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 September 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 . 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, 1999, registrant had 10,570,944 shares of Common Stock issued and outstanding. 2 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES FORM 10-Q September 30, 1999 INDEX Page No. Part I Financial Information: Item 1. Financial Statements. Consolidated Balance Sheets September 30, 1999 (Unaudited) and December 31, 1998.............................................4 Consolidated Statements of Income (Unaudited) Nine Months and Three Months Ended September 30, 1999 and 1998...................................5 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 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 September 30, 1999 and December 31, 1998, and the related consolidated statements of income for the three and nine month periods ended September 30, 1999 and 1998 and cash flows for the nine month periods ended September 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 October 28, 1999 4 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS September 30, 1999 December 31, (Unaudited) 1998 ------------------ ------------ Property and equipment, less accumulated depreciation of $142,574 and $105,074, respectively $ 220,608 $ 204,013 Cash and cash equivalents 294,818 325,699 Accounts receivable - trade 1,859,147 1,240,736 Accounts receivable - affiliates -- 3,020,755 Investments 54,600,710 40,573,000 Notes receivable 3,464,272 3,348,468 Other assets 2,931,098 2,986,120 ------------ ------------ TOTAL ASSETS 63,370,653 51,698,791 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable 2,575,248 2,776,336 Notes payable - affiliate 2,904,210 2,747,347 Accounts payable - trade 1,094,379 302,853 Accounts payable - affiliates 5,222,945 240,762 Accrued liabilities 1,024,232 806,683 Income taxes payable 1,615,000 238,500 ------------ ------------ Total liabilities 14,436,014 7,112,481 Minority interest in limited partnership 10,129,055 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 37,418,326 34,282,340 ------------ ------------ Total shareholders' equity 38,805,584 35,669,598 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,370,653 $ 51,698,791 ============ ============ 4 5 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenue Commission income $ 10,213,526 $ 12,976,462 $ 3,670,703 $ 4,539,158 Management fee income 5,530,960 5,126,141 1,821,594 1,794,727 Consulting fee income 2,748,453 7,267,384 195,755 1,622,163 Motel -- 1,014,091 -- -- Other 1,317,934 1,997,470 362,030 879,705 ------------ ------------ ------------ ------------ 19,810,873 28,381,548 6,050,082 8,835,753 Operating expenses Salaries and wages 5,293,721 3,698,943 1,191,776 1,111,168 Consulting fees expense 5,000,000 5,500,000 5,000,000 5,500,000 General and administrative 1,410,715 781,411 361,146 259,407 Minority interest in limited partnership 1,212,340 2,144,825 282,982 586,079 Insurance and taxes 1,024,740 698,068 729,784 250,708 Legal and professional fees 261,197 201,844 44,520 64,940 Other operating expenses 240,868 1,117,424 38,932 202,950 Loss on sale of motel properties 97,129 865,159 94,095 6,580 Depreciation and amortization 94,406 179,467 26,469 18,968 Telephone and utilities 56,998 110,558 17,420 9,057 Repairs and maintenance 20,238 76,381 12,968 1,543 Advertising and promotion 5,410 79,408 1,640 2,940 Franchise fees -- 73,523 -- -- ------------ ------------ ------------ ------------ Total operating expenses 14,717,762 15,527,011 7,801,732 8,014,340 ------------ ------------ ------------ ------------ Income (loss) from operations 5,093,111 12,854,537 (1,751,650) 821,413 Other expenses Interest expense (342,125) (365,616) (112,528) (161,678) ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 4,750,986 12,488,921 (1,864,178) 659,735 Deferred tax benefit (expense) -- (3,975,000) -- (1,325,000) Current tax (provision) benefit (1,615,000) (189,123) 635,000 1,146,877 ------------ ------------ ------------ ------------ (1,615,000) (4,164,123) 635,000 (178,123) ------------ ------------ ------------ ------------ Net income $ 3,135,986 $ 8,324,798 $ (1,229,178) $ 481,612 ============ ============ ============ ============ Earnings per share $ .30 $ .79 $ (.11) $ .05 ============ ============ ============ ============ 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) Nine months ended September 30, -------------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,135,986 $ 8,324,798 Adjustments to reconcile net income to net cash used for operating activities Loss on sale of motel properties 97,129 865,159 Depreciation and amortization 94,406 179,467 Minority interest in limited partnership 1,212,340 2,144,826 Noncash litigation settlement 175,000 -- Other (2,125) 195,016 (Increase) decrease in Accounts receivable - trade (618,411) 150,942 Accounts receivable - affiliates (7,965,515) (19,139,698) Prepaid expenses and other (1,885) 14,500 Deferred tax asset -- 3,975,000 Notes receivable (115,804) -- Increase (decrease) in Accounts payable 791,526 (224,992) Accounts payable - affiliates 1,320,743 3,758,539 Accrued expenses 217,549 (391,345) Accrued Interest - notes payable - affiliate 156,863 -- Income taxes payable 1,376,500 (262,215) ------------ ------------ Net cash provided by (used for) operating activities (125,698) (410,003) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (54,095) (172,341) Proceeds from sale 525,000 275,354 ------------ ------------ Net cash provided by investing activities 470,905 103,013 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related parties -- 505,761 Payments on long term debt (376,088) (97,286) ------------ ------------ Net cash provided by (used for) financing activities (376,088) 408,475 ------------ ------------ Net increase (decrease) in cash and cash equivalents (30,881) 101,485 Cash and cash equivalents at beginning of period 325,699 144,906 ------------ ------------ Cash and cash equivalents at end of period $ 294,818 $ 246,391 ============ ============ 6 7 FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - Continued (Unaudited) Nine months ended September 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 -- 32,500,000 Payment of dividends -- 3,791,167 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 September 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 disposed of its three motel properties located in the Spokane, Washington area for $4,660,000. The properties were exchanged 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 September 30, 1999 compared to three months ended September 30, 1998 Revenues decreased to $6,050,082 versus prior year of $8,835,753. The decrease was due to lower commission and consulting fee income. Total operating expenses decreased from $8,014,340 to $7,801,732. The decrease resulted from lower consulting fees, lower minority interest income, and lower operating expenses. Results of Operations Nine months ended September 30, 1999 compared to nine months ended September 30, 1998 Revenues decreased to $19,810,873 versus prior year of $28,381,548. The decrease resulted from lower commission income, lower consulting fees and the sale of motel properties in 1998. Total operating expenses decreased to $14,717,762 due to lower minority interest income, lower operating costs and the sale of the motel properties in 1998. These decreases were largely offset by higher salaries, wages and general and administrative expenses. Earnings before income taxes decreased to $4,750,986 compared to prior year of $12,488,921. The decrease in income tax expense to $1,615,000 was due to lower pre-tax earnings. Financial Condition and Liquidity At September 30, 1999, the company had total assets of $63,370,653. Cash and cash equivalents were $294,818. Total liabilities increased to $14,436,014 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. Also, effective October 1, 1999, the Company modified certain brokerage fee contracts. These changes will significantly reduce revenues 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. October 28, 1999 /s/ F. Terry Shumate, Director, Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 12 INDEX TO EXHIBITS Exhibit Number Description of Exhibit -------------- ---------------------- 27.0 Financial Data Schedule