<PAGE> 1
July 21, 1994
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 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 SEPTEMBER 30, 1993
-------------------------------------------------
[ ] 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 0-9097
COMMONWEALTH EQUITY TRUST
------------------------------------------------------
(Exact Name of Registrant as Specified on its Charter)
CALIFORNIA 94-2255677
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
705 UNIVERSITY AVENUE SACRAMENTO, CALIFORNIA 95825
-------------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (916) 929-8244
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Title of Each Class
-------------------
Common Shares of Beneficial Interest
$1.00 par value ("Common Shares")
Indicate by check mark whether the registrant (1) has filed all reports
required 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.
Yes No X
--- ---
Sequential Page: 01 of 78
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July 21, 1994
Exhibit Index: Sequential page 70
Indicate by check mark whether if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[ X ]
MARKET VALUE
There is no active trading market for Common Shares.
OUTSTANDING SHARES
As of June 30, 1994, there were 25,093,000 outstanding Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 3
July 21, 1994
COMMONWEALTH EQUITY TRUST
<TABLE>
<CAPTION>
PART I
PAGE
<S> <C>
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of
Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial
Owners and Management 52
Item 13. Certain Relationships and Related Transactions 52
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 53
</TABLE>
i.
<PAGE> 4
July 21, 1994
PART I
ITEM 1. BUSINESS
(A) GENERAL
Commonwealth Equity Trust ("Trust") was formed as a real estate
investment trust ("REIT") on July 31, 1973 for the primary purpose of
acquiring, owning and financing real property and mortgage investments. The
Trust provides investors with the opportunity to own, through transferable
shares, an interest in diversified real estate investments. The Trust invested
primarily in income-producing real property (as opposed to property investments
acquired primarily for possible capital gain) and in loans secured by mortgages
on real property in accordance with investment objectives and policies. Most
of the investments in mortgage loans were in connection with the disposition of
The Trust's real properties. In addition, the Trust also acquired unimproved
real property with little current income for the propose of constructing
buildings or other improvements thereon or for capital appreciation.
Through these investments, The Trust has provided investors with the
opportunity to participate in a portfolio of professionally managed real estate
assets in much the same way that a mutual fund affords investors an opportunity
to invest in a professionally managed portfolio of stocks, bonds and other
securities. A REIT is not, however, a mutual fund, and is not subject to the
same regulations as a mutual fund.
In 1977, the Trust elected to be and was taxed as a REIT through the
year ended September 30, 1992. Under the Internal Revenue Code, a qualified
REIT is relieved, in part, of federal income taxes on ordinary income and
capital gains distributed to shareholders. State tax benefits may also accrue
to a qualified REIT. The Trust maintained a general policy of distributing
cash to its shareholders that approximated taxable income plus noncash charges
such as depreciated and amortization. As a result, distributions to
shareholders often exceeded cumulative net income.
During the year ended September 30, 1993, the Trust did not qualify to
be taxed as a REIT. The termination of its REIT status will be effective as of
the beginning of that fiscal year. Furthermore, the circumstances of that
termination were such that it is unlikely that the Trust will be eligible to
re-elect to be taxed as a REIT prior to its taxable year ending September 30,
1998.
1
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July 21, 1994
The Trust operates pursuant to a Declaration of Trust which sets forth
the powers of the Board of Trustees with regard to management and investment
activities of the Trust. The Declaration of Trust gives the Board of Trustees
the power to borrow money on the Trust's behalf; to make loans to other
persons; to invest in the securities of other issuers under certain
circumstances; to make investments in property; to purchase outstanding shares
of the Trust for such consideration as they deem advisable; to issue an annual
report to shareholders; to issue debt securities; to allocate investments
between direct and indirect ownership; and to exercise other powers in
connection with the Trust's operation. Pursuant to the Declaration of Trust,
the Trustees make decisions regarding the Trust's investment and sales
activities without the prior approval of shareholders.
CURRENT DEVELOPMENTS
CHAPTER 11 PROCEEDINGS. On August 2, 1993, the Trust filed a petition
for reorganization under Chapter 11 of the United States Bankruptcy Code. The
bankruptcy case is currently pending in the United States Bankruptcy Court for
the Eastern District of California, Sacramento Division and is entitled In re
Commonwealth Equity Trust Case No. 93-26727-C-11. The proximate cause of the
Trust's filing a petition for reorganization was its falling out of compliance
with a restructuring agreement entered into on July 17, 1992 with a lender
group for which Pacific Mutual Life Insurance Company ("Pacific Mutual
Lenders") acted as agent.
The Trust was unable to meet payment dates on the Pacific Mutual
Lenders' restructured debt. The Pacific Mutual Lenders noticed the Trust's
default, but attempted to negotiate a further restructuring and resolve claims
by the Trust against the Pacific Mutual Lenders. Finally, on August 2, 1993,
the Trust filed its petition for reorganization under Chapter 11 of the U. S.
Bankruptcy Code.
In September 1993 the United States Trustee ("UST") appointed an
Official Committee of Holders of Equity Interests ("Equity Holders Committee")
and an Official Committee of Creditors Holding Unsecured Claims ("Creditors
Committee"). Both the Equity Holders Committee and the Creditors Committee
have undertaken significant involvement in many aspects of the Chapter 11 case,
including evaluation of the Trust's business operations and of reorganization
alternatives.
On March 30, 1994, the Trust filed with the Court a Plan of
Reorganization and Disclosure Statement. Thereafter, there were a number of
further discussions and negotiations between the Trust and the Pacific Mutual
Lenders regarding settlement. On May 13, 1994, the Trust, together with the
Equity Holders' Committee and the Pacific Mutual Lenders (collectively,
together with the Trust, the "Plan Proponents") filed with the Court a First
Amended Plan of Reorganization and a Disclosure Statement with respect thereto.
2
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July 21, 1994
On June 3, 1994, the Plan Proponents filed with the Court a Second
Amended Plan of Reorganization and a Disclosure Statement with respect thereto.
On June 9, 1994, the Plan Proponents and the Creditors Committee as an
additional proponent filed with the Court a Third Amended Plan and related
Disclosure Statement. The Third Amended Plan provided for, inter alia: (a) the
restructuring of virtually all of the Trust's secured and unsecured debt; (b)
the reduction in the number of Common Shares held by current shareholders from
approximately 25,100,000 shares to approximately 2,450,000 shares (effectively,
a reverse stock split); and the issuance of approximately 2,550,000 new Common
Shares, as well as a new class of Preferred Shares, of the Trust to the Pacific
Mutual Lenders. After the restructuring, the Pacific Mutual Lenders will own a
majority of the new Common Shares.
The Disclosure Statement was approved by the Court after a hearing on
June 8 and 9, 1994. The Disclosure Statement was mailed to the Trust's
creditors and equity security holders on or about June 21, 1994, with ballots
to be returned by July 18, 1994. A hearing to confirm the Plan is tentatively
scheduled from July 27 through August 8, 1994.
EFFECT OF ECONOMIC DOWNTURN ON DISPOSITIONS. Overall recessionary
factors and depressed conditions in the real estate industry, which result in
part from the contraction of available financing to the commercial real estate
industry, have restricted the Trust's ability to generate liquidity through the
sale of its properties because potential buyers have been unable to obtain the
necessary financing to consummate transactions.
VALUATION LOSSES. The Trust recorded $53,089,000 in 1993 as an
allowance for possible investment losses. The valuation loss provision was
recorded based on appraisals and management's estimate of net realizable values
of certain real properties owned by the Trust, notes receivable secured by real
properties and Partnership interests, and after consideration of various market
factors adversely affecting real estate at the present time, particularly the
lack of credit available to purchasers of commercial real estate and overbuilt
commercial real estate markets. Gain or loss will be recorded in the future to
the extent that amounts realized from sale of these properties differ from the
appraised or estimated net realizable values. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Since its inception in 1973, the Trust has sought to acquire a
diversified portfolio of income producing real property and mortgage
investments (as opposed to investment acquired primarily for possible capital
gain), primarily in California. The Trust does not intend to actively invest
additional significant amounts at the present time. It is anticipated that the
terms of the new notes to be issued to the Pacific Mutual Lenders will severely
limit the Trust's ability to make acquisitions. However, the Trust will
continue to make investment to the extent necessary to preserve or to develop
existing assets, including acquisitions and dispositions to provide additional
diversity, flexibility and liquidity to the portfolio. To the extent that the
Trust continues to invest, the Declaration of Trust grants broad discretion to
the Trustees to allocate the Trust's assets without prior approval of
shareholders between real property (both improved and unimproved) and mortgage
loans and between direct and indirect ownership interest.
3
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July 21, 1994
During the last three fiscal years, the following sources have
contributed to the Trust's total income:
<TABLE>
<CAPTION>
Percent of Total Fiscal Years Ended September 30,
---------------- -----------------------------------------
Income From 1993 1992 1991
----------- ---- ---- ----
<S> <C> <C> <C>
Rental income 125.9 % 86.2% 88.5%
Interest income 10.5 % 12.1% 10.9%
Gains (losses) from foreclosure
or sale of rental properties
and partnership interests (36.4)% 1.7% 0.6%
</TABLE>
The Declaration of Trust permits the Trust to leverage its
investments, that is, the Trust may finance or refinance its properties by
borrowings. The level of leverage of the Trust at September 30, 1993, which
level will likely change as a result of the Chapter 11 Case, is 1 to 1.
The Trust generally has made significant cash investments in any
properties it acquires. Historically, the Trust has invested primarily in
properties which show income in excess of expenses. During the last several
years, the ability of the Trust's properties to produce positive cash flow has
been negatively impacted by the current economic downturn.
The real estate market is highly competitive. Although the Trust is
not currently competing for investment opportunities, the pool of available
financing for real estate investments has diminished and the Trust competes for
such financing with an indeterminate number of individuals, both foreign and
domestic, including other REITs, life insurance companies, pension funds, trust
funds and private sources of investment capital.
(C) SELECTION, MANAGEMENT AND CUSTODY OF THE TRUST'S INVESTMENTS.
The Declaration of Trust authorized the Trustees to seek advice from
time to time on the values and suitability of prospective investments and
dispositions.
The Trust's management at the time of its bankruptcy filing was
subject to considerable controversy and dispute. The Trust filed an
application (the "B&B Employment Application") seeking authority to employ its
prepetition advisor and property manager, B&B I and B&B II, respectively. The
UST and the Pacific Mutual Lenders, among others, raised numerous questions
regarding the employment and compensation of B&B I and B&B II in the Chapter 11
Case, which objections were scheduled for a hearing and cross-examination
testimony. Following numerous and lengthy discussions with the UST, in
particular, as well as other parties, regarding the Trust's post-petition
operations and management, the Trust withdrew the B&B Employment Application.
For two decades the Trust had no employees and managed and operated
its properties through outside entities. Pursuant to a consensual agreement
with the UST, the Trust won court approval of and implemented a sweeping change
in its management structure. In October 1993, the Trust changed to a
self-administration management structure. This involved:
4
<PAGE> 8
July 21, 1994
1. Hiring a number of employees of B&B I and B&B II who were
knowledgeable regarding the Trust's properties, operations and financial
affairs;
2. Expanding the duties of Doris Alexis, chairperson of the
Trust's Board of Trustees, including significantly enlarging her day to day
responsibilities and involvement;
3. Other management and administration changes, including changes
in responsibilities; physical relocation of personnel, records and equipment;
activation of new telephone numbers; computer system realignments; and
construction of walls physically segregating remaining B&B I and B&B II
personnel pending the relocation of B&B I and B&B II;
4. Engaging in arranging and negotiating the relicensing of the
Trust's hotel operations and the proposed terms of continued affiliation with
national hotel franchisors who had previously dealt directly with B&B I and B&B
II and related outside management companies; and
5. Formulating and implementing plans for realignment of the
Trust's property lease-up and property management functions, including
parameters for use of in-house brokers and outside tenant brokers.
NEW CEO. An additional change in the Trust management was implemented
in March, 1994, when the Trust hired Frank A. Morrow, through his corporation
FAMA Management, Inc. as chief executive officer pending Bankruptcy Court
approval of a services and confidentiality agreement, which agreement was
approved by the Court following a hearing held on March 31, 1994. Mr. Morrow
was not previously affiliated with the Trust, but has a range of real estate
and management experience, having served as Director of Real Estate for
Stanford University, Senior Vice President/Regional Manager of Bedford
Properties, Senior Vice President of Boise Cascade Urban Development
Corporation and Assistant to the Chairman for Hawaiian Airlines, among other
experience. As CEO, he will exercise "hands-on" oversight of business
operations and advise the Board of Trustees. The term of the agreement is from
March 8, 1994 through September 30, 1994, subject to the Trust's right to
terminate upon thirty (30) days advance notice.
NEW PROPERTY MANAGEMENT COMPANY. The Trust has searched for and
obtained the services of a property management company to assist in the
management of the Trust's commercial real estate portfolio. On June 15, 1994
the court approved the contract for services with United Property Services.
(D) OTHER INFORMATION
During its last three fiscal years, the Trust has been involved in
only one industry segment: the acquisition, operation and holding for
investment of income producing real properties, the making of loans secured by
real property and improvements in connection with those activities. Revenues,
net income and assets concerning this industry segment are set forth in the
Trust's financial statements.
5
<PAGE> 9
July 21, 1994
The rules and regulations adopted by various agencies of federal,
state or local government relating to environmental controls in the development
and operation of real property may operate to reduce the number of available
investment opportunities or may adversely affect existing properties. While
the Trust does not believe that environmental controls have had a material
impact on its activities to date, there can be no assurance that the Trust will
not be adversely affected in the future.
The Trust does not engage in research and development activities nor
is it involved in any foreign operations. The Trust does not derive income
from foreign sources.
6
<PAGE> 10
ITEM 2: PROPERTIES
The following table sets forth certain information relating to properties owned
by the Trust at September 30, 1993. All of the properties are suitable for
the purpose for which they are designed and are being used.
<TABLE>
<CAPTION>
Date of Ownership Square Total
Direct Equity Investments Acquisition Percentage Feet Cost(1) Encumbrances(2)
------------------------- ----------- ---------- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
OFFICE BUILDINGS:
Milpitas, Milpitas, California 1/85 100% 42,913 $ 10,717,000 -
Pacific Palisades, Pacific Palisades, California 4/86 100% 85,068 15,805,000 8,793,000
Timberlake, Sacramento, California 12/86 100% 22,023 2,313,000 546,000
16th and K Streets, Sacramento, California 8/87 100% 40,346 5,391,000 -
3604 Fair Oaks Boulevard, Sacramento, California 12/86 75% 22,420 3,351,000 2,479,000
425 University Avenue, Sacramento, California 11/85 100% 34,384 5,302,000 2,948,000
Town Center Garden Office Park, Long Beach, California 12/87 100% 92,236 16,011,000 -
11135 Trade Center Drive, Rancho Cordova, California 5/88 100% 143,220 5,810,000 -
11167 Trade Center Drive, Rancho Cordova, California 5/88 100% 57,810 1,596,000 -
Hurley Ethan Office Park I, Sacramento, California 4/88 100% 37,509 4,201,000 1,214,000
System Integrators Buildings, Sacramento, California 5/88 100% 90,000 8,285,000 4,679,000
Hurley Ethan Office Park II, Sacramento, California 6/88 100% 41,497 5,161,000 2,245,000
Parkway Center, El Dorado Hills, California 1/88 100% 45,396 1,526,000 -
Redfield Commerce Center, Scottsdale, Arizona 5/88 78% 27,900 1,462,000 -
----------- ----------
Total office buildings 86,931,000 22,904,000
----------- ----------
COMMERCIAL BUILDINGS:
One Sunrise Park, Rancho Cordova, California 8/83 100% 44,219 3,447,000 -
Burbank Mini-Warehouse, Santa Rosa, California 4/85 100% 72,200 2,571,000 -
Regency Plaza, Sacramento, California 5/85 100% 142,150 14,298,000 8,864,000
Villa Del Sol, Fullerton, California 5/85 100% 35,111 4,088,000 -
University Village, Sacramento, California 12/86 100% 83,033 10,259,000 7,745,000
TGIF Sunrise Hills, Citrus Heights, California 1/87 100% 8,500 1,884,000 -
Fulton Square, Sacramento, California 5/91 78% 35,493 3,536,000 340,000
Totem Square, Kirkland, Washington 11/90 47% 126,623 9,038,000 4,425,000
Downtown Mini Storage, Sacramento, California 3/88 100% 44,825 2,005,000 -
515 S. Fair Oaks Avenue, Pasadena, California 7/88 78% 83,000 5,745,000 -
Imperial Canyon, Anaheim, California 7/88 78% 55,500 7,896,000 4,540,000
Sunrise Hills, Citrus Heights, California 1/89 100% 83,944 7,559,000 4,331,000
Sierra Oaks, Roseville, California 1/89 100% 60,064 8,617,000 4,971,000
Mallory Service Building, Walnut Creek, California 10/88 100% 21,752 2,483,000 -
----------- ----------
Total commercial buildings 83,426,000 35,216,000
----------- ----------
</TABLE>
7
<PAGE> 11
ITEM 2: PROPERTIES (continued)
<TABLE>
<CAPTION>
Date of Ownership Square Total
Direct Equity Investments Acquisition Percentage Feet Cost(1) Encumbrances(2)
------------------------- ----------- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
LAND:
Florin Perkins, Sacramento, California 6/91 100% 3,457,181 $ 6,228,000 -
Parthenia, Northridge, California 9/92 100% 75,000 2,025,000 -
------------ ----------
Total land 8,253,000 -
------------ ----------
HOTELS:
Redding Holiday Inn, Redding, California 7/85 100% 111,310 7,203,000 1,577,000
Chico Holiday Inn, Chico, California 9/86 100% 87,000 10,937,000 -
Sacramento Holiday Inn, Sacramento, California 9/86 100% 139,800 22,470,000 -
Walnut Creek Holiday Inn, Walnut Creek, California 3/85 100% 78,470 13,819,000 -
Casa Grande Motor Inn, Arroyo Grande, California 9/92 78% 64,200 6,149,000 3,121,000
Howard Johnson's, Lake Ozark, Missouri 2/88 100% 56,852 4,209,000 1,285,000
------------ ----------
Total hotels 64,787,000 5,983,000
------------ ----------
$243,397,000 64,103,000
============ ==========
</TABLE>
(1) Total cost before any reduction for valuation allowance related to
investments and accumulated depreciation.
