<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 December 31, 1993 Commission file number 0-9097
------------------------ -------
COMMONWEALTH EQUITY TRUST
- - -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
California 94-2255677
- - ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
705 University Avenue, Sacramento, California 95825
----------------------------------------------------------------
(Address of registrant's principal executive offices) (Zip Code)
(916) 929-8244
---------------------------------------------------
(Registrants telephone number, including area code)
----------------------------------------------------
(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.
Yes X 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.
<TABLE>
<S> <C>
Class Outstanding at December 31, 1993
- - ----------------------------------- --------------------------------
Shares of Beneficial Interest 25,093,426
Par value one dollar per share
</TABLE>
<PAGE> 2
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Consolidated Condensed Balance Sheets - December 31, 1993
and September 30, 1993 3
Consolidated Condensed Statements of Income - For the
Three Months Ended December 31, 1993 and 1992 4
Consolidated Condensed Statements of Cash Flows - For the
Three Months Ended December 31, 1993 and 1992 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. 10
Item 5: Other Information
Item 6: Reports on Form 8-K
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1993
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Assets
Investments:
Rental properties, less accumulated depreciation of
$33,084,000 and $31,708,000 and valuation allowance
of $78,850,000 and $78,659,000 at December 31, 1993
and September 30, 1993, respectively $ 132,036,000 133,030,000
Partnership interests, net of valuation allowance of
$17,924,611 and $17,429,000 at December 31, 1993 4,000,000 4,000,000
and September 30, 1993, respectively
Notes receivable, net of valuation allowance of $6,320,000 and
$6,964,000 at December 31, 1993 and September 30, 1993,
respectively, and unaccreted discount of $2,004,000 and
$ 1,466,000 at December 31, 1993 and September 30, 1993,
respectively 18,611,000 19,262,000
------------ -----------
154,647,000 156,292,000
Cash 5,828,000 6,994,000
Restricted cash 111,000 111,000
Rents and accrued interest receivable, net of valuation
allowance of $2,484,000 and $2,478,000 at
December 31, 1993 and September 30, 1993, respectively 1,065,000 1,179,000
Other assets 3,835,000 4,637,000
------------ -----------
Total assets $ 165,486,000 169,213,000
============== ===========
Liabilities and Shareholders' Equity
Liabilities:
Long-term notes payable, collateralized
by deeds of trust on rental properties $ 15,839,000 15,874,000
Accounts payable and accrued expenses 3,936,000 3,526,000
------------ -----------
19,775,000 19,400,000
Liabilities subject to compromise 132,927,000 133,065,000
------------ -----------
Total liabilities 152,702,000 152,465,000
------------ -----------
Minority interests 6,789,000 6,947,000
------------ -----------
Shareholders' Equity:
Shares of beneficial interest, par value of $1 a share,
unlimited authorization, 25,093,000 shares outstanding
at December 31, 1993 and September 30, 1993 25,093,000 25,093,000
Additional paid-in capital 219,848,000 219,848,000
Accumulated deficit (238,946,000) (235,140,000)
------------ -----------
Total shareholders' equity 5,995,000 9,801,000
------------ -----------
Total liabilities and shareholders' equity $ 165,486,000 169,213,000
============== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
CONSOLIDATED CONDENSED STATEMENTS OF (lOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1993 1992
------------ ----------
<S> <C> <C>
REVENUES:
Rent $ 3,738,000 5,812,000
Interest 456,000 723,000
Hotel 4,387,000 -
------------ ----------
8,581,000 6,535,000
------------ ----------
EXPENSES:
Operating expenses 1,477,000 2,707,000
Hotel operating expenses 4,165,000 -
Property management 186,000 388,000
Depreciation and amortization 1,274,000 1,787,000
Interest 3,468,000 3,903,000
General and administrative 795,000 997,000
------------ ----------
11,365,000 9,782,000
------------ ----------
Loss before reorganization items, gain on foreclosure or
sale of investments, valuation losses and minority interest (2,784,000) (3,247,000)
Reorganization items (492,000) -
------------ ----------
Loss before gain on foreclosure or sale of investments,
valuation losses and minority interest (3,276,000) (3,247,000)
Gain on sale of rental properties - 465,000
------------ ----------
Loss before valuation losses and minority interest (3,276,000) (2,782,000)
Valuation losses (688,000) (216,000)
------------ ----------
Loss before minority interest (3,964,000) (2,998,000)
Minority interest 158,000 90,000
------------ ----------
Net loss $ (3,806,000) (2,908,000)
============ =========
Weighted average number of shares of
beneficial interest outstanding $ 25,093,000 25,093,000
============ =========
Net loss per share of beneficial interest $ (0.15) (0.12)
============ =========
Cash distributions per share of beneficial interest $ 0.00 0.00
============ =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1993 1992
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,806,000) (2,908,000)
------------ ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,274,000 1,787,000
Accretion of discount on notes receivable (89,000) -
Gain on sales of rental properties and partnership interest - (465,000)
