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 March 31, 1998 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 [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 March 31, 1998, registrant had 10,570,944 shares of Common Stock issued and outstanding. 2 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES FORM 10-Q March 31, 1998 INDEX Part I Financial Information: Page No. Item 1. Financial Statements. Consolidated Balance Sheets March 31, 1998 (Unaudited) and December 31, 1997.................................................3 Consolidated Statement of Earnings (Unaudited) Three Months Ended March 31, 1998 and 1997.......................................................4 Consolidated Statement of Cash Flows (Unaudited) Three Months Ended March 31, 1998 and 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..........................................................9 2 3 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, 1998 December 31, (Unaudited) 1997 -------------- ------------ Motel and other property and equipment, less accumulated depreciation of $480,094 and $414,313, respectively $ 5,653,445 $ 5,693,509 Cash and cash equivalents 169,509 144,906 Accounts receivable - trade 1,091,172 1,190,357 Accounts receivable - affiliates 17,248,199 17,217,713 Prepaid expenses 17,920 10,500 Investments 41,527,000 41,526,000 Other assets 3,043,025 3,065,995 Deferred tax asset 3,975,000 5,300,000 ----------- ----------- $72,725,270 $74,148,980 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 2,802,843 $ 2,830,913 Notes payable - affiliate 2,321,432 2,279,578 Accounts payable - trade 497,649 444,274 Accounts payable - affiliate 527,690 74,597 Accrued liabilities 540,036 557,242 Income taxes payable 851,085 596,215 ----------- ----------- Total liabilities 7,540,735 6,782,819 Minority interest in limited partnership 6,735,613 6,163,464 Shareholders' Equity Series A preferred stock, $.01 par value; 40,000 shares authorized; 32,500 shares issued and outstanding; stated at liquidation value 27,500,000 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 29,561,664 27,315,439 ----------- ----------- Total shareholders' equity 58,448,922 61,202,697 ----------- ----------- $72,725,270 $74,148,980 =========== =========== 3 4 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the three months ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ------------ ------------ Revenue Commission income $ 3,209,277 $ 2,284,199 Consulting fee income 1,825,831 230,007 Management fee income 1,535,033 1,255,297 Motel 425,109 368,734 Other 421,015 555,900 ------------ ------------ 7,416,265 4,694,137 Operating expenses Salaries and wages 1,388,568 852,065 Minority interest in limited partnership 572,149 144,967 Other operating expenses 332,211 209,294 General and administrative 216,360 601,434 Insurance and taxes 204,677 60,953 Depreciation and amortization 84,749 90,287 Legal and professional fees 76,347 12,962 Telephone and utilities 54,773 65,996 Advertising and promotion 41,864 20,255 Repairs and maintenance 37,164 61,679 Franchise fees 30,142 35,345 ------------ ------------ Total operating expenses 3,039,004 2,155,237 ------------ ------------ Earnings from operations 4,377,261 2,538,900 Other expenses Interest expense (101,162) (124,616) ------------ ------------ Earnings before income taxes 4,276,099 2,414,284 Income tax benefit (expense) Deferred (1,325,000) 434,765 Current (254,870) (48,913) ------------ ------------ (1,579,870) 385,852 ------------ ------------ NET EARNINGS $ 2,696,229 $ 2,800,136 ============ ============ Earnings per share $ .26 $ .26 ============ ============ Weighted average shares outstanding 10,570,944 10,570,944 ============ ============ 4 5 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,696,229 $ 2,800,136 Adjustments to reconcile net income to net cash provided (used) by operating activities Deferred tax (benefit) expense 1,325,000 (434,765) Depreciation and amortization 84,749 90,287 Minority interest in limited partnership 572,149 144,967 (Increase) decrease in Accounts receivable - trade 99,185 344,863 Accounts receivable - affiliate (5,480,487) (2,490,740) Prepaid expenses and other (7,420) 19,913 Increase (decrease) In Accounts payable 53,375 (97,153) Accrued expenses (17,206) (230,733) Other current liabilities -- (439,992) Accounts payable - affiliate 453,093 190,641 Income taxes payable 254,870 48,913 ----------- ----------- Net cash provided (used) by operating activities 33,537 (53,663) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (25,717) (58,788) Other 2,999 -- Net cash acquired from acquisition -- 298,105 ----------- ----------- Net cash provided (used) by investing activities (22,718) 239,317 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related parties 41,854 297,659 Payments on long term debt (28,070) (52,206) ----------- ----------- Net cash provided by financing activities 13,784 245,453 ----------- ----------- Net increase in cash and cash equivalents 24,603 431,107 Cash and cash equivalents at beginning of period 144,906 76,355 ----------- ----------- Cash and cash equivalents at end of period $ 169,509 $ 507,462 =========== =========== 5 6 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the three months ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ----------- ------------ Noncash investing and financing activities Preferred stock issued for acquisition $ -- $ 32,500,000 Redemption of preferred stock in exchange for reduction of receivable from affiliate 5,000,000 -- Payment of dividend in exchange for reduction of receivable from affiliate 450,000 -- 6 7 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (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, 1998. For further information, refer to the Company's annual report on Form 10-K for the year ended December 31, 1997. NOTE B - SHAREHOLDERS' EQUITY During the quarter, preferred stock of $5,000,000 was redeemed in exchange for reduction of a receivable from affiliate. 7 8 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 March 31, 1998 compared to three months ended March 31, 1997 Revenues increased to $7,416,265 versus prior year of $4,694,137. The increase was due to higher commission income and timing of consulting fee income. Total operating expenses increased from $2,155,237 in 1997 to $3,039,004 in 1998. The increase was primarily due to higher salaries and wages and higher minority interest earnings. Earnings from operations increased from $2,538,900 in 1997 to $4,377,261 in 1998. The increase in income tax expense to $1,579,870 was due to utilization of existing net operating loss carryforwards and utilization of the deferred tax asset. Financial Condition and Liquidity At March 31, 1998, the Company had total assets of $72,725,270 compared to prior year of $74,148,980. Cash and cash equivalents were $169,509. Total liabilities were $7,540,735 versus prior year of $6,782,819. Preferred stock decreased from $32,500,000 to $27,500,000 due to a redemption in exchange for reduction of receivable from an affiliate. 8 9 Part II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit ------- ---------------------- 27.0 Financial Data Schedule, filed herewith (b) Reports on Form 8-K - None 9 10 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. May 11, 1998 /s/ F. Terry Shumate, Director, Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 10 11 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------------- ---------------------- 27 Financial Data Schedule