(2) All of the above properties are pledged as collateral, subject to existing
liens, for the restructured debt.
8
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July 21, 1994
ITEM 3. LEGAL PROCEEDINGS
At the time its Chapter 11 petition was filed in August 1993, the
Trust was party to a number of lawsuits. Most involved ordinary disputes
common to the real property management business, and amounts immaterial to the
Trust's overall financial condition. In addition, the Trust was party to the
lawsuits described below.
SHAREHOLDER B&B LITIGATION. In December, 1991, the Trust received
notice of a pending action (the "Luebkeman Litigation") filed by a shareholder
in the Superior Court of the State of California, County of Sacramento
("Sacramento Superior Court") and seeking to maintain (a) a class action on
behalf of all shareholders, and (b) a derivative action on the Trust's behalf.
The action named as defendants B&B II, the individual Trustees of the Trust,
and Merrill Lynch Business, Brokerage and Valuation, Inc. The Trust was named
as a nominal defendant. The action sought, among other things, a declaration
that the Trust's management agreement with B&B II was invalid; imposition of a
constructive trust on and recovery of $7,195,000 received by B&B II in
December, 1989, in connection with the Second Amendment to the B&B Management
Agreement; attorneys' fees, costs of suit; and other damages according to
proof. The Trust appointed a committee of independent Trustees who are not
defendants to engage counsel to represent the Trust's interests in the action.
On April 30, 1992, the Sacramento Superior Court sustained the
defendants' demurrer to the class action causes of action, but authorized the
plaintiffs to proceed with the case as a derivative action. The Sacramento
Superior Court also ruled that, in light of the terms of the Declaration of
Trust, the Trustees would no be held liable to the Trust based upon simple
negligence.
On July 16, 1992, the Sacramento Superior Court sustained the
defendants' demurrer to the derivative action, with leave to amend. This
ruling was based on the plaintiffs' failure to make demand on the Trustees to
take the action requested in the complaint or to allege with sufficient
particularity the reasons why such a demand would be futile. The Sacramento
Superior Court also stayed the action for all other purposes for 60 days,
except to allow plaintiffs to amend their complaint.
On March 30, 1993, the plaintiffs filed and served a second amended
complaint, which names as additional defendants Joyce Berger and the law firm
of Nossaman, Guthner, Knox and Elliott. Upon dissolution of the stay, the
parties actively engaged in settlement negotiations. Prior to bankruptcy,
settlement negotiations were progressing toward a payment to the Trust of over
$1 million. Since the bankruptcy and the involvement of creditor
constituencies, the parties have sought to broaden negotiations to encompass a
global settlement of disputes involving the B&B entities. If Lubekeman is not
settled, the current plaintiffs' counsel will continue prosecution of the
action on a contingency fee basis. Due to settlement negotiations, there has
been little discovery and, therefore, the likelihood of success on the merits
is uncertain.
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July 21, 1994
FORMER SHAREHOLDER LITIGATION. On April 27, 1993, the Trust received
notice that it had been named as a defendant in a complaint filed in the United
States District Court for the Eastern District of California (the "Aizuss
Action"). The complaint was filed by about 130 former Commonwealth Equity
Trust shareholders and named defendants the Trust, current and former Trustees,
B&B II and its shareholders, and various current and former professional
advisors and consultants to the Trust. The plaintiffs allege breach of
fiduciary duty, violation of federal and state securities laws, violation of
civil RICO, fraud, negligent misrepresentation, negligence and civil
conspiracy. The non-Debtor defendants to this litigation filed a motion to
dismiss the plaintiffs' complaint and a request for sanctions. The district
court granted the motion, and assessed sanctions against the plaintiffs'
attorneys. Subsequently, pursuant to a stipulation by and between the Trust
and the plaintiffs, the action was dismissed without prejudice as to the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No annual meeting of the Trust's shareholders was held during 1993.
No matters were put to a vote of the shareholders.
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July 21, 1994
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Trust has one class of authorized and outstanding equity
consisting of common shares of beneficial interest, par value $1.00 per share.
Historical Pricing of and Market for Shares
From its inception through April 4, 1982, the Trust sold its shares at
$10 per share regardless of the value of its investment portfolio. The equity
interests in real estate owned by the Trust are carried on its financial
statements at the lower of (a) cost less accumulated depreciation, or (b) net
realizable value, rather than at current fair market values. Accordingly, any
increase or decrease in portfolio value is reflected in the Trust's financial
statements only upon the sale of a property or upon a determination by the
Trust that the value of a property has been impaired by economic circumstances.
Historically, the Trustees from time to time adjusted the offering price of the
Trust's shares to reflect appreciation of the Trust's portfolio. The first
such adjustment was made on April 4, 1982, when the price per share was raised
to $11.50. On June 9, 1983, the Trustees revalued the Trust portfolio, raising
the price per share to $12.00.
There is no established market for the Trust's Shares. From July 1973
until July 5, 1989, the Trust engaged in a continuous intrastate offering of
its securities pursuant to permits issued by the California Commissioner of
Corporations. In May 1989, the Trust advised its shareholders that (a) the
offering would terminate as of July 5, 1989 and (b) shareholders desiring to
purchase or sell shares pursuant to the "crossing" arrangement described below
would have to submit their purchase orders or shares prior to that date.
Although the shares of the Trust are not traded on any exchange or on the
NASDAQ System, several registered broker-dealers from time to time have matched
orders to purchase and sell outstanding shares.
Status of Liquidation
The Trust terminated the continuous offering and the crossing
arrangement effective July 5, 1989. The Trust determined that it would arrange
for the purchase at $10.80 per share ($12 per share less commissions) of all
shares properly submitted to the designated crossing agent prior to the
termination date. To the extent that account "liquidation" requests could not
be matched with new purchase orders, the Board of Trustees authorized
redemption of the shares by the Trust using proceeds from the sale of shares
from January 1, 1989 to the termination date to fund the redemption. At June
30, 1994, 29,691 shares, had been tendered and not redeemed. Holders of these
shares will receive the same treatment as all other shareholders under the
Amended Plan of Reorganization.
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July 21, 1994
Distributions
Until recent years, it was the Trust's policy to declare quarterly
distributions and to declare special distributions from time to time, usually
to distribute gains realized on the sale or refinancing of Trust property.
Because of the financial difficulties, the Trust made only one distribution
during fiscal 1991 ($.20 per share on October 3, 1990) and no distributions
during 1992 or 1993.
It is not anticipated that any distributions will be made in the
foreseable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
At June 30, 1994, there were 28,832 shareholders of record of the
Trust.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Thousands Omitted)
---------------------------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating results:
Revenues (1) $ 19,585 $ 31,925 $ 34,831 $ 39,020 $ 48,084
Net (loss) income (2) (71,997) (56,718) (35,300) (10,746) 5,417
Per Share of Beneficial Interest:
Net (loss) income $ (2.87) $ (2.26) $ (1.40) $ (.42) $ .21
Distributions None None .20 .83 .80
Financial Position:
Total Assets $169,213 $280,010 $334,652 $369,951 $442,495
Short term notes payable - - - 37,000 43,799
Long-term obligations 140,173 180,171 179,141(3) 134,842 151,315
</TABLE>
(1) Included net (losses) gains from sales of rental properties, note
receivable and partnership interests of $($7,130), $539, $203, $616,
and $5,692 for the years 1993, 1992, 1991, 1990 and 1989,
respectively.
(2) Includes valuation losses of $53,089, $48,130, $28,298, $7,408 and
$1,840 for 1993, 1992, 1991, 1990 and 1989, respectively. See note 7
of the Notes to Consolidated Financial Statements for further
discussion.
(3) Includes $29,000 of short-term notes payable to bank in 1991 which had
been renegotiated in 1992 as secured long-term debt.
12
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July 21, 1994
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY. The Trust anticipates that its
principal source of funds during 1994 will be operating income. Because the
Trust will be under the protection of Chapter 11 during the year, the payment
of certain liabilities has been stayed. It is a condition to confirmation of
the Amended Plan, that the Trust obtain a working capital loan of approximately
ten million dollars to meet capital needs in excess of available income.
However, capital resources and the amount and timing of Trust liabilities
cannot be finally determined until the status of the Amended Plan is finally
determined.
RESULTS OF OPERATIONS
1993 vs. 1992
Results of operations for 1993 were affected principally by the
continuing downturn in the general economy, as reflected in the commercial real
estate market, through California and Arizona and especially in Southern
California.
Approximately 74% of the year's net loss was effected by the total
valuation loss of $53,089,000, as applied to the Trust's real properties, notes
receivable and partnership interests. The provision for valuation loss
reflects recent independent appraisals and managements's estimates of net
realizable value on the Trust's real properties, notes receivable secured by
real properties and partnership interests compared with book value. Factors
considered include increased capitalization rates, decreased rental rates and
decreased occupancy rates for many of the Trust's properties.
The largest valuation losses recorded against real properties
aggregated $25,183,000 on the following properties: Redding Park Holiday Inn
(Redding, CA), Pacific Palisades Office Building (Pacific Palisades, CA),
Sacramento Holiday Inn (Sacramento, CA), Chico Holiday Inn (Chico, CA), Town
Center Garden Office Park (Long Beach, CA) Trade Center A (Rancho Cordova, CA),
Florin Perkins land (Sacramento, CA), Parthenia land (Northridge, CA) and Casa
Grande Motor Inn (Arroyo Grande, CA).
The largest valuation loss recorded against notes receivable
collateralized by real properties was $2,400,000 on a note secured by
Southcoast Commerce (Fountain Valley, CA).
Total valuation losses of $12,472,000 were recorded against the
Trust's partnership interest in CR Properties and Placer Ranch Partners. CR
Properties, which interest has been written down to zero, is a limited partner
in Sacramento Renaissance, a limited partnership, which owns the Renaissance
Tower office building (Sacramento, CA). The independent appraisal has
determined that the value of the property does not exceed the related debts.
Placer Ranch Partners' indirectly owned land has been written down to its value
as agricultural land, as development of the property is not ascertained at this
point.
Gain or loss will be recorded in the future to the extent that amounts
13
<PAGE> 17
July 21, 1994
realized from the sale of these assets differ from the appraised or estimated
net realizable values. In the event economic conditions for real estate
continue to decline, additional valuation losses will be recognized. Losses
and gains are realized only on the sale of the underlying assets.
From August 2, 1993 through September 30, 1993, the Trust operated as
debtor-in-possession and incurred net reorganization expenses of $679,000. For
the year total revenues (excluding reorganized revenue items, which equaled
$27,000 or 0.1% of prior year's revenue) decreased by 14.9%. Rental revenues
declined by $2,862,000 (10.4%), and interest income declined by $1,809,000
(46.7%).
Total expenses (excluding reorganization expense items, which equaled
$706,000 or 1.6% of prior year's expenses) decreased by $3,772,000 (8.7%) from
1992 to 1993.
Loss on foreclosure or sale of investments totaled $7,130,000 and
reflects net loss derived from the sale of Pavilions, 20 Bicentennial Drive,
Denny's, Florin/Perkins, Dunlap, Northern, Park West, Sizzler, West Southern,
Corona and six notes receivable and the foreclosure of Howe Avenue & Cottage
Way, Arbor Plaza, Huntington and Hookston Square.
1992 vs. 1991
Results of operations for 1992 were affected principally by the
continuing downturn in the general economy, as reflected in the commercial real
estate market, throughout California and Arizona and especially in Southern
California.
Although the net loss during the year was attributable in part to
decreased revenues, as discussed below, the bulk of the net loss results from
$48,130,000 in valuation losses relating to the Trust's real properties, notes
receivable and partnership interests. The provision for valuation loss
reflects recent independent appraisals and management's estimates of net
realizable value on the Trust's real properties, notes receivable secured by
real properties and partnership interests compared with book value. Factors
considered include increased capitalization rates, decreased rental rates and
decreased occupancy rates for many of the Trust's real properties. The most
extreme valuation reserves were recorded against real properties and notes
receivable collateralized by real properties located in Southern California and
Arizona including Town Center, Villa Del Sol, Imperial Canyon and Southcoast
Commerce Center, which together accounted for $14,138,000 of total valuation
writedowns. Properties located in Sacramento were not immune from the
continuing impact of the economy on commercial real estate. A provision from
valuation loss of $4,957,000 was made against the Trust's investment in CR
Properties (formerly CET/RJB), a limited partner in Sacramento Renaissance,
owner of the Renaissance Towers property, reflecting substantial loans for
tenant improvements and other leasing and marketing expenses made to Sacramento
Renaissance by its general partner which must be repaid before returns are paid
to the Trust. A valuation allowance of $1,910,000 was recorded as to the
Florin Perkins lots reflecting the decrease in the value of raw land and
reduced prospects for development over the medium term. Writedowns on thirteen
additional properties located in the Sacramento area accounted for $7,592,000
of the allowance.
14
<PAGE> 18
July 21, 1994
In addition to valuation reserves, total revenues decreased $3,242,000
(9.4%) in 1992 as compared with 1991. While aggregate interest income remained
relatively unchanged, rental revenues decreased $3,329,000 (10.8%) reflecting
sale of four properties during 1992 and disposition of an additional property
by voluntary foreclosure. In addition, the Trust experienced a substantial
decrease in aggregate rental revenue of $708,000 at Imperial Canyon, Arbor
Plaza and 515 S. Fair Oaks Avenue, all properties located in Southern
California as a result of greater vacancy and lower lease renewal rates. The
Trust's rental income relating to its hotel properties also reflected a
$1,200,000 decrease as a result of partial closures and reduced occupancy
during renovations required by the franchisor. Notwithstanding the foregoing,
several Trust properties showed increased revenues during 1992 including Totem
Square, with increased revenues of $300,000 and higher occupancy rates, the
Fulton Square, a property acquired in 1991 which accounted for $375,000 in
increased rental income.
Total expenses increased by $828,000 (2%) from 1991 to 1992. While
property management and depreciation and amortization expense decreased by
$179,000 (10.4%) and $1,527,000 (15.2%), respectively, reflecting property
dispositions during the year, general and administrative expenses showed an
increase of $2,817,000 (90.4%). The increase resulted principally from (i)
$1,000,000 in professional services (including lender legal fees, appraisal
costs and accounting fees) related to restructuring of the Trust's debt with
its Senior Lenders and (ii) $1,100,000 in legal fees and costs arising from the
shareholder litigation described in Item 3 of this report and in fees incurred
by the Trust in the restructuring of debt with the Senior Lenders. The
increase in general and administrative expense also reflects fees for
consultants to the Independent Trustees.
Net gain on sale of rental properties totalling $539,000 reflects net
gain derived from the sale of F Street Professional Building, 190 Otis, 1227
Chester Avenue and Fountain View Office Plaza.
1991 vs. 1990
Results of operations in 1991 showed the impact of overall
recessionary factors and highly competitive market conditions in many real
estate markets.
Rental revenue decreased $1,777,000 (5.5%) in 1991 as compared with
1990. Two-thirds of the decrease is attributable to property sales in 1990 and
1991. In addition, properties held by the Trust during both 1991 and 1990
generally showed lower revenues in 1991, accounting for one-third of the total
decrease in rental revenues. Lower average note receivable balances in 1991
led to a decrease of $1,999,000 (34.6%) in interest revenue from the 1990
level. The lower balances were a result of collections, sale of participation
interests and conversion of a note into a partnership interest. Overall,
revenues decreased $3,776,000 (9.8%) in 1991 as compared with 1990.
Expenses increased 1.6% in 1991 as compared with 1990. Decreases in
property management and general and administrative expenses of $312,000 (15.4%)
and $788,000 (20.2%), respectively, resulting from property sales were offset
by increases in depreciation and amortization of $958,000 (10.5%) and in
interest expense of $788,000 (4.7%). The increased depreciation and
amortization reflects amortization for a full twelve month period in 1991 (as
compared with a partial year in 1990) of the $7,195,000 paid to the Adviser in
connection with the Second Amendment to Management Agreement, as discussed
above. Increased interest expense reflects higher average note payable
balances outstanding in 1991 as compared with 1990.
