<PAGE> 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 (Fee Required)
For the fiscal year ended: December 31, 1997
/ / 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)
One Scripps Drive, Suite 303, Sacramento, California 95825
(Address of registrant's principal executive offices) (Zip Code)
(916) 564-4532
(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 Benefieical 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 February
28, 1998, was $19,854,537 (based solely on the book value as there is no
trading market in the shares).
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 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 ...... 7
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 ..................................... 9
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ..................... 18
PART III.
ITEM 10. Directors and Executive Officers
of the Registrant ........................ 18
ITEM 11. Executive Compensation ..................... 19
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management ......... 20
ITEM 13. Certain Relationships and
Related Transactions ..................... 20
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K .................. 21
<PAGE> 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 95 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 principal offices of the Trust are located at One Scripps Drive,
Suite 303, Sacramento, California 95825.
CURRENT DEVELOPMENTS
On August 31, 1994 the Trust became self-administered and 1997 is its
third year of operation as a self-administered real estate investment trust.
In August, 1997 the Trust sold its property located at 1056 Harbor Blvd.
in West Sacramento, California.
<PAGE> 4
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.
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.
<PAGE> 5
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.
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 legislaton may have on entities such as a
real estate investment trust.
<PAGE> 6
ITEM 2. PROPERTIES
The Trust owns seven 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.
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 1997.
<PAGE> 7
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. As of December 31, 1997, the Trust had 3,960,855 shares
outstanding to about 10,242 shareholders of record. There is no trading
market for the shares of the Trust.
Pursuant to the Trust's offers in 1995 and 1996 to repurchase its shares
from shareholders who owned fewer than 100 shares, the Trust repurchased
92,419 shares from 2,918 shareholders at a cost of $332,507.
In 1996 and 1997, the Trust received unsolicited offers from other share-
holders to sell their shares to the Trust, and accepted offers at or below
$3.50 per share. In said transactions, the Trust repurchased 119,065 shares
from 427 shareholders at a cost of $407,902.
Repurchased shares revert to authorized but unissued shares and result in
closing shareholder accounts. Closing these accounts reduces annual servicing
expenses and increases the book value of shares for the remaining shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The following represents selected financial data for the Trust for the
five years ended December 31, 1997. 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)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Operating Results:
Revenues $ 2,978 $ 2,677 $ 2,858 $ 2,978 $ 2,896
Net income (loss) 1,181 918 753 (1,443) (2,556)
Total Assets 26,097 22,843 23,802 25,924 29,333
Long-term obligations 6,145 2,047 2,099 3,345 3,268
Net income (loss)
per share $ 0.30 $ 0.23 $ 0.18 $ (0.35) $ (0.61)
Cash distributions
per share $ 0.42 $ 0.38 $ 0.32 $ 0.26 $ 0.12
<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of 1997 to 1996 and 1996 to 1995
Effective August 31, 1994, the Trust terminated its agreements with its
former advisor and property manager and became self-administered. 1997 was
the third full year the Trust was self-administered.
Rent revenues increased $347,610 or 14 percent in 1997 compared to 1996
primarily due to the purchase of 1590 Sycamore Drive in Hercules, California
in May, 1997.
Rent revenues decreased $214,497 or 8 percent in 1996 compared to 1995
due to the sale of 1450 Hatch Road in Ceres, California, in May, 1995, and
the sale of Keystone Square in Reno, Nevada, in August, 1996.
Interest revenues decreased $46,692 in 1997 compared to 1996 due to lower
average cash balances and conversely in 1996 interest revenues increased
$33,018 compared to 1995 due to higher average balances.
A decrease in operating expenses of $24,110 or 8 percent in 1996
compared to 1995 was offset by the purchase of earthquake insurance for
19401 Parthenia in Northridge, California in the amount of $24,602, so that
total operating expenses increased by only $492.
Property taxes decreased $26,263 or 12 percent in 1997 compared to 1996
primarily due to our successful appeals to certain property tax assessments.
Interest expense increased $218,153 or 130 percent in 1997 compared to
1996 due to a higher level of outstanding debt in 1997.
Interest expense decreased $102,292 or 38 percent in 1996 compared to
1995 and $331,570 or 55 percent in 1995 compared to 1994 because of lower
interest rates and lower outstanding indebtedness.
General and administrative expense decreased $59,874 or 16 percent in
1997 compared to 1996 and $260,057 or 41 percent in 1996 compared to 1995.
These decreases were primarily the result of fewer professional fees in 1997
and 1996.
The 1995 legal settlement was for the settlement of all litigation with
the former advisor of the Trust. The Trust is not now engaged in litigation
in any court with any party.
The Trust recognized no valuation losses in 1997 and 1996 compared to
$124,000 in 1995.
The 1997 gain on sale of properties was attributed to the sale of 1056
Harbor Boulevard in West Sacramento, California in August, 1997.
The 1995 gain on sale of properties was attributed to the sale of 1450
Hatch Road in Ceres, California in May, 1995.
Net income was $1,180,730 or 30 cents per share in 1997 and $918,269 or
23 cents per share in 1996 and $752,898 or 18 cents per share in 1995.
<PAGE> 9
The Trust paid distributions per share of 42 cents, 38 cents and 32 cents
in 1997, 1996 and 1995, respectively.
lIQUIDITY AND CAPITAL RESOURCES
The Trust expects that income, cash in the bank, proceeds from the sale
of properties, and borrowings collateralized by prooperties will adequately
meet its liquidity and capital resource requirements in the future.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report .............................. 10
Balance Sheets
As of December 31, 1997 and 1996 ........................ 11
Statements of Income
Years Ended December 31, 1997, 1996 and 1995 ............ 12
Statements of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995 ............ 13
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 ............ 14
Notes to Financial Statements ............................. 15
Schedule III
Real Estate and Accumulated Depreciation ................ 22-25
<PAGE> 10
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, 1997 and 1996 and the related statements of income,
changes in shareholders' equity, and cash flows for the years ended
December 31, 1997, 1996 and 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as 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, 1997 and 1996 and the results of its operations and
its cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles. 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, Umphress & Company, LLP
Rancho Cordova, California
January 22, 1998
<PAGE> 11
USA REAL ESTATE INVESTMENT TRUST
Balance Sheets
December 31, December 31,
1997 1996
----------- -----------
ASSETS
Rental properties, less accumulated
depreciation of $2,859,213 and
$2,271,650 in 1997 and 1996,
respectively and valuation allowances
of $4,945,000 and $5,060,000 in 1997
and 1996, respectively $ 24,939,462 $ 17,939,415
Notes receivable 726,000 726,000
---------- -----------
25,665,462 18,665,415
Cash and cash equivalents 168,236 3,909,665
Other assets 263,728 268,013
----------- -----------
Total assets $ 26,097,426 $ 22,843,093
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable $ 6,145,044 $ 2,047,333
Accounts payable 30,688 90,055
Lease deposits 67,157 59,845
----------- -----------
Total liabilities 6,242,889 2,197,233
----------- -----------
Shareholders' Equity:
Shares of beneficial interest, par value
$1 a share; authorized 7,500,000 shares;
3,960,855 and 4,042,904 shares outstanding
in 1997 and 1996, respectively $ 3,960,855 $ 4,042,904
Additional paid-in capital 29,998,871 30,202,139
Distributions in excess of net income (14,105,189) (13,599,183)
----------- -----------
Total shareholders' equity 19,854,537 20,645,860
----------- -----------
Total liabilities and shareholders' equity $ 26,097,426 $ 22,843,093
=========== ===========
See notes to financial statements.
<PAGE> 12
USA REAL ESTATE INVESTMENT TRUST
Statements of Income (Operations)
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Revenues:
Rent $ 2,839,596 $ 2,491,986 $ 2,706,483
Interest 138,177 184,869 151,851
----------- ----------- -----------
2,977,773 2,676,855 2,858,334
----------- ----------- -----------
Expenses:
Operating expenses 305,907 308,460 307,968
Property taxes 201,433 227,696 225,342
Property management fees 48,000 48,000 54,000
Interest 385,930 167,777 270,069
Depreciation and amortization 649,936 636,996 655,597
General and administative 309,783 369,657 629,714
Legal settlement 0 0 250,000
Valuation loss 0 0 124,000
----------- ----------- -----------
1,900,989 1,758,586 2,516,690
----------- ----------- -----------
Net income before gain on sale
of rental properties 1,076,784 918,269 341,644
Gain on sale of rental properties 103,946 0 411,254
----------- ----------- -----------
Net income $ 1,180,730 918,269 $752,898
=========== =========== ===========
Net income per share of
beneficial interest $ 0.30 $ 0.23 $ 0.18
=========== =========== ===========
Weighted average number of shares $ 3,997,650 $ 4,068,623 $ 4,153,717
=========== =========== ===========
See notes to financial statements.
