<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended March 31, 1994 Commission file number 0-9097
------------- ------
COMMONWEALTH EQUITY TRUST
- - ------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
California 94-2255677
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Ethan Way, Suite 200, Sacramento, California 95825
- - ------------------------------------------------------------------------------
(Address of registrant's principal executive offices) (Zip Code)
(916) 929-8244
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(Registrants telephone number, including area code)
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(Former name)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
Class Outstanding at March 31, 1994
------------------------------ ----------------------------
Shares of Beneficial Interest 25,093,426
Par value one dollar per share
<PAGE> 2
COMMONWEALTH EQUITY TRUST
AND AFFILIATE
INDEX
Part I. Financial Information
Consolidated Condensed Balance Sheets - March 31, 1994
and September 30, 1993 3
Consolidated Condensed Statements of Income - For the
Three Months and Six Months ended March 31, 1994 and 1993 4
Consolidated Condensed Statements of Cash Flows - For the
Three Months and Six Months ended March 31, 1994 and 1993 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capital Resources and Liquidity 8
Results of Operations 8
Part II.
Item 5: Other Information 11
Item 6: Reports on Form 8-K
2
<PAGE> 3
<TABLE>
Part I. FINANCIAL INFORMATION
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
Consolidated Condensed Balance Sheets
<CAPTION>
March 31, September 30,
1994 1993
(Unaudited) (Audited)
------------------ -------------
<S> <C> <C>
Assets
Investments:
Rental properties, less accumulated depreciation of
$33,818,000 and $31,708,000 and valuation allowance of
$78,350,000 and $78,659,000 at March 31, 1994 and
September 30, 1993, respectively $ 128,682,000 133,030,000
Partnership interests, net of valuation allowance of
$17,925,000 and $17,429,000 at March 31, 1994
and September 30, 1993, respectively 4,000,000 4,000,000
Notes receivable, net of valuation allowance of $6,320,000 and
$6,964,000 at March 31, 1994 and September 30, 1993,
respectively, and unaccreted discount of $1,924,000 and
$1,466,000 at March 31, 1994 and September 30, 1993,
respectively 18,679,000 19,262,000
------------------ ------------
151,361,000 156,292,000
Cash 6,252,000 6,994,000
Restricted cash 111,000 111,000
Rents and accrued interest receivable, net of valuation allowance
of $3,534,000 and $2,478,000 at March 31, 1994 and September 30,
1993, respectively 1,583,000 1,179,000
Other assets 3,745,000 4,637,000
------------------ ------------
Total assets $ 163,052,000 169,213,000
================== ============
Liabilities and Shareholders' Equity
Liabilities:
Long-term notes payable, collateralized
by deeds of trust on rental properties $ 13,338,000 15,874,000
Accounts payable and accrued expenses 7,574,000 3,526,000
------------------ ------------
20,912,000 19,400,000
Liabilities subject to compromise 132,886,000 133,065,000
------------------ ------------
Total liabilities 153,798,000 152,465,000
------------------ ------------
Minority interests 6,951,000 6,947,000
------------------ ------------
Shareholders' Equity:
Shares of beneficial interest, par value of $1 a share,
unlimited authorization, 25,093,000 shares outstanding
at March 31, 1994 and September 30, 1993 25,093,000 25,093,000
Additional paid-in capital 219,848,000 219,848,000
Accumulated deficit (242,638,000) (235,140,000)
------------------ ------------
Total shareholders' equity 2,303,000 9,801,000
------------------ ------------
Total liabilities and shareholders' equity $ 163,052,000 169,213,000
================== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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<TABLE>
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
Consolidated Condensed Statements of (Loss)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent $ 3,888,000 5,942,000 $ 7,626,000 11,753,000
Interest 505,000 584,000 961,000 1,308,000
Hotel 3,354,000 - 7,741,000 -
-------------------- ----------- ------------------- -----------
7,747,000 6,526,000 16,328,000 13,061,000
-------------------- ----------- ------------------- -----------
Expenses:
Operating expenses 1,784,000 1,982,000 3,261,000 4,689,000
Hotel operating expenses 2,953,000 - 7,118,000 -
Property management 121,000 312,000 307,000 699,000
Depreciation and amortization 1,243,000 1,620,000 2,517,000 3,407,000
Interest 3,348,000 3,933,000 6,816,000 7,836,000
Legal settlement - 368,000 - 368,000
General and administrative 835,000 1,510,000 1,630,000 2,507,000
-------------------- ----------- ------------------- -----------
10,284,000 9,725,000 21,649,000 19,506,000
-------------------- ----------- ------------------- -----------
Loss before reorganization items, (loss)
gain on foreclosure or sale of
investments, valuation losses and
minority interest (2,537,000) (3,199,000) (5,321,000) (6,445,000)
Reorganization items (936,000) -- (1,428,000) --
-------------------- ----------- ------------------- -----------
Loss before (loss) gain on foreclosure
or sale of investments, valuation
losses and minority interest (3,473,000) (3,199,000) (6,749,000) (6,445,000)
(Loss) gain on foreclosure or sale
of investments (215,000) (303,000) (215,000) 162,000
-------------------- ----------- ------------------- -----------
Loss before valuation losses and
minority interest (3,688,000) (3,502,000) (6,964,000) (6,283,000)
Valuation losses -- (477,000) (688,000) (693,000)