15
<PAGE> 19
July 21, 1994
Shareholder's equity was $138,559,000 at September 30, 1991 compared
with $180,946,000 at September 30, 1990. The decrease from 1990 to 1991 was
the result of the net loss incurred in 1991, the October 1990 distribution to
shareholders and the Trust's repurchase in 1991 of shares submitted for
redemption prior to termination of the Trust's offering on July 5, 1989.
The bulk of the loss results from provision for valuation losses of
$28,298,000 recorded in 1991. The provision reflects the Trust's estimation of
the net realizable values of its real estate investments as compared with the
book value of such investments. The valuation loss provision was recorded
after consideration of various market factors adversely affecting real estate
at the present time. particularly the lack of credit available to purchasers
of commercial real estate and overbuilt and overinvested commercial real estate
markets. Thus, $12,800,000 of the valuation losses arise from properties owned
in the Phoenix metropolitan area, which has experienced a lengthy period of
oversaturation of retail and office properties. An additional $14,800,000 of
the valuation losses relate to hotel properties and reflect increased
competition arising from a general overinvestment in the hotel industry by
developers and banks during the latter part of the 1980's. Gain or loss will
be recorded in the future to the extent that amounts realized from sale of
these properties differ from the estimated net realizable values. Losses and
gains are realized only on sale of the underlying real property.
Net gain on sale of rental properties totalling $203,000 reflects net
gain derived from the sale of 87 Scripps Drive, El Torito, National University
and Vacation Special Apartments. The decrease in gain from 1990 reflects the
continued slowdown in the commercial real estate market; current economic
conditions have severely restricted credit availability to prospective buyers
of Trust properties.
IMPACT OF INFLATION. The effect of inflation on the Trust's
operations and properties is varied. Revenues have not recently been affected
by inflation as highly competitive market conditions have prevented increases
in rental rates for most of the Trust's properties and, in some cases, have
caused rental rates to decrease. Although operating expenses are impacted by
inflation, inflation related increases in operating expenses have not been
material during the past year.
16
<PAGE> 20
July 21, 1994
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index Page
- - ----- ----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Reports 19-21
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Changes in Shareholders'
Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-48
Schedule IX - Short-Term Borrowings 56
Schedule X - Supplementary Income Statement Information 57
Schedule XI - Real Estate and Accumulated Depreciation 58-62
Schedule XII - Mortgage Loans on Real Estate 63-65
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
(a) As of November 3, 1993, KPMG Peat Marwick was terminated as
the Trust's independent accountant. The Trust's financial statements for its
fiscal year ended September 30, 1992 contained a report of KPMG Peat Marwick
which included an explanatory paragraph regarding substantial doubt about the
Trust's ability to continue as a going concern because of the Trust's recurring
losses, non-compliance with certain loan covenants and significant loan
repayments due in fiscal 1993 on its long term notes payable. Similarly, the
Trust's financial statements for its fiscal year ended September 30, 1991
contained a report of KPMG Peat Marwick which included an explanatory paragraph
regarding substantial doubt about the Trust's ability to continue as a going
concern because of the Trust's recurring losses, non- compliance with certain
loan covenants and significant loan repayments due in fiscal 1992 under its
bank debt and debenture agreements.
The Board of Trustees of the Trust decided to solicit bids from
independent accountants, including KPMG Peat Marwick, for accounting services
to be provided to the Trust. KPMG Peat Marwick submitted a bid but was not the
winning bidder and thus has been terminated. The winning bidder was Coopers &
Lybrand. The decision to change independent accountants was approved by the
Board of Trustees.
During the two most recent fiscal years preceding KPMG Peat Marwick's
termination, there were no disagreements with KPMG Peat Marwick on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which would have caused it to make a reference to
the subject
17
<PAGE> 21
July 21, 1994
matter of the disagreement in connection with its report. Furthermore, there
were no reportable events during the two most recent fiscal years preceding
KPMG Peat Marwick's termination arising from KPMG Peat Marwick having advised
the company (a) that the internal controls necessary for the Trust to develop
reliable financial statements did not exist; (b) that information had come to
its attention that led it to no longer be able to rely on management's
representations or that made it unwilling to be associated with financial
statements prepared by management; (c) (1) of the need to expand significantly
the scope of its audit or that information had come to its attention that if
further investigated might either (i) materially impact the fairness or
reliability of a previously issued audit report or underlying financial
statements or the financial statements issued or to be issued to cover the
fiscal period subsequent to the date of the most recent financial statements
covered by an audit report or (ii) cause it to be unwilling to rely on
management's representations or be associated with the Trust's financial
statements and (2) due to KPMG Peat Marwick's termination, it did not so expand
the scope of its audit or conduct such further investigations; and (d) (1)
information had come to its attention that it concluded materially impacts the
fairness or reliability of either (i) a previously issued audit report or the
underlying financial statements, (ii) the financial statements issued or to be
issued covering the fiscal period subsequent to the date of the most recent
financial statement covered by an audit report (including information that,
unless resolved to its satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements) and (2) due to KPMG
Peat Marwick's termination, the issue has not been resolved to its satisfaction
prior to its termination.
(e) Coopers & Lybrand was appointed by the Board of Trustees as
the new independent accountant for the Trust effective November 3, 1993.
During the Trust's two most recent fiscal years and the subsequent interim
period prior to KPMG Peat Marwick's termination, the Trust did not consult with
Coopers & Lybrand regarding the application of accounting principles to a
specified transaction or the type of audit opinion that might be rendered on
the Trust's financial statements.
18
<PAGE> 22
Independent Auditors' Report
The Board of Trustees
Commonwealth Equity Trust
We have audited the consolidated balance sheet of Commonwealth Equity Trust and
Affiliates (Trust) as of September 30, 1993, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the year then ended. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement schedules as
listed in the accompanying index for the year ended September 30, 1993. These
consolidated financial statements and financial statement schedules are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audit. The consolidated financial statements and
financial statement schedules of the Trust for the years ended September 30,
1992 and 1991, were audited by other auditors, whose report dated February 5,
1993, on those statements included an explanatory paragraph that described
substantial doubt about the Trust's ability to continue as a going concern,
which is discussed in Note 14 to those financial statements.
We conducted our audit 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 evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Equity Trust and Affiliates at September 30, 1993, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules for the year ended
September 30, 1993, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects, the
information set forth therein.
19
<PAGE> 23
The Board of Trustees
Commonwealth Equity Trust
Page 2
The accompanying consolidated financial statements have been prepared assuming
that the Trust will continue as a going concern. As discussed in Notes 1 and
13 to the consolidated financial statements, the Trust's Chapter 11 bankruptcy
proceedings and related litigation raise substantial doubt about the Trust's
ability to continue as a going concern. Management's Plan of Reorganization
and Disclosure Statement that have been submitted to the Court is described in
Note 1, which includes the Equity Security Holders' Committee and the Pacific
Mutual Lenders as coproponents. The consolidated financial statements do not
include any adjustment that might result from the outcome of these
uncertainties.
COOPERS & LYBRAND
Sacramento, California
May 26, 1994 except for
Note 1, as to which the
date is June 3, 1994
20
<PAGE> 24
KPMG Peat Marwick
Certified Public Accountants
2495 Natomas Park Drive
Sacramento, CA 95833-2936
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Commonwealth Equity Trust:
We have audited the consolidated balance sheets of Commonwealth Equity Trust
and affiliates as of September 30, 1992, and the related consolidated
statements of loss, changes in shareholders' equity, and cash flows for each of
the years in the two-year period ended September 30, 1992. In connection with
our audits of the consolidated financial statements, we also have audited the,
financial statement schedules for the periods ended September 30, 1992. These
consolidated financial statements and financial statement schedules are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules 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 evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commonwealth Equity
Trust and affiliates at September 30, 1992, and the results of their operations
and their cash flows for each of the years in the two-year period ended
September 30, 1992, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects, the information set
forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Trust will continue as a going concern. As discussed in Note 14 to
the financial statements, the Trust's recurring losses, noncompliance with
certain loan covenants and significant loan repayments due in fiscal 1993 on
its long-term notes payable, raise substantial doubt about the Trust's ability
to continue as a going concern, Management's plans in regards to these matters
are also described in Note 14. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick
February 5, 1993
21
<PAGE> 25
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
September 30
____________
<TABLE>
<CAPTION>
ASSETS 1993 1992
------------- -------------
<S> <C> <C>
Investments:
Rental properties, less accumulated depreciation of $31,708,000 and
$37,019,000 in 1993 and 1992, respectively, and valuation allowance
of $78,659,000 and $66,195,000 in 1993 and 1992, respectively $ 133,030,000 $ 222,041,000
Partnership interests, net of valuation allowance of
$17,429,000 and $4,957,000 in 1993 and 1992, respectively 4,000,000 16,472,000
Notes receivable, net of valuation allowance of $6,964,000 and
$5,420,000 in 1993 and 1992, respectively, and unaccreted discount
of $1,466,000 and $1,189,000 in 1993 and 1992, respectively 19,262,000 31,740,000
------------- -------------
156,292,000 270,253,000
Cash 6,994,000 1,418,000
Restricted cash 111,000 584,000
Rents and accrued interest receivable, net of valuation allowance
of $2,478,000 and $1,948,000 in 1993 and 1992, respectively 1,179,000 2,492,000
Other assets 4,637,000 5,263,000
------------- -------------
Total assets $ 169,213,000 $ 280,010,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities not subject to compromise:
Long-term notes payable, collateralized by deeds
of trust on rental properties $ 15,874,000 $ 101,626,000
Principal and deferred interest notes -- 78,545,000
Accounts payable and accrued expenses 3,526,000 9,658,000
------------- ------------
19,400,000 189,829,000
Liabilities subject to compromise (Note 14) 133,065,000 --
------------- ------------
Total liabilities 152,465,000 189,829,000
------------- ------------
Minority interests 6,947,000 8,383,000
------------- ------------
Shareholders' equity:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 25,093,000 shares outstanding in 1993 and 1992 25,093,000 25,093,000
Additional paid-in capital 219,848,000 219,848,000
Accumulated deficit (235,140,000) (163,143,000)
------------- -------------
Total shareholders' equity 9,801,000 81,798,000
------------- -------------
Commitments and contingencies (Notes 4 and 12)
Total liabilities and shareholders' equity $ 169,213,000 $ 280,010,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 26
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30
______________
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Rent $ 21,523,000 $ 27,512,000 $ 30,841,000
Interest 2,065,000 3,874,000 3,787,000
Hotel 3,127,000 -- --
------------ ------------ ------------
26,715,000 31,386,000 34,628,000
------------ ------------ ------------
Expenses:
Operating expenses 9,752,000 10,005,000 9,868,000
Hotel operating expenses 2,647,000 -- --
Property management 1,386,000 1,535,000 1,714,000
Depreciation and amortization 6,115,000 8,551,000 10,078,000
Interest 14,846,000 17,352,000 17,772,000
General and administrative 4,860,000 5,935,000 3,118,000
------------ ------------ ------------
39,606,000 43,378,000 42,550,000
------------ ------------ ------------
Loss before reorganization items, (loss) gain on
foreclosure or sale of investments, valuation losses
and minority interest (12,891,000) (11,992,000) (7,922,000)
Reorganization items (Note 15) (679,000) -- --
------------ ------------ ------------
Loss before (loss) gain on foreclosure or sale of
investments, valuation losses and minority interest (13,570,000) (11,992,000) (7,922,000)
(Loss) gain on foreclosure or sale of investments, net (7,130,000) 539,000 203,000
------------ ------------ ------------
Loss before valuation losses and
minority interest (20,700,000) (11,453,000) (7,719,000)
Valuation losses (Note 7) (53,089,000) (48,130,000) (28,298,000)
------------ ------------ ------------
Loss before minority interest (73,789,000) (59,583,000) (36,017,000)
Minority interest 1,792,000 2,865,000 717,000
------------ ------------ ------------
Net loss $(71,997,000) $(56,718,000) $(35,300,000)
============ ============ ============
Net loss per share of beneficial interest $(2.87) $(2.26) $(1.40)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 27
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended September 30, 1993, 1992 and 1991
______________
<TABLE>
<CAPTION>
Beneficial Interest Additional Total
--------------------------- Paid-In Accumulated Shareholders'
Number Amount Capital Deficit Equity
---------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1990 25,286,000 $25,286,000 $221,723,000 $ (66,063,000) $180,946,000
Liquidation of
shares (189,000) (189,000) (1,836,000) -- (2,025,000)
Net loss -- -- -- (35,300,000) (35,300,000)
Distributions -- -- -- (5,062,000) (5,062,000)
---------- ----------- ------------ ------------- ------------
Balance at
September 30, 1991 25,097,000 25,097,000 219,887,000 (106,425,000) 138,559,000
Liquidation of
shares (4,000) (4,000) (39,000) -- (43,000)
Net loss -- -- -- (56,718,000) (56,718,000)
---------- ----------- ------------ ------------- ------------
Balance at
September 30, 1992 25,093,000 25,093,000 219,848,000 (163,143,000) 81,798,000
Net loss -- -- -- (71,997,000) (71,997,000)
---------- ----------- ------------ ------------- ------------
Balance at
September 30, 1993 25,093,000 $25,093,000 $219,848,000 $(235,140,000) $ 9,801,000
========== =========== ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 28
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30
______________
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(71,997,000) $(56,718,000) $(35,300,000)
------------ ------------ ------------
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 6,115,000 8,551,000 10,078,000
Accretion of discount on notes receivable (303,000) -- --
Loss (gain) on foreclosure or sale of investments, net 7,130,000 (539,000) (203,000)
Minority interest in net loss (1,792,000) (2,865,000) (717,000)
Valuation losses 53,089,000 48,130,000 28,298,000
Changes in other assets and liabilities,
net of acquisition effects of affiliates:
Decrease (increase) in rents and accrued interest receivable 1,052,000 (516,000) (1,743,000)
(Increase) in other assets (539,000) (1,151,000) (558,000)
Increase (decrease) in accounts payable and accrued expenses 3,430,000 5,955,000 (584,000)
------------ ------------ ------------
Total adjustments 68,182,000 57,565,000 34,571,000
------------ ------------ ------------
Net cash (used in) provided by operating activities (3,815,000) 847,000 (729,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of and improvements to rental properties (3,887,000) (3,594,000) (5,826,000)
Proceeds from sale of rental properties 3,021,000 1,604,000 2,398,000
Proceeds from sales of and collections on notes receivable 16,958,000 1,271,000 9,716,000
------------ ------------ ------------
Net cash provided by (used in) investing activities 16,092,000 (719,000) 6,288,000
------------ ------------ ------------
Cash flows from financing activities:
Net payments under revolving line of credit -- -- (8,000,000)
Principal payments on long-term notes payable (6,643,000) (1,066,000) (15,326,000)
Distributions paid -- -- (5,062,000)
Distributions paid to minority interests (531,000) (387,000) (588,000)
Redemption of shares -- (43,000) (2,025,000)
Proceeds from issuance of long-term notes payable -- 181,000 26,621,000
Reduction of restricted cash 473,000 -- 211,000
------------ ------------ ------------
Net cash used by financing activities (6,701,000) (1,315,000) (4,169,000)
------------ ------------ ------------
Net increase (decrease) in cash 5,576,000 (1,187,000) 1,390,000
Cash, beginning of year 1,418,000 2,605,000 1,215,000
------------ ------------ ------------
Cash, end of year $ 6,994,000 $ 1,418,000 $ 2,605,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 29
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______________
1. Organization, Summary of Significant Accounting Policies and Chapter 11
Proceedings:
Organization
Commonwealth Equity Trust (the Trust) was organized under the laws of
the State of California pursuant to a Declaration of Trust dated July
31, 1973. From July 1973 until July 1989, the Trust engaged in a
continuous intrastate offering of its securities pursuant to permits
issued by the California Department of Corporations. Commencing
September 1, 1993, the Trust became self-administered.
Principles of Consolidation
At September 30, 1993, the consolidated financial statements include the
accounts of the Trust and its majority-owned affiliates: 3604 Fair Oaks
Boulevard (3604) and California Real Estate Investment Trust (CalREIT).
Majority-owned affiliates consist of a general partnership and a real
estate investment trust engaged in real estate activities in which the
Trust owns a greater than 50% interest.
Plan of Reorganization Under Chapter 11 Proceedings
On August 2, 1993, the Trust filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The bankruptcy case is
currently pending in the United States Bankruptcy Court for the Eastern
District of California, Sacramento Division and is entitled In re
Commonwealth Equity Trust, Case No. 93-26727-C-11. On March 30, 1994,
the Trust filed with the Court a Plan of Reorganization and Disclosure
Statement. On May 13, 1994, the Trust, together with the Equity
Security Holders' Committee and the Pacific Mutual Lenders
(collectively, together with the Trust, the "Plan Proponents"), filed
with the Court a First Amended Plan of Reorganization and a Disclosure
Statement with Respect to First Amended Plan of Reorganization.