Minority interest in net loss (158,000) (90,000)
Valuation losses 688,000 216,000
Changes in other assets and liabilities, net of acquisition
effects of affiliates:
Decrease in rents and accrued interest receivable 162,000 70,000
Decrease in other assets 250,000 245,000
(Decrease) increase in accounts payable and
accrued expenses 357,000 (327,000)
------------ ---------
Total adjustments to net loss 2,484,000 1,436,000
------------ ---------
Net cash used in operating activities (1,322,000) (1,472,000)
------------ ---------
Cash flows from investing activities:
Purchases of and improvements to rental properties (415,000) (1,299,000)
Collections from notes receivable 691,000 5,841,000
------------ ---------
Net cash provided by investing activities 276,000 4,542,000
------------ ---------
Cash flows from financing activities:
Principal payments on long-term notes payable (120,000) (3,671,000)
Distributions paid to minority shareholders - (84,000)
Proceeds from issuance of long-term notes payable - 4,000
------------ ---------
Net cash used by financing activities (120,000) (3,751,000)
------------ ---------
Net decrease in cash (1,166,000) (681,000)
Cash, beginning of year 6,994,000 2,002,000
------------ ---------
Cash, end of year $ 5,828,000 1,321,000
============ =========
</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
December 31, 1993, and the results of its operations for the three
months ended December 31, 1993 and 1992 and cash flows for the three
months ended December 31, 1993 and 1992.
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 December 31,
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)
(3) (Continued)
The income tax effect of temporary timing differences between
financial and income tax reporting that give rise to a significant portion of
the deferred income tax assets and liabilities at December 31, 1993, under the
provision of SFAS 109, is as follows:
<TABLE>
<CAPTION>
Deferred Income
Federal State
------- -----
<S> <C> <C>
Net operating loss carryforward $16,608,919 $1,491,404
Depreciation (2,733,217) (498,410)
Valuation allowance on investments 35,037,680 2,172,336
Allowance for doubtful accounts 186,446 33,999
Other 7,961,156 5,668,628
-------------------------------------
57,060,984 8,867,957
Less valuation allowance (57,060,984) (8,867,957)
-------------------------------------
$0 $0
=====================================
</TABLE>
(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:
<TABLE>
<S> <C>
Interest earned on accumulated cash $1,000
Professional fees (474,000)
Other (19,000)
---------
Net reorganization items $(492,000)
=========
</TABLE>
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 fiscal 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. It is a condition to effectiveness of
the 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
Rental revenue decreased $2,074,000 for the three months ended
December 31, 1993 as compared to December 31, 1992. The decrease is primarily
due to rental property disposition, cancellation of the Trusts hotel leases,
further described below in hotel revenues and operating expenses, and decreases
resulting from lower lease renewal rates.
Interest income decreased $267,000 for the three months ended December
31, 1993 as compared to December 31, 1992. The decrease was 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 $1,230,000 for the three months ended
December 31, 1993 as compared to December 31, 1992. The decrease was primarily
due to property dispositions.
8
<PAGE> 9
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (Continued)
RESULTS OF OPERATIONS (Continued)
Interest expenses decreased $435,000 for the three months ended
December 31, 1993 as compared to December 31, 1992. The decrease was 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 $513,000 for the three months
ended December 31, 1993 as compared to December 31, 1992. The decrease was
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 is being 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 1990
and 1991 than 1993 and 1992. This reduction in the amortization charge,
relating to the termination fee, continues through March 1994, at which time
the fee will be fully amortized.
General and administrative expenses decreased $202,000 for the three
months ended December 31, 1993 as compared to December 31, 1992. 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 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 investment over the appraised or net
realizable value of the property securing the note.
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
December 31, 1993.
9
<PAGE> 10
COMMONWEALTH EQUITY TRUST
AND AFFILIATES
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
In January 1994, the partnership which owned the property at 3604 Fair
Oaks Boulevard in Sacramento, allowed the lender to foreclose on the property.
CET owns a 75% interest in the partnership. The foreclosure resulted in a
$215,000 loss to CET.
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 one report on Form 8-K during the quarter ended
December 31, 1993 as follows:
Item 4: Changes in Registrant's Certifying Accountant November 3, 1993
10
<PAGE> 11
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
----------------------------------------
8-18-94 /s/ FRANK A. MORROW
- - --------------- ----------------------------------------
Date Frank A. Morrow
Chief Executive Officer
8-18-94 /s/ HOWARD COHN
- - --------------- ----------------------------------------
Date Howard Cohn
Trustee
11
