<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 June 30, 1994 Commission file number 0-9097
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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
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(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 June 30, 1994
------------------------------ ----------------------------
Shares of Beneficial Interest 25,093,426
Par value one dollar per share
<PAGE> 2
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
INDEX
Part I. Financial Information
Consolidated Condensed Balance Sheets - June 30, 1994
and September 30, 1993 3
Consolidated Condensed Statements of Income - For the
Three Months and Nine Months ended June 30, 1994 and 1993 4
Consolidated Condensed Statements of Cash Flows - For the
Three Months and Nine Months ended June 30, 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>
June 30, September 30,
1994 1993
(Unaudited) (Audited)
------------------ -------------
<S> <C> <C>
Assets
Investments:
Rental properties, less accumulated depreciation of
$33,298,000 and $31,708,000 and valuation allowance of
$73,834,000 and $78,659,000 at June 30, 1994 and
September 30, 1993, respectively $ 121,755,000 133,030,000
Partnership interests, net of valuation allowance of
$17,925,000 and $17,429,000 at June 30, 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 June 30, 1994 and September 30, 1993,
respectively, and unaccreted discount of $1,843,000 and
$1,466,000 at June 30, 1994 and September 30, 1993,
respectively 18,751,000 19,262,000
------------------ ------------
144,506,000 156,292,000
Cash 4,117,000 6,994,000
Restricted cash 111,000 111,000
Rents and accrued interest receivable, net of valuation allowance
of $3,373,000 and $2,478,000 at June 30, 1994 and September 30,
1993, respectively 2,032,000 1,179,000
Other assets 2,649,000 4,637,000
------------------ ------------
Total assets $ 153,415,000 169,213,000
================== ============
Liabilities and Shareholders' Equity
Liabilities:
Long-term notes payable, collateralized
by deeds of trust on rental properties $ 8,800,000 15,874,000
Accounts payable and accrued expenses 8,072,000 3,526,000
------------------ ------------
16,872,000 19,400,000
Liabilities subject to compromise 131,522,000 133,065,000
------------------ ------------
Total liabilities 148,394,000 152,465,000
------------------ ------------
Minority interests 6,776,000 6,947,000
------------------ ------------
Shareholders' Equity:
Shares of beneficial interest, par value of $1 a share,
unlimited authorization, 25,093,000 shares outstanding
at June 30, 1994 and September 30, 1993 25,093,000 25,093,000
Additional paid-in capital 219,848,000 219,848,000
Accumulated deficit (246,696,000) (235,140,000)
------------------ ------------
Total shareholders' equity (1,755,000) 9,801,000
------------------ ------------
Total liabilities and shareholders' equity $ 153,415,000 169,213,000
================== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
<TABLE>
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
Consolidated Condensed Statements of (Loss)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rent $ 3,579,000 5,584,000 $ 11,205,000 17,337,000
Interest 459,000 502,000 1,420,000 1,810,000
Hotel 4,052,000 - 11,793,000 -
-------------------- ----------- ------------------- -----------
8,090,000 6,086,000 24,418,000 19,147,000
-------------------- ----------- ------------------- -----------
Expenses:
Operating expenses 1,395,000 1,825,000 4,656,000 6,514,000
Hotel operating expenses 3,706,000 - 10,824,000 -
Interest 3,096,000 3,596,000 9,912,000 11,432,000
Property management 129,000 253,000 436,000 953,000
Depreciation and amortization 1,115,000 1,395,000 3,632,000 4,802,000
Legal settlement - - - 368,000
General and administrative 893,000 1,062,000 2,523,000 3,569,000
-------------------- ----------- ------------------- -----------
10,334,000 8,131,000 31,983,000 27,638,000
-------------------- ----------- ------------------- -----------
Loss before reorganization items, gain
(loss) on foreclosure or sale of
investments, valuation losses and
minority interest (2,244,000) (2,045,000) (7,565,000) (8,491,000)
Reorganization items (2,067,000) -- (3,495,000) --
-------------------- ----------- ------------------- -----------
Loss before gain (loss) on foreclosure
or sale of investments, valuation
losses and minority interest (4,311,000) (2,045,000) (11,060,000) (8,491,000)
Gain (loss) on foreclosure or sale
of investments 175,000 (154,000) (40,000) 9,000
-------------------- ----------- ------------------- -----------
Loss before valuation losses and
minority interest (4,136,000) (2,199,000) (11,100,000) (8,482,000)
Valuation losses -- (285,000) (688,000) (978,000)
-------------------- ----------- ------------------- -----------
Loss before minority interest (4,136,000) (2,484,000) (11,788,000) (9,460,000)
Minority interest 78,000 (118,000) 232,000 (7,000)
-------------------- ----------- ------------------- -----------
Net loss $ (4,058,000) (2,602,000) $ (11,556,000) (9,467,000)
==================== =========== =================== ===========
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 $ (0.16) (0.10) $ (0.46) (0.38)
==================== =========== =================== ===========
