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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 1998
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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.
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(Exact name of registrant as specified in its charter)
Nevada 95-6799846
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State of other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
10670 N. Central Expressway, Suite 410, Dallas, Texas 75231
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214 750-5800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ('229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS 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 Section 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 [ ]
As of March 26, 1999, registrant had 10,570,944 shares of common stock
issued and outstanding. Of the total shares outstanding, 2,642,736 shares were
held by other than those who may be deemed to be affiliated, but the aggregate
market value of such shares held by non-affiliates is not ascertainable since no
trading market presently exists for the shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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ITEM 1. BUSINESS.
First Equity Properties, Inc. (herein referred to as "FEPI" or
"Registrant" or the "Company") was incorporated by the filing of Articles of
Incorporation in the State of Nevada on December 19, 1996. Its fiscal year ends
December 31 of each year.
Prior to January 1, 1997, the Registrant's only business consisted of
the management and operation of three motel properties in the Spokane,
Washington area. Until June 30, 1998, the Registrant, through its own
operations, was engaged in the hospitality business (management and operation of
three motel properties, one of which was exchanged for a residential property
and two of such properties have been sold under a contract for deed). During the
fiscal year ended December 31, 1998, this Registrant through its subsidiaries
was, and at present is engaged in property management (management of commercial
real property, including retail centers, office buildings, industrial properties
and hotels), and real estate brokerage (services in locating, leasing and
purchasing real estate). See Note T to the Consolidated Financial Statements for
a break out of revenues, expenses and earnings contributions of each separate
line of business.
TRANSACTION OF SUCCESSION.
FEPI is the successor-in-interest to Wespac Investors Trust III, a
California real estate investment trust ("WesPac") originally established August
22, 1983 which had its shares of beneficial interest, no par value, registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934. Wespac was the
subject of two filings for protection under Chapter 11 of the United States
Bankruptcy Code, one filed April 13, 1988 (the "1988 Reorganization") which
resulted in a plan of reorganization approved and confirmed by the court on
March 29, 1989 with certain amendments, and which was closed by the court on
August 21, 1992 and a filing made January 27, 1994 in the case styled In re:
Wespac Investors Trust III, Case No. 94-00228-K11, in the United States
Bankruptcy Court for the Eastern District of Washington (the "1994
Reorganization"). A plan of reorganization dated March 22, 1996 (as modified)
was confirmed by Order Confirming Plan of Reorganization dated May 15, 1996,
entered May 20, 1996, as amended by order entered October 29, 1996 approving
First Modification to Plan of Reorganization (the "Modified Plan"). Pursuant to
the Modified Plan, there was distributed to the shareholders of Wespac a
proposal to convert Wespac from a California business trust into a Nevada
corporation through the "Incorporation Procedure" described therein coupled with
a change of the name of the resulting entity. On November 29, 1996, the then
shareholders of Wespac approved the conversion of Wespac into FEPI, which was
accomplished by incorporating WESPAC as a California corporation and merging it
into FEPI, previously a wholly-owned subsidiary of
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WESPAC, with FEPI as the surviving entity. The effective date of the merger of
FEPI and the California corporation was December 24, 1996. Pursuant to such
transaction, persons deemed to be prior holders of shares of beneficial
interest, no par value, of Wespac became holders of FEPI Common Stock on a
one-for-one exchange basis. On February 11, 1997, the Court entered its final
decree which closed the 1994 Reorganization. See "Item 3. Legal Proceedings."
HOSPITALITY BUSINESS
Prior to December 31, 1996, the Company's only business consisted of
ownership and operation of two Comfort Inn hotels and one Rodeway Inn hotel
(sold June 1, 1997 and foreclosed on by the Company in January 1998) located in
Spokane, Washington. The two Comfort Inn hotels are The Comfort Inn-Valley (a
76-room hotel located at N. 905 Sullivan Road, Spokane Valley, Washington) and
The Comfort Inn-North (a 96-room hotel located at N. 7111 Division Street,
Spokane, Washington). Such properties are collectively referred to as the
"Spokane Properties."
During June 1998, FEPI entered into a contract for deed to sell the two
Comfort Inn hotels (Comfort Inn North and Comfort Inn Valley) to an unaffiliated
Washington corporation for a total of $4,000,000 with a small down payment and
an all inclusive wrap-around note which "wraps" certain existing underlying
indebtedness. As a part of the transaction, FEPI ceded the management of the
properties to the unaffiliated Washington corporation and it assumed the
underlying indebtedness due to US Bank.
Also during June, 1998, FEPI exchanged the Rodeway Inn hotel to an
unaffiliated party for a residential property near Couer d'Alene, Idaho. Such
Rodeway Inn had previously been sold on June 1, 1997 to a corporation owned by a
former director and officer of the Company. The Rodeway Inn is a 90-room hotel
located at W. 4301 Sunset Boulevard, Spokane, Washington. See "Item 13. Certain
Relationships and Related Transactions." During January 1998, the Company
foreclosed on the Spokane Rodeway following a failure of performance by the
purchaser on the related note receivable. See Note Q to the Consolidated
Financial Statements.
Such dispositions ended the Company's direct ownership in the
hospitality line of business.
PROPERTY MANAGEMENT
Effective January 1, 1997, the Company acquired all of the issued and
outstanding Common Stock of Carmel Realty, Inc., a Texas Corporation ("Carmel"),
and an 81.6% limited partnership interest in Carmel Realty Services, Ltd., a
Texas limited partnership ("CRSL"). The general partner of CRSL is Basic Capital
Management, Inc., a Nevada corporation ("BCM") which is the contractual advisor
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to and performs administrative services for five other publicly held entities
which are engaged in the real estate business. See also "Item 12. Certain
Relationships and Related Transactions." Carmel is engaged in the management and
direction of various portfolios of commercial real property including retail
centers, office buildings, industrial properties and hotels. Carmel maintains
the management responsibility for five hotels totaling 1,000 rooms and
approximately 15,000,000 square feet of commercial real estate. CRSL manages
multi-family portfolios which include over 32,000 multi-family units through
seven third-party regional management companies.
Both Carmel and CRSL provide management services primarily to five
publicly-traded real estate entities throughout the continental United States.
Under such arrangements Carmel or CRSL receives a fee of 5% or less of the
monthly gross rents collected on the properties under Management. CRSL
subcontracts with other entities for the provision of property level services.
All property management contracts pursuant to which Carmel and CRSL provide
management services to the five publicly-traded real estate entities are subject
to cancellation on 30 days' written notice. Carmel and CRSL have not expended
any significant sum during each of the last two fiscal years on research and
development activities.
The real estate business overall, including management of real estate,
is highly competitive and Carmel and CRSL compete with numerous entities engaged
in similar activities, some of which may have greater financial resources than
those of Carmel and/or CRSL. Management of Carmel and CRSL believe that success
against such competition is dependent upon the geographic location of the
properties, the performance of the property managers in areas such as marketing,
collections and the ability to control operating expenses, the amount of new
construction in the area and maintenance and appearance of each individual
property. Additional competitive factors with respect to commercial industrial
properties are the ease of access to the property, adequacy of related
facilities such as parking, and sensitivity to market conditions in setting rent
levels. With respect to multi-family residential units, competition is also
based upon the design and mix of the units and the ability to provide a
community atmosphere for tenants. Management of Carmel and CRSL also believe
that general economic circumstances and trends and new properties in the
vicinity of each of the properties managed by Carmel and CRSL are also
competitive factors.
