Annual Report (Form 10-K), fiscal year 1993

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.
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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.
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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.
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During the last three fiscal years, the following sources have contributed to the Trust's total income:
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:
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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.
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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.
ITEM 2:



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.
ITEM 2: PROPERTIES (continued)
(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.
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ITEM 3.

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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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.

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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PART II
ITEM 5.

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 ($12 per share less commissions) of all shares properly submitted to the designated crossing agent prior to the termination date. To the extent that account "liquidation" requests could not be matched with new purchase orders, the Board of Trustees authorized redemption of the shares by the Trust using proceeds from the sale of shares from January 1, 1989 to the termination date to fund the redemption. At June 30, 1994, 29,691 shares, had been tendered and not redeemed. Holders of these shares will receive the same treatment as all other shareholders under the Amended Plan of Reorganization.
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Distributions
Until recent years, it was the Trust's policy to declare quarterly distributions and to declare special distributions from time to time, usually to distribute gains realized on the sale or refinancing of Trust property. Because of the financial difficulties, the Trust made only one distribution during fiscal 1991 ($.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.

ITEM 6. SELECTED FINANCIAL DATA
(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.
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ITEM 7.

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
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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.
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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.
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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.
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ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.

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
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.
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.
The Board of Trustees Commonwealth Equity Trust
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
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
COMMONWEALTH EQUITY TRUST (Debtor-in-Possession) AND AFFILIATES CONSOLIDATED BALANCE SHEETS September 30 ____________
See accompanying notes to consolidated financial statements.
COMMONWEALTH EQUITY TRUST (Debtor-in-Possession) AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended September 30 ______________
See accompanying notes to consolidated financial statements.
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 ______________
See accompanying notes to consolidated financial statements.
COMMONWEALTH EQUITY TRUST (Debtor-in-Possession) AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended September 30 ______________
See accompanying notes to consolidated financial statements.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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:
COMMONWEALTH EQUITY TRUST (Debtor-in-Possession) AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ______________
7. Allowance for Valuation Losses, continued:
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.
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).
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:
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.
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:
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.
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.
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:
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:
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:
(1) It was not practical to value notes payable due to the reorganization proceedings described in Note 1.
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:
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.
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.
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
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 __________
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 __________
COMMONWEALTH EQUITY TRUST (Debtor-in-Possession) AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ______________
20. Selected Quarterly Financial Data (Unaudited):
(1) Includes $53,089,000 in valuation losses.
(2) Includes $48,130,000 in valuation losses.
July 21, 1994
PART III
ITEM 10.



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.
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.
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).
ITEM 11.

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:
(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.
ITEM 12.

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.
* Ownership represents less than 1% of the total outstanding Shares.
ITEM 13.

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.
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.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND EXHIBITS FILED
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:
(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.
COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE IX - SHORT-TERM BORROWINGS Years ended September 30, 1993, 1992 and 1991
* 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.
- - -------------------------------------------------------------------------------- COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1993 Page 1 Part A - - --------------------------------------------------------------------------------
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(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.
- - -------------------------------------------------------------------------------- COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1993 Page 1 Part B - - --------------------------------------------------------------------------------
COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1993 Page 2 Part B
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Reconciliation of total real estate carrying values for the three years ended September 30, 1993, 1992 and 1991 are as follows:
- - ------------------------------------------------------------------------------ COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized by Deeds of Trust) SEPTEMBER 30, 1993 - - -----------------------------------------------------------------------------
- - ------------------------------------------------------------------------------ COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized by Deeds of Trust) SEPTEMBER 30, 1993 - - ------------------------------------------------------------------------------
(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.
- - ------------------------------------------------------------------------ COMMONWEALTH EQUITY TRUST AND AFFILIATES SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE - - ------------------------------------------------------------------------
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.
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.
July 21, 1994
EXHIBIT INDEX