On June 3, 1994, the Plan Proponents filed with the Court a Second
Amended Plan of Reorganization and Disclosure Statement with Respect to
Second Amended Plan of Reorganization. The Second Amended Plan provides
for, inter alia: (a) the restructuring of virtually all of the Trust's
secured and unsecured debt; (b) the issuance of new common stock of the
Trust to current equity security holders; (c) the issuance of new common
stock of the Trust to the Pacific Mutual Lenders; and (d) the issuance
of preferred stock of the Trust to the Pacific Mutual Lenders and other
creditors of the Trust will result in a dilution of the current equity.
26
<PAGE> 30
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
1. Organization, Summary of Significant Accounting Policies and Chapter 11
Proceedings, continued:
A hearing to approve the Disclosure Statement is scheduled for June 8,
1994. Neither the Disclosure Statement nor the Second Amended Plan will
be distributed to the Trust's equity security holders and creditors for
voting until the Court has approved the contents of the Disclosure
Statement. Accordingly, both the Second Amended Plan and Disclosure
Statement are subject to further revisions and modifications. After the
Disclosure Statement is approved, the Trust will transmit same to the
Trust's creditors and equity security holders for voting and request
that the Court confirm the Plan in accordance with the provisions of the
United States Bankruptcy Code.
On July 17, 1992, the Trust completed a restructuring of $78,445,000 in
unsecured obligations (see Note 9). The terms of the restructuring
agreement allowed for an extension of maturity dates for 5 1/2 years,
provided that certain conditions were met. Pursuant to the agreement,
if these conditions were not met, new secured notes (bearing interest at
9.5%) came due as follows: $3,445,000 on December 31, 1992; $2,500,000
on March 31, 1993, and $72,600,000 on June 30, 1993. The Trust
defaulted under the terms of the restructuring agreement and was unable
to meet its payment dates. After attempting to negotiate a further
restructuring, the Trust filed the aforementioned petition for
reorganization.
In the Trust's Chapter 11 case, all litigation and claims against the
Trust at the date of filing were automatically stayed, and the Trust
continues business operations as a debtor-in-possession. (See Note 8
for a description of debt in process of foreclosure and other matters).
The Bankruptcy Code prohibits creditors who are subject to the
jurisdiction of the Bankruptcy Court from attempting to collect their
pre-petition debts from the Trust, either by commencement or
continuation of a lawsuit or otherwise, unless the Bankruptcy terminates
or modifies the stay.
During the Chapter 11 proceedings, interest expense is recorded at
contractually stated amounts as the related debt is not in excess of
aggregate assets.
Neither of the Trust's majority owned affiliates, 3604 or CalREIT, filed
for protection under Chapter 11. However, 3604 is under a court
appointed receiver.
27
<PAGE> 31
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
1. Organization, Summary of Significant Accounting Policies and Chapter 11
Proceedings, continued:
Partnership Interests
Partnership investments of 20% to 50% are accounted for by the equity
method. Under this method, the investments are recorded at initial cost
and increased for partnership income and decreased for partnership
losses and distributions.
During the year ended September 30, 1990, the Trust entered into Placer
Ranch Partners, a limited partnership in which the Trust owns a 31%
interest. CR Properties, formerly CET/RJB, is a general partnership, in
which the Trust owns a 50% interest.
Income Taxes
In 1977, the Trust elected to be and was taxed as a real estate
investment trust (REIT) through the year ended September 30, 1992. A
REIT is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real
estate investment trust taxable income is distributed.
During the year ended September 30, 1993, the Trust did not qualify to
be taxed as a REIT. The termination of its REIT status is effective as
of October 1, 1992. Furthermore, the circumstances of that termination
were such that the Trust will not be eligible to re- elect to be taxed
as a REIT prior to its fifth taxable year which begins after its taxable
year ended September 30, 1992.
Rental Properties
Rental properties are carried at cost, net of accumulated depreciation
and less a valuation allowance for possible investment losses. The
Trust's valuation allowance for possible investment losses represents
the excess of the carrying value of individual properties over their
appraised or estimated net realizable value.
The additions to the valuation allowance for possible investment losses
are recorded after consideration of various external factors,
particularly the lack of credit available to purchasers of real estate
and overbuilt real estate markets, both of which adversely affect real
estate. A gain or loss will be recorded to the extent that the amounts
ultimately realized from property sales differ from those currently
estimated. In the event economic conditions for real estate continue to
decline, additional valuation losses may be recognized.
28
<PAGE> 32
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
1. Organization, Summary of Significant Accounting Policies and Chapter 11
Proceedings, continued:
The allowance for depreciation and amortization has been calculated
under the straight-line method, based upon the estimated useful lives of
the properties which range from 30 to 40 years. Expenditures for
maintenance, repairs and betterments which do not materially prolong the
normal useful life of an asset are charged to operations as incurred.
Contract termination costs described in Note 2 have been capitalized as
a carrying cost of the properties and are being amortized over one to
four years.
Real estate acquired by cancellation of indebtedness or foreclosure is
recorded at current fair market value at the date of acquisition, but
not in excess of the unpaid balance of the related loan plus costs of
securing title to and possession of the property.
Cash
The Trust invests its cash and restricted cash in demand deposits with
banks with strong credit ratings. Cash at September 30, 1993, in excess
of federally insured amounts was $4,951,000. The Trust has not
experienced any losses on these deposits.
Distributions in Excess of Cumulative Net Income
The Trust, in the past, maintained a general policy of distributing cash
to its shareholders in an amount that approximated taxable income plus
noncash charges such as depreciation and amortization. As a result,
distributions to shareholders exceeded cumulative net income.
Sales of Real Estate
The Trust complies with the provisions of Statement of Financial
Accounting Standards No. 66 (SFAS 66), "Accounting for Sales of Real
Estate." Accordingly, the recognition of gains on certain transactions
are deferred until such transactions have complied with the criteria for
full profit recognition under the Statement.
29
<PAGE> 33
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
1. Organization, Summary of Significant Accounting Policies and Chapter 11
Proceedings, continued:
Adoption of Authoritative Statement
In fiscal 1993, the Trust adopted Statement of Financial Accounting
Standards No. 107 (SFAS 107), "Disclosure About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of
all financial instruments, both assets and liabilities recognized and
not recognized in the balance sheet. The adoption of SFAS 107 resulted
only in additional disclosure requirements and had no effect on the
Trust's financial position or results of operations.
Net Loss Per Share
Net loss per share of beneficial interest has been computed based on the
weighted-average number of shares outstanding during the year of
25,093,000 in 1993, 25,095,000 in 1992 and 25,138,000 in 1991.
Reclassifications
Certain reclassifications have been made in the presentation of the 1992
and 1991 financial statements to conform to the 1993 presentation.
2. Related-Party Transactions:
Until September 1, 1993, administrative services were provided to the
Trust by B&B Property Investment, Development and Management Company,
Inc. (B&B). B&B's compensation consisted of 5% of the gross proceeds
from the sale of shares of beneficial interest, as well as a
reimbursement of certain expenses incurred in performing services for
the Trust. B&B earned real estate commissions in connection with
purchases and sales of Trust properties handled by B&B, as well as
leasing commissions. The agreement also provided that B&B reimburse the
Trust for any promotional or annual expenses which exceed the statutory
allowable limits established by the State of California.
30
<PAGE> 34
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
2. Related-Party Transactions, continued:
On December 27, 1989, the Trust and B&B terminated the portion of the
Advisory Agreement relating to CET which granted B&B an exclusive
authorization to act as a real estate broker in connection with the sale
of Trust properties owned at August 31, 1989. In consideration of this
termination, B&B received $595,000 in cash and two promissory notes
totalling $6,600,000 which have subsequently been paid. The $7,195,000
of consideration was capitalized as a carrying cost of the properties
and is fully amortized as of September 30, 1993.
Until September 1, 1993, property management responsibilities of the
Trust were assigned to B&B Property Investments, Inc. (B&B Property), a
wholly-owned subsidiary of B&B. The compensation for property
management services was negotiated by B&B Property and the Trustees for
each property when acquired.
Compensation, leasing commissions and expense reimbursements to B&B and
B&B Property were $2,826,000, $3,341,000 and $3,330,000 for the years
ended September 30, 1993, 1992 and 1991, respectively. The commissions
paid are included in other assets and amortized over the term of the
leases, typically five years.
The Trust entered into certain leasing transactions with North Main
Street Company (North Main), a company owned by the President and
Chairman of the Board of the Trust's former advisor, B & B. Until July
20, 1993, North Main leased the Trust's hotels under triple net leases,
which leases generated revenue to the Trust of $1,854,000 during the
year ended September 30, 1993. Generally such leases provided for
payment of the greater of a minimum rent or specified percentages of
preestablished revenue categories as stated in each hotel's lease. An
amount of $70,000 was owed by North Main to the Trust as of September
30, 1992.
The Trust terminated its lease arrangement with North Main on or about
July 20, 1993. North Main has asserted a claim under the Chapter 11
proceedings against the Trust arising out of that termination, which
claim the Trust disputes. In addition, North Main left unpaid certain
payables in connection with the hotels' operations, for which the Trust
disputes liability and which may be offset against any North Main claim.
At September 30, 1993 and 1992, the Trust has amounts due to CalREIT
aggregating $597,000 and $539,000, respectively. Such amounts bear
interest at 10% and are due on demand, without collateral, and are
eliminated in consolidation.
During the year ended September 30, 1993, the Trust paid fees of
$93,000, primarily for consulting, to a company owned by one of the
Trustees.
31
<PAGE> 35
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
3. Restricted Cash:
At September 30, 1993 and 1992, cash of $111,000 and $584,000,
respectively, is restricted under the terms of the agreement with Sun
Life Insurance Company of America in connection with their purchase of
senior participation interests in notes receivable (Note 6).
4. Rental Properties:
At September 30, 1993 and 1992, the Trust's rental property portfolio at
cost included office buildings, $86,931,000 and $142,622,000; commercial
buildings, $83,426,000 and $110,075,000; hotels, $64,787,000 and
$62,393,000 and land, $8,253,000 and $10,165,000, respectively.
Noncancellable operating leases at September 30, 1993, provide for
minimum rental income during each of the next five years of $10,702,000,
$9,902,000, $8,229,000, $5,876,000 and $4,284,000, respectively, and
$11,854,000 thereafter. Certain of the leases increase periodically
based on changes in the Consumer Price Index.
In March 1989, the Trust sold its Milpitas, California office building
for $10,000,000, comprised of a $5,000,000 promissory note
collateralized by the property and a $5,000,000 credit towards the
purchase of 680 acres in Roseville, California. Under the terms of the
sale agreement, the Trust agreed to lease the entire building for one
year and received an option to repurchase the property for $5,000,000.
The transaction was recorded as a financing arrangement for financial
accounting purposes and no gain or loss was recognized in accordance
with generally accepted accounting principles. In August 1990, the
Trust exercised its option to repurchase the property for $5,000,000 by
canceling the $5,000,000 promissory note collateralized by the property.
For income tax purposes, this transaction was accounted for as a sale
and subsequent repurchase of $5,000,000. Based on the different tax and
financial accounting treatments accorded this transaction, the Trust's
tax basis in the Milpitas, California office building is $5,000,000 less
than the financial accounting basis and the tax basis of the 680 acres
is $5,000,000 more than the financial accounting basis. In February
1990, the Trust contributed the 680 acres in Roseville, California to
Placer Ranch Partners, a limited partnership.
Rental properties with costs of $9,583,000 are subject to purchase
options exercisable on the part of the lessees.
32
<PAGE> 36
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
5. Partnership Interests:
As discussed in Notes 1 and 4, the Trust is a partner in Placer Ranch
Partners, a limited partnership in which the Trust owns a 31% limited
partnership interest. No income has been recognized in the Trust's
financial statements for 1993, 1992 and 1991 related to the Placer Ranch
Partners partnership as payment of such income is contingent upon the
future sale of land. The following represents an unaudited summary
balance sheet and operational information of the partnership for the
years ended September 30:
<TABLE>
<CAPTION>
ASSETS UNAUDITED
----------------------------------------------
1993 1992 1991
----------- ------------ ------------
<S> <C> <C> <C>
Cash $ 123,203 $ 111,104 $ 70,841
Receivables 7,938,750 5,748,750 3,558,750
Land and improvements 49,215,000 49,215,000 49,215,000
Organizational costs, net of
accumulated amortization 27,622 48,342 69,056
----------- ----------- -----------
$57,304,575 $55,123,196 $52,913,647
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
1993 1992 1991
----------- ----------- -----------
Accounts payable, predominantly
Placer Ranch, Inc. $ 120,842 $ 117,318 $ 117,319
Capital, Placer Ranch, Inc. 30,985,688 30,994,068 30,980,579
Capital, Commonwealth Equity Trust,
at basis to the partnership, plus
allocated income 26,198,045 24,011,810 21,815,749
----------- ----------- -----------
$57,304,575 $55,123,196 $52,913,647
=========== =========== ===========
REVENUE AND EXPENSES
Revenue $ 2,209,930 $ 2,236,335 $ 2,232,897
Expenses 32,071 26,786 19,389
----------- ----------- -----------
Net income $ 2,177,859 $ 2,209,549 $ 2,213,508
=========== =========== ===========
Investment in Placer Ranch Partners,
Limited partnership, at the Trust's
financial accounting basis as
described in Note 4, net of valuation
allowance of $9,701,000 in 1993 $ 4,000,000 $13,701,000 $13,701,000
=========== =========== ===========
</TABLE>
33
<PAGE> 37
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
5. Partnership Interests, continued:
The Trust is also a partner in CR Properties, a general partnership, in
which the Trust owns a 50% interest. CR Properties is a limited partner
in a partnership which owns an office building in Sacramento,
California. No portion of the CR Properties partnership loss has been
recognized in the Trust's financial statements for 1993, 1992 and 1991
as the partnership agreement specifies that net losses shall be
allocated 100% to the other partner. As CR Properties has a limited
partnership interest, it has no contingent liability with respect to the
office building debt.
<TABLE>
<S> <C> <C> <C>
Investment in CR Properties general
partnership, net of valuation
allowance of $7,728,000 in 1993
and $4,957,000 in 1992 $ -- $2,771,000 $7,728,000
=========== ========= =========
</TABLE>
6. Notes Receivable:
In order to facilitate sales of real estate, the Trust has accepted
partial payment in the form of notes receivable collateralized by deeds
of trust. Additionally, the Trust has invested in a variety of loans
collateralized by deeds of trust. As of September 30, 1993 and 1992,
the Trust had long-term notes receivable, collateralized by deeds of
trust, of (before valuation allowance and unaccreted discount)
$27,692,000 and $38,349,000, respectively. Generally the notes are
collateralized by real estate properties in California.
The notes are to be repaid from the cash flow of the property or
proceeds from the sale or refinancing of the property. At September 30,
1993, $2,448,000 of such notes were delinquent. Contractually scheduled
principal collections over the next five years, excluding delinquent
notes, are as follows: $1,129,000, $2,055,000, $7,349,000, $2,860,000,
$815,000, respectively, and $11,036,000 thereafter. The notes bear
interest at rates ranging from 8% to 13% as of September 30, 1993. For
the year ended September 30, 1993, the overall effective rate was 8.2%.
During the year ended September 30, 1990, the Trust sold $13,753,000 in
senior participation interests in certain notes receivable to Sun Life
Insurance Company of America, a Maryland corporation. The participation
agreement specifies that upon default of any note receivable covered by
the agreement, Sun Life will have priority in any proceeds before the
Trust. Total participation outstanding at September 30, 1993 and 1992,
was $1,194,000 and $11,812,000, respectively.
34
<PAGE> 38
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
7. Allowance for Valuation Losses:
In connection with preparing its plan or reorganization, as described in
Note 1, the Trust engaged outside professionals to assist in developing
the plan related to its real estate investments. Based on this review
of the real estate investments, the Trust does not expect losses in
excess of the valuation allowances established. Adverse economic
factors, particularly the lack of credit available to purchasers of real
estate and overbuilt real estate markets resulting in declining lease
renewal rates, necessitated a provision for valuation losses. If such
adverse economic factors continue, additional valuation loss provisions
may be required.
Analysis of changes in the allowance for possible losses on real estate
investments, partnership interests, notes receivable, and rents and
interest receivable for fiscal years ended September 30, 1993, 1992 and
1991 follow:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Rental Properties
-----------------
Allowance for valuation losses on
rental property investments:
Beginning balance $ 66,195,000 $34,117,000 $ 7,972,000
Provision for valuation losses 37,386,000 34,575,000 26,145,000
Amounts charged against allowance
for valuation losses (24,922,000) (2,497,000) --
------------ ----------- -----------
Ending balance $ 78,659,000 $66,195,000 $34,117,000
============ =========== ===========
Partnership Interests
---------------------
Allowance for valuation losses on
partnership interests:
Beginning balance $ 4,957,000 $ -- $ --
Provision for valuation losses 12,472,000 4,957,000 --
------------ ----------- -----------
Ending balance $ 17,429,000 $ 4,957,000 $ --
============ =========== ===========
</TABLE>
35
<PAGE> 39
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
7. Allowance for Valuation Losses, continued:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Notes Receivable
----------------
Allowance for valuation losses and unaccreted
discounts on notes receivable:
Beginning balance $ 6,609,000 $ -- $ --
Provision for valuation losses 2,971,000 8,269,000 --
Discounts on notes and other, net 921,000 -- --
Amounts charged against allowance
for valuation losses (2,071,000) (1,660,000) --
----------- ----------- ----------
Ending balance $ 8,430,000 $ 6,609,000 $ --
=========== =========== ==========
Rents and Interest Receivable
-----------------------------
Allowance for bad debt losses on
rents and interest receivable:
Beginning balance $ 1,948,000 $ 1,948,000 $ 500,000
Provision for losses 906,000 -- 2,153,000
Amounts charged against allowance
for losses (376,000) -- (705,000)
----------- ----------- ----------
Ending balance $ 2,478,000 $ 1,948,000 $1,948,000
=========== =========== ==========
</TABLE>
In addition, the Trust has established an allowance for valuation losses
on other assets in the amounts of $590,000 and $330,000 at September 30,
1993 and 1992, respectively.
8. Long-Term Notes Payable:
As of September 30, 1993 and 1992, the Trust had long-term notes
payable, most of which are collateralized by deeds of trust on rental
properties and are subject to compromise, due in installments extending
to the year 2008, with interest rates ranging from 7.5% to 18.0% for the
years ended September 30, 1993 and 1992. Contractually scheduled
principal payments during each of the next five years are $19,282,000,
$11,556,000, $27,178,000, $477,000 and $3,641,000, respectively, and
$5,439,000 thereafter.
36
<PAGE> 40
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
8. Long-Term Notes Payable, continued:
The Trust is in default under the notes, due to, among other factors,
its filing a petition under Chapter 11 (see Note 1).
As a result of reorganization proceedings described in Note 1, the
amount and/or timing of these future payments may change. Long-term
notes payable, mostly collateralized by deeds of trust on rental
properties, in the amount of $15,874,000 are collateralized by CalREIT
properties and 3604 and, therefore, are not subject to compromise.
Two rental properties collateralizing debt of $11,272,000 at September
30, 1993, are in the hands of receivers and are in the process of
foreclosure. The assets have been valued in the financial statements
equal to the nonrecourse deeds of trust debt.
Subsequent to September 30, 1993, a senior mortgage holder filed an
action with the Bankruptcy Court for relief from stay with regard to its
indebtedness which totaled $28,859,000 at September 30, 1993, and which
is collateralized by rental properties with a carrying value of
$35,830,000 at September 30, 1993. This action is currently scheduled
for trial in June 1994.
9. Principal and Deferred Interest Notes:
On July 17, 1992, the Trust completed a restructuring of $46,000,000 in
debentures outstanding with interest rates ranging from 9% to 9.94%, and
a bank loan of $29,000,000 at 9%, along with unpaid interest to July 31,
1992, aggregating $3,445,000. Under that restructuring agreement,
substantially all of the Trust's assets, subject to previously existing
liens, were pledged as collateral for the restructured debt. All sales,
refinancings or other disposition of such pledged assets were subject to
review by the secured lenders prior to completion. These secured notes
bear contractual interest at 9.5% and were due $3,445,000 on December
31, 1992, and additional amounts of $2,500,000 on March 31, 1993 and
$72,600,000 on June 30, 1993 (which date could have been extended if
certain conditions which were not met had been met). At September 30,
1993, the balance was $72,600,000.
The terms of the debt restructuring prohibit the Trust from making
distributions to shareholders until all principal and capitalized
interest scheduled for payment through December 31, 1993, have been
paid. No distributions were made by the Trust for the fiscal years
ended September 30, 1993 and 1992.
The Trust is in default under the debt restructuring agreement due to,
among other factors, its filing a petition under Chapter 11 (see Note
1).
37
<PAGE> 41
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
10. Distributions:
No cash distributions were made to holders of shares of beneficial
interest for the fiscal years ended September 30, 1993 and 1992. A cash
distribution (which was entirely return of capital) of $.20 per share of
beneficial interest was made for the fiscal year ended September 30,
1991.
11. Statements of Cash Flows Supplemental Information:
In connection with the purchase of property and improvements, the Trust
entered into various noncash transactions as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Property cost $ -- $ 7,225,000 $18,492,000
Other additions 4,267,000 5,129,000 4,609,000
---------- ----------- -----------
Total additions 4,267,000 12,354,000 23,101,000
---------- ----------- -----------
Debt incurred by the Trust -- 3,060,000 5,044,000
Other liabilities incurred
by the Trust 305,000 1,476,000 --
Notes receivable applied
to purchase -- 5,440,000 10,030,000
Valuation loss on in-substance
foreclosures -- (1,565,000) --
Other assets applied to purchase 75,000 349,000 2,201,000
---------- ----------- -----------
Total deductions 380,000 8,760,000 17,275,000
---------- ----------- -----------
Cash used $3,887,000 $ 3,594,000 $ 5,826,000
========== =========== ===========
</TABLE>
The property cost additions of $7,225,000 during 1992 resulted from
recognition of in-substance foreclosures on two properties securing
notes receivable and related interest aggregating $8,790,000, resulting
in a valuation loss of $1,565,000.
In 1991, the Trust was allocated an additional capital contribution of
$166,000 in the CR Properties Partnership in conjunction with the
purchase of property.
38
<PAGE> 42
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
11. Statements of Cash Flows Supplemental Information, continued:
In connection with the sale of property, the Trust entered into various
noncash transactions as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Sales price $16,653,000 $13,406,000 $14,868,000
Notes receivable 9,600,000 7,112,000 11,429,000
Notes payable assumed by buyer and
other liabilities applied to sales
price 4,032,000 4,690,000 1,041,000
---------- ---------- ----------
Cash received $ 3,021,000 $ 1,604,000 $ 2,398,000
========== ========== ==========
Cost of property sold $23,764,000 $16,649,000 $15,777,000
========== ========== ==========
</TABLE>
Four properties which collateralized notes payable in the aggregate
amount of $29,845,000 were foreclosed upon during the year ended
September 30, 1993, causing a net loss of $4,783,000 to be recorded.
During the year ended September 30, 1993, the Trust sold six notes
receivable for net proceeds of $11,538,000, reduced by other costs
(including delinquent taxes, fees and closing costs) of $1,297,000,
producing net cash proceeds to the Trust of $10,241,000, resulting in a
loss of $662,000. Two of the six notes were treated differently than
the other four. The Trust sold a partial interest in those notes for
$4,968,000 in cash (resulting in a loss of $204,000). The Trust's
retained interest in those two notes amounts to $3,047,000 and is
noninterest bearing. A discount of $1,189,000 was recorded on the
Trust's portion of the notes as of September 30, 1992, using an imputed
interest rate of 15%. The agreement provides for the purchaser to
receive interest of 18%, representing all interest on the total balance
of such notes. In addition, the purchaser will receive all payments on
the notes until interest and principal is paid in full. In the event
the notes go into default, the Trust must cure such default or lose its
remaining interest of $3,047,000 in the notes.
In 1992, CalREIT modified the terms of a note receivable collateralized
by rental property. As a provision of the modification, $1,275,000 of
deferred interest and $214,000 of accrued interest was added to the
principal amount of the note.
Interest paid on the Trust's outstanding debt for the years ended
September 30, 1993, 1992, and 1991 was $12,579,000, $16,762,000 and
$17,987,000, respectively.
39
<PAGE> 43
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
12. Commitments and Contingencies:
Leases
The Trust is obligated under land leases to the year 2033. The minimum
annual payment under the leases for each of the next five years are
$121,000, $121,000, $121,000, $104,000, $104,000, respectively, and
$3,324,000 thereafter.
Litigation
At the time the Trust filed its Chapter 11 petition in August 1993, it
was party to a number of lawsuits. Most involved ordinary disputes
common in the real property management business, and amounts immaterial
to the Trust's overall financial situation.
Other lawsuits involved the following matters:
. Claims filed by the Pacific Mutual Lenders, Senior Mortgage Holders
and other Claim Holders as summarized in Notes 1, 2 and 8.
. Litigation filed in 1991 naming the individual Trustees of the
Trust and B & B, among others, as defendants, and the Trust as a
nominal defendant. It sought, among other things, a declaration
that the Trust's management agreement with B & B was invalid and
imposition of a constructive trust on and recovery of $7,195,000 by
B&B in 1989. (See Note 2). This case had been in settlement
discussions prior to the filing of the Chapter 11 petition.
. A complaint filed by about 130 former Trust shareholders in 1993
naming the Trust, current and former Trustees, B & B and its
shareholders and various current and former professional advisors
and consultants to the Trust as defendants. The complaint alleged
breach of fiduciary duty, violation of federal and state securities
laws, violation of civil RICO, fraud, negligent misrepresentation,
negligence and civil conspiracy. Subsequently, the action was
dismissed without prejudice as to the Trust.
. A complaint was filed in April 1994 by the franchisor of most of
the Trust's hotels, alleging trademark infringement and unfair
business practices. Following extensive negotiations, the parties
entered into a settlement agreement approved by the Bankruptcy
Court which involved ongoing licensing arrangements for the hotels.
40
<PAGE> 44
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
12. Commitments and Contingencies, continued:
Other
In accordance with bankruptcy proceedings, claims are filed with the
Court by specified dates. At September 30, 1993, the Trust recorded its
estimate of valid claims.
The Trust believes, based on the supporting documentation that it has,
that the remaining excess claims will ultimately be determined not to be
valid. However, there is no assurance that the Court will not hold
additional claims from the remaining excess claims to be valid; and, if
the Court does so hold, there is no practical way of estimating what the
total amount of additional claims would be.
13. Basis of Presentation:
The financial statements have been presented on a going concern basis
which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business; however, as a result of
the Chapter 11 proceedings and related litigation, such realization of
assets and satisfaction of liabilities are subject to significant
uncertainties. These financial statements include adjustments and
reclassifications that have been made to reflect indebtedness as
extended under the Plan of Reorganization, as described in Note 1. Such
indebtedness is included in "Liabilities Subject to Compromise." These
financial statements do not include any adjustments that would be
required should the Trust be unable to continue as a going concern or as
a result of the finalization of the Chapter 11 proceedings.
14. Liabilities Subject to Compromise:
The Trust has $133,065,000 of liabilities which are subject to
compromise in Chapter 11 proceedings as follows:
<TABLE>
<S> <C>
Long-term notes payable, collateralized by
deeds of trust on real property $ 49,099,000
Senior secured notes payable 72,600,000
Other notes payable 2,600,000
Pre-petition accounts payable and
accrued expenses 8,766,000
-----------
$133,065,000
===========
</TABLE>
41
<PAGE> 45
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
15. Reorganization Items:
Reorganization items are calculated from August 2, 1993, the date on
which the Trust filed its petition for reorganization, and consist of
the following:
<TABLE>
<S> <C>
Interest earned on accumulated cash $ 27,000
Professional fees (706,000)
---------
Net reorganization items $(679,000)
=========
</TABLE>
16. Fair Value of Financial Instruments:
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Trust.
The estimated fair value of the Trust's financial instruments at
September 30, 1993, is as follows:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
-------- ----------
<S> <C> <C>
Financial Assets:
Cash and restricted cash $ 7,105,000 $ 7,105,000
Notes receivable 19,262,000 19,262,000
Rents and other receivables 1,179,000 1,179,000
Financial liabilities:
Notes payable $140,173,000 (1)
</TABLE>
(1) It was not practical to value notes payable due to the
reorganization proceedings described in Note 1.
42
<PAGE> 46
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
17. Subsequent Event - CalREIT Board of Trustees:
Effective April 14, 1994, CalREIT elected a new Board of Trustees,
comprising Frank Morrow, Howard Cohn and Mark Bennett, all of whom are
key management personnel of the Trust. CalREIT also terminated certain
management and advisory agreements with B & B and B & B Property.
Certain disputes with B & B and B & B Property in connection with that
termination were settled in May 1994.
18. Income Taxes:
At September 30, 1993, the Trust had tax net operating loss
carryforwards (NOL) which may be applied against future taxable income
and which expire as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30 Federal California
------------------ ------- ----------
<S> <C> <C>
2003 $ 370,000 $ 5,000
2004 4,834,000 2,592,000
2005 4,685,000 2,538,000
2006 8,948,000 4,128,000
2007 31,338,000 15,847,000
----------- -----------
$50,175,000 $25,110,000
=========== ===========
</TABLE>
The Trust's alternative minimum tax operating loss carryforwards are
substantially the same as its NOLs at September 30, 1993.
The Trust's ability to use its NOLs to offset future income is subject
to restrictions enacted in the Internal Revenue Code (Code). These
restrictions limit the Trust's future use of its NOLs if certain stock
ownership changes described in the Code (referred to herein as an
Ownership Change) occur.
The Trust does not believe that any recent or historical changes in
stock ownership have resulted in an Ownership Change through the date of
these financial statements. However, depending on final approval of a
Plan of Reorganization and other events as described in Note 1, changes
in stock ownership which would limit the Trust's future use of its NOLs
may occur.
43
<PAGE> 47
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
18. Income Taxes, continued:
As stated in Note 1, during the year ended September 30, 1993, the Trust
failed to qualify under the Internal Revenue Code to be taxed as a REIT.
The lack of a need for a provision for income taxes has been calculated
for fiscal 1993 according to the precepts of Accounting Principles Board
Opinion No. 11, "Accounting for Income Taxes."
The Trust plans to adopt Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes," beginning with the fiscal
year ending September 30, 1994. The Trust estimates that the impact on
the financial statements as a result of the application of SFAS 109 will
not be material.
44
<PAGE> 48
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
19. Condensed Financial Statements of Commonwealth Equity Trust (CET) Only:
Condensed financial statements as of and for the year ended September
30, 1993, for CET only are as follows:
Commonwealth Equity Trust
(Debtor-in-Possession)
Condensed Balance Sheet
September 30, 1993
__________
ASSETS
<TABLE>
<S> <C>
Investments:
Rental properties, net $ 107,413,000
Investment in CalREIT 22,483,000
Other investments 9,300,000
-------------
139,196,000
Cash 3,213,000
Other assets 3,950,000
-------------
Total assets $ 146,359,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities subject to compromise $ 133,065,000
Due to CalREIT, subject to compromise 597,000
Post petition accounts payable and accrued expenses 2,896,000
-------------
Total liabilities 136,558,000
-------------
Shareholders' equity:
Shares of beneficial interest 25,093,000
Additional paid in capital 219,848,000
Accumulated deficit (235,140,000)
-------------
Total shareholders' equity 9,801,000
-------------
Total liabilities and shareholders' equity $ 146,359,000
=============
</TABLE>
45
<PAGE> 49
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
19. Condensed Financial Statements of Commonwealth Equity Trust (CET) Only,
continued:
Commonwealth Equity Trust
(Debtor-in-Possession)
Condensed Statement of Operations
for the year ended September 30, 1993
__________
<TABLE>
<S> <C>
Revenues:
Operating revenues $ 20,075,000
Interest 991,000
Allocable loss from CalREIT and 3604 (5,482,000)
------------
Total revenue 15,584,000
------------
Expenses:
Operating expenses 11,285,000
Interest 13,184,000
Depreciation and amortization 5,024,000
General and administrative 4,153,000
Valuation losses 45,778,000
------------
Total expenses 79,424,000
------------
Loss before reorganization items, loss on
foreclosure or sale of investments (63,840,000)
Reorganization items (679,000)
------------
Loss before loss on foreclosure or sale of investments (64,519,000)
Loss on foreclosure or sale of investments, net (7,478,000)
------------
Net loss $(71,997,000)
============
</TABLE>
46
<PAGE> 50
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
19. Condensed Financial Statements of Commonwealth Equity Trust (CET) Only,
continued:
Commonwealth Equity Trust
(Debtor-in-Possession)
Condensed Statement of Cash Flows
for the year ended September 30, 1993
__________
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(71,997,000)
------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 5,024,000
Valuation losses 45,778,000
Accretion of note discount (287,000)
Allocable loss from CalREIT and 3604 5,482,000
Loss on foreclosure or sale of investments, net 7,478,000
Changes in other assets and liabilities, net 4,690,000
------------
Total adjustments 68,165,000
------------
Net cash used by operating activities (3,832,000)
------------
Cash flows from investing activities:
Purchases of and improvements to rental properties (2,778,000)
Distributions from CalREIT, net 1,868,000
Proceeds from sales of and collections on notes receivable 11,499,000
Proceeds from sales of rental properties 1,756,000
------------
Net cash provided by investment activities 12,345,000
------------
Cash flows from financial activities:
Principal payments on long-term notes payable (6,577,000)
------------
Net cash used by financing activities (6,577,000)
------------
Net increase in cash 1,936,000
Cash, beginning of year 1,277,000
------------
Cash, end of year $ 3,213,000
============
</TABLE>
47
<PAGE> 51
COMMONWEALTH EQUITY TRUST
(Debtor-in-Possession)
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________
20. Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
1993
----
<S> <C> <C> <C> <C>
Revenues $6,535,000 $6,526,000 $6,086,000 $7,568,000
========= ========= ========= =========
Reorganization items -- -- -- $(679,000)
=======
Gain (loss) on fore-
closure or sale of
investments, net $465,000 $(303,000) $(154,000) $(7,138,000)
======= ======= ======= =========
Net loss $(2,908,000) $(3,958,000) $(2,602,000) $(62,529,000)(1)
========= ========= ========= ==========
Net loss per share $(.12) $(.16) $(.10) $(2.49)
=== === === ====
1992
----
Revenues $8,292,000 $7,541,000 $7,481,000 $8,072,000
========= ========= ========= =========
Gain (loss) on sale
of rental properties $921,000 $ -- $44,000 $(426,000)
======= == ====== =======
Net (loss) $(1,422,000) $(3,537,000) $(3,452,000) $(48,307,000)(2)
========= ========= ========= ==========
Net (loss) per share $(.06) $(.14) $(.14) $(1.92)
=== === === ====
</TABLE>
(1) Includes $53,089,000 in valuation losses.
