FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ------ ------ Commission file number 0-11777 -------------------------------------------------------- FIRST EQUITY PROPERTIES, INC. ------------------------------------------------------------------------------ (Exact name of registrant as specified in the charter) Nevada 95-6799846 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 Valley View Lane, Suite 160, Dallas, Texas 75234 - ------------------------------------------------------------------------------- (Address of principal executive offices) 214-750-5800 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of September 30, 2002, registrant had 10,570,944 shares of Common Stock issued and outstanding. FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES FORM 10-Q September 30, 2002 INDEX <Table> <Caption> Part I Financial Information: Page No. Item 1. Financial Statements Consolidated Balance Sheets September 30, 2002 (Unaudited) and December 31, 2001.............................................3 Consolidated Statement of Earnings (Unaudited) Three Months and Nine Months Ended September 30, 2002 and 2001...................................4 Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2002 and 2001....................................................5 Notes to Consolidated Financial Statements.........................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................7 Item 4. Controls and Procedures...................................................................7 Part II Other Information: Item 6. Exhibits and Reports on Form 8-K..........................................................8 </Table> 2 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> September 30, 2002 December 31, (Unaudited) 2001 ------------------ ------------- ASSETS Cash and cash equivalents $ 13,699 $ 8,985 Investments 46,421,719 46,421,719 Accounts receivable - affiliate 900,213 851,946 --------------- --------------- $ 47,335,631 $ 47,282,650 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable - trade $ 5,548,224 $ 5,548,224 Accounts payable - affiliate 3,562,977 3,622,977 --------------- --------------- Total liabilities 9,111,201 9,171,201 Minority interest in limited partnership 547,498 547,498 Shareholders' equity Common stock, $0.01 par, 40,000,000 shares authorized, 10,570,944 shares issued and outstanding 105,710 105,710 Capital in excess of par value 1,281,548 1,281,548 Retained earnings 36,289,674 36,176,693 --------------- --------------- Total shareholders' equity 37,676,932 37,563,951 --------------- --------------- $ 47,335,631 $ 47,282,650 =============== =============== </Table> 3 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <Table> <Caption> Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenue Management fees $ 46,964 $ -- $ 141,907 $ -- Interest income 2 111 30 49,006 ------------ ------------ ------------ ------------ 46,966 111 141,937 49,006 Operating expenses General and administrative 910 1,363 2,529 2,950 Legal and professional fees 11,308 1,671 26,427 33,034 Bad debt expense -- -- -- 76,800 ------------ ------------ ------------ ------------ Total operating expenses 12,218 3,034 28,956 112,784 ------------ ------------ ------------ ------------ Income (loss) from operations 34,748 (2,923) 112,981 (63,778) Other expenses Interest expense -- -- -- (29,108) ------------ ------------ ------------ ------------ Net earnings (loss) $ 34,748 $ (2,923) $ 112,981 $ (92,886) ============ ============ ============ ============ Earnings (loss) per share $ -- $ -- $ .01 $ (.01) ============ ============ ============ ============ Weighted average shares outstanding 10,570,944 10,570,944 10,570,944 10,570,944 ============ ============ ============ ============ </Table> 4 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2002 and 2001 (Unaudited) <Table> <Caption> 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 112,981 $ (92,886) Adjustments to reconcile net income to net cash provided by (used for) operating activities Bad debt expense -- 76,800 Decrease in accounts payable - affiliate (60,000) -- Increase in accounts receivable - affiliate (48,267) (500,052) ----------- ----------- Net cash provided by (used for) operating activities 4,714 (516,138) CASH FLOWS FROM INVESTING ACTIVITIES Collections from note receivable -- 2,525,588 ----------- ----------- Net cash provided by investing activities -- 2,525,588 CASH FLOWS FROM FINANCING ACTIVITIES Payments on long term debt -- (2,048,559) ----------- ----------- Net cash used for financing activities -- (2,048,559) ----------- ----------- Net increase (decrease) in cash and cash equivalents 4,714 (39,109) Cash and cash equivalents at beginning of period 8,985 44,679 ----------- ----------- Cash and cash equivalents at end of period $ 13,699 $ 5,570 =========== =========== Noncash investing and financing activities: Exchange of account payable from affiliate for minority interest in subsidiary and effective writedown of investment due to application of purchase method of accounting for the acquisition of minority interest $ -- $ 4,225,879 Exchange of a note receivable for investment in Preferred stock of an affiliate $ -- $ 585,000 </Table> 5 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Operating results for the interim period presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the Company's annual report on Form 10-K for the year ended December 31, 2001. 6 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three months ended September 30, 2002 compared to three months ended September 30, 2001 Revenues increased to $46,966 versus prior year of $111. The increase was due to management fee income in the current quarter that was not present in the same quarter last year. Total operating expenses increased to $12,218 in 2001 from $3,034 in 2001 due to an increase in legal and professional fees. Results of Operations Nine months ended September 30, 2002 compared to nine months ended September 30, 2001 Revenues increased to $141,937 versus prior year of $49,006. The increase was due to management fee income in the current year that was not present last year. Total operating expenses decreased to $28,956 in 2002 from $112,784 in 2001 primarily due to lower bad debt expense. Financial Condition and Liquidity At September 30, 2002, the Company had total assets of $47,335,631 compared to $47,282,650 at December 31, 2001. Cash and cash equivalents were $13,699. At September 30, 2002 the Company had total illiquid investments of $45,836,720, which consists of preferred stock of Realty Advisors, Inc., an affiliated company. Total liabilities were $9,111,201 versus $9,171,201 at December 31, 2001. Item 4. Controls and Procedures Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, our Acting Principal Executive Officer and Chief Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective. There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, and there has not been any corrective action with regard to significant deficiencies and material weaknesses. 7 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES Part II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K - None 8 SIGNATURES Pursuant to the requirements 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. FIRST EQUITY PROPERTIES, INC. November 14, 2002 /s/ Ronald E. Kimbrough, Vice President, Secretary, Treasurer, Acting Principal Executive Officer and Chief Financial Officer 9 CERTIFICATION I, Ronald E. Kimbrough, Acting Principal Executive Officer and Chief Financial Officer of First Equity Properties, Inc. ("the Company"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining internal controls and procedures and have: a. designed such internal controls to insure that material information relating to the company and its consolidated subsidiaries is made known to me by others within those entities, particularly for the periods presented in this quarterly report; b. evaluated the effectiveness of the Company's internal controls as of a date within 90 days prior to the filing date of this quarterly report; and c. presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on a date within 90 days prior to the filing date of this quarterly report; 5. I have disclosed to the Company's auditors and Audit Committee of the Board of Directors (or persons fulfilling the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 10 CERTIFICATION (CONTINUED) 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including corrective actions with regard to significant deficiencies and material weaknesses. /s/ Ronald E. Kimbrough Ronald E. Kimbrough Acting Principal Executive Officer and Chief Financial Officer November 14, 2002 11 EXHIBIT INDEX <Table> <Caption> Exhibit Number Description - -------- ----------- 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 </Table> 12