was $1,333,621 or $50.25 per share in 2002, $1,071,107 or
$39.51 per share in 2001 and $1,061,966 or $36.76 per share in 2000.
The Trust paid distributions per share of $63.36, $63.36 and $63.36 in
2002, 2001 and 2000, 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 2002 the Trust received $7,128,742 from the sale of 1590 Sycamore
Drive in Hercules, California and collected $40,000 on an outstanding note
receivable. The Trust used this capital to payoff its long-term note
payable and its lines of credit and to fund renovations and share
repurchases.
The Trust's capital requirements in 2003 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust's primary financial market risk is the fluctuation in interest
rates. At December 31, 2002, the Trust had no variable rate debt. However,
if the Trust had $1,000,000 of variable rate debt and interest rates
increased one percent, the Trust's net income and cash flows would decrease
by $10,000. Conversely, if the Trust had $1,000,000 of variable rate debt
and interest rates decreased one percent, the Trust's net income and cash
flows would increase by $10,000. 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, 2002 and 2001 ........................ 12
Statements of Income
Years Ended December 31, 2002, 2001 and 2000 ............ 13
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2002, 2001 and 2000 ............ 14
Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000 ............ 15
Notes to Financial Statements ............................. 16-19
Schedule III
Real Estate and Accumulated Depreciation ................ 24-27
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, 2002 and 2001 and the related statements of income,
changes in shareholders' equity, and cash flows for the years ended
December 31, 2002, 2001 and 2000. 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 auditing standards 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, 2002 and 2001 and the results of its operations and
its cash flows for the years ended December 31, 2002, 2001 and 2000 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, 2003
12
USA REAL ESTATE INVESTMENT TRUST
Balance Sheets
December 31, December 31,
2002 2001
----------- -----------
ASSETS
Rental properties, less accumulated
depreciation of $4,285,259 and
$4,562,374 in 2002 and 2001,
respectively $ 12,926,048 $ 19,554,997
Note receivable 110,000 150,000
---------- -----------
13,036,048 19,704,997
Cash and cash equivalents 214,999 737,709
Other assets 261,370 307,263
----------- -----------
Total assets $ 13,512,417 $ 20,749,969
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term note payable $ 0 $ 3,755,977
Lines of credit 0 2,824,285
Lease deposits 30,263 53,301
Accounts payable 8,381 6,923
----------- -----------
Total liabilities 38,644 6,640,486
----------- -----------
Shareholders' Equity:
Shares of beneficial interest, par value
$1 a share; authorized 62,500 shares;
26,285 and 26,898 shares outstanding
in 2002 and 2001, respectively 26,285 26,898
Additional paid-in capital 30,546,358 30,834,227
Distributions in excess of net income (17,098,870) (16,751,642)
----------- -----------
Total shareholders' equity 13,473,773 14,109,483
----------- -----------
Total liabilities and shareholders' equity $ 13,512,417 $ 20,749,969
=========== ===========
See notes to financial statements.
13
USA REAL ESTATE INVESTMENT TRUST
Statements of Income
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Revenues:
Rent $ 2,311,636 $ 3,169,227 $ 3,255,352
Interest 12,923 14,792 54,225
----------- ----------- -----------
2,324,559 3,184,019 3,309,577
----------- ----------- -----------
Expenses:
Operating expenses 347,559 337,583 322,366
Property taxes 225,269 208,107 222,686
Property management fees 52,800 52,800 52,800
Interest 253,772 713,811 753,752
Depreciation and amortization 616,812 813,180 718,879
General and administrative 165,088 213,957 223,083
----------- ----------- -----------
1,661,300 2,339,438 2,293,566
----------- ----------- -----------
Net income before gain on
sale of rental properties 663,259 844,581 1,016,011
Gain on sale of rental properties 670,362 226,526 45,955
----------- ----------- -----------
Net income $ 1,333,621 $ 1,071,107 $ 1,061,966
=========== =========== ===========
Net income per share of
beneficial interest $ 50.25 $ 39.51 $ 36.76
=========== =========== ===========
Weighted average number of shares 26,541 27,108 28,890
=========== =========== ===========
See notes to financial statements.
