<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 September 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
---------------------------------------------------------
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, 1998, registrant had 10,570,944 shares of Common
Stock issued and outstanding.
1
<PAGE> 2
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
FORM 10-Q
September 30, 1998
INDEX
<TABLE>
<CAPTION>
Part I Financial Information: Page No.
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997.............................................4
Consolidated Statements of Income (Unaudited)
Nine Months and Three Months Ended September 30, 1998 and 1997...................................5
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997....................................................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
</TABLE>
<PAGE> 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, 1998 and December 31, 1997, and the
related consolidated statements of income for the three and nine month periods
ended September 30, 1998 and 1997 and cash flows for the nine month periods
ended September 30, 1998 and 1997 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, 1998
<PAGE> 4
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 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 $ 181,881 $ 5,693,509
Cash and cash equivalents 246,391 144,906
Accounts receivable - trade 1,039,415 1,190,357
Accounts receivable - affiliates 1,639,244 17,217,713
Notes receivable 3,352,320 --
Prepaid expenses -- 10,500
Investments 40,703,000 41,526,000
Other assets 3,005,089 3,065,995
Deferred tax asset 1,325,000 5,300,000
----------- -----------
$51,492,340 $74,148,980
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,700,926 $ 2,830,913
Notes payable - affiliate 2,694,484 2,279,578
Accounts payable - trade 219,282 444,274
Accounts payable - affiliates 3,833,136 74,597
Accrued liabilities 165,897 557,242
Income taxes payable 334,000 596,215
----------- -----------
Total liabilities 9,947,725 6,782,819
Minority interest in limited partnership 8,308,290 6,163,464
Shareholders' Equity
Series A preferred stock, $.01 par value; 40,000 shares authorized;
32,500 shares issued and outstanding
at December 31, 1997, 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 31,849,067 27,315,439
----------- -----------
Total shareholders' equity 33,236,325 61,202,697
----------- -----------
$51,492,340 $74,148,980
=========== ===========
</TABLE>
4
<PAGE> 5
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
-----------------------------------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Commission income $ 12,976,462 $ 10,554,958 $ 4,539,158 $ 2,788,244
Consulting fee income 7,267,384 5,880,776 1,622,163 1,655,193
Management fee income 5,126,141 4,113,159 1,794,727 1,444,889
Motel 1,014,091 1,561,459 -- 660,295
Other 1,997,470 1,661,976 879,705 564,738
------------ ------------ ------------ ------------
28,381,548 23,772,328 8,835,753 7,113,359
Operating expenses
Consulting fees expense 5,500,000 -- 5,500,000
Salaries and wages 3,698,943 2,354,986 1,111,168 835,243
General and administrative 781,411 1,739,787 259,407 279,112
Minority interest in limited partnership 2,144,825 1,291,298 586,079 251,624
Other operating expenses 1,117,424 779,311 202,950 244,117
Depreciation and amortization 179,467 233,586 18,968 71,649
Insurance and taxes 698,068 162,052 250,708 41,844
Repairs and maintenance 76,381 155,786 1,543 53,134
Franchise fees 73,523 130,579 -- 57,669
Telephone and utilities 110,558 99,544 9,057 28,233
Advertising and promotion 79,408 79,436 2,940 28,733
Legal and professional fees 201,844 114,134 64,940 22,645
Loss on sale of motel properties 865,159 -- 6,580 --
------------ ------------ ------------ ------------
Total operating expenses 15,527,011 7,140,499 8,014,340 1,914,003
------------ ------------ ------------ ------------
Income from operations 12,854,537 16,631,829 821,413 5,199,356
Other expenses
Interest expense (365,616) (335,270) (161,678) (102,205)
------------ ------------ ------------ ------------
Earnings before income taxes 12,488,921 16,296,559 659,735 5,097,151
Deferred tax benefit (expense) (3,975,000) 3,766,135 (1,325,000) 1,177,952
Current tax provision (189,123) (423,711) 1,146,877 (132,526)
------------ ------------ ------------ ------------
(4,164,123) 3,342,424 (178,123) 1,045,426
------------ ------------ ------------ ------------
Net income $ 8,324,798 $ 19,638,983 $ 481,612 $ 6,142,577