(2) Includes $48,130,000 in valuation losses.
48
<PAGE> 52
July 21, 1994
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Trustees was composed of five and six persons during the year
ended September 30, 1993. Two positions on the Board are currently vacant.
The following table sets forth certain information as of June 30, 1994 with
respect to each of the Trustees of The Trust and the Trust's single officer.
<TABLE>
<CAPTION>
Trustee
Name Age Since Office
---- --- ------- ------
<S> <C> <C> <C>
Doris V. Alexis 72 1979 President of the Board of Trustees
Richard Rathfon 75 1980 Trustee
Albert S. Rodda 82 1983 Trustee
Steven H. Gold 54 1991 Trustee
Howard E. Cohn 42 1992 Trustee
Frank A. Morrow 54 -- Chief Executive Officer
</TABLE>
There are no arrangements or understandings between any trustee and
any other person pursuant to which the trustee was or is to be selected as a
trustee. There are no family relationships between any trustees.
Until September 1, 1993, Jeffrey B. Berger served as Secretary of the
Trust. William Gallagher served as a Trustee from April 28, 1993 until he
resigned on August 9, 1993.
The principal occupations and affiliations of the Trustees and Chief
Executive Officer as of June 30, 1994 were as follows:
DORIS V. ALEXIS, President of the Board of Trustees, formerly served
as the Director of the California Department of Motor Vehicles. She was
appointed to that position by the Governor in 1977 after 23 years of service
with the Department of Motor Vehicles. She has experience in management,
planning and budgeting and is currently a senior consultant to the National
Traffic Safety Institute and a member of the Advisory Council to Californians
for Drug Free Youth. She is the past President of the Board of Directors of
the YWCA.
HOWARD E. COHN serves in the capacity of Operations Manager for the
Trust. He has specialized in general real estate law and real estate, personal
injury and insurance defense litigation since 1980. Mr. Cohn received a B.S.
degree in business administration from Menlo College in 1974 and a Juris Doctor
degree from Western State University College of Law in 1976. Mr Cohn is also a
Trustee and Secretary of the Trust's 77% owned subsidiary California Real
Estate Investment Trust.
49
<PAGE> 53
STEVEN H. GOLD is Chairman and Chief Financial Officer of Center
Financial Group, which arranges debt and equity financing. Mr. Gold
specializes in financing major real estate developments including income and
residential properties. he also originates joint ventures for developers with
institutional partners. Mr. Gold writes regularly for real estate publications
on real estate investment and financing. he has lectured at major universities
and has given seminars throughout the United States, Canada and Western Europe
on these topics. Mr. Gold earned a Master's Degree in Business Administration
from the University of California, Los Angeles. He is a Chairman of the Real
Estate Advisory Board of UCLA and is a member of the Dean's Council of the UCLA
School of Architecture and Urban Planning. He is listed in Who's Who in Real
Estate and is a director of numerous civic organizations, including the
Anti-Defamation League, The United Jewish Appeal and the Guardians.
RICHARD RATHFON, now retired, was the Sacramento City Manager from
1968 to 1976. He has over 31 years of diversified experience in housing,
architecture and urban planning. He is currently Chairman of the Capital Area
Development Authority.
ALBERT S. RODDA, A.B., M.A. AND Ph.D. from Stanford University, taught
American History and Principles of Economics for 20 years at Sacramento City
College. He served as Senator in the California State Senate for 22 years and
is an Executive Secretary of the California Commission on State Finance for two
years. During World War II he served in the Pacific as a gunnery officer with
the U.S. Navy.
FRANK A. MORROW is Chief Executive Officer of the Trust. He received
a B.S. from the U.S. Naval Academy in 1961 and an M.B.A. from Stanford
University in 1971. He has a range of real estate and management experience,
having served as Director of Real Estate for Stanford University, Senior Vice
President/Regional Manager of Bedford Properties, Senior Vice President of
Boise Cascade Urban Development Corporation and assistant to the Chairman of
Hawaiian Airlines, among other experience.
POST-REORGANIZATION MANAGEMENT. The Amended Plan or Reorganization
provides that, on the plan effective date, the Board of Trustees will consist
of five persons, one of whom shall be designated by the Trust, provided that
the Trust's designee is Mr. Morrow; and three of whom shall be designated by a
majority vote of an election committee consisting of two Pacific Mutual Lender
designees and one Equity Committee designee. The Trustees shall serve for an
initial one year period.
The Plan Proponents have reached an agreement with Frank Morrow on the
terms of his continued management services after the plan effective date. The
agreement will provide that Morrow will act as Chief Executive Officer for a
term of one year, for monthly compensation of $25,000, commencing on the
effective date, and terminable at any date with or without cause by the
Trustees. If the contract is terminated before the first anniversary date or
not renewed at the first anniversary, Mr. Morrow will be entitled to receive a
termination payment equal to one year's salary ($300,000).
50
<PAGE> 54
ITEM 11. EXECUTIVE COMPENSATION
The following table lists the cash compensation of the Trustees and
the officers of the Trust for the fiscal year ended September 30, 1993:
<TABLE>
<CAPTION>
Name of individual or
number of persons in Capacities in Cash
group which served compensation
--------------------- ------------ ------------
<S> <C> <C>
All Trustees and Trustees and $150,000 (2)
officers as a group Secretary
(seven people) (1)
</TABLE>
(1) Includes compensation paid to Jeffrey B. Berger as Secretary
of the Trust from October 1, 1992 through August 31, 1993.
(2) Does not include amounts paid to Center Financial Group, a
company owned by Mr. Gold, a trustee. Also does not include
amounts paid to Howard Cohn, a trustee, for legal services.
See "Certain Relationships and Related Transactions."
Trustees and Officer
Each Trustee is paid $2,000 for each Trustees' meeting attended.
During the fiscal year ended September 30, 1993, 8 regular meetings and 3
special meetings for the Trustees were held.
In August 1992, the Trust established a policy pursuant to which
Trustees who are requested to render extraordinary service to the Trust receive
$2,000 per full day, or a pro rata amount for less than a full day, plus
expenses incurred in performing such services. If any Trustee receives a
transaction fee in connection with any services performed for the Trust,
expenses and extraordinary compensation paid or payable will be credited
against the amount of the transaction fee.
51
<PAGE> 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Following is the beneficial security ownership of the trustees of the
Trust and all trustees, officers and former officers as a Group who owned
Shares at June 30, 1994. Except as otherwise indicated, all securities are
directly or beneficially owned by the named trustee. No person is known to the
Trust to own beneficially more than 5% of the outstanding Shares.
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial Percent
Title of Class Owner Ownership of Class
- - -------------- ------------------ ----------------- --------
<S> <C> <C> <C>
Shares of Doris V. Alexis 232 *
Beneficial
Interest Jeffrey B. Berger 1,161 *
Richard Rathfon 705 *
Albert S. Rodda 1,524 *
All trustees, officers
and former officers
as a group (7 people) 3,622 *
</TABLE>
* Ownership represents less than 1% of the total outstanding Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jeffrey B. Berger, former Secretary and a former Trustee of the
Trust, is Chairman of the Board, President and a shareholder of B&B Property
Investment, Development and Management Company, Inc., which was financial
advisor to the Trust until September 1, 1993. An Advisory Agreement between
the Trust and B&B provided for compensating for various types of services at
such rates as may be agreed upon and reimbursement of expenses incurred in
performing such services. The agreement provided that B&B would reimburse the
Trust for any promotional or annual expenses which exceeded the statutory
allowable limits established by the Stated of California. The portion of the
Advisory Agreement which related to property management services was
transferred by the Trust and B&B to B&B's wholly owned subsidiary, B&B Property
Investments, Inc. ("B&B Property") on December 20, 1979.
During the fiscal year ended September 30, 1993, B&B and B&B property
received $2,826,000 as compensation, leasing commissions, and expense
reimbursements.
52
<PAGE> 56
In addition, Mr. Berger is sole shareholder of North Main St. Co.,
which managed the Trust's hotel properties pursuant to leases, each with a
primary term expiring December 31, 1998, which provide (subject to reduction
during scheduled capital improvements projects) for annual rent of the greater
of $2,520,000 or a percentage rent based on certain revenue categories from the
hotels. CET received $1,854,000 from North Main St. Co pursuant to such
leases in 1993 before terminating the lease arrangement on or about July 20,
1993.
In October 1992, the Trust entered into an Exchange Agreement with
California Real Estate Investment Trust ("Cal REIT"), its 77% owned subsidiary,
pursuant to which the Pavillions at Mesa property in Mesa, Arizona was
exchanged for notes receivable collateralized by deeds of trust owned by Cal
REIT. The value of the transaction was estimated at the time to be
approximately $6,300,000. Each party paid one-half of the expenses of the
exchange. Thereafter, the Trust sold $1,084,000 of the notes for $920,000 in
cash.
Howard E. Cohn, a Trustee of the Trust, received $252,219 fees for
legal from the Trust in Fiscal 1993.
During the year ended September 30, 1993, the Trust paid fees of
$93,000 to a company owned by Mr. Gold, a Trustee, for consulting services in
connection with obtaining debt for the Trust.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) (1) FINANCIAL STATEMENTS Page
- - ------- -------------------- ----
<S> <C>
Included in Part II of this report:
Independent Auditors' Reports 19-21
Consolidated Balance Sheets at September 30, 1993 and 1992 22
Consolidated Statements of Operations, Years Ended
September 30, 1993, 1992 and 1991 23
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended September 30, 1993, 1992 and 1991 24
Consolidated Statements of Cash Flows, Years Ended
September 30, 1993, 1992 and 1991 25
Notes to Consolidated Financial Statements 26-48
</TABLE>
53
<PAGE> 57
(a) (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND EXHIBITS FILED
<TABLE>
<S> <C> <C>
Schedule IX - Short Term Borrowings 56
Schedule X - Supplementary Income Statement Information 57
Schedule XI - Real Estate and Accumulated Depreciation 58-62
Schedule XII - Mortgage Loans on Real Estate 63-65
</TABLE>
The statements and schedules referred to above should be read in
conjunction with the financial statements with 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 consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
The Trust filed three reports on Form 8-K during the quarter ended
September 30, 1993 as follows:
<TABLE>
<CAPTION>
Financial
Date of Report Item Reported Statements Filed
-------------- ------------------------- ----------------
<S> <C> <C>
July 7, 1993 Lenders' notice of default N/A
and entry of the trust into
a Standstill Agreement with
the Lenders.
July 29, 1993 Further negotiations with N/A
the lenders and the
execution of a new Standstill
Agreement.
August 11, 1993 The Trust's filing of a N/A
Chapter 11 petition.
</TABLE>
54
<PAGE> 58
(c) Exhibits
3.1 Declaration of Trust, filed as Exhibit A to the Trust's Form
10, filed on December 31, 1979, and incorporated herein by
reference.
10.1 Services and Confidentiality Agreement dated as of March 8,
1994, between the Trust and FAMA Management, Inc.
16. Letter dated November 15, 1993 from KPMG Peat Marwick to
Securities and Exchange Commission, filed as Exhibit A to
the Trust's Form 8-K/A Report dated November 3, 1993 and
incorporated herein by reference.
55
<PAGE> 59
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE IX - SHORT-TERM BORROWINGS
Years ended September 30, 1993, 1992 and 1991
<TABLE>
<CAPTION>
Weighted Maximum Average Weighted
Category Balance Average Amount Amount Average
Of End of Interest Outstanding Outstanding Interest Rate
Year Borrowing Year*** Rate During Year During Year* During Year**
---- --------- ------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1993 Bank $ 0 -- $ 0 $ 0 --
Borrowings
1992 Bank $ 0 8.00% $29,000,000 $29,000,000 8.40%
Borrowings
1991 Bank $29,000,000 9.50% $38,150,000 $32,330,035 9.60%
Borrowings
</TABLE>
* Average borrowings were computed by dividing the borrowed amounts,
which were weighted on the basis of the number of days outstanding,
by 365 days for 1991 and by 259 days for 1992.
** The weighted average interest rate during the year was determined by
dividing total interest expense related to short-term borrowings by
average borrowings outstanding during the year.
*** As a result of the July 17, 1992 debt restructuring agreement, the
note payable to bank is currently secured and included as part of the
principal and deferred interest notes.
56
<PAGE> 60
<TABLE>
<CAPTION>
Charged to Costs and Expenses
Item Year Ended September 30,
- - ---------------------------------- --------------------------------------
1993 1992 1991
---------- --------- ---------
<S> <C> <C> <C>
Real estate taxes $3,080,000 2,757,000 2,570,000
Repairs and maintenance 1,721,000 1,519,000 1,466,000
</TABLE>
57
<PAGE> 61
- - --------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 1993 Page 1 Part A
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- - ----------------------------------------------- -------------- -------------------------- -----------------------------
Cost Capitalization Subsequent
Initial Cost to Trust to Acquisition
-------------------------- ------------------------------
Buildings,
Improvements
and Personal
Description Encumbrances Land Property Improvements Carrying Cost
----------- ------------ --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OFFICE BUILDINGS:
Milpitas, Milpitas, California $ - 2,957,000 4,475,000 3,285,000 -
Pacific Palisades, Pacific Palisades, California 8,793,000 3,777,000 10,819,000 822,000 387,000
Timberlake, Sacramento, California 546,000 Leased 1,908,000 350,000 55,000
16th and K Streets, Sacramento, California - 550,000 4,586,000 121,000 134,000
3604 Fair Oaks Boulevard, Sacramento, California 2,479,000 700,000 2,585,000 66,000 -
425 University Avenue, Sacramento, California 2,948,000 800,000 3,218,000 1,160,000 124,000
Town Center Garden Office Park, Long Beach, California - 3,805,000 11,414,000 396,000 396,000
11135 Trade Center Drive, Rancho Cordova, California - 1,238,000 4,390,000 37,000 145,000
11167 Trade Center Drive, Rancho Cordova, California - 586,000 956,000 14,000 40,000
Hurley Ethan Office Park I, Sacramento, California 1,214,000 650,000 2,277,000 1,174,000 100,000
System Integrators Buildings, Sacramento, California 4,679,000 1,532,000 6,532,000 13,000 208,000
Hurley Ethan Office Park II, Sacramento, California 2,245,000 1,631,000 3,166,000 240,000 124,000
Parkway Center, El Dorado Hills, California - 233,000 1,224,000 31,000 38,000
Redfield Commerce Center, Scottsdale, Arizona - 552,000 855,000 55,000 -
---------- --------- ---------- --------- ---------
Total office buildings 22,904,000 19,011,000 58,405,000 7,764,000 1,751,000
---------- --------- ---------- --------- ---------
COMMERCIAL BUILDINGS:
One Sunrise Park, Rancho Cordova, California - 536,000 2,314,000 517,000 80,000
Burbank Mini--Warehouse, Santa Rosa, California - 692,000 1,814,000 - 65,000
Regency Plaza, Sacramento, California 8,864,000 4,200,000 7,986,000 1,626,000 486,000
Villa Del Sol, Fullerton, California - 1,904,000 1,436,000 649,000 99,000
University Village, Sacramento, California 7,745,000 939,000 7,952,000 1,124,000 244,000
TGIF Sunrise Hills, Citrus Heights, California - 458,000 1,374,000 5,000 47,000
Fulton Square, Sacramento, California 340,000 Leased 3,536,000 - -
Totem Square, Kirkland, Washington 4,425,000 3,175,000 5,793,000 70,000 -
Downtown Mini Storage, Sacramento, California - Leased 1,951,000 4,000 50,000
515 S. Fair Oaks Avenue, Pasadena, California - 1,410,000 2,619,000 1,716,000 -
Imperial Canyon, Anaheim, California 4,540,000 2,408,000 5,061,000 427,000 -
Sunrise Hills, Citrus Heights, California 4,331,000 2,746,000 4,294,000 337,000 182,000
Sierra Oaks, Roseville, California 4,971,000 2,109,000 6,003,000 292,000 213,000
Mallory Service Building, Walnut Creek, California - 2,005,000 415,000 - 63,000
---------- --------- ---------- --------- ---------
Total commercial buildings 35,216,000 22,582,00 52,548,000 6,767,000 1,529,000
---------- --------- ---------- --------- ---------
(Continued)
</TABLE>
58
<PAGE> 62
- - --------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 1993 Page 2 Part A
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Column A Column B Column C Column D
- - --------------------------------------------------------- ------------ ------------------------ ------------------------------
Cost Capitalization Subsequent
Initial Cost to Trust to Acquisition
------------------------ ------------------------------
Buildings,
Improvements
and Personal
Description Encumbrances Land Property Improvements Carrying Cost
----------- ------------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
LAND:
Florin Perkins, Sacramento, California - 4,752,000 - 1,476,000 -
Parthenia, Northridge, California - 2,025,000 - - -
----------- ---------- ----------- ---------- ----------
Total land - 6,777,000 - 1,476,000 -
----------- ---------- ----------- ---------- ----------
HOTELS:
Redding Holiday Inn, Redding, California 1,577,000 1,838,000 2,756,000 2,446,000 163,000
Chico Holiday Inn, Chico, California - 636,000 7,035,000 3,032,000 234,000
Sacramento Holiday Inn, Sacramento, California - 4,251,000 13,618,000 4,090,000 511,000
Walnut Creek Holiday Inn, Walnut Creek, California - 3,750,000 8,800,000 925,000 344,000
Casa Grande Motor Inn, Aroyo Grande, California 3,121,000 1,289,000 3,911,000 949,000 -
Howard Johnson's, Lake Ozark, Missouri 1,285,000 463,000 3,397,000 243,000 106,000
----------- ---------- ----------- ---------- ----------
Total hotels 5,983,000 12,227,000 39,517,000 11,685,000 1,358,000
----------- ---------- ----------- ---------- ----------
Total Investment in Real Estate $64,103,000 60,597,000 150,470,000 27,692,000 4,638,000
=========== ========== =========== ========== ==========
PARTNERSHIPS:
CR Properties, Sacramento, California $ 0 0 0 0 7,728,000
Placer Ranch, Rocklin, California 0 0 0 0 13,701,000
----------- ---------- ----------- ---------- ----------
Total Investment in Partnerships $ 0 0 0 0 21,429,000
=========== ========== =========== ========== ==========
Total Investment in Real Estate and Partnerships $64,103,000 60,597,000 150,470,000 27,692,000 26,067,000
=========== ========== =========== ========== ==========
</TABLE>
(1) The reduction in basis resulted from a judgment against the original seller
of the property.