-------------------- ----------- ------------------- -----------
Loss before minority interest (3,688,000) (3,979,000) (7,652,000) (6,976,000)
Minority interest in net income (4,000) 21,000 154,000 111,000
-------------------- ----------- ------------------- -----------
Net loss $ (3,692,000) (3,958,000) $ (7,498,000) (6,865,000)
==================== =========== =================== ===========
Weighted average number of shares of
beneficial interest outstanding $ 25,093,000 25,093,000 $ 25,093,000 25,093,000
==================== =========== =================== ===========
Net loss per share of beneficial
interest $ (0.15) (0.16) $ (0.30) (0.27)
==================== =========== =================== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
<TABLE>
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ ( 7,498,000) (6,865,000)
-------------------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,517,000 3,311,000
Accretion of discount on notes receivable (169,000) -
Gain on sales of rental properties and partnership interest 215,000 (162,000)
Minority interest in net loss (154,000) (111,000)
Valuation losses 688,000 215,000
Changes in other assets and liabilities, net of acquisition
effects of affiliates:
Increase in rents and accrued interest receivable (355,000) (227,000)
Decrease in other assets 88,000 690,000
(Decrease) increase in accounts payable and
accrued expenses 4,084,000 (416,000)
-------------------- -----------
Total adjustments to net loss 6,914,000 3,300,000
-------------------- -----------
Net cash used by operating activities (584,000) (3,565,000)
-------------------- -----------
Cash flows from investing activities:
Proceeds from sale of rental properties - 1,027,000
Purchases of and improvements to rental properties (647,000) (2,531,000)
Collections from notes receivable 704,000 13,941,000
Investment in affiliates - 368,000
-------------------- -----------
Net cash provided by investing activities 57,000 12,805,000
-------------------- -----------
Cash flows from financing activities:
Principal payments on long-term notes payable (215,000) (6,318,000)
Distributions paid to minority shareholders - (190,000)
Proceeds from the sale of shares - 10,000
Proceeds from issuance of long-term notes payable - 2,000
-------------------- -----------
Net cash used by financing activities (215,000) (6,496,000)
-------------------- -----------
Net (decrease) increase in cash (742,000) 2,744,000
Cash, beginning of year 6,994,000 2,002,000
-------------------- -----------
Cash, end of year $ 6,252,000 4,746,000
==================== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of the Trust, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to
present fairly the Trust's financial position as of March 31, 1994, and the
results of its operations for the three months and six months ended March
31, 1994 and 1993 and cash flows for the six months ended March 31, 1994
and 1993.
The accounting policies followed by the Trust are set forth in Note 1
to the Trust's financial statements in the 1993 Form 10-K, which are
incorporated herein by reference.
(2) In 1977, the Trust elected to be and was taxed as a real estate
investment trust ("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
depreciation 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 was 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.
(3) Effective October 1, 1993, the Trust implemented Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes."
SFAS 109 changes the way deferred income tax liabilities or assets are
recorded and requires ongoing adjustments for enacted changes and tax
rates and regulations. As permitted by the standard, the Trust has
elected not to restate prior period financial statements. As a result of
applying the provisions of the SFAS, there was no cumulative effect in the
quarter ended March 31, 1994 for the change in accounting principle.
The provision for income taxes for the quarter ended March 31, 1994 has
been computed based upon the estimated annual effective tax rates of the
Trust of 40.2%, which includes federal of 34% and state, net of federal
benefit, of 6.2%. Under current state regulations, the moratorium on the
recognition of state operating loss carryforwards expired as of December
31, 1992.
6
<PAGE> 7
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Reorganization items are calculated from August 2, 1993, the date on
which the Trust filed its petition for reorganization, and consist of the
following:
Interest earned on accumulated cash $ 3,000
Professional fees (1,392,000)
Other (39,000)
-----------
Net reorganization items $(1,428,000)
===========
7
<PAGE> 8
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
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 fiscal year, the payment of certain liabilities has been stayed.
The Trust's Third Amended Plan was confirmed by the bankruptcy court on August
8, 1994. A condition to the Plan is that the Trust obtain a working capital
loan of approximately ten million dollars to meet capital needs in excess of
available income. Capital resources and the amount and timing of Trust
liabilities cannot be finally determined until the status of all claims
contained in the Amended Plan are finally determined.
RESULTS OF OPERATIONS
Rental revenue decreased $4,127,000 and $2,054,000 for the six months and
three months ended March 31, 1994 as compared to the same period in the prior
year. These decreases are primarily due to rental property dispositions,
cancellation of the Trust's hotel leases, further described below in hotel
revenues and operating expenses, and decreases resulting from lower lease
renewal rates.
Interest income decreased $347,000 and $79,000 for the six months and three
months ended March 31, 1994 as compared to the same period in the prior year.
These decreases were primarily due to the retirement of notes receivable in
connection with asset acquisitions and from collections on notes receivable.
Decreases were offset in part by increases resulting from new notes receivable
acquired through property sales.
Hotel revenues and hotel operating expenses are a result of the July 1993
action taken by CET to cancel the leases on the Trusts hotel properties and
assume day to day management responsibility for the hotels. The hotels were
previously leased by the North Main Street Company. Since the lease
cancellation, the Trust has recorded gross revenues and expenses separately on
the income statement. Prior to the take over, monthly rent was collected from
the hotels and recorded as rent revenue. Additionally, Cal REIT, through a
deed in lieu of foreclosure on a note receivable, acquired the Casa Grande
Motor Inn in January 1993, and is also now recording gross revenues and
expenses for that hotel property.
Operating expenses decreased $1,428,000 and $198,000 for the six months and
three months ended March 31, 1994 as compared to the same period in the prior
year. These decreases were primarily due to property dispositions.
8
<PAGE> 9
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Interest expenses decreased $1,020,000 and $585,000 for the six months and
three months ended March 31, 1994 as compared to the same period in the prior
year. These decreases were primarily due to note payoffs resulting from
property dispositions, payment of $3,445,000 of capitalized interest accruing
interest at 9.5%, and fully reserving interest on an unsecured $2,500,000 note
payable due to the bankruptcy treatment of the unsecured debt.
Depreciation and amortization decreased $890,000 and $377,000 for the six
months and three months ended March 31, 1994 as compared to the same period in
the prior year. These decreases were primarily due to rental property
dispositions and from the completed depreciation of various properties relating
to the fee paid B & B on December 27, 1989, to terminate the portion of the
Advisory Agreement which granted B & B an exclusive authorization to act as a
real estate broker in connection with the sale of Trust's 1989 Properties.
This termination fee was amortized over one to four years, depending on the
assumed sale dates of the various 1989 Properties, and, accordingly, a larger
portion of the fee was amortized in 1991 and 1992 than 1993 and 1994. This
reduction in the amortization charge, relating to the termination fee,
continues through March 1994, at which time the fee will be fully amortized.
Legal settlement of $368,000 relates to the transfer of 91,000 shares of
California Real Estate Investment Trust.
General and administrative expenses decreased $877,000 and $675,000 for the
six months and three months ended March 31, 1994 as compared to the same period
in the prior year. As of October 1993, the Trust changed to a
self-administration management structure and started paying salaries and
benefits to its employees. In the prior year these costs were borne by the
Trust's Advisor.
The $688,000 valuation loss relates to valuation write downs on Cal REIT's
investment in Totem Square and the property at Totem Square. The Trust
establishes allowances for possible investment losses which represent the
excess of the face amount of the note over the appraised or net realizable
value of the property securing the note.
9
<PAGE> 10
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Loss on disposition of partnership of $215,000 relates to the disposition of
3604 Fair Oaks Boulevard, a property owned by a partnership in which CET has a
75% partnership interest. (See Part II Item 5: for further discussion of
transactions)
IMPACT OF INFLATION
The effect of inflation on the Trust's operations and properties is varied.
Although revenues and operating expenses are impacted by inflation, the effects
of inflation have not been material during the six months and three months
ended March 31, 1994.
10
<PAGE> 11
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
In February 1994, the lender on the Trust's Pacific Palisades property was
granted relief from the automatic stay, in place due to the Chapter 11 filing,
in order to commence foreclosure proceedings on the property. The foreclosure
was completed in July 1994.
On April 14, 1994 the Board of CET voted its' shares of Cal REIT to elect a
new Board of Trustees for Cal REIT. The new Board is comprised of Frank
Morrow, Howard Cohn, and Mark Bennett all of whom are key management personnel
of CET. The new Cal REIT Board then terminated certain management and advisory
agreements with B & B and B & B Property, Cal REIT's former advisor and
property manager. Certain disputes with B & B and B & B Property in connection
with the termination were settled in May 1994, resulting in a payment, by Cal
REIT, of $45,000 to those entities.
In April 1994, Cal REIT sold the Imperial Canyon property for $4,093,000, net
of selling expenses, resulting in a gain of $114,000. The Trust did not
receive any cash from this transaction.
In May 1994, the Trust sold the Howard Johnson's located in Lake of the
Ozarks, Missouri for $1,936,000, net of selling expenses, resulting in a gain
of $62,000. The Trust received $541,000 in cash.
ITEM 6: REPORTS ON FORM 8-K
The Trust filed no reports on Form 8-K during the quarter ended March 31,
1994.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH EQUITY TRUST
----------------------------------------
9-7-94 /s/ FRANK A. MORROW
_______________ ________________________________________
Date Frank A. Morrow
Chief Executive Officer
9-7-94 /s/ HOWARD COHN
_______________ ________________________________________
Date Howard Cohn
Trustee
12