============ ============ ============ ============
Earnings per share $ .79 $ 1.86 $ .05 $ .59
============ ============ ============ ============
Weighted average shares outstanding 10,570,944 10,570,944 10,570,944 10,570,944
============ ============ ============ ============
</TABLE>
5
<PAGE> 6
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------- --------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,324,798 $ 19,638,983
Adjustments to reconcile net income to net cash
used for operating activities
Loss on sale of motel properties 865,159 --
Depreciation and amortization 179,467 233,586
Minority interest in limited partnership 2,144,826 1,291,298
Other 195,016 --
(Increase) decrease in
Accounts receivable - trade 150,942 (15,706)
Accounts receivable - affiliates (19,139,698) (19,090,773)
Prepaid expenses and other 14,500 (23,218)
Deferred tax asset 3,975,000 (3,766,135)
Increase (decrease) in
Accounts payable (224,992) (99,880)
Accounts payable - affiliates 3,758,539 --
Accrued expenses (391,345) 132,417
Other current liabilities -- (439,992)
Income taxes payable (262,215) 423,711
-------------- --------------
Net cash provided (used) by operating activities (410,003) (1,715,709)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (172,341) (171,507)
Net cash acquired from acquisition -- 298,105
Proceeds from sale of motel properties 275,354 --
-------------- --------------
Net cash provided by investing activities 103,013 126,598
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related parties 505,761 1,716,393
Payments on long term debt (97,286) (141,527)
-------------- --------------
Net cash provided (used) by financing activities 408,475 1,574,866
-------------- --------------
Net increase in cash and cash equivalents 101,485 (14,245)
Cash and cash equivalents at beginning of period 144,906 76,355
-------------- --------------
Cash and cash equivalents at end of period $ 246,391 $ 62,110
============== ==============
</TABLE>
6
<PAGE> 7
FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
----------- ------------
<S> <C> <C>
Noncash investing and financing activities:
Reduction of receivable from affiliate in exchange for:
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 --
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>
7
<PAGE> 8
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 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
<PAGE> 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, 1998 compared to three months ended September
30, 1997
For the quarter, revenues were $8,835,753 compared to $7,113,359 in 1997. The
increase resulted primarily from higher commission income and increased
management fees. Operating expenses increased significantly due to higher
consulting fees, higher general and administrative expenses and increased
salaries and wages.
Results of Operations
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997
Revenues increased to $28,381,548 due to higher commission income, higher
consulting fee income, higher management fee income and increased construction
fee income. Operating expenses increased due to higher consulting fees, higher
general and administrative expenses, higher salaries and wages, higher
insurance and taxes and loss on sale of motel properties.
Financial Condition and Liquidity
At September 30, 1998, the company had cash and cash equivalents of $246,391.
Year to date, the Company redeemed $32,500,000 of it's preferred stock in
exchange for reduction of receivable from an affiliate.
9
<PAGE> 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
<PAGE> 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.
November 12, 1998 /s/ F. Terry Shumate, Director,
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
11
<PAGE> 12
INDEX TO EXHIBITS
Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
27.0 Financial Data Schedule, filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 246,391
<SECURITIES> 0
<RECEIVABLES> 1,039,415
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 239,427
<DEPRECIATION> 57,546
<TOTAL-ASSETS> 51,492,340
<CURRENT-LIABILITIES> 0
<BONDS> 5,395,410
0
0
<COMMON> 105,710
<OTHER-SE> 33,130,615
<TOTAL-LIABILITY-AND-EQUITY> 51,492,340
<SALES> 28,381,548
<TOTAL-REVENUES> 28,381,548
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,527,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365,616
<INCOME-PRETAX> 12,488,921
<INCOME-TAX> 4,164,123
<INCOME-CONTINUING> 8,324,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,324,798
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