At March 26, 1999, Carmel has 127 employees and CRSL has 7 employees.
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REAL ESTATE BROKERAGE
Carmel also provides real estate brokerage services (on a nonexclusive
basis) to five publicly-traded real estate entities and a number of other
entities and individuals and receives brokerage commissions under varying
arrangements from a fixed amount to a sliding scale on a percentage basis. In
general, such services include assistance in locating, leasing or purchasing
real estate. Carmel receives fees equal to the lesser of (i) a percentage of the
cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated
brokers, or (ii) the compensation customarily charged in arm's-length
transactions by others rendering similar property acquisition services as an
ongoing public activity in the same geographical location and for comparable
property.
ITEM 2. PROPERTIES.
The Company's principal offices are located at 10670 North Central
Expressway, Suite 410, Dallas, Texas 75231. In the opinion of the Company's
management, the Company's offices are suitable and adequate for its present
operations.
Prior to December 31, 1996, the Company's only business consisted of
ownership and operation of two Comfort Inn hotels and one Rodeway Inn hotel
(sold effective June 1, 1997 and foreclosed upon during January 1998) located in
Spokane, Washington, all of which were disposed of during 1998. Although the
record title to the Comfort Inn hotels may remain in the Company subject to the
Contract for Deed, the Company considers it has disposed of such properties.
Except for any remaining record title to the two Comfort Inn hotels, the Company
owns no real property.
Periodically, Carmel leases additional space as required. In January
1998, Carmel leased 23,813 square feet of space in Denver, Colorado. The lease
term is for 36 months with two automatic renewals of one year each.
Also in June 1998, Carmel leased an additional 25,827 square feet of
office space in Farmers Branch, Texas. The lease term is 15 years.
Carmel's management considers both the Denver and Farmers Branch space
to be rentable and adequate for the operations conducted at such locations.
ITEM 3. LEGAL PROCEEDINGS.
During January 1988, four of the elected Trustees of Wespac resigned
pursuant to an agreement with U.S. Real Estate Advisors, Inc. ("USREA"), a
privately held California corporation, and four new trustees were elected, all
of whom were officers of USREA. Also, during January 1988 Wespac entered into
certain financing arrangements with USREA and on April 13, 1988 the Trustees who
were also officers of USREA caused Wespac to file for protection under
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Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District of California under case No. 88-02222-JR which
resulted in a plan of reorganization approved and confirmed by the Court on
March 29, 1989 with certain amendments. The 1988 Reorganization was closed by
the Bankruptcy Court on August 21, 1992.
Wespac acted as a Debtor-in-Possession in the 1988 reorganization which
concluded in the Third Amended Plan of Reorganization dated January 24, 1989
(the "1989 Plan"), confirmation of which served to re-vest all assets of the
Estate in Wespac, free and clear of all liabilities except those payable under
the 1989 Plan. As provided for by that 1989 Plan, USREA exercised its warrants
by purportedly forgiving $715,586.50 which Wespac allegedly owed under an
Amended Financing Agreement. Wespac then liquidated all real estate assets
except a shopping center in Ogden, Utah (later sold) and three hotels located in
Spokane, Washington consisting of The Rodeway Inn-Spokane House, The Comfort Inn
Valley, and The Comfort Inn North. The 1988 Reorganization was closed by the
Court on August 21, 1992.
On January 27, 1994, Wespac again instituted a Chapter 11 bankruptcy
proceeding styled In re: Wespac Investors Trust III, Case No. 94-00228-K11, in
the United States Bankruptcy Court for the Eastern District of Washington, to
seek a restructuring of the assets and liabilities of Wespac, in response to
certain litigation that resulted in at least one judgment. A plan of
reorganization dated March 22, 1996 (as modified) was confirmed by Order
Confirming Plan of Reorganization dated May 15, 1996, entered May 20, 1996 (the
"Confirmed Plan"). During the process of consummation of the Confirmed Plan, and
on the eve of issuance of the final decree with respect to the Confirmed Plan,
and emergence from the 1994 Reorganization, the Board of Trustees of Wespac by
motion filed October 29, 1996 sought a modification of the Confirmed Plan which
resulted in the entry of an Order from the Court approving the First
Modification to Plan of Reorganization (as modified) (the "Modification").
Pursuant to the Confirmed Plan, Class 6 consisted of the Allowed
Interest of former public shareholders in "Old Common Stock," all of which was
canceled on the Effective Date of the Confirmed Plan (June 15, 1996) with one
share of beneficial interest of Wespac deemed to be exchanged for each share of
Allowed Interest, other than Greenbriar Corporation who were then to hold in the
aggregate 25% of the New Shares of Beneficial Interest. After objections to
proofs of interest demonstrating an interest in another entity, it was
determined that the Allowed Interest of such holders were equivalent to
2,642,236 Shares of Beneficial Interest.
Also, pursuant to the Confirmed Plan, upon the Effective Date,
Greenbriar Corporation reduced its claim to the so-called "USREA Shares"
acquired from Zimco to equal 25% of the Allowed Interest (a total of 2,642,736
Shares of Beneficial Interest) and Nevada Sea Investments, Inc. ("Nevada Sea")
was deemed to exercise an option to receive all such Shares of Beneficial
Interest. In addition, in
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the compromise of the Wespac Creditors' Claim, Greenbriar Corporation was to
receive, pursuant to the Confirmed Plan, 50% of the issued and outstanding
Shares of Beneficial Interest, but prior to the Effective Date of the Confirmed
Plan, by agreement, Greenbriar Corporation entered into an arrangement pursuant
to which Greenbriar Corporation conveyed to Nevada Sea an undivided 50% in and
to the creditors' claim resulting in an undivided 25% out of an aggregate of 50%
of New Shares of Beneficial Interest of Wespac to be issued, on a "when issued"
basis, to Nevada Sea in consideration of cancellation of certain indebtedness.
As a result, prior to the implementation of the procedures set forth in the
Modification and as of November 29, 1996, there were deemed to be 10,570,944
Shares of Beneficial Interest, no par value of Wespac, available for issuance to
Shareholders, of which 2,642,736 Shares were issuable to public shareholders (an
aggregate of 25% of such Shares), 2,642,736 Shares were issuable to Greenbriar
Corporation (an aggregate of 25% of such Shares) and 5,285,472 Shares of
Beneficial Interest were issuable to Nevada Sea (an aggregate of 50% of such
Shares).
In order to ensure that the correct number of Shares were issued to
Greenbriar Corporation and Nevada Sea, Wespac and Nevada Sea entered into that
certain Share Settlement Agreement dated as of May 31, 1996 (the "Share
Settlement Agreement") pursuant to which, in the event it is ultimately
determined for whatever reason that either too many or too few Shares have been
issued to Nevada Sea and/or Greenbriar Corporation so that either or both hold
in excess of or less than the required number of issued and outstanding Shares
of Wespac pursuant to the Confirmed Plan and such Shares are issued, Wespac
agreed to either issue additional Shares or Nevada Sea (and/or Greenbriar
Corporation) are to return to Wespac for cancellation such number of Shares as
will make the percentages work out to the required percentages pursuant to the
Confirmed Plan.