(2) Represents total cost of assets after valuation allowance.
(3) The Trust establishes allowances for possible investment losses which
represent the excess of the carrying value of individual properties over
their appraised or estimated net realizable value. Various external
factors, particularly the lack of credit available to purchasers of real
estate and overbuilt real estate markets have adversely affected real estate
and necessitated the allowance.
59
<PAGE> 63
- - --------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 1993 Page 1 Part B
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column E
- - ----------------------------------------------- ------------------------------------------------
Gross Amount at Which
Carried at Close of Period
------------------------------------------------
Valuation
Buildings and Write
Description Land Improvements Down(3) Total(2)
----------- ------ ------------- --------- --------
<S> <C> <C> <C> <C>
OFFICE BUILDINGS:
Milpitas, Milpitas, California $ 2,957,000 7,760,000 5,816,000 4,901,000
Pacific Palisades, Pacific Palisades, California 3,777,000 12,028,000 5,220,000 10,585,000
Timberlake, Sacramento, California Leased 2,313,000 942,000 1,371,000
16th and K Streets, Sacramento, California 550,000 4,841,000 1,336,000 4,055,000
3604 Fair Oaks Boulevard, Sacramento, California 700,000 2,651,000 500,000 2,851,000
425 University Avenue, Sacramento, California 800,000 4,502,000 1,458,000 3,844,000
Town Center Garden Office Park, Long Beach, California 3,805,000 12,206,000 9,222,000 6,789,000
11135 Trade Center Drive, Rancho Cordova, California 1,238,000 4,572,000 2,745,000 3,065,000
11167 Trade Center Drive, Rancho Cordova, California 586,000 1,010,000 447,000 1,149,000
Hurley Ethan Office Park I, Sacramento, California 650,000 3,551,000 1,381,000 2,820,000
System Integrators Buildings, Sacramento, California 1,532,000 6,753,000 490,000 7,795,000
Hurley Ethan Office Park II, Sacramento, California 1,631,000 3,530,000 2,354,000 2,807,000
Parkway Center, El Dorado Hills, California 233,000 1,293,000 - 1,526,000
Redfield Commerce Center, Scottsdale, Arizona 552,000 910,000 542,000 920,000
---------- ---------- ---------- ----------
Total office buildings 19,011,000 67,920,000 32,453,000 54,478,000
---------- ---------- ---------- ----------
COMMERCIAL BUILDINGS:
One Sunrise Park, Rancho Cordova, California 536,000 2,911,000 894,000 2,553,000
Burbank Mini--Warehouse, Santa Rosa, California 692,000 1,879,000 666,000 1,905,000
Regency Plaza, Sacramento, California 4,200,000 10,098,000 - 14,298,000
Villa Del Sol, Fullerton, California 1,904,000 2,184,000 3,075,000 1,013,000
University Village, Sacramento, California 939,000 9,320,000 574,000 9,685,000
TGIF Sunrise Hills, Citrus Heights, California 458,000 1,426,000 27,000 1,857,000
Fulton Square, Sacramento, California Leased 3,536,000 - 3,536,000
Totem Square, Kirkland, Washington 3,175,000 5,863,000 1,405,000 7,633,000
Downtown Mini Storage, Sacramento, California Leased 2,005,000 342,000 1,663,000
515 S. Fair Oaks Avenue, Pasadena, California 1,410,000 4,335,000 887,000 4,858,000
Imperial Canyon, Anaheim, California 2,408,000 5,488,000 2,880,000 5,016,000
Sunrise Hills, Citrus Heights, California 2,746,000 4,813,000 1,079,000 6,480,000
Sierra Oaks, Roseville, California 2,109,000 6,508,000 792,000 7,825,000
Mallory Service Building, Walnut Creek, California 2,005,000 478,000 1,366,000 1,117,000
---------- ---------- ---------- ----------
Total commercial buildings 22,582,000 60,844,000 13,987,000 69,439,000
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Column F Column G Column H Column I
-------- --------- -------- --------
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Description Depreciation Construction Acquired Computed
----------- ------------ ------------ -------- --------------
<S> <C> <C> <C> <C>
OFFICE BUILDINGS:
Milpitas, Milpitas, California 1,401,000 1986 1/85 40 Years
Pacific Palisades, Pacific Palisades, California 2,482,000 1981 4/86 40 Years
Timberlake, Sacramento, California 412,000 1973 12/86 40 Years
16th and K Streets, Sacramento, California 855,000 1987 8/87 40 Years
3604 Fair Oaks Boulevard, Sacramento, California 446,000 1986 12/86 40 Years
425 University Avenue, Sacramento, California 904,000 1977 11/85 40 Years
Town Center Garden Office Park, Long Beach, California 2,089,000 1983 12/87 40 Years
11135 Trade Center Drive, Rancho Cordova, California 745,000 1984 5/88 40 Years
11167 Trade Center Drive, Rancho Cordova, California 170,000 1984 5/88 40 Years
Hurley Ethan Office Park I, Sacramento, California 529,000 1978 4/88 40 Years
System Integrators Buildings, Sacramento, California 1,095,000 1984 5/88 40 Years
Hurley Ethan Office Park II, Sacramento, California 558,000 1981 6/88 40 Years
Parkway Center, El Dorado Hills, California 223,000 1985 1/88 40 Years
Redfield Commerce Center, Scottsdale, Arizona 187,000 1983 5/88 30 Years
----------
Total office buildings 12,096,000
----------
COMMERCIAL BUILDINGS:
One Sunrise Park, Rancho Cordova, California 792,000 1982 8/83 35 Years
Burbank Mini--Warehouse, Santa Rosa, California 450,000 1984 4/85 40 Years
Regency Plaza, Sacramento, California 2,109,000 1986 5/85 40 Years
Villa Del Sol, Fullerton, California 473,000 1955 5/85 40 Years
University Village, Sacramento, California 1,684,000 1975 12/86 40 Years
TGIF Sunrise Hills, Citrus Heights, California 277,000 1984 1/87 40 Years
Fulton Square, Sacramento, California 206,000 1980 5/91 40 Years
Totem Square, Kirkland, Washington 406,000 1981 11/90 40 Years
Downtown Mini Storage, Sacramento, California 323,000 1980 3/88 40 Years
515 S. Fair Oaks Avenue, Pasadena, California 560,000 1915/1988 7/88 40 Years
Imperial Canyon, Anaheim, California 696,000 1980/1986 7/88 40 Years
Sunrise Hills, Citrus Heights, California 680,000 1981 1/89 40 Years
Sierra Oaks, Roseville, California 925,000 1989 1/89 40 Years
Mallory Service Building, Walnut Creek, California 107,000 1970 10/88 40 Years
----------
Total commercial buildings 9,688,000
----------
(Continued)
</TABLE>
60
<PAGE> 64
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 1993 Page 2 Part B
<TABLE>
<CAPTION>
Column A Column E
- - ------------------------------------------------- ------------------------------------------------------
Gross Amount at Which
Carried at Close of Period
------------------------------------------------------
Valuation
Buildings and Write
Description Land Improvements Down (3) Total (2)
----------- ---- ------------- -------- ---------
<S> <C> <C> <C> <C>
LAND:
Florin Perkins, Sacramento, California 4,752,000 1,476,000 4,058,000 2,170,000
Parthenia, Northridge, California 2,025,000 - 2,025,000 0
----------- ----------- ---------- -----------
Total land 6,777,000 1,476,000 6,083,000 2,170,000
----------- ----------- ---------- -----------
HOTELS:
Redding Holiday Inn, Redding, California 1,838,000 5,365,000 2,601,000 4,602,000
Chico Holiday Inn, Chico, California 636,000 10,301,000 2,208,000 8,729,000
Sacramento Holiday Inn, Sacramento, California 4,251,000 18,219,000 8,597,000 13,873,000
Walnut Creek Holiday Inn, Walnut Creek, California 3,750,000 10,069,000 8,325,000 5,494,000
Casa Grande Motor Inn, Aroyo Grande, California 1,289,000 4,860,000 2,769,000 3,380,000
Howard Johnson's, Lake Ozark, Missouri 463,000 3,746,000 1,636,000 2,573,000
----------- ----------- ---------- -----------
Total hotels 12,227,000 52,560,000 26,136,000 38,651,000
----------- ----------- ---------- -----------
Total Investment in Real Estate $60,597,000 182,800,000 78,659,000 164,738,000
=========== =========== ========== ===========
PARTNERSHIPS:
CR Properties, Sacramento, California $ 0 0 7,728,000 0
Placer Ranch, Rocklin, California 0 0 9,701,000 4,000,000
----------- ----------- ---------- -----------
Total Investment in Partnerships $ 0 0 17,429,000 4,000,000
=========== =========== ========== ===========
Total Investment in Real Estate and Partnerships $60,597,000 182,800,000 96,088,000 168,738,000
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Column F Column G Column H Column I
------------ ------------ -------- ------------
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Description Depreciation Construction Acquired Computed
----------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
LAND:
Florin Perkins, Sacramento, California - n/a 6/91 n/a
Parthenia, Northridge, California - n/a 9/92 n/a
----------
Total land -
----------
HOTELS:
Redding Holiday Inn, Redding, California 1,302,000 1968/1971 7/85 40 Years
Chico Holiday Inn, Chico, California 2,029,000 1972/1979 9/86 40 Years
Sacramento Holiday Inn, Sacramento, California 3,773,000 1978 9/86 40 Years
Walnut Creek Holiday Inn, Walnut Creek, California 2,093,000 1987 3/85 40 Years
Casa Grande Motor Inn, Aroyo Grande, California 75,000 1984 9/92 40 Years
Howard Johnson's, Lake Ozark, Missouri 652,000 1972 2/88 40 Years
----------
Total hotels 9,924,000
----------
Total Investment in Real Estate 31,708,000
==========
PARTNERSHIPS:
CR Properties, Sacramento, California 0
Placer Ranch, Rocklin, California 0
----------
Total Investment in Partnerships 0
==========
Total Investment in Real Estate and Partnerships 31,708,000
==========
</TABLE>
61
<PAGE> 65
- - ------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
- - ------------------------------------------------------------------------------
Reconciliation of total real estate carrying values for the three years ended
September 30, 1993, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ----------- -----------
<S> <C> <C> <C>
ASSET RECONCILIATION:
Balance, beginning of year $259,060,000 295,433,000 314,254,000
Additions:
Property acquisitions - - 18,492,000
In-substance foreclosures on properties - 7,225,000 -
Improvements 4,267,000 5,129,000 4,609,000
Deductions:
Real estate sold (35,217,000) (16,649,000) (15,777,000)
In-substance foreclosures (50,908,000) - -
Valuation losses (12,464,000) (32,078,000) (26,145,000)
------------ ----------- -----------
Balance, end of year $164,738,000 259,060,000 295,433,000
============ =========== ===========
ACCUMULATED DEPRECIATION
RECONCILIATION:
Balance, beginning of year $ 37,019,000 31,423,000 23,341,000
Additions:
Depreciation 5,686,000 7,744,000 9,481,000
Deductions:
Accumulated depreciation on
real estate sold (4,324,000) (2,148,000) (1,399,000)
Accumulated depreciation on
in-substance foreclosures (6,673,000) - -
------------ ----------- -----------
Balance, end of year $ 31,708,000 37,019,000 31,423,000
============ =========== ===========
</TABLE>
62
<PAGE> 66
- - ------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized
by Deeds of Trust)
SEPTEMBER 30, 1993
- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
-------- -------- -------- -------- -------- -------- ---------------------- --------
Valuation Carrying Principal Amount of
Final Periodic Face Amount Write Amount of Loans Subject to
Interest Maturity Payment Prior of Notes Down or Notes Delinquent Principal
Description Rate Date Terms Liens Receivable Discounts(2) Receivable(1) or Interest
----------- ---- ---- ----- ----- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST DEEDS OF TRUST:
Land, Corona, Monthly interest
California 10.00% 1992 only payments N/A $ 49,000 $ 49,000 $ 49,000
Retail Building, Monthly principal and
Tempe, Arizona 9.25% 2017 interest payments
of $9,249 N/A 969,000 969,000 None
Commercial Building, Monthly principal and
Napa, California 9.00% 1995 interest payments
of $2,923 N/A 348,000 348,000 None
Commercial Building, Monthly principal and
Bakersfield, 9.00% 1993 interest payments
California of $10,318 N/A 248,000 $248,000 0 248,000
Commercial Building, Monthly interest
Corona, California 9.50% 1995 only payments N/A 1,684,000 1,684,000 None
Office Building, Monthly interest
Sacramento, 9.50% 1993 only payments N/A 619,000 8,000 611,000 None
California
Office Building, Monthly interest
Sacramento, 10.00% 1996 only payments N/A 2,428,000 953,000 1,475,000 None
California
Office Building, Monthly interest
Phoenix, Arizona 8.00% 1996 only payments N/A 867,000 168,000 699,000 None
Office/Commercial Monthly 50% interest
Building, Phoenix, 8.00% 2000 only payments N/A 9,256,000 994,000 8,262,000 None
Arizona
</TABLE>
63
<PAGE> 67
- - ------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
(Notes Receivable Collateralized by Deeds of Trust)
SEPTEMBER 30, 1993
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
-------- -------- -------- -------- -------- -------- --------------------- --------
Principal
Amount
of Loans
Valuation Carrying Subject to
Final Periodic Face Amount Write Amount of Delinquent
Interest Maturity Payment Prior of Notes Down or Notes Principal or
Description Rate Date Terms Liens Receivable Discounts(2) Receivable(1) Interest
----------- ------ -------- -------- ------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECOND DEEDS OF TRUST:
Commercial Building,
Pacheco, California 9.25% 1998 Monthly interest
only payments 2,190,000 780,000 780,000 None
Commercial Office Building, Monthly interest
San Francisco, California 10.50% 1996 only payments 3,400,000 475,000 475,000 75,000
Office Building, Monthly interest
Corona, California 11.00% 1993 only payments 1,368,000 275,000 275,000 5,000
Office/retail complex, Monthly interest
Fountain Valley, 11.50% 1998 only payments 9,117,000 6,454,000 5,634,000 820,000 None
California
Office/warehouse complex, 10.00% - Monthly interest
Sunnyvale, California 16.00% 1989 only payments 850,000 2,071,000 2,071,000 2,071,000
Retail Building, Monthly interest
Sacramento, California 11.00% 1994 only payments 1,548,000 211,000 211,000 0 None
Commercial Building, Monthly 50% interest
Tempe, Arizona 8.00% 2000 only payments 958,000 360,000 214,000 146,000 None
Commercial Building, Monthly principal and
Westminster, California 9.50% 1998 interest payments
of $5,000 5,750,000 598,000 598,000 None
----------- ----------- ---------- -----------
$25,181,000 $27,692,000 $8,430,000 $19,262,000
=========== =========== ========== ===========
</TABLE>
(1) Represents carrying amount of notes after valuation allowance.
(2) The Trust establishes allowances for possible investment losses which
represent the excess of the face amount of the note over the appraised or
estimated net realizable value of the property securing the note. In
addition, discounts on the Trust's remaining interest in note sold has
been recognized to reflect a market rate of interest. Such write downs
in no way limit the obligation of the borrower to comply with the terms
of the note.