<PAGE> 13
USA REAL ESTATE INVESTMENT TRUST
Statements of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
Distribu- Total
Shares of Additional tions in Share-
Beneficial Interest Paid-in Excess of holders'
Number Amount Capital Net Income Equity
--------- --------- ----------- ------------- -----------
December 31,
1994, as
originally
reported 4,177,723 4,177,723 30,535,678 (12,341,097) 22,372,304
Prior period
adjustment - - - (49,417) (49,417)
--------- --------- ---------- ----------- ----------
December 31,
1994, as
restated 4,177,723 4,177,723 30,535,678 (12,390,514) 22,322,887
Redemption of
shares (57,293) (57,293) (140,144) - (197,437)
Net income - - - 752,898 752,898
Distributions - - - (1,330,652) (1,330,652)
--------- --------- ---------- ----------- ----------
December 31,
1995 4,120,430 4,120,430 30,395,534 (12,968,268) 21,547,696
Redemption of
shares (77,526) (77,526) (193,395) - (270,921)
Net income - - - 918,269 918,269
Distributions - - - (1,549,184) (1,549,184)
--------- --------- ---------- ----------- ----------
December 31,
1996 4,042,904 $4,042,904 $30,202,139 $(13,599,183) $20,645,860
Redemption of
shares (82,049) (82,049) (203,268) - (285,317)
Net Income - - - 1,180,730 1,180,730
Distributions - - - (1,686,736) (1,686,736)
--------- --------- ---------- ----------- ----------
December 31,
1997 3,960,855 $3,960,855 $29,998,871 $(14,105,189) $19,854,537
========= ========= ========== =========== ==========
See notes to financial statements.
<PAGE> 14 USA REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income $ 1,180,730 $ 918,269 $ 752,898
---------- ---------- ----------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation & amortization 649,936 636,996 655,597
Amortization of loan fees 4,285 4,290 4,290
Valuation loss 0 0 124,000
Gain on sale of properties (103,946) 0 (411,254)
Changes in other assets &
liabilities:
Decrease in other assets 0 8,383 180,222
Increase(decrease)in accounts
payable (59,367) 5,318 (97,683)
Increase(decrease)in lease
deposits 7,312 (10,526) (3,287)
---------- ---------- ----------
Total adjustments to net income 498,220 644,461 451,885
---------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,678,950 1,562,730 1,204,783
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases & improvements to
properties (4,133,378) (501,586) (1,269,097)
Proceeds from the sale of
properties 787,341 3,139,682 3,800,463
Collections on notes receivable 0 92,869 147,178
---------- ---------- ----------
NET CASH PROVIDED(USED)BY
INVESTING ACTIVITIES (3,346,037) 2,730,965 2,678,544
---------- ---------- ----------
FINANCING ACTIVITIES:
Redemption of shares (285,317) (270,921) (197,437)
Payments on long-term notes payable (102,289) (51,586) (1,245,988)
Distributions paid (1,686,736) (1,549,184) (1,330,652)
---------- ---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (2,074,342) (1,871,691) (2,774,077)
---------- ---------- ----------
NET INCREASE(DECREASE)IN CASH (3,741,429) 2,422,004 1,109,250
Cash and cash equivalents at
beginning of year $ 3,909,665 $ 1,487,661 $ 378,411
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 168,236 $ 3,909,665 $ 1,487,661
========== ========== ==========
INTEREST PAID $ 381,644 $ 163,487 $ 270,069
========== ========== ==========
See notes to financial statements.
<PAGE> 15
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. The Trust maintains deposits in a financial
institution in excess of FDIC insurable amounts.
RENTAL PROPERTIES: The Trust carries its rental properties at depreciated
cost unless the asset is determined to be impaired. In accordance with State-
ment 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, 1996, 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 forty years.
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.