Confirmation of the Confirmed Plan (as modified) served to re-vest all
assets of the estate in Wespac free and clear of all liabilities except those
payable pursuant to the Confirmed Plan. Under the Confirmed Plan, Wespac
retained the Spokane Properties and all allowed claims have been provided for or
paid. The effect of the Modification was to distribute to the shareholders of
Wespac a proposal to convert Wespac from a California business trust into a
Nevada corporation through the "Incorporation Procedure" described therein,
coupled with a change of the name of Wespac. Such proposal was distributed to
the shareholders of Wespac who, by November 29, 1996, approved the proposal by a
vote in excess of 84% in favor. The Incorporation Procedure was implemented.
Following completion of the Incorporation Procedure Wespac submitted to the
Court a Certificate of Substantial Consummation and requested the entry of a
Final Decree on January 24, 1997 to close the 1994 Reorganization. The Final
Decree was entered by the Court February 11, 1997.
The Company's subsidiaries are involved in certain legal actions
arising in the ordinary course of business. Management of the Company believes
that such litigation and claims, individually
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and in the aggregate, will be resolved without material effect upon the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
FEPI's shares of Common Stock, par value $0.01 per share, are available
for trading in the over-the-counter market, but to the knowledge of management
of FEPI, no shares have traded since their issuance. The CUSIP Number is
320097-10-8. The shares of Beneficial Interest of WESPAC traded through the
first quarter of 1988 and, at one time, were quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"). Since cessation of
trading on NASDAQ, there has been no established, independent trading market for
the shares of Beneficial Interest of WESPAC or the shares of Common Stock of
FEPI as the successor.
No cash dividends have been declared or paid during the period from
January 1, 1994 to the present on either the shares of Beneficial Interest of
the Trust or the shares of Common Stock of FEPI as the successor.
As of March 26, 1999, the 10,570,944 shares of Common Stock of FEPI
issued and outstanding were held by approximately 2,400 holders of record.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated historical financial data presented below for
the two fiscal years ended December 31, 1998 and the period from June 15, 1996
(fresh start) through December 31, 1996 are derived from the audited
consolidated financial statements and reflect (i) the adoption of fresh start
reporting in accordance with AICPA Statement of Position 90-7, (ii) confirmation
and consummation of the Modified Plan, (iii) the transaction of succession, and
(iv) the acquisition by the Company of Carmel Realty, Inc. and an 81.6% limited
partnership interest in Carmel Realty Services, Ltd. The following data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<TABLE>
<CAPTION>
Year Ended Period June 15,
December 31, 1996
------------------------------ to December 31
1998 1997 1996
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<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ...................................... $ 35,563,209 $ 33,370,720 $ 1,475,831
Operating Costs ............................... 16,300,214 8,381,325 1,484,023
General and Administrative .................... 1,472,368 1,658,681 101,554
Interest Expense .............................. 486,730 399,368 209,946
Earnings (loss) Before Income Taxes ........... 16,151,691 22,931,346 (319,692)
Income tax expense (current) .................. (93,623) (596,215) --
Income tax (expense) benefit (deferred)........ (5,300,000) 5,300,000 --
------------ ------------ ------------
Net earnings (loss) ........................... $ 10,758,068 27,635,131 (319,692)
============ ============ ============
Net earnings (loss) per share.................. $ 1.02 $ 2.61 $ (0.03)
============ ============ ============
Weighted Average Shares outstanding............ 10,570,944 10,570,944 10,570,944
CONSOLIDATED BALANCE SHEET DATA:
Total Assets .................................. $ 51,698,791 $ 74,148,980 $ 5,822,865
Short Term Debt ............................... 4,336,145 3,951,906 879,761
Long Term Debt ................................ 2,776,336 2,830,913 3,875,538
Stockholders' Equity .......................... 35,669,598 61,202,697 1,067,566
Minority Interest in Subsidiary ............... 8,916,712 6,163,464 --
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion and analysis provide information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. The discussion should
be read in conjunction with the financial statements and notes thereto.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries had total assets of
$51,698,791 at December 31, 1998. Of that amount, $325,699 was held in cash.
Long-term debt was $2,776,336. The decrease in total assets from prior year was
due primarily to the Company redeeming its preferred stock in return for its
receivable from Syntek West, Inc. and reduction of its deferred tax asset.
Also during 1998, the Company sold three hotel properties (Comfort Inn
North, Comfort Inn South and Rodeway Inn). The Comfort Inns were sold, through a
contract for deed to sell, for a total of $4,000,000 with a down payment and an
all inclusive wrap-around note which "wraps" certain existing underlying
indebtedness. The Rodeway Inn was sold in exchange for a $100,000 note
receivable and a residential property near Couer d'Alene, Idaho.
RESULTS OF OPERATIONS
In 1998, total revenue increased to $35,563,209 from $33,370,720 in
1997. The increase was due to increased consulting fees, higher management fees
and increased construction supervision fees. Partially offsetting the increases
were lower commission income and lower motel revenues.
Earnings before income tax were $16,151,691 versus prior year of
$22,931,346. The decrease resulted primarily from higher operating costs and
loss on the sale of the three hotel properties (Comfort Inn North, Comfort Inn
South and Rodeway Inn). Income tax expense was $5,393,623 versus an income tax
benefit of $4,703,785 in 1997. The increase in income tax expense was due to
utilization of net operating loss carryforwards.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company and its consolidated subsidiaries had
total assets of $74,148,980. Of that amount $144,906 was held in cash. The
Company's long-term debt at December 31, 1997 totaled $2,830,913, which includes
mortgage notes payable related to the motel properties owned by the Company. The
increase in assets and liabilities from the prior year relates solely to the
acquisition of Carmel Realty, Inc. and Carmel Realty Services, Ltd.
Effective June 1, 1997, the Company sold one of the motel properties
for $1,475,000 to a former officer and director of the Company, in return for a
$1,475,000 note receivable from the buyer. The note bears interest at 5% for the
period from June 1, 1997 to June 1, 1998, and increases by 1% per year until it
reaches 9% for the period from June 1, 2001 to July 10, 2002, and collateralized
by a deed of trust on the property and a security agreement on the related
personal property. Interest only was due in monthly installments beginning in
July 1997, for a period of 60 months. The entire balance was to mature on July
10, 2002. In addition, the Company loaned the buyer $160,000 to fund needed
renovations on the property. In January 1998, the Company foreclosed on the
property and wrote off the $160,000 loan.
Effective January 1, 1997, the Company acquired from a related party
100% of the outstanding common stock of Carmel Realty, Inc. and an 81.6% limited
partnership interest in Carmel Realty Services, Ltd. for a purchase price of
$32,500,000, consisting of 32,500 shares of Series A 8% Cumulative Preferred
Stock having a liquidation value of $1,000 per share (the "Series A Preferred
Stock"). The Series A Preferred Stock has a right to cumulative cash dividends
of $80 per share per annum; payment of $1,000 per share in the event of
dissolution, liquidation or winding up of the Company before any distribution is
made by the Company to its common shareholders; optional redemption at any time
at a price of $1,000 per share, plus cumulative dividends; no right of
conversion into any other securities of the Company; and no voting rights except
as may be required by law.
RESULTS OF OPERATIONS
As discussed in Note B to the financial statements, the Company was
required to adopt "fresh start" reporting at the effective time of the Modified
Plan. As more fully explained in Note B, fresh start reporting requires an
allocation of the Company's reorganization value, which represents the fair
value of the Company before considering liabilities, and approximates the amount
a willing buyer would pay for the assets of the Company immediately after its
emergence from Chapter 11. As a result of adopting fresh start reporting, only
the results of operations from the effective time of the reorganization plan,
June 15, 1996, are included in the Company's statement of operations.
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For 1997, revenues totaled $33,370,720 compared to $1,475,831 for 1996.
Operating expenses were $10,040,006 compared to $1,585,577 in 1996. Earnings
from operations were $23,330,714 compared to a loss of $109,746 in 1996. These
increases from 1996 relate to the previously mentioned acquisition of Carmel
Realty, Inc. and Carmel Realty Services, Ltd.
The income tax benefit in 1997 was due to utilization of operating loss
carry forwards generated in prior years.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, the Company may be potentially liable for removal or
remediation costs, as well as certain other potential costs, relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where any property-level manager in the employee of a
subsidiary of the Company may have arranged for the removal, disposal or
treatment of hazardous or toxic substances. Management is not aware of any
environmental liability relating to the above matters that would have a material
adverse effect on the Company's business, assets or results of operations.
INFLATION
The effects of inflation on the Company's operations are not
quantifiable. To the extent that inflation affects interest rates, the Company's
earnings from any short-term investments and the cost of new financings as well
as the cost of variable rate financing will be affected.
YEAR 2000
Management of the Company believes that its computer hardware operating
system and computer software have been certified as year 2000 compliant.
Further, CRSL performs property management services for properties owned by
others, and effective January 1, 1999, it began using year 2000 compliant
hardware and property management computer software for commercial properties it
manages. CRSL has been informed that its subcontractors either have in place or
will have in place in the first quarter of 1999, year 2000 compliant hardware
and property management computer software.
The Company has not incurred, nor does it expect to incur, any costs
related to its accounting and property management computer software being
modified, upgraded or replaced in order to make it year 2000 compliant. Such
costs have been or will be borne by either CRSL or the property management
subcontractors or CRSL.
Management has completed its evaluation of the Company's computer
controlled building systems, such as security, elevators, heating and cooling,
etc., to determine what systems are not year 2000 complaint. Management believes
that necessary modifications to such systems are insignificant and do not
require significant expenditures, as such enhanced operating systems are readily
available.
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The Company has or will have in place the year 2000 compliant systems
that will allow it to operate. The risks the Company faces are that certain of
its vendors will not be able to supply goods or services and that financial
institutions and taxing authorities will not be able to accurately apply
payments made to them. The Company believes that other vendors are readily
available and that financial institutions and taxing authorities will, if
necessary, apply monies received manually. The likelihood of the above having a
significant impact on the Company's operations is negligible.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates
which may adversely affect its financial position, results of operations and
cash flows. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating activities. The
Company does not use financial instruments for trading or other speculative
purposes and is not a party to any leveraged financial instruments.
Based upon the Company's market risk sensitive instruments (including
variable rate debt) outstanding at December 31, 1998, the Company has determined
that there was no material market risk exposure to the Company's financial
position, results of operations or cash flows as of such date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements, together with an index thereto, are attached
hereto following the signature page to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the fiscal year ended December 31, 1996, the Registrant had no
principal independent accountant. During the pendency of the 1994 Reorganization
described under Item 3. Legal Proceedings above, the Trust utilized the services
of LeMaster & Daniels, PLLC, an accounting firm in Spokane, Washington, for the
preparation of internal financial statements and compilation of certain
projections and analyses in connection with the Modified Plan. Such firm did not
serve as the principal independent accountant for Registrant and during the
pendency of the 1994 Reorganization through the issuance of the Final Decree on
February 11, 1997, the Registrant had no independent accountant. Following the
issuance of the Final Decree the Registrant was unable to complete the
preparation of financial statements until late fall 1997 due to the continuous
involvement of the predecessor of the Company in bankruptcy proceedings since
1988, including the 1988 Reorganization and the 1994 Reorganization, which
required
-13-
<PAGE> 14
confirmation of various items over a nine-year period. During April 1997, the
Board of Directors selected Farmer, Fuqua, Hunt & Munselle, P.C. to serve as the
independent auditors for the Company for the fiscal year ended December 31,
1996. Such firm was again selected by the Board of Directors to serve as the
independent auditors for the Company for the fiscal years ended December 31,
1997 and 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The business affairs of the Company are managed by, or under the
direction of, the Board of Directors. The Board of Directors is responsible for
the general investment policies of the Company and for such general supervision
of the business of the Company conducted by its officers, agents, employees,
advisors or independent contractors as may be necessary to insure that such
business conforms to policies adopted by the Board of Directors. Pursuant to
Article III, Section 3.1, of the Bylaws of the Company, there shall not be less
than three (3) nor more than fifteen (15) directors of the Company. The number
of directors shall be determined from time to time by resolution of the
directors and the last fixing of that number of directors was at three (3) at
the time of creation of the Company. The initial three directors were the three
members of the Board of Trustees of the Trust. The term of office of each
director is one year and until the election and qualification of his or her
successor. Directors may succeed themselves in office and are to be elected at
the annual meeting of stockholders or appointed by the Company's incumbent Board
of Directors.
The current directors of the Company (two of whom are also executive
officers) are listed below, together with their ages, all positions and offices
with the Company, their principal occupation, business experience and
directorship with other companies during the last five years or more. Each of
the following individuals was named as a director in the Articles of
Incorporation of the Company filed December 19, 1996. A vacancy exists on the
Board of Directors following the resignation effective March 1, 1997 of Georgie
Liebelt. See "Item 13. Certain Relationships and Related Transactions."
-14-
<PAGE> 15
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Karl L. Blaha 51 President
F. Terry Shumate 59 Vice President, Secretary and Treasurer
</TABLE>
Karl L. Blaha is President (since October 1993) and a director (since
June 1996) of American Realty Trust, Inc. ("ART"), a New York Stock Exchange
listed entity engaged in real estate, and was Executive Vice President and
Director of Commercial Management (April 1992 to October 1993) of ART. He is
also Executive Vice President and Director of Commercial Management (April 1992
to August 1995 and since July 1997) of Basic Capital Management, Inc. ("BCM"), a
contractual advisor to many entities engaged in the real estate business,
Continental Mortgage and Equity Trust ("CMET"), a publicly-held real estate
investment trust (REIT), Income Opportunity Realty Investors, Inc. ("IORI"), a
publicly-held REIT, Transcontinental Realty Investors, Inc. ("TCI"), a
publicly-held REIT, and Syntek Asset Management, Inc. ("SAMI") Director (since
November 1998) of SAMI; Executive Vice President (since November 1998) and
Director (since January 1999) of NRLP Management Corp ("NMC"), the managing
general partner of National Realty, L.P. ("NRLP"), an American Stock Exchange
listed publicly-held limited partnership, and its operating partnership,
National Operating L.P. ("NOLP"); Executive Vice President (October 1992 to July
1997) of Carmel Realty, Inc. ("Carmel Realty"), a company which provides real
estate brokerage services and commercial property management services; Executive
Vice President and Director of Commercial Management (April 1992 to February
1994) of National Income Realty Trust ("NIRT") and Vinland Property Trust
("VPT"), then both publicly-held REITs; partner-director of National Real Estate
Operations of First Winthrop Corporation (August 1988 to March 1992); Corporate
Vice President of Southmark Corporation ("Southmark") (April 1984 to August
1988); and President of Southmark Commercial Management (March 1986 to August
1988. Mr. Blaha was also a member of the Board of Trustees of Wespac from June
19, 1996 until implementation of the Incorporation Procedure.
For more than the past five years, Mr. Shumate has been Vice President
and Secretary of Syntek West, Inc. (real estate investment). He has been
Secretary and Treasurer of Carmel Realty (property management and real estate
brokerage) since June 1992; sole director and President, Secretary and Treasurer
of Carmel Realty Services, Inc. (property management) since July 1990; Vice
President of SAMI (February 1989 to December 1996); and Vice President of BCM
(May 1990 to December 1996); director, Chairman of the Board, Vice President,
Secretary and Treasurer of Nevada Sea Investments, Inc. (from May 1995 to March
1997), the owner and holder of 50% of the issued and outstanding common stock of
the Company. He was Vice President, Secretary and Treasurer of Davister Corp.
(real estate) until March 18, 1997. Mr. Shumate was also a member of the Board
of Trustees and Vice President, Secretary and Treasurer of Arlington Realty
Investors
-15-
<PAGE> 16
(now known as Watermark Investors Trust), a publicly-held REIT, from November
10, 1993 until December 5, 1995. Mr. Shumate was also a member of the Board of
Trustees of Wespac from June 19, 1996 until implementation of the Incorporation
Procedure.
There are no family relationships among the directors or executive
officers of the Company.
MEETINGS AND COMMITTEES OF DIRECTORS
The Company's Board of Directors acted upon four matters by unanimous
written consent since December 19, 1996 and has held no formal meetings. The
Board of Directors has no standing audit, nominating or compensation committee.
COMPLIANCE WITH SECTION 16(a) OF THE 1934 ACT.
Under the securities laws of the United States, the Company's
directors, executive officers, and any person holding more than 10% of the
Company's shares of common stock are required to report their ownership of the
Company's shares and any changes in ownership to the Commission. Specific due
dates for these reports have been established and the Company is required to
report any failure to file by the date. All the filing requirements were
satisfied by the Company's directors, executive officers and 10% holders during
1996. In making these statements, the Company has relied on the written
representations of its directors and executive officers and its 10% holders and
copies of the reports that they filed with the Commission, both with respect to
the Trust, as a predecessor to the Company, and the Company.
ITEM 11. EXECUTIVE COMPENSATION.
Neither the executive officers nor directors received salaries or cash
compensation from the Company or its predecessor, Wespac, for acting in such
capacity during the two years ended December 31, 1998, in an amount required to
be disclosed under this item. The only director or executive officer who
received salaried compensation from the Company or its predecessor, Wespac, was
Georgie Liebelt whose compensation until her resignation effective March 1, 1997
was $59,000 per year plus a $6,000 per year car allowance. The Company has no
retirement, annuity or pension plan covering its directors or executive
officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company's voting securities consist of the shares of common stock,
par value $0.01 per share. As of March 26, 1999, according to the stock transfer
records of the Company and other information available to the Company, the
following persons were known to be the beneficial owners of more than five
percent (5%) of the outstanding shares of common stock of the Company:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
<S> <C> <C> <C>
Shares of Common Stock, par Nevada Sea Investments, Inc. 5,285,472 shares 50%
value $0.01 per share 10670 North Central Expressway
Suite 410
Dallas, Texas 75231
Shares of Common Stock, par Greenbriar Corporation 2,642,736 shares 25%
value $0.01 per share 4265 Kellway Circle
Dallas, Texas 75248
</TABLE>
(1) Based on 10,570,944 shares of common stock outstanding on March 26,
1999.
As of March 26, 1999, according to the stock transfer records of the
Company and other information available to the Company, each of the directors
and executive officers of the Company, and all present executive officers and
directors as a group, beneficially own the following shares:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS(a)
<S> <C> <C> <C>
Shares of Common Stock, par Karl L. Blaha None None
value $0.01 per share 10670 North Central Expressway
Suite 300
Dallas, Texas 75231
Shares of Common Stock, par F. Terry Shumate None None
value $0.01 per share 10670 North Central Expressway
Suite 410
Dallas, Texas 75231
Shares of Common Stock, par All officers and directors as a group None None
value $0.01 per share
</TABLE>
(a) Based on 10,570,944 shares of common stock outstanding on March 26,
1999.
-17-
<PAGE> 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 25, 1996, in connection with the Confirmed Plan, the Company
received an advance of funds from Nevada Sea in the amount of $250,000 unsecured
and bearing interest at the rate of 8% per annum. All principal and interest
under such advances were originally due June 14, 1998. Subsequent to the initial
advance, Nevada Sea and/or its affiliates have advanced an additional $2,391,552
to the Company under the same terms and conditions. As of December 31, 1998, the
sum of $2,641,552 is due and payable to Nevada Sea and/or its affiliates in
principal, together with interest thereon at the rate of 8% per annum.
Effective January 1, 1997, the Company acquired from Syntek West, Inc.,
a Nevada corporation, all of the issued and outstanding common stock of Carmel
Realty, Inc., a Texas corporation ("Carmel") and an 81.6% limited partnership
interest in Carmel Realty Services, Ltd., a Texas limited partnership ("CRSL")
for an aggregate purchase price of $32,500,000, which was paid by the issuance
of 32,500 shares of Series A 8% Cumulative Preferred Stock with a liquidation
value of $1,000 per share (the "Series A Preferred Stock"). The Series A
Preferred Stock has a right to cumulative cash dividends of $80 per share per
annum, payment of $1,000 per share in the event of dissolution, liquidation of
winding up of the Company before any distribution is made to the holders of
Common Stock, optional redemption at any time at a price of $1,000 per share,
plus cumulative dividends, no right to conversion into any other securities of
the Company, and no voting rights except as may be required by law. See "Item 1.
Business," for a brief description of businesses of Carmel and CRSL and see Note
K to the Financial Statements. During 1998, the Company redeemed all of its
$32,500,000 of preferred stock in exchange for reduction of receivables from
Syntek West, Inc.
Effective January 1, 1997 the Company contracted with Regis Management
Corporation, a subsidiary of Carmel, to manage the day-to-day operations of the
Spokane Properties for 5% of the gross revenues from the Spokane Properties.
Such management arrangement ceased at the time of disposition of the Spokane
Properties during June 1998.
Effective June 1, 1997, the Company sold a 90-room Rodeway Inn located
at W. 4301 Sunset Boulevard, Spokane, Washington to Georgie Liebelt. At the time
of the sale the Company paid off the underlying debt secured by the property
sold. Ms. Liebelt was appointed a Trustee of Wespac in January 1994 and served
in that capacity until implementation of the Incorporation Procedure. She was an
initial director of the Company and Regional Director for the Company
responsible for all operations involving the hotel properties located in
Spokane, Washington. Ms. Liebelt resigned as a Director effective March 1, 1997.
The purchase price for the
-18-
<PAGE> 19
Rodeway Inn was $1,475,000 paid by the delivery of a promissory note from
Spokane House, Inc. (a Washington corporation wholly owned by Georgie Liebelt)
secured by a Deed of Trust covering the property and a security interest on all
related personal property. Such note bore interest at 5% per annum for the
period from June 1, 1997 to June 1, 1998 and was to increase by 1% per annum
until it reached 9% for the period from June 1, 2001 to July 10, 2002. At the
time of maturity of the Note, Spokane House, Inc. was obligated to pay the
lesser of (i) the total of the unpaid principal and interest due on the note, or
(ii) the appraised value of the property as of June 1, 2002. In addition, the
Company loaned to Spokane House, Inc. $160,000 to fund needed renovations on the
property. Commencing March 1, 1997, Spokane House, Inc. became the operator of
the property, retaining all income and paying all expenses relating to the
operation of the property. In January 1998 the Company foreclosed on the
property following a failure of performance on the promissory note and wrote off
the $160,000 loan. The Company exchanged the property in June 1998 for a
residential property near Couer d'Alene, Idaho. See also Note Q to the
Consolidated Financial Statements.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements. The following documents are filed as part of this
report:
<TABLE>
<CAPTION>
1. Consolidated Financial Statements. Page
----
<S> <C>
Independent auditor's report F-1
Balance Sheets as of December 31, 1998 and 1997 F-2
Statements of Operations for the years ended December 31, 1998 and 1997
and the period from June 15, 1996 (fresh start) through December 31,
1996 F-3
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998 and 1997 and the period from June 15, 1996 (fresh
start) through December 31, 1996 F-4
Statements of Cash Flows for the years ended December 31, 1998 and 1997
and the period from June 15, 1996 (fresh start) through December 31,
1996 F-5
Notes to Financial Statements F-6
</TABLE>
-19-
<PAGE> 20
2. Financial Statement Schedules.
All other schedules and financial statements are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
(b) Reports on Form 8-K. During the last quarter of the period covered by
this report, no reports on Form 8-K were filed.
(c) Exhibits. The following documents are filed herewith as exhibits or
incorporated by the references indicated below:
<TABLE>
<CAPTION>
EXHIBIT
DESIGNATION DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
2.1 Plan of Reorganization (as modified) dated March 22,
1996 (incorporation by reference is made by Exhibit
2.1 to Form 8-K of First Equity Properties, Inc. for
event reported June 19, 1996).
2.2 First Amended Disclosure Statement (as modified)
dated March 22, 1996 (incorporation by reference is
made to Exhibit 2.2 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
2.3 Order Confirming Plan of Reorganization dated May 15,
1996 entered May 20, 1996 (incorporation by reference
is made to Exhibit 2.3 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
2.4 First Modification to Plan of Reorganization (as
modified) dated October 29, 1996 (incorporation by
reference is made to Exhibit 2.4 to Form 8-K of First
Equity Properties, Inc. for event reported June 19,
1996).
2.5 Ex parte Order approving modification to Plan of
Reorganization (as modified) entered October 29, 1996
(incorporation by reference is made to Exhibit 2.5 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
</TABLE>
-20-
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
DESIGNATION DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
2.6 Certificate of Substantial Consummation dated January
21, 1997 (incorporation by reference is made to
Exhibit 2.6 to Form 8-K of First Equity Properties,
Inc. for event reported June 19, 1996).
2.7 Final Decree issued by the Court on February 11, 1997
(incorporation by reference is made to Exhibit 2.7 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
3.1 Articles of Incorporation of Wespac Property
Corporation as filed with and endorsed by the
Secretary of State of California on December 16, 1996
(incorporation by reference is made to Exhibit 3.1 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
3.2 Articles of Incorporation of First Equity Properties,
Inc. filed with and approved by the Secretary of
State of Nevada on December 19, 1996 (incorporation
by reference is made to Exhibit 3.2 to Form 8-K of
First Equity Properties, Inc. for event reported June
19, 1996).
3.3 Bylaws of First Equity Properties, Inc. as adopted
December 20, 1996 (incorporation by reference is made
to Exhibit 3.3 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
3.4 Agreement and Plan of Merger of Wespac Property
Corporation and First Equity Properties, Inc. dated
December 23, 1996 (incorporation by reference is made
to Exhibit 3.4 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
</TABLE>
-21-
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
DESIGNATION DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3.5 Articles of Merger of Wespac Property Corporation
into First Equity Properties, Inc. as filed with and
approved with the Secretary of State in Nevada
December 24, 1996 (incorporation by reference is made
to Exhibit 3.5 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
3.6 Certificate of Designation of Preferences and
Relative Participating or Optional of Other Special
Rights and Qualifications, Limitations or
Restrictions thereof of the Series A 8% Cumulative
Preferred Stock (incorporation by reference is made
to Exhibit 3.6 to Form 10-KSB of First Equity
Properties, Inc. for the fiscal year ended December
31, 1996.)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
-22-
<PAGE> 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed by the undersigned, thereunto
duly authorized.
FIRST EQUITY PROPERTIES, INC.
Dated: April 14, 1999
By /s/ F. TERRY SHUMATE
------------------------------------
F. Terry Shumate, Director, Vice
President, Secretary and Treasurer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacity and on
the date indicated.
/s/ KARL L. BLAHA
- ------------------------ Director and President (Principal April 14, 1999
Karl L. Blaha Executive Officer)
/s/ F. TERRY SHUMATE
- ------------------------ Director, Vice President, Secretary April 14, 1999
F. Terry Shumate and Treasurer (principal financial
and accounting officer)
-23-
<PAGE> 24
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets as of December 31, 1998 and 1997 F-2
Statements of operations for the years ended December 31, 1998 and 1997 and
the period from June 15, 1996 (fresh start) through December 31, 1996 F-3
Statements of changes in shareholders' equity for the years ended December
31, 1998 and 1997 and the period from June 15, 1996 (fresh start) through
December 31, 1996 F-4
Statements of cash flows for the years ended December 31, 1998 and 1997 and
the period from June 15, 1996 (fresh start) through December 31, 1996 F-5
Notes to financial statements F-6
</TABLE>
All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Equity Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of First Equity
Properties, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years ended December 31, 1998 and 1997 and the period
from June 15, 1996 (fresh start) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Equity Properties, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997 and the period from June 15, 1996 (fresh start)
through December 31, 1996, in conformity with generally accepted accounting
principles.
FARMER, FUQUA, HUNT & MUNSELLE, P.C.
March 31, 1999
Dallas, Texas
F-1
<PAGE> 26
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
Motel property and equipment, less
accumulated depreciation of $105,074
and $414,313, respectively $ 204,013 $ 5,693,509
Cash and cash equivalents 325,699 144,906
Accounts receivable - trade 1,240,736 1,190,357
Accounts receivable - affiliate 3,020,755 17,217,713
Prepaid expenses -- 10,500
Investments 40,573,000 41,526,000
Notes receivable 3,348,468 --
Other assets 2,986,120 3,065,995
Deferred tax asset -- 5,300,000
----------- -----------
$51,698,791 $74,148,980
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,776,336 $ 2,830,913
Notes payable - affiliate 2,747,347 2,279,578
Accounts payable - trade 302,853 444,274
Accounts payable - affiliate 240,762 74,597
Accrued liabilities 806,683 557,242
Income taxes payable 238,500 596,215
----------- -----------
Total liabilities 7,112,481 6,782,819
Minority interest in subsidiary 8,916,712 6,163,464
Shareholders' Equity
Series A preferred stock, $.01 par value; 40,000 shares
authorized; -0- and 32,500 shares issued and outstanding
at December 31, 1998 and 1997, respectively; 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 34,282,340 27,315,439
----------- -----------
Total shareholders' equity 35,669,598 61,202,697
----------- -----------
$51,698,791 $74,148,980
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 27
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
and the Period from June 15, 1996 (fresh start)
through December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Commissions $ 15,088,330 $ 16,009,816 $ --
Consulting fees 9,580,256 7,519,680 --
Management fees 7,011,188 5,648,933 --
Other 2,869,344 2,266,064 43,856
Motel 1,014,091 1,926,227 1,431,975
------------ ------------ ------------
35,563,209 33,370,720 1,475,831
Operating expenses
Consulting fees 5,500,000 -- --
Salaries and wages 5,062,774 3,900,342 532,109
Minority interest in earnings
of subsidiary 2,753,250 2,100,338 --
General and administrative 1,472,368 1,658,681 101,554
Other operating expenses 1,353,393 876,105 140,164
Insurance and taxes 810,717 457,907 97,255
Depreciation and amortization 245,964 305,123 129,136
Repairs and maintenance 77,625 193,939 97,223
Franchise fees 73,523 172,176 89,392
Telephone and utilities 126,364 157,463 119,469
Advertising and promotion 81,653 116,733 69,934
Legal and accounting 214,951 101,199 209,341
------------ ------------ ------------
Total operating expenses 17,772,582 10,040,006 1,585,577
------------ ------------ ------------
Earnings (loss) from operations 17,790,627 23,330,714 (109,746)
Other expenses
Interest expense (486,730) (399,368) (209,946)
------------ ------------ ------------
Earnings (loss) before income taxes
and loss on sale of assets 17,303,897 22,931,346 (319,692)
Loss on sale of assets (1,152,206) -- --
------------ ------------ ------------
Earnings (loss) before income taxes 16,151,691 22,931,346 (319,692)
Income tax benefit (expense)
Current (93,623) (596,215) --
Deferred (5,300,000) 5,300,000 --
------------ ------------ ------------
(5,393,623) 4,703,785 --
------------ ------------ ------------
NET EARNINGS (LOSS) 10,758,068 $ 27,635,131 $ (319,692)
============ ============ ============
Earnings (loss) per share $ 1.02 $ 2.61 $ (.03)
============ ============ ============
Weighted average shares outstanding 10,570,944 10,570,944 10,570,944
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 28
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
and the Period from June 15, 1996 (fresh start)
through December 31, 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock Capital Retained
------------------------- ---------------------- in excess earnings Total
Shares Amount Shares Amount of par (deficit) equity
---------- ---------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 15, 1996 10,570,944 $ 105,710 -- $ -- $ 1,281,548 $ -- $ 1,387,258
Net loss -- -- -- -- -- (319,692) (319,692)
---------- ---------- -------- ------------ ------------ ------------ ------------
Balances at December 31, 1996 10,570,944 105,710 -- -- 1,281,548 (319,692) 1,067,566
Issuance of preferred stock to
acquire subsidiary -- -- 32,500 32,500,000 -- -- 32,500,000
Net earnings -- -- -- -- -- 27,635,131 27,635,131
---------- ---------- -------- ------------ ------------ ------------ ------------
Balances at December 31, 1997 10,570,944 105,710 32,500 32,500,000 1,281,548 27,315,439 61,202,697
Redemption of preferred stock -- -- (32,500) (32,500,000) -- -- (32,500,000)
Dividends paid -- -- -- -- -- (3,791,167) (3,791,167)
Net earnings -- -- -- -- -- 10,758,068 10,758,068
---------- ---------- -------- ------------ ------------ ------------ ------------
Balances at December 31, 1998 10,570,944 $ 105,710 -- -- $ 1,281,548 $ 34,282,340 $ 35,669,598
========== ========== ======== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 29
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1998 and 1997
and the Period from June 15, 1996 (fresh start)
through December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (earnings) loss $ 10,758,068 $ 27,635,131 $ (319,692)
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation and amortization 245,964 305,123 129,136
Minority interest 2,753,250 2,100,338 --
Loss on sale of assets 1,152,206 -- --
(Increase) decrease in
Accounts receivable - trade (50,379) (124,024) 36,840
Deferred tax asset 5,300,000 (5,300,000) --
Accounts receivable - affiliate (20,521,209) (26,945,736) --
Prepaid expenses and other assets 14,500 8,507 (2,013)
Increase (decrease) in
Accounts payable (141,421) 261,069 99,028
Accounts payable - affiliate 166,164 74,598 --
Accrued expenses 249,441 169,108 18,166
Other current liabilities -- (439,992) (313,970)
Income taxes payable (357,715) 596,215 --
------------ ------------ ------------
Net cash used by operating activities (431,131) (1,659,663) (352,505)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (242,001) (181,072) (107,496)
Sale of motels and equipment 488,425 -- --
Payments received on notes receivable 20,815 -- --
Net cash acquired from acquisition -- 298,105 --
------------ ------------ ------------
Net cash provided (used) by
investing activities 267,239 117,033 (107,496)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - affiliate 467,769 1,767,951 511,627
Payments on long term debt (123,084) (156,770) (120,966)
------------ ------------ ------------
Net cash provided by financing activities 344,685 1,611,181 390,661
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 180,793 68,551 (69,340)
Cash and cash equivalents at beginning of period 144,906 76,355 145,695
------------ ------------ ------------
Cash and cash equivalents at end of period $ 325,699 $ 144,906 $ 76,355
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 30
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - HISTORY
WesPac Investors Trust III ("WesPac), a California business trust, was
originally organized on August 22, 1983. Since April 1988, WesPac has
been the subject of two filings for protection under Chapter 11 of the
United States Bankruptcy Code. On April, 13, 1988, WesPac filed a
Voluntary Petition in Bankruptcy (the "1988 Reorganization") which
resulted in a Plan of Reorganization approved and confirmed by the
Court on March 29, 1989 with certain amendments, and which was closed
by the Court on August 21, 1992. Pursuant to the 1988 Reorganization,
WesPac liquidated all real estate assets except three hotel properties
located in Spokane, Washington.
