1 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 June 30, 1997 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 incorporation (I.R.S. Employer or organization) Identification No.) 10670 N. Central Expressway, Suite 410, Dallas, Texas 75231 ----------------------------------------------------------- (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 . 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 . No X ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: As of June 30, 1997, registrant had 10,570,944 shares of Common Stock issued and outstanding. 2 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES June 30, 1997 INDEX Part I Financial Information: Page No. Item 1. Financial Statements. Consolidated Balance Sheets June 30, 1997 (Unaudited) and December 31, 1996...............................................3 Consolidated Statement of Operations (Unaudited) Six Months Ended June 30, 1997................................................................4 Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 30, 1997................................................................5 Notes to Consolidated Financial Statements......................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................8 Part II Other Information: Item 6. Exhibits and Reports on Form 8-K.......................................................8 2 3 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS June 30, 1997 Dec. 31, 1996 -------------- ------------- Motel property and equipment, less accumulated depreciation of $310,680 and $129,136, respectively $ 5,725,845 $ 5,678,361 Cash and cash equivalents 250,505 76,355 Account receivable - trade 992,009 47,657 Account receivable - affiliates 3,589,463 --- Prepaid expenses 106,896 20,492 Investments 41,526,000 --- Goodwill, net of amortization 2,997,035 --- Deferred tax asset 2,588,183 --- ----------- ----------- $57,775,936 $ 5,822,865 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 2,873,161 $ 3,875,538 Notes payable - related parties 2,172,165 511,627 Accounts payable - trade 64,845 181,494 Accrued liabilities 207,803 102,554 Other current liabilities --- 84,086 Income taxes payable 291,185 --- ----------- ----------- Total liabilities 5,609,159 4,755,299 Minority interest in limited partnership 5,102,805 --- Shareholders' Equity Series A preferred stock, $.01 par value; 40,000 shares authorized; 32,500 shares issued and outstanding; stated at liquidation value 32,500,000 --- Other preferred stock, $.01 par value; 4,960,000 shares authorized; none issued or outstanding --- --- 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 (deficit) 13,176,714 (319,692) ----------- ----------- Total shareholders' equity 47,063,972 1,067,566 ----------- ----------- $57,775,936 $ 5,822,865 =========== =========== 3 4 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three months Six Months ended ended June 30, 1997 June 30, 1997 ------------- ------------ Revenue Commission income $ 5,482,515 $ 7,766,714 Consulting fee income 3,995,576 4,225,583 Management fee income 1,412,973 2,668,270 Motel 532,430 901,164 Other 541,338 1,097,238 ------------ ------------ 11,964,832 16,658,969 Operating expenses Salaries and wages 667,678 1,519,743 General and administrative 859,241 1,460,675 Minority interest in limited partnership 894,707 1,039,674 Other operating expenses 325,900 535,194 Depreciation and amortization 71,650 161,937 Insurance and taxes 59,255 120,208 Repairs and maintenance 40,973 102,652 Franchise fees 37,565 72,910 Telephone and utilities 5,315 71,311 Advertising and promotion 30,448 50,703 Legal and professional fees 78,527 91,489 ------------ ------------ Total operating expenses 3,071,259 5,226,496 ------------ ------------ Income from operations 8,893,573 11,432,473 Other expenses Interest expense (108,449) (233,065) ------------ ------------ Earnings before income taxes 8,785,124 11,199,408 Deferred tax benefit 2,153,418 2,588,183 Current tax provision (242,272) (291,185) ------------ ------------ 1,911,146 2,296,998 ------------ ------------ Net income $ 10,696,270 $ 13,496,406 ============ ============ 4 5 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended June 30, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,496,406 Adjustments to reconcile net income to net cash used for operating activities Depreciation and amortization 161,937 Minority interest in limited partnership 1,039,674 (Increase) decrease in Accounts receivable - trade 74,328 Accounts receivable - affiliates (13,317,028) Prepaid expenses and other 20,166 Deferred tax asset (2,588,183) Increase (decrease) in Accounts payable (118,360) Accrued expenses (180,329) Other current liabilities (439,992) Income taxes payable 291,185 ------------ Net cash used for operating activities (1,560,196) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (109,775) Net cash acquired from acquisition 298,105 Net cash provided by investing activities 188,330 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related parties 1,660,538 Payments on long term debt (114,522) ------------ Net cash provided by financing activities 1,546,016 ------------ Net increase in cash and cash equivalents 174,150 Cash and cash equivalents at beginning of period 76,355 ------------ Cash and cash equivalents at end of period $ 250,505 ============ 5 6 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - Continued For the six months ended June 30, 1997 Noncash investing and financing activities: Preferred stock issued for acquisition $ 32,500,000 Long term debt paid by related party 887,855 Stock issued to company to retire debt 9,482,000 Details of acquisition: Fair value of assets acquired 34,171,349 Liabilities assumed (4,706,322) Goodwill 3,034,973 Stock issued (32,500,000) ------------ Cash paid --- Plus: cash acquired 298,105 ------------ Net cash acquired from acquisition $ 298,105 ============ 6 7 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with 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 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, 1997. For further information, refer to the Company's annual report on Form 10-K for the year ended December 31, 1996. As discussed in the Company's annual report on Form 10-K for the year ended December 31, 1996, effective with the opening of business on June 15, 1996, the Company's plan of reorganization became effective. At that time, the Company was required to adopt fresh start reporting. As a result of the Company's emergence from the plan of reorganization and the adoption of "fresh start" reporting, comparative quarterly information was not available for inclusion in this Form 10-WQ. NOTE B - ACQUISITION Effective January 1, 1997, the Company acquired from a related party, 100% of the outstanding common stock of Carmel Realty, Inc. and an 81.6% limited partnership interest in Carmel Realty Services, Ltd (the " Acquired Companies"), for a purchase price of $32,500,000, consisting of 32,500 shares of Series A 8% Cumulative Preferred Stock having a liquidation value of $1,000 per share (the "Preferred Stock"). The Preferred Stock has a right to cumulative cash dividends of $80 per share per annum; payment of $1,000 per share in the event of dissolution, liquidation or winding up of the Company before any distribution is made by the Company to its common shareholders; optional redemption at any time at a price of $1,000 per share, plus cumulative dividends; no right of conversion into any other securities of the Company; and no voting rights, except as may be required by law. The acquisition has been accounted for using the purchase method of accounting. Accordingly, the Acquired Companies' results of operations are included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over assets acquired approximated $3,035,000 and is being amortized over 40 years. 7 8 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES Item 2. Managements Discussion and Analysis of of Financial Condition and Results of Operations Results of Operations Six months ended June 30, 1997 Net income for the period was $13,496,406. Revenues totaled $16,658,969. Operating expenses were $5,226,496 and interest expense totaled $233,065. The income tax benefit was due to utilization of operating loss carryforwards generated in prior years. All these categories are significantly higher than prior periods due to the previously mentioned acquisition of Carmel Realty, Inc. and Carmel Realty Services, Ltd. Three months ended June 30, 1997 For the quarter, revenues were $11,964,832. Total operating expenses were $3,071,259 and interest expense totaled $108,449. The income tax benefit was due to utilization of operating loss carryforwards generated in prior years. Net income was $10,696,270. All these categories are significantly higher than prior year due to the previously mentioned acquisition. Financial Condition and Liquidity At June 30, 1997, the Company had total assets of $57,775,936 and total liabilities of $5,609,159. Of the total assets, $250,505 was held in cash. The increases from the December 31, 1996 year end are due to the previously mentioned acquisition. Part II Other Information Item 6. Exhibits and Reports on Form 8 - K (a) Exhibits - Financial Data Schedule (b) Reports on Form 8-K - None 8 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to he signed on its behalf by the undersigned thereunto duly authorized. FIRST EQUITY PROPERTIES, INC. April 23, 1998 /s/ F. Terry Shumate, Director Vice President, Secretary and Treasurer 9 10 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule