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, 1999 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 June 30, 1999, registrant had 10,570,944 shares of Common Stock issued and outstanding. 2 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES FORM 10-Q June 30, 1999 INDEX Part I Financial Information: Page No. Item 1. Financial Statements. Consolidated Balance Sheets June 30, 1999 (Unaudited) and December 31, 1998..................................................4 Consolidated Statements of Income (Unaudited) Six Months and Three Months Ended June 30, 1999 and 1998.........................................5 Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1999 and 1998..........................................................6 Notes to Consolidated Financial Statements.........................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................9 Part II Other Information: Item 6. Exhibits and Reports on Form 8-K..........................................................10 3 Board of Directors First Equity Properties, Inc. and Subsidiaries The accompanying consolidated balance sheets of First Equity Properties, Inc. and subsidiaries as of June 30, 1999 and December 31, 1998, and the related consolidated statements of income for the three and six month periods ended June 30, 1999 and 1998 and cash flows for the six month periods ended June 30, 1999 and 1998 were not audited by us and, accordingly, we do not express an opinion on them. FARMER, FUQUA, HUNT & MUNSELLE, P.C. Dallas, Texas August 13, 1999 4 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS June 30, 1999 December 31, (Unaudited) 1998 ------------- ------------ Property and equipment, less accumulated depreciation of $135,074 and $105,074, respectively $ 225,152 $ 204,013 Cash and cash equivalents 94,700 325,699 Accounts receivable - trade 1,485,599 1,240,736 Accounts receivable - affiliates -- 3,020,755 Investments 55,220,710 40,573,000 Other assets 2,950,067 2,986,120 Notes receivable 3,471,605 3,348,468 ----------- ----------- TOTAL ASSETS $63,447,833 $51,698,791 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 2,724,242 $ 2,776,336 Notes payable - affiliate 2,851,347 2,747,347 Accounts payable - trade 449,862 302,853 Accounts payable - affiliates 4,083,780 240,762 Accrued liabilities 969,271 806,683 Income taxes payable 2,488,500 238,500 ----------- ----------- Total liabilities 13,567,002 7,112,481 Minority interest in limited partnership 9,846,073 8,916,712 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 38,647,500 34,282,340 ----------- ----------- Total shareholders' equity 40,034,758 35,669,598 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,447,833 $51,698,791 =========== =========== 4 5 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six months ended June 30, Three months ended June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenue Commission income $ 6,542,823 $ 8,437,304 $ 4,323,986 $ 5,228,027 Management fee income 3,709,366 3,331,414 1,936,478 1,796,381 Consulting fee income 2,552,698 5,645,221 1,485,636 3,819,390 Other 955,904 1,117,765 553,042 696,750 Motel -- 1,014,091 -- 588,982 ------------ ------------ ------------ ------------ 13,760,791 19,545,795 8,299,142 12,129,530 Operating expenses Salaries and wages 4,101,945 2,587,775 2,760,204 1,199,207 General and administrative 1,049,569 522,004 662,710 305,644 Minority interest in limited partnership 929,358 1,558,746 521,965 986,597 Insurance and taxes 294,956 447,360 134,396 242,683 Other operating expenses 204,974 914,474 51,900 582,263 Legal and professional fees 216,677 136,904 127,492 60,557 Depreciation and amortization 67,937 160,499 33,968 75,750 Telephone and utilities 39,578 101,501 23,956 46,728 Repairs and maintenance 7,270 74,838 4,245 37,674 Advertising and promotion 3,770 76,468 2,356 34,604 Franchise fees -- 73,523 -- 43,381 Loss on sale of motel properties -- 858,579 -- 858,579 ------------ ------------ ------------ ------------ Total operating expenses 6,916,034 7,512,671 4,323,192 4,473,667 ------------ ------------ ------------ ------------ Income from operations 6,844,757 12,033,124 3,975,950 7,655,863 Other expenses Interest expense (229,597) (203,938) (112,624) (102,776) ------------ ------------ ------------ ------------ Earnings before income taxes 6,615,160 11,829,186 3,863,326 7,553,087 Deferred tax benefit (expense) -- (2,650,000) -- (1,325,000) Current tax provision (2,250,000) (1,336,000) (1,310,000) (1,081,130) ------------ ------------ ------------ ------------ (2,250,000) (3,986,000) (1,310,000) (2,406,130) ------------ ------------ ------------ ------------ Net income $ 4,365,160 $ 7,843,186 $ 2,553,326 $ 5,146,957 ============ ============ ============ ============ Earnings per share $ .41 $ .74 $ .24 $ .49 ============ ============ ============ ============ Weighted average shares outstanding 10,570,944 10,570,944 10,570,944 10,570,944 ============ ============ ============ ============ 5 6 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, ------------------------------ 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,365,160 $ 7,843,186 Adjustments to reconcile net income to net cash provided by (used for) operating activities Loss on sale of motel properties -- 745,017 Depreciation and amortization 67,938 160,499 Minority interest in limited partnership 929,361 1,558,746 Other -- 47,032 (Increase) decrease in Accounts receivable - trade (244,863) 217,001 Accounts receivable - affiliates (7,965,515) (14,608,125) Prepaid expenses and other (1,885) 14,500 Deferred tax asset -- 2,650,000 Notes receivable (123,137) -- Increase (decrease) in Accounts payable 147,009 51,391 Accounts payable - affiliates 181,578 151,478 Accrued expenses 162,588 27,701 Income taxes payable 2,250,000 1,336,000 ------------ ------------ Net cash provided by (used for) operating activities (231,766) 194,426 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (51,139) (146,947) Proceeds from sale of motel properties -- 275,354 ------------ ------------ Net cash provided by (used for) investing activities (51,139) 128,407 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related parties 104,000 -- Payments on long term debt (52,094) (206,998) ------------ ------------ Net cash provided by (used for) financing activities 51,906 (206,998) ------------ ------------ Net increase in cash and cash equivalents (230,999) 115,835 Cash and cash equivalents at beginning of period 325,699 144,906 ------------ ------------ Cash and cash equivalents at end of period $ 94,700 $ 260,741 ============ ============ 6 7 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - Continued (Unaudited) Six months ended June 30, ----------------------------- 1999 1998 ------------ ------------ Noncash investing and financing activities: Reduction of receivable from affiliate in exchange for: Investment in preferred stock of affiliate ................ $ 14,647,710 $ -- Redemption of preferred stock ............................. -- 26,325,000 Payment of dividends ...................................... -- 3,009,000 Exchange of investment for account receivable from affiliates ................................ -- 1,573,000 Assets received and liabilities assumed in connection with sale of Motel properties: Notes receivable .......................................... -- 3,600,000 Investment in real property ............................... -- 750,000 Mortgage payable on investment in real property ........... $ -- $ 290,000 7 8 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (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, 1999. For further information, refer to the Company's annual report on Form 10-K for the year ended December 31, 1998. NOTE B - MOTEL PROPERTIES In June 1998, the company sold its three motel properties located in the Spokane, Washington area for $4,660,000. The properties were sold for a combination of cash, notes receivable and real estate. Revenues and income from the properties sold are not material to the future operations of the company. 8 9 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 June 30, 1999 compared to three months ended June 30, 1998 Revenues decreased to $8,299,142 versus prior year of $12,129,530. The decrease was due to lower commission and consulting fee income. Total operating expenses decreased from $4,473,667 to $4,323,192. The decrease resulted from lower operating expenses and the sale of the motel properties in 1998. The decrease in income tax expense to $1,310,000 was due to lower pre-tax earnings. Results of Operations Six months ended June 30, 1999 compared to six months ended June 30, 1998 Revenues decreased to $13,760,791 versus prior year of $19,545,795. The decrease resulted from lower commission income, lower consulting fees and the sale of motel properties in 1998.. Total operating expenses decreased to $6,916,034 due to lower minority interest income, lower operating costs and the sale of the motel properties in 1998. Earnings before income taxes decreased to $6,615,160 compared to prior year of $11,829,186. The decrease in income tax expense to $2,250,000 was due to lower pre-tax earnings. Financial Condition and Liquidity At June 30, 1999, the company had total assets of $63,447,833. Cash and cash equivalents were $94,700. Total liabilities increased to $13,567,002 primarily due to increase in income tax payable and accounts payable affiliate. Other Effective July 1, 1999, the Company modified its consulting fee relationship with an affiliate. This change will significantly reduce consulting fee income going forward. 9 10 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 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 10 11 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. August 13, 1999 /s/ F. Terry Shumate, Director, Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 12 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 27.0 Financial Data Schedule, filed herewith