</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
June 30,
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,556,000) (9,467,000)
-------------------- -----------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 3,632,000 4,610,000
Accretion of discount on notes receivable (250,000) -
(Loss) gain on sales of rental properties and partnership interest 40,000 (9,000)
Minority interest in net (loss) income (232,000) 7,000
Valuation losses 688,000 978,000
Changes in other assets and liabilities, net of acquisition
effects of affiliates:
Increase in rents and accrued interest receivable (825,000) (427,000)
Increase (decrease) in other assets 1,044,000 (966,000)
(Decrease) increase in accounts payable and
accrued expenses 4,758,000 (845,000)
-------------------- -----------
Total adjustments to net loss 8,855,000 3,348,000
-------------------- -----------
Net cash used by operating activities (2,701,000) (6,119,000)
-------------------- -----------
Cash flows from investing activities:
Proceeds from sale of rental properties 473,000 1,895,000
Purchases of and improvements to rental properties (977,000) (3,371,000)
Collections from notes receivable 713,000 16,331,000
Investment in affiliates - 368,000
-------------------- -----------
Net cash provided by investing activities 209,000 15,223,000
-------------------- -----------
Cash flows from financing activities:
Principal payments on long-term notes payable (288,000) (6,508,000)
Distributions paid to minority shareholders (97,000) (570,000)
Proceeds from the sale of shares - 39,000
Proceeds from issuance of long-term notes payable - 2,000
-------------------- -----------
Net cash used by financing activities (385,000) (7,037,000)
-------------------- -----------
Net increase (decrease) in cash (2,877,000) 2,067,000
Cash, beginning of year 6,994,000 2,002,000
-------------------- -----------
Cash, end of year $ 4,117,000 4,069,000
==================== ===========
</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 June 30, 1994, and the
results of its operations for the three months and nine months ended June
30, 1994 and 1993 and cash flows for the nine months ended June 30, 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 distribution 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 June 30, 1993 for the change in accounting principle.
The provision for income taxes for the quarter ended December
31, 1993 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 $ 19,000
Professional fees (3,150,000)
Other (364,000)
-----------
Net reorganization items $(3,495,000)
===========
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 Amended 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 determined.
RESULTS OF OPERATIONS
Rental revenue decreased $6,132,000 and $2,005,000 for the nine months and
three months ended June 30, 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 $390,000 and $43,000 for the nine months and three
months ended June 30, 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.
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)
Operating expenses decreased $1,858,000 and $430,000 for the nine months and
three months ended June 30, 1994 as compared to the same period in the prior
year. This decrease was primarily due to property dispositions.
Interest expenses decreased $1,520,000 and $500,000 for the nine months and
three months ended June 30, 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.
Property management expenses decreased $517,000 and $124,000 for the nine
months and three months ended June 30, 1994 as compared to the same period in
the prior year. These decreases were due to the fact that the Management
Agreement with B&B II was terminated in October 1993.
Depreciation and amortization decreased $1,170,000 and $280,000 for the nine
months and three months ended June 30, 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 in 1993 and 1994. This
reduction in the amortization charge related to the termination fee continued
through March 1994, at which time the fee was fully amortized.
Legal settlement of $368,000 relates to the transfer of 91,000 shares of
California Real Estate Investment Trust.
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)
General and administrative expenses decreased $1,046,000 and $169,000 for the
nine months and three months ended June 30, 1994 as compared to the same period
in the prior year. This decrease is primarily a result of the fact that all
professional fees during the period relating to the bankruptcy are included in
reorganization items. This decrease is offset by increases in salaries and
benefits. 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 expenses were borne by the Trusts advisor.
The $688,000 valuation loss relates to valuation write downs on Cal REIT's
investment in Totem Square and the Totem Square property. 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.
Loss on foreclosure or sale of investment of $40,000 relates to the
disposition of the 3604 Fair Oaks Partnership, and the sale of Howard Johnson's
and Imperial Canyon. (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 three months ended June 30,
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.
ITEM 6: REPORTS ON FORM 8-K
The Trust filed no reports on Form 8-K during the quarter ended June 30, 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