<PAGE> 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, 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
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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
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(Address of principal executive offices)
214-750-5800
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(Registrant's telephone number, including area code)
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(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 June 30, 1998, registrant had 10,570,944 shares of Common Stock
issued and outstanding.
1
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FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
FORM 10-Q
June 30, 1998
INDEX
<TABLE>
<CAPTION>
Part I Financial Information: Page No.
Item 1. Financial Statements.
<S> <C>
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997..................................................3
Consolidated Statements of Income (Unaudited)
Six Months and Three Months Ended June 30, 1998 and 1997.........................................4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 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
</TABLE>
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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1998 December 31,
(Unaudited) 1997
----------- -----------
<S> <C> <C>
Motel and other property and equipment, less
accumulated depreciation of $57,546 and $480,094,
respectively $ 156,487 $ 5,693,509
Cash and cash equivalents 260,741 144,906
Accounts receivable - trade 1,407,358 1,190,357
Accounts receivable - affiliates 4,064,838 17,217,713
Notes receivable 3,600,000 --
Prepaid expenses -- 10,500
Investments 40,703,000 41,526,000
Other assets 3,024,058 3,065,995
Deferred tax asset 2,650,000 5,300,000
----------- -----------
$55,866,482 $74,148,980
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 3,052,783 $ 2,830,913
Notes payable - affiliate 2,140,710 2,279,578
Accounts payable - trade 495,665 444,274
Accounts payable - affiliates 226,075 74,597
Accrued liabilities 584,943 557,242
Income taxes payable 1,932,215 596,215
----------- -----------
Total liabilities 8,432,391 6,782,819
Minority interest in limited partnership 7,722,210 6,163,464
Shareholders' Equity
Series A preferred stock, $.01 par value; 40,000 shares authorized; 6,175 and
32,500 shares issued and outstanding at June 30, 1998 and December 31,
1997, respectively; stated at liquidation value 6,175,000 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 32,149,623 27,315,439
----------- -----------
Total shareholders' equity 39,711,881 61,202,697
----------- -----------
$55,866,482 $74,148,980
=========== ===========
</TABLE>
3
<PAGE> 4
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Commission income $ 8,437,304 $ 7,766,714 $ 5,228,027 $ 5,482,515
Consulting fee income 5,645,221 4,225,583 3,819,390 3,995,576
Management fee income 3,331,414 2,668,270 1,796,381 1,412,973
Motel 1,014,091 901,164 588,982 532,430
Other 1,117,765 1,097,238 696,750 541,338
------------ ------------ ------------ ------------
19,545,795 16,658,969 12,129,530 11,964,832
Operating expenses
Salaries and wages 2,587,775 1,519,743 1,199,207 667,678
General and administrative 522,004 1,460,675 305,644 859,241
Minority interest in limited partnership 1,558,746 1,039,674 986,597 894,707
Other operating expenses 914,474 535,194 582,263 325,900
Depreciation and amortization 160,499 161,937 75,750 71,650
Insurance and taxes 447,360 120,208 242,683 59,255
Repairs and maintenance 74,838 102,652 37,674 40,973
Franchise fees 73,523 72,910 43,381 37,565
Telephone and utilities 101,501 71,311 46,728 5,315
Advertising and promotion 76,468 50,703 34,604 30,448
Legal and professional fees 136,904 91,489 60,557 78,527
Loss on sale of motel properties 858,579 -- 858,579 --
------------ ------------ ------------ ------------
Total operating expenses 7,512,671 5,226,496 4,473,667 3,071,259
------------ ------------ ------------ ------------
Income from operations 12,033,124 11,432,473 7,655,863 8,893,573
Other expenses
Interest expense (203,938) (233,065) (102,776) (108,449)
------------ ------------ ------------ ------------
Earnings before income taxes 11,829,186 11,199,408 7,553,087 8,785,124
Deferred tax benefit (expense) (2,650,000) 2,588,183 (1,325,000) 2,153,418
Current tax provision (1,336,000) (291,185) (1,081,130) (242,272)
------------ ------------ ------------ ------------
(3,986,000) 2,296,998 (2,406,130) 1,911,146
------------ ------------ ------------ ------------
Net income $ 7,843,186 $ 13,496,406 $ 5,146,957 $ 10,696,270
============ ============ ============ ============
Earnings per share $ .74 $ 1.28 $ .49 $ 1.01
============ ============ ============ ============