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 95 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 3,997,650, 4,068,623 and 4,153,717
during 1997, 1996 and 1995, 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
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets, liabilities,
<PAGE> 16
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. LEGAL SETTLEMENT WITH FORMERLY AFFILIATED PARTIES
B&B Property Investment, Development and Management Company, Inc. ("B&B")
served as advisor to the Trust, and B&B Property Investments, Inc., a wholly-
owned subsidiary of B&B, served as property manager for the Trust from
inception through August 31, 1994. Effective August 31, 1994, the Trust
terminated its agreements with B&B and B&B Property Investments, Inc. As a
result, B&B and its principal, Jeffrey Berger, filed a lawsuit against the
Trust, and the Trust cross-complained. In June, 1995 the Trust settled all
claims and cross claims between the Trust and B&B and its related parties by
the payment to the principal of B&B, Jeffrey Berger, of $250,000.
3. ALLOWANCE FOR VALUATION LOSSES
The Trust recorded allowances for valuation losses of $124,000 in 1995.
The Trust charged $338,000 and $115,000 against the valuation allowance in
connection with the sale of property in 1995 and 1997, respectively.
4. NOTE RECEIVABLE
The note receivable as of December 31, 1997 and 1996 is collateralized by a
property in Sacramento, California. As of December 31, 1997, the $726,000
note bears interest at 8 percent per annum and is payable in monthly
installments of interest only until October 8, 2000, when the entire note is
due. The fair value of the note approximates the carrying value as of
December 31, 1997 and December 31, 1996.
5. LONG-TERM NOTES PAYABLE
Long-term notes payable are collateralized by two properties in California.
As of December 31, 1997, the long-term notes payable bear interest at rates
ranging from 8 percent to 8.6 percent and mature in 2000 and 2017. Principal
payments during each of the next five years are as follows: $137,249,
$2,028,069, $102,313, $111,467, $121,440, and $3,644,506 thereafter. The
aggregate fair value of the notes approximate their carrying value as of
December 31, 1997 and 1996. Rates currently available to the Trust for debt
with similar terms and maturity were used to estimate the fair value of the
notes.
6. LINE OF CREDIT
As of December 31, 1997, the Trust had a $750,000 line of credit with
Sumitomo Bank of California. Advances under the line of credit bear interest
<PAGE> 17
at the bank's prime rate plus 3/4 percent, which was 9 1/4 percent at
December 31, 1997, and is collateralized by a deed of trust on one property.
The Trust did not borrow on this line of credit during 1997.
7. DISTRIBUTIONS
Cash distributions per share of beneficial interest for Federal income tax
purposes for the past three years were: 27 percent of the distributions paid
in 1997 were ordinary income and 73 percent were return of capital; 1 percent
of the distributions paid in 1996 were capital gains, 13 percent were
ordinary income and 86 percent were return of capital; 6 percent of the
distributions paid in 1995 were capital gains, 37 percent were ordinary
income and 57 percent were return of capital.
8. RENT UNDER OPERATING LEASES
Noncancelable operating leases provide for minimum rent during each of the
next five years of $2,686,511, $2,267,719, $2,002,034, $1,963,692 and
$1,158,833, respectively, and in aggregate $14,961,021 thereafter. The
above assumes that all leases which expire are not renewed, therefore
neither renewal rent nor rent from replacement tenants is included.
9. PRIOR PERIOD ADJUSTMENT
In 1997 it was discovered that in 1993 the title company failed to charge
the Trust for $49,417 in unpaid property taxes due to an error by
Sacramento County in connection with the sale of the property known as
11840 Folsom Blvd. After investigation of the matter and negotiation with
Sacramento County, the Trust agreed to pay the unpaid property taxes and
Sacramento County agreed to waive the related late penalties. If the
property taxes had been charged and paid in 1993, the loss on sale of
properties in 1993 would have been increased by $49,417 and reduced
previously reported operations as follows:
Year Ended
December 31, 1993
-----------------
Net loss:
As previously reported $ 2,506,635
As restated $ 2,556,052
Net loss per share of
beneficial interest:
As previously reported 60 cents
As restated 61 cents
Distributions in excess of
cummulative net income:
As previously reported $ 9,801,497
As restated $ 9,850,914
<PAGE> 18 PART III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 46 1986 Trustee and Chairman and
Chief Financial Officer
Benjamin A. Diaz 64 1988 Trustee and Secretary
William M. Gallagher 78 1992 Trustee
Joyce A. Marks 63 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,
<PAGE> 19
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
of California Franchise Tax Board, dealing with large corporate unitary tax
audits, and with the California State Board of Equalization.