64
<PAGE> 68
- - ------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
- - ------------------------------------------------------------------------
<TABLE>
<CAPTION>
A summary of activity for note receivable collateralized by deeds of trust for
the years ended September 30, 1993, 1992 and 1991 are as follows:
1993 1992 1991
------------ ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 31,740,000 36,553,000 40,495,000
Additions:
New loans 9,600,000 7,112,000 11,429,000
Accretion of discount on
notes receivable 303,000 - 76,000
Additions to notes receivable
from acquisition of interest
in affiliate - - 536,000
Additions to notes receivable from
capitalization of accrued interest
on note modification 54,000 1,490,000 -
Deductions:
Sales and collections of principal (16,958,000) (1,271,000) (5,903,000)
Deductions for loss on sale of
notes receivable (935,000) - -
Deductions from notes receivable
applied to purchase - - (9,730,000)
Deductions from note receivable
on in substance foreclosure - (5,440,000) -
Write-offs - - (350,000)
Deductions from loss on prepayment
of notes receivable - (95,000) -
Deductions from valuation losses
and discounts on notes receivable (4,542,000) (6,609,000) -
------------ ---------- ----------
Balance, end of year $ 19,262,000 31,740,000 36,553,000
============ ========== ==========
</TABLE>
65
<PAGE> 69
July 21, 1994
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
<TABLE>
COMMONWEALTH EQUITY TRUST
<S> <C>
July 25, 1994 /s/ FRANK A. MORROW
___________________ ______________________________
Date Frank A. Morrow
Chief Executive Officer
</TABLE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
July 25, 1994 /s/ DORIS V. ALEXIS
____________________ ______________________________
Date Doris V. Alexis
President, Board of Trustees
July 25, 1994 /s/ RICHARD RATHFON
____________________ ______________________________
Date Richard Rathfon
Trustee
July 25, 1994 /s/ ALBERT S. RODDA
____________________ ______________________________
Date Albert S. Rodda
Trustee
July 25, 1994 /s/ HOWARD E. COHN
____________________ ______________________________
Date Howard E. Cohn
Trustee
</TABLE>
66
<PAGE> 70
July 21, 1994
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Page
<S> <C> <C>
3.1 Declaration of Trust, filed as Exhibit A to the N/A
Trust's Form 10, filed on December 31, 1979, and
incorporated herein by reference.
10.1 Services and Confidentiality Agreement dated as of 68-75
March 8, 1994, between the Trust and
FAMA Management, Inc.
16. Letter dated November 15, 1993 from KPMG Peat N/A
Marwick to Securities and Exchange Commission,
filed as Exhibit A to the Trust's Form 8-K/A
Report dated November 3, 1993 and incorporated
herein by reference.
</TABLE>
67
<PAGE> 1
EXHIBIT 10.1
SERVICES AND CONFIDENTIALITY AGREEMENT
1. IDENTIFICATION.
This Services and Confidentiality Agreement (the "Agreement") is made
as of March 8, 1994, between Commonwealth Equity Trust, a California Real
Estate Investment Trust ("CET"), and Fama Management, Inc., a California
corporation ("Fama").
2. RECITALS.
2.1. CET is presently a debtor in possession operating under
Chapter 11 of the United States Bankruptcy Code, and is currently preparing a
plan of reorganization which will be submitted to the bankruptcy court for
approval. CET is also negotiating plan alternatives with other parties. CET
desires to engage an interim Chief Executive Officer to provide services to CET
pending the confirmation and effective date of a plan of reorganization in
CET's bankruptcy proceeding (the "Plan of Reorganization").
2.2. In addition, CET is seeking to achieve continuity in its
management, and for that reason, desires to engage an interim Chief Executive
Officer who is able and desires to continue in the position of Chief Executive
Officer of CET following the effective date of the Plan of Reorganization.
2.3. CET wishes to engage Fama to provide the services of
Frank A. Morrow ("Morrow") who will act as CET's interim Chief Executive
Officer. Fama desires to provide Morrow's services to CET, as more
particularly described below, and in addition, desires to make Morrow available
should CET elect to engage Morrow as its Chief Executive Officer following the
effective date of the Plan of Reorganization.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties agree as follows:
3. TERM.
This Agreement shall commence on March 8, 1994, and shall continue
through July 31, 1994 (the "Original Term"), unless earlier terminated by CET
on thirty (30) days' prior written notice to Fama. The Original Term may be
extended by CET for a period of two (2) months, on the same terms set forth
herein which apply during the Original Term. The Original Term and any
extension thereof shall be collectively referred to herein as the "Term."
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5. COMPENSATION.
5.1. During the Original Term, and conditioned upon Morrow's full and
faithful performance of his duties hereunder, CET shall pay to Fama, as full
and complete compensation for all of the services to be rendered by Fama
hereunder, the following: (i) a base salary equal to One Thousand Two Hundred
Dollars ($1,200) per day, subject to a maximum limitation of Twenty Thousand
Dollars ($20,000) during each month of the Term, and, (ii) a bonus of Ten
Thousand Dollars ($10,000) per month during the Original Term (the "Bonus").
CET shall pay Fama one-half of the base salary on the tenth (10th) and the
twenty-fifth (25th) day of each month during the Term. The Bonus shall accrue
but shall not become due and payable to Fama until such time as a Plan of
Reorganization has been confirmed by the bankruptcy court, and further, until
the effective date of such Plan of Reorganization.
5.2. If CET terminates this Agreement prior to the expiration of the
Original Term by delivery of thirty (30) days' prior written notice as set
forth in Article 3 above, the compensation to be paid by CET to Fama pursuant
to the terms hereof (i.e. base salary and Bonus) shall be prorated for the
month during which such termination occurs, and Fama shall be compensated up
until the effective date of such termination at a rate equal to (i) One
Thousand Two Hundred Dollars ($1,200) per day as base salary, subject to a
maximum limitation of Twenty Thousand Dollars ($20,000) for the month during
which such termination occurs, plus (ii) Six Hundred Dollars ($600) per day as
Bonus.
5.3. Fama acknowledges that neither Fama nor Morrow shall be an
employee of CET for federal tax purposes, and Fama shall be responsible for
paying all of its and Morrow's estimated income and self-employment taxes. CET
shall have no obligation to make any withholdings from compensation payable
hereunder for state or federal taxes and shall have no other obligations of an
employer with respect to Fama and/or Morrow. Fama shall indemnify and hold CET
harmless from and against any and all costs, liabilities, expenses, damages or
fees (including, but not limited to, attorneys' fees and costs) resulting from
a failure by Fama and/or Morrow to pay its or his own estimated income and
self-employment taxes.
5.4. All compensation payable for Morrow's services shall be payable
to Fama directly, and not to Morrow. Morrow shall look solely to Fama to
perform and discharge, and Fama shall fully perform and discharge, and CET
shall have no responsibility or liability on account of, any obligation of an
employer, including, without limitation, the payment and/or withholding of all
sums required to be paid and/or withheld by such employer, pension, health and
welfare benefits, social security, unemployment, workers' compensation and
state disability insurance required in connection with, based on, resulting
from or relating to the
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services to be rendered hereunder and/or the rights to be granted by Morrow
under this Agreement and/or the compensation to be paid to Fama therefore.
Fama and Morrow agree to indemnify and hold CET harmless from and against any
and all liability (including, without limitation, judgments, penalties,
interests, damages, costs, expenses and attorneys' fees) which CET may incur by
reason of Fama's failure to assume and discharge all obligations imposed on
employers (including, without limitation, with respect to income tax
withholding as discussed in Section 5.3 above).
6. EXPENSE REIMBURSEMENTS.
6.1. CET shall reimburse Fama for Morrow's actual and
reasonable out-of-pocket expenses incurred in the performance of Morrow's
duties hereunder. Reimbursable expenses shall include Morrow's commuting costs
from San Francisco to Sacramento, which shall include gasoline, tolls, parking,
hotels and meals. In addition, CET shall reimburse Fama for Morrow's business
expenses related to travel from Sacramento to Los Angeles, or other locations
requiring his presence for CET business.
6.2. Notwithstanding the provisions of Section 6.1 above, in
no event shall the aggregate reimbursement of expenses from CET to Fama exceed
Two Thousand Five Hundred Dollars ($2,500) in any month during the Term.
6.3. CET's reimbursement of Morrow's expenses, as
described in Sections 6.1 and 6.2 above, is expressly conditioned upon the
following in each instance:
(a) Each such expense must be of a nature
qualifying it as a proper deduction on CET's federal and state income tax
returns as a business expense, and not as deductible compensation to Fama;
(b) Fama and/or Morrow furnishes CET with adequate
records and other documentary evidence required by either federal or state
statutes or regulations issued by appropriate taxing authorities for the
substantiation of such expenses as deductible business expenses of CET and not
as deductible compensation to Fama; and
(c) reimbursement shall be paid and payable by
CET in accordance with its policies and procedures for making such
reimbursements in the normal course of its business.
7. CONFIDENTIAL INFORMATION.
7.1. "Confidential Information" means any information
relating to CET's business or operations which is not generally known outside
of CET or information entrusted to CET by third parties, and includes
information known as confidential or secret
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or which reasonably should be known as confidential or secret. Confidential
Information may relate, for example, to financial or other investment
information, shareholder information, CET's strategic planning, trade secrets,
technology, ideas, processes, computer hardware, computer software, business or
marketing plans, the names and locations of employees and/or shareholders, and
any and all other information relating to CET and the operation of its
business. Confidential Information may be contained in materials (collectively
"Materials") such as business records, legal documents, correspondence, data,
reports, programs, contracts between CET and third parties, or computer
programs, or may be in the nature of, or consist of, unwritten knowledge,
techniques, devices, processes, practices, methods or know-how.
Notwithstanding the foregoing, "Confidential Information" does not include
information (i) which is or becomes generally available to the public other
than as a result of a disclosure by Fama, Morrow or its or his agents, (ii)
which was available to Fama and/or Morrow on a non-confidential basis prior to
disclosure of the information to Fama and/or Morrow by CET, or (iii) which
becomes available to Fama and/or Morrow on a non-confidential basis from a
person or entity other than CET, who is not otherwise bound by a written
confidentiality agreement prohibiting that person or entity from disclosing the
information. For purposes hereof, information made public only in connection
with CET's Chapter 11 bankruptcy proceeding shall not be deemed information
generally available to the public.
7.2. Fama acknowledges that a confidential and fiduciary
relationship exists between Fama and Morrow, on the one hand, and CET, on the
other hand, in connection with CET's Confidential Information.
7.3. Other than as required in order for Morrow to perform
the services contemplated herein, Fama shall not, and shall cause Morrow not
to, use, disclose, disseminate or otherwise communicate, directly or
indirectly, in whole or in part, at any time or in any manner, whether during
the Term or for a period of twelve (12) months thereafter, any Confidential
Information, without CET's prior written consent in each instance, and Fama
shall use its best efforts to prohibit its representatives, or any third person
acting for or on Fama's or Morrow's behalf to do any of the foregoing. If at
any time Fama and/or Morrow becomes aware of any such unauthorized use,
disclosure, dissemination or communication, or any threat thereof, Fama shall
immediately notify CET, which notice shall specify the person(s) and
circumstances relating to such unauthorized use, disclosure, dissemination,
communication or threat.
7.4. All Confidential Information relating to CET's
business that comes into Fama's and/or Morrow's knowledge or possession, as
between CET on the one hand, and Fama and Morrow on the other, is CET's
exclusive property, and except as necessary in
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order for Morrow to perform the services contemplated herein, may not be
reproduced, copies, summarized or removed from CET's premises without CET's
prior written consent in each instance. Any such Confidential Information
removed from CET's premises shall be immediately returned to CET when it is no
longer required in order for Morrow to perform his duties hereunder or upon
CET's demand at any time or times.
7.5. Fama acknowledges that all Confidential Information
created by Fama and/or Morrow shall be CET's exclusive property, free of any
claim or interest of any third party, and Fama, for itself and on behalf of
Morrow, hereby irrevocably and perpetually assigns to CET all rights of every
kind or nature which arise from Morrow's and/or Fama's creation of any
Confidential Information, to the extent that CET does not already own such
rights.
7.6. In CET's sole discretion, CET may elect to apply for,
obtain, register or take any action to protect or prevent the infringement,
dissemination or release of any Confidential Information. If CET chooses to
take any such action, either during or after the Term, Fama shall:
(a) take any reasonable action CET determines to
be necessary or desirable in connection with the exercise and/or protection of
these rights; and
(b) execute and acknowledge before a notary and
deliver to CET, in a form suitable to CET, any document reasonably necessary or
required to obtain, exercise or protect such rights.
7.7. Fama hereby irrevocably appoints any of CET's
authorized corporate officers to act as its and Morrow's agent and
attorney-in-fact, which appointment is coupled with an interest, to perform all
acts described in Section 7.6 above.
7.8. Fama's covenants and agreements contained in this
Article 7 shall be deemed to be effective as of the date Fama and/or Morrow
first acquired knowledge of any Confidential Information.
7.9. Fama's covenants and agreements contained in this
Article 7 shall survive the expiration or termination of this Agreement.
8. INDEMNIFICATION.
CET shall, to the maximum extent permitted by law, indemnify and hold
Fama and Morrow harmless from and against any and all claims, actions, causes
of actions, judgments, fines, settlements, and other amounts actually incurred
("Liabilities") arising out of,
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relating to, or in connection with the discharge of Fama's and Morrow's duties
hereunder; provided, however, that CET shall have no obligation to indemnify
Fama or Morrow for any Liabilities resulting from Fama's or Morrow's bad faith,
malfeasance, gross negligence or reckless disregard of duties as described
herein.
9. REPRESENTATIONS AND WARRANTIES.
9.1. Fama is and shall remain during the Term a
corporation in good standing, duly organized and existing under the laws of the
State of California, and authorized to engage in business in the State of
California.
9.2. Fama has a valid, binding and subsisting agreement
with Morrow pursuant to which Morrow is obligated to render Morrow's services
exclusively for Fama for at least the full Term, and pursuant to which Fama has
the full right and authority to enter into this Agreement and furnish Morrow's
services and to grant CET the rights herein granted.
9.3. Fama has not undertaken any obligations to any
person, firm, corporation or other entity which might conflict with, interfere
with, or derogate from the rights granted to CET hereunder, or the obligations
incurred by Morrow in this Agreement.
9.4. CET has been authorized by its Board of Trustees to
enter into this Agreement, and once such Agreement has been approved by the
bankruptcy court, no further approval or authority is required in order for
this Agreement to constitute a legal and binding obligation of CET.
10. MISCELLANEOUS.
10.1. This Agreement is to be governed by and construed
under the laws of the State of California.
10.2. Should any provision of this Agreement for any reason
be declared invalid, void or unenforceable by a court of competent
jurisdiction, such adjudication shall in no way affect any other provision of
this Agreement nor the validity or enforcement of the remainder of this
Agreement, and any provision so affected shall be curtailed only to the extent
necessary to bring this Agreement within the applicable requirements of the
law.
10.3. This Agreement contains the sole and entire
understanding between the parties pertaining to the subject matter hereof and
supersedes all prior and contemporaneous oral and written agreements,
understanding, statements and practices among the parties.
10.4. This Agreement may not be modified, except in
writing, signed by the parties hereto. No waiver of any provision
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of this Agreement shall be deemed to be a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
No waiver shall be binding unless executed in writing by the party charged with
the waiver.
10.5. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
10.6. Any notices, requests, demands, waivers, consents,
approvals or other communications which are required hereunder shall be in
writing and shall be deemed given only if delivered personally or sent by
telegram or by registered or certified mail, postage prepaid, return receipt
requested, to the recipients at the following addresses:
If to CET: Commonwealth Equity Trust
705 University Avenue
Suite A
Sacramento, CA 95825
Attn: Ms. Doris V. Alexis
with a copy to: Greenberg, Glusker, Fields,
Claman & Machtinger
1900 Avenue of the Stars,
Suite 2000
Los Angeles, CA 90067
Attn: Paula J. Peters, Esq.
If to Fama: Fama Management, Inc.
1249 Lombard Street
San Francisco, CA 94109
10.7. If either party to this Agreement brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party
in such action shall be entitled to an award of reasonable costs of litigation,
including attorneys' fees and related costs, to be paid by the losing party in
such amount as may be determined by the court having jurisdiction in such
action.
10.8. In addition to attorneys' fees and costs as provided
for in Section 10.7 above, the parties hereto agree that if any dispute between
the parties results in a judgment in favor of either party, the prevailing
party shall be entitled to recover from the other all attorneys' fees and costs
incurred by the prevailing party in enforcing such judgment. This provision is
intended to be severable from any other provision in this Agreement and is not
to be deemed merged in the judgment.
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10.9. The parties consent that the bankruptcy court shall
have jurisdiction over any disputes arising out of this Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date set forth below.
<TABLE>
<S> <C>
Date of
Execution: 3/15 , 1994 COMMONWEALTH EQUITY TRUST,
--------------- a California Real Estate
Investment Trust
By: /s/ Doris V. Alexis
----------------------
Its: Board Chair
------------------
Date of
Execution: 3/15 , 1994 FAMA MANAGEMENT, INC.,
--------------- a California corporation
By: /s/ Frank A. Morrow
----------------------
Its: President
------------------
ACKNOWLEDGED, ACCEPTED
AND AGREED TO;
/s/ Frank A. Morrow
- - -----------------------
FRANK A. MORROW
</TABLE>
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