14
USA REAL ESTATE INVESTMENT TRUST
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2002, 2001 and 2000
Distribu- Total
Shares of Additional tions in Share-
Beneficial Interest Paid-in Excess of holders'
Number Amount Capital Net Income Equity
--------- --------- ----------- ------------- -----------
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
Repurchases
of shares (613) (613) (287,869) - (288,482)
Net income 1,333,621 1,333,621
Distributions
($63.36 per
share) - - - (1,680,849) (1,680,849)
--------- --------- ---------- ----------- ----------
December 31,
2002 26,285 $ 26,285 $30,546,358 $(17,098,870) $13,473,773
========= ========= ========== =========== ==========
See notes to financial statements.
15 USA REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
OPERATING ACTIVITIES: ---------- ---------- ----------
Net income $ 1,333,621 $ 1,071,107 $ 1,061,966
---------- ---------- ----------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation & amortization 575,685 740,259 712,906
Amortization of loan fees 41,127 72,921 5,973
Gain on sale of properties (670,362) (226,526) (45,955)
Changes in other assets & liabilities:
Increase in other assets (55,640) (49,469) (73,760)
Increase in accounts payable 1,459 6,923 0
Decrease in lease deposits (23,038) (5,201) (3,781)
---------- ---------- ----------
Total adjustments to net income (130,769) 538,907 595,383
---------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,202,852 1,610,014 1,657,349
---------- ---------- ----------
INVESTING ACTIVITIES:
Collections on notes receivable 40,000 75,000 851,000
Improvements to properties (344,711) (448,739) (181,425)
Proceeds from sale of properties 7,128,742 4,209,791 495,955
---------- ---------- ----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 6,824,031 3,836,052 1,165,530
---------- ---------- ----------
FINANCING ACTIVITIES:
Borrowings (payments) on
lines of credit, net (2,824,285) (205,715) 689,000
Redemption of shares (288,482) (276,364) (1,481,860)
Payments on long-term notes payable (3,755,977) (2,598,052) (180,509)
Distributions paid (1,680,849) (1,718,826) (1,830,589)
---------- ---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (8,549,593) (4,798,957) (2,803,958)
---------- ---------- ----------
NET(DECREASE)INCREASE IN CASH (522,710) 647,109 18,921
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 737,709 90,600 71,679
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 214,999 $ 737,709 $ 90,600
========== ========== ==========
INTEREST PAID $ 253,772 $ 713,811 $ 753,752
========== ========== ==========
See notes to financial statements.
16 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. 144,
Accounting for the Impairment of Long-Lived Assets, which was adopted by the
Trust on January 1, 2002, 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.
REVERSE SHARE SPLIT: The Trust executed a one-for-thirty reverse share
17
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 26,541, 27,108 and 28,890 during 2002,
2001 and 2000, 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. The Trust maintains cash balances in excess
of Federal Deposit Insurance Corporation insurable limits.
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.
2. NOTE RECEIVABLE
The note receivable as of December 31, 2002 and 2001 is collateralized
by a property in Rocklin, California. As of December 31, 2002 the note bears
interest at 10 percent per annum. The interest is current. The fair market
value of the note approximates its carrying value at December 31, 2002 and
2001.
3. LONG-TERM NOTE PAYABLE
The long-term note payable was collateralized by one property in
California. As of December 31, 2001, the long-term note payable bears
interest at 8.6 percent per annum and matures in 2017. The aggregate fair
value of the note approximates its carrying value as of December 31, 2001.
Rates currently available to the Trust for debt with similar terms and
maturity were used to estimate the fair value of the note. Said note was
paid off in July 2002.
4. LINES OF CREDIT
At December 31, 2002 and 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 per annum, 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.
18
At December 31, 2002 and 2001 there were aggregate outstanding
balances of $0 and $2,824,285, respectively on the lines of credit. The
weighted-average interest rates for the lines of credit were 5.81 percent
and 7.37 percent for 2002 and 2001, respectively.
5. DISTRIBUTIONS
Cash distributions per share of beneficial interest for federal income
tax purposes for the past three years were: 47 percent of the distributions
paid in 2002 were ordinary income, 15 percent were nontaxable and 38 percent
were capital gains; 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.
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 $853,252,
$519,639, $291,560, $214,623 and $83,097, respectively, and in the
aggregate $194,457 thereafter. The above assumes that all leases which
expire are not renewed, therefore neither renewal rent nor rent from
replacement tenants is included.
19
7. QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results of operations for 2002
and 2001:
Quarters Ended
March 31 June 30 Sept 30 Dec 31 Total
-------- -------- -------- -------- ----------
2002:
Revenues $689,307 $677,358 $533,573 $424,321 $2,324,559
Operating income 200,989 255,045 126,774 80,451 663,259
Net income:
Income 200,989 255,045 797,136 80,451 1,333,621
Income per share $ 7.53 $ 9.58 $ 30.07 $ 3.07 $ 50.25
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
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 51 1986 Trustee and Chairman and
Chief Financial Officer
Benjamin A. Diaz 69 1988 Trustee and Secretary
Joyce A. Marks 66 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
21
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 2002, 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 2002, none of the Trust's officers received
compensation in excess of $66,550.
Summary Compensation Table
Total Long-Term
Name and Officer Annual and other
Principal Position Year Compensation Compensation Compensation
- ----------------------------- ---- ------------ ------------ ------------
Gregory E. Crissman, Chairman 2002 $52,800 $66,550 (1) None
(1) Includes fees for each meeting of the Trustees attended for a
total of $13,750.
22
COMPENSATON OF TRUSTEES
Each Trustee receives $1,375 or $345 for each Trustees' meeting attended
plus reimbursement of 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 2002 except
Gregory E. Crissman who received compensation as an officer for work performed.
The Board of Trustees does not maintain a nominating or compensation committee
or any other standing committee except for an audit committee. The audit
committee consists of Benjamin A. Diaz who serves without additional
compensation. The Board of Trustees has authority to establish other
committees and to compensate members as appropriate for their service. During
2002, the Board of Trustees had ten regular meetings. All Trustees attended all
meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2002, 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 1,843.000 7.0116
3187-D Airway Avenue
Costa Mesa, California 92626
Gregory E. Crissman, Chairman and Trustee 46.000 .1750
2561 Fulton Square Lane, #55
Sacramento, CA 95821
All Trustees and officers as a group 46.000 .1750
During 2002, 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.
PAGE> 23 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, 2002 and 2001 ... 12
Statements of Income for Years Ended
December 31, 2002, 2001 and 2000 ................ 13
Statements of Changes in Shareholders' Equity for
Years Ended December 31, 2002, 2001 and 2000 .... 14
Statements of Cash Flows for Years Ended
December 31, 2002, 2001 and 2000 ................ 15
Notes to Financial Statements ..................... 16-19
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule III - Real Estate and Accumulated
Depreciation .................................... 24-27
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.
24
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
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
4350 Pell Drive,
Sacramento,
California - 1,500,000 2,213,325
One Scripps Drive,
Sacramento,
California - 650,000 2,274,888
------------ ------------ ------------
$ - $ 7,920,000 $ 7,588,213
============ ============ ============
25
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
Page 1, Part B
- ------------------ -----------------------------
Column A Column D
- ------------------ -----------------------------
Cost Capitalization
Subsequent to
---------Acquisition---------
Description Improvements Carrying Cost
- ------------------ ------------ -------------
19401 Parthenia
Street, Northridge,
California 2,627,100 -
4350 Pell Drive,
Sacramento,
California 1,403,310 -
One Scripps Drive,
Sacramento,
California 1,925,684 -
------------- -------------
$ 5,956,094 $ -
============= =============
26
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
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 5,727,100 3,483,000 8,014,100
4350 Pell Drive,
Sacramento,
California 1,500,000 3,616,635 - 5,116,635
One Scripps Drive,
Sacramento,
California 650,000 4,200,572 770,000 4,080,572
------------ ------------ ------------ ------------
$ 7,920,000 $ 13,544,307 $ 4,253,000 $ 17,211,307
============ ============ ============ ============
27
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
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 1,985,521 1973 11/90 40 years
4350 Pell Drive,
Sacramento,
California 1,083,290 1975 09/92 40 years
One Scripps Drive,
Sacramento,
California 1,216,448 1972 09/92 40 years
------------
$ 4,285,259
============
Footnote to Schedule III:
Balance at beginning of period $ 24,117,371
Additions during period:
Acquisitions through foreclosure $ 0
Other acquisitions 0
Improvements 344,711
Other 0
-----------
Deductions during period:
Cost of real estate sold 7,250,775
Other 0
-----------
(6,906,064)
-----------
Balance at end of period: $ 17,211,307
===========
28
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 14, 2003 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 14, 2003 Gregory E. Crissman
------------------- By: -------------------------------
Gregory E. Crissman
Chairman
Dated: March 14, 2003 Benjamin A. Diaz
------------------- By: -------------------------------
Benjamin A. Diaz
Trustee
Dated: March 14, 2003 Joyce A. Marks
------------------- By: -------------------------------
Joyce A. Marks
Trustee