Weighted average shares outstanding 10,570,944 10,570,944 10,570,944 10,570,944
============ ============ ============ ============
</TABLE>
4
<PAGE> 5
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,843,186 $ 13,496,406
Adjustments to reconcile net income to net cash
used for operating activities
Loss on sale of motel properties 745,017 --
Depreciation and amortization 160,499 161,937
Minority interest in limited partnership 1,558,746 1,039,674
Other 47,032 --
(Increase) decrease in
Accounts receivable - trade 217,001 74,328
Accounts receivable - affiliates (14,608,125) (13,317,028)
Prepaid expenses and other 14,500 20,166
Deferred tax asset 2,650,000 (2,588,183)
Increase (decrease) in
Accounts payable 51,391 (118,360)
Accounts payable - affiliates 151,478 --
Accrued expenses 27,701 (180,329)
Other current liabilities -- (439,992)
Income taxes payable 1,336,000 291,185
------------ ------------
Net cash provided (used) by operating activities 194,426 (1,560,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (146,947) (109,775)
Net cash acquired from acquisition -- 298,105
Proceeds from sale of motel properties 275,354 --
------------ ------------
Net cash provided by investing activities 128,407 188,330
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related parties -- 1,660,538
Payments on long term debt (206,998) (114,522)
------------ ------------
Net cash provided (used) by financing activities (206,998) 1,546,016
------------ ------------
Net increase in cash and cash equivalents 115,835 174,150
Cash and cash equivalents at beginning of period 144,906 76,355
------------ ------------
Cash and cash equivalents at end of period $ 260,741 $ 250,505
============ ============
</TABLE>
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FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
Noncash investing and financing activities:
Reduction of receivable from affiliate in exchange for:
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 --
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
============ ============
</TABLE>
6
<PAGE> 7
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 - 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.
7
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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, 1998 compared to three months ended June 30, 1997
Revenues increased to $12,129,530 versus prior year of $11,964,832. The increase
was primarily due to higher management fees. Total operating expenses increased
from $3,071,259 to $4,473,667. The increase resulted from the nonrecurring loss
on the sale of the three hotel properties and higher salaries and wages.
The increase in income tax expense to $2,406,130 was due to utilization of
existing net operating loss "carryforwards" and utilization of the deferred tax
asset.
Results of Operations
Six months ended June 30, 1998 compared to six months ended June 30, 1997
Revenues increased to $19,545,795 versus prior year of $16,658,969. The increase
resulted from higher commission income and higher consulting and management
fees.
Total operating expenses increased to $7,512,671 due to higher salaries and
wages and the nonrecurring loss on the sale of the three hotel properties.
Earnings before income taxes increased to $11,829,186 compared to prior year of
$11,199,408. The increase in income tax expense to $3,986,000 was due to
utilization of existing net operating loss "carryforwards" and utilization of
the deferred tax asset.
Financial Condition and Liquidity
At June 30, 1998, the company had total assets of $55,866,782. Cash and cash
equivalents increased to $260,741.
Total liabilities increased to $8,432,391 primarily due to increase in income
tax payable.
Year to date, the Company redeemed $26,325,000 of it's preferred stock in
exchange for reduction of receivable from an affiliate.
8
<PAGE> 9
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
9
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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 11, 1998 /s/ F. Terry Shumate, Director,
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
10
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 260,741
<SECURITIES> 0
<RECEIVABLES> 1,407,358
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 214,033
<DEPRECIATION> 57,546
<TOTAL-ASSETS> 55,866,482
<CURRENT-LIABILITIES> 0
<BONDS> 5,193,493
0
6,175,000
<COMMON> 105,710
<OTHER-SE> 33,431,171
<TOTAL-LIABILITY-AND-EQUITY> 55,866,482
<SALES> 19,545,795
<TOTAL-REVENUES> 19,545,795
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,512,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,938
<INCOME-PRETAX> 11,829,186
<INCOME-TAX> 3,986,000
<INCOME-CONTINUING> 7,843,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,843,186
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