WILLIAM M. GALLAGHER. The Honorable William M. Gallagher is a retired
judge of the Superior Court of California. He served as a judge of the
Sacramento County Superior Court from 1964 until 1980, and of the Sacramento
Municipal Court from 1961 to 1964. Mr. Gallagher received his Juris Doctor
degree from Hastings College of the Law in San Francisco. After 1980, Mr.
Gallagher was engaged in private practice as a partner in the law firm of
Hefner, Stark & Marois in Sacramento, California, specializing in Chapter 11
bankruptcy, lender liability litigation and real estate related transactions.
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 1997, the Trust was managed by its Trustees as a self-administered
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 a officer. During
1997, none of the Trust's officers received compensation in excess of $48,000.
Summary Compensation Table
Total Long-Term
Name and Officer Annual and other
Principal Position Year Compensation Compensation Compensation
- ----------------------------- ---- ------------ ------------ ------------
Gregory E. Crissman, Chairman 1997 $48,000 $66,750 (1) None
(1) Includes fees of $1,250 for each meeting of the Trustees attended.
<PAGE> 20
COMPENSATON OF TRUSTEES
During 1997 and currently, the Trustees receive $1,250 or $313 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
1997. 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 1997, the Trust had twelve regular and three
special meetings 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 February 28, 1998, 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
------------------------------------ -------------------- --------
Gregory E. Crissman, Chairman and Trustee 1,400 .0003
2561 Fulton Square Lane, #55
Sacramento, CA 95821
All Trustees and officers as a group 1,400 .0003
During 1997, 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> 21
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS Page
----
Independent Auditors' Report ...................... 10
Balance Sheets: December 31, 1997 and 1996 ....... 11
Statements of Income: Years Ended
December 31, 1997, 1996 and 1995 ................ 12
Statements of Changes in Shareholders' Equity:
Years Ended December 31, 1997, 1996 and 1995 .... 13
Statements of Cash Flows: Years Ended
December 31, 1997, 1996 and 1995 ................ 14
Notes to Financial Statements ..................... 15-17
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule III - Real Estate and Accumulated
Depreciation .................................... 22-25
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.
<PAGE> 22 USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Page 1, Part A
------------------ ------------ ---------------------------
Column A Column B Column C
------------------ ------------ ---------------------------
---Initital Cost to Trust--
Buildings
Improvements,
& Personal
Decription Encumbrances Land Property
------------------ ------------ ------------ ------------
RETAIL:
170-174 West Shaw
Avenue, Clovis,
California $ 2,047,333 $ 1,690,000 $ 2,542,532
7390 Greenback Lane,
Citrus Heights,
California - 533,000 179,333
3090 Sunrise Blvd.,
Rancho Cordova,
California - 450,000 -
19401 Parthenia
Street, Northridge,
California - 5,770,000 3,100,000
1590 Sycamore,
Hercules,
California - 1,310,000 5,912,015
------------ ------------ ------------
Total Retail 2,047,333 9,753,000 11,733,880
------------ ------------ ------------
INDUSTRIAL:
4350 Pell Drive,
Sacramento,
California - 1,500,000 2,213,325
------------ ------------ ------------
Total Industrial - 1,500,000 2,213,325
------------ ------------ ------------
OFFICE:
One Scripps Drive,
Sacramento,
California - 650,000 2,274,888
------------ ------------ ------------
Total Office - 650,000 2,274,888
------------ ------------ ------------
$ 2,047,333 $ 11,903,000 $ 16,222,093
============ ============ ============
<PAGE> 23
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Page 1, Part B
- ------------------ -----------------------------
Column A Column D
- ------------------ -----------------------------
Cost Capitalization
Subsequent to
---------Acquisition---------
Description Improvements Carrying Cost
- ------------------ ------------ -------------
RETAIL:
170-174 West Shaw
Avenue, Clovis,
California $ 7,300 $ -
7390 Greenback Lane,
Citrus Heights,
California 5,957 -
3090 Sunrise Blvd.,
Rancho Cordova,
California - -
19401 Parthenia
Street, Northridge,
California 2,456,458 -
1590 Sycamore,
Hercules,
California 28,761 -
------------- -------------
Total Retail 2,498,476 -
------------- -------------
INDUSTRIAL:
4350 Pell Drive,
Sacramento,
California 695,310 -
------------- -------------
Total Industrial 695,310 -
------------- -------------
OFFICE:
One Scripps Drive,
Sacramento,
California 1,424,796 -
------------- -------------
Total Office 1,424,796 -
------------- -------------
$ 4,618,582 $ -
============= =============
<PAGE> 24
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
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
- ------------------ ------------ ------------ ----------- ------------
RETAIL:
170-174 West Shaw
Avenue, Clovis,
California $ 1,690,000 $ 2,549,832 $ 590,000 $ 3,649,832
7390 Greenback Lane,
Citrus Heights,
California 533,000 185,290 102,000 616,290
3090 Sunrise Blvd.,
Rancho Cordova,
California 450,000 - - 450,000
19401 Parthenia
Street, Northridge,
California 5,770,000 5,556,458 3,483,000 7,843,458
1590 Sycamore,
Hercules,
California 1,310,000 5,940,776 - 7,250,776
------------ ------------ ------------ ------------
Total Retail 9,753,000 14,232,356 4,175,000 19,810,356
------------ ------------ ------------ ------------
INDUSTRIAL:
4350 Pell Drive,
Sacramento,
California 1,500,000 2,908,635 - 4,408,635
------------ ------------ ------------ ------------
Total Industrial 1,500,000 2,908,635 - 4,408,635
------------ ------------ ------------ ------------
OFFICE:
One Scripps Drive,
Sacramento,
California 650,000 3,699,684 770,000 3,579,684
------------ ------------ ------------ ------------
Total Office 650,000 3,699,684 770,000 3,579,684
------------ ------------ ------------ ------------
$ 11,903,000 $ 20,840,675 $ 4,945,000 $ 27,798,675
============ ============ ============ ============
<PAGE> 25
USA REAL ESTATE INVESTMENT TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
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
- ------------------ ------------ ------------ ----------- ------------
RETAIL:
170-174 West Shaw
Avenue, Clovis,
California $ 471,062 1985 05/90 40 years
7390 Greenback Lane,
Citrus Heights,
California 32,645 1980 08/90 40 years
3090 Sunrise Blvd.,
Rancho Cordova,
California - N/A 10/90 N/A
19401 Parthenia
Street, Northridge,
California 1,526,402 1973 11/90 40 years
1590 Sycamore,
Hercules,
California 102,368 05/97 40 years
------------
Total Retail 2,132,477
------------
INDUSTRIAL:
4350 Pell Drive,
Sacramento,
California 330,624 1975 09/92 40 years
------------
Total Industrial 330,624
------------
OFFICE:
One Scripps Drive,
Sacramento,
California 396,112 40 years
------------
Total Office 396,112
------------
$ 2,859,213
============
<PAGE> 26
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 25, 1998 USA Real Estate Investment Trust
--------------------
Gregory E. Crissman
By: -------------------------------
Gregory E. Crissman as
Chief Financial Offficer
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 25, 1998 Gregory E. Crissman
------------------- By: -------------------------------
Gregory E. Crissman
Chairman
Dated: March 25, 1998 Benjamin A. Diaz
------------------- By: -------------------------------
Benjamin A. Diaz
Trustee
Dated: March 25, 1998 William M. Gallagher
------------------- By: -------------------------------
William M. Gallagher
Trustee
Dated: March 25, 1998 Joyce A. Marks
------------------- By: -------------------------------
Joyce A. Marks
Trustee
<PAGE> 27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition at December 31, 1997 and the Statement
of Income for the fiscal year ended December 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 168,236
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 168,236
<PP&E> 27,798,675
<DEPRECIATION> 2,859,213
<TOTAL-ASSETS> 26,097,426
<CURRENT-LIABILITIES> 97,845
<BONDS> 0
<COMMON> 3,960,855
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,097,426
<SALES> 2,977,773
<TOTAL-REVENUES> 2,977,773
<CGS> 0
<TOTAL-COSTS> 1,900,989
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385,930
<INCOME-PRETAX> 1,180,730
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,180,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,180,730
<EPS-PRIMARY> 0.300
<EPS-DILUTED> 0.300
</TABLE>