On January 24, 1994, WesPac again instituted a Chapter 11 bankruptcy
proceeding in the United States Bankruptcy Court for the Eastern
District of Washington (the "1994 Reorganization"). A Plan of
Reorganization dated March 22, 1996 (as modified) was confirmed by
Order Confirming Plan of Reorganization dated May 15, 1996 and entered
May 20, 1996. Although WesPac did not obtain a Final Decree in the 1994
Reorganization until later, effective with the opening of business on
June 15, 1996, the Plan became effective for purposes of resolution of
all claims against WesPac, as well as for a resolution of certain legal
disputes, in exchange for cash, new indebtedness and/or new equity
securities.
The Plan was amended by Order entered October 29, 1996 approving the
First Modification to Plan of Reorganization (the "Modified Plan").
Pursuant to the Modified Plan, there was distributed to the
shareholders of WesPac a proposal to convert WesPac from a California
business trust into a Nevada corporation through the "Incorporation
Procedure" described therein, coupled with a change in the name of the
resulting entity. Such proposal was distributed to the shareholders of
WesPac, who on November 29, 1996 approved the proposal by a vote in
excess of 84% in favor. The Incorporation Procedure was implemented and
resulted in transaction of succession which created First Equity
Properties, Inc. (the "Company") as the ultimate successor-in-interest
to WesPac, with each of the shareholders of WesPac prior to
commencement of the Incorporation Procedure becoming shareholders of
the Company on a one-for-one exchange basis. The Company, which was
incorporated in Nevada on December 19, 1996, was the surviving entity
following the incorporation of WesPac into a California corporation and
subsequent merger of that California corporation with and into the
Company accomplished by Articles of Merger and a Plan of Merger filed
in the States of California and Nevada on December 24, 1996. The
Company automatically, by operation of law, succeeded to all of the
assets, rights, duties, liabilities and obligations of the California
corporation (as the immediate successor to WesPac) upon the
effectiveness of the Merger on December 24, 1996.
F-6
<PAGE> 31
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE A - HISTORY - CONTINUED
In general, the Modified Plan provided for the cancellation of the
former publicly-held shares on the effective date of the Modified Plan
with one share of the Company deemed to be exchanged for each former
publicly-held share with the former public shareholders to hold, in the
aggregate, 25% of the equity interest in the Company (an aggregate of
2,642,736 shares of Common Stock, par value $0.01 per share of the
Company).
Confirmation of the Modified Plan served to re-vest all assets of the
estate of WesPac free and clear of all liabilities, except those
payable pursuant to the Modified Plan. Under the Modified Plan, WesPac
retained the Spokane Motel Properties and all allowed claims were
provided for or paid.
NOTE B - FRESH START REPORTING
In accordance with AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code",
("SOP 90-7") the Company was required to adopt "fresh start" reporting
and reflect the effects of such adoption in the financial statements as
of June 15, 1996. The ongoing impact of the adoption of fresh-start
reporting is reflected in the accompanying financial statements. SOP
90-7 is applicable because pre-reorganization shareholders received
less than 50% of the Company's new common stock and the reorganization
value of the assets of the reorganized company was less than the total
of all post petition liabilities and allowed claims.
In adopting fresh-start reporting, the Company, with the assistance of
its financial advisors, was required to determine its reorganization
value, which represents the fair value of the entity and approximates
the amount a willing buyer would pay for the assets immediately after
its emergence from Chapter 11. The reorganization value of the Company
was determined, after extensive negotiations between the Company and
its creditors, to be $1,387,258. The reorganization value was based on,
among other things, discounted projected cash flows for the reorganized
company and real estate appraisals. The projected cash flows include
assumptions as to anticipated revenues, operating expenses, and capital
expenditures.
SOP 90-7 requires an allocation of the reorganization value in
conformity with the procedures specified by Accounting Principles Board
Opinion 16, "Business Combinations", for transactions reported on the
basis of the purchase method. In applying SOP 90-7, the Company
allocated $5,700,000 to motel properties in recognition of their
current appraised value and settled $800,000 of bankruptcy claims by
issuing new common stock. The adjustments to reflect the consummation
of the Plan and the adjustments to record assets and liabilities at
their fair values have been reflected in the accompanying financial
statements.
F-7
<PAGE> 32
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company and its subsidiaries provide management services to a
variety of commercial and residential real estate entities throughout
the continental United States. The Company also operates three motel
properties in the Spokane, Washington area. In addition, the Company
indirectly invests in real estate entities and marketable securities
through its investment in the preferred stock of Realty Advisors, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of First
Equity Properties, Inc., its wholly-owned subsidiaries, Carmel Equity
Lending, Inc. and Carmel Realty, Inc. and its majority-owned
subsidiary, Carmel Realty Services, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with original maturities of three months or less
to be cash equivalents.
Property, Equipment, Depreciation and Amortization
Property and equipment in place on June 15, 1996 are stated at fair
value in accordance with fresh-start reporting. Additions are stated at
cost. Depreciation and amortization are provided over the estimated
useful lives of the assets on the straight-line method. Maintenance and
repairs of a routine nature are charged to expense. Renewals and
betterments which extend the useful life of existing assets are
capitalized and depreciated over their estimated useful lives.
Investments
Investments consist of non-marketable investments in private companies,
and are carried at the lower of cost or estimated net realizable value.
Goodwill
Goodwill represents the excess of cost over the fair value of assets
acquired and is being amortized using the straight-line method over 40
years. The carrying value of goodwill is periodically reviewed by the
Company based on the expected future undiscounted operating cash flows
of the related business unit. If it is determined that impairment has
occurred, any excess will be charged to operations.
F-8
<PAGE> 33
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes". SFAS 109 requires an asset and liability approach to
financial accounting for income taxes. In the event differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities result in deferred tax assets, SFAS 109 requires an
evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance is provided
for a portion or all of the deferred tax assets when there is an
uncertainty regarding the Company's ability to recognize the benefits
of the assets in future years.
Credit Risk
The Company's trade accounts receivable arise in the normal course of
business and primarily relate to management of commercial and
residential properties located throughout the United States. Such
receivables are unsecured. The Company performs ongoing credit
evaluations of the entities from whom such amounts are receivable. The
Company places its cash investments in high credit quality institutions
and, by policy, limits the amount of credit exposure to any one
institution.
Earnings (Loss) per Share
Earnings (loss) per share (EPS) are calculated in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128), which was adopted in 1997 for both years presented. Basic
EPS is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during the
period. Diluted EPS does not apply to the Company due to the absence of
dilutive potential common shares. The adoption of SFAS 128 had no
effect on previously reported EPS.
Concentration of Credit Risk
At December 31, 1998, the Company had cash in excess of federally
insured limits on deposit in a bank.
F-9
<PAGE> 34
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE D - ACCOUNTS RECEIVABLE - AFFILIATES
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Syntek West, Inc. $ 2,955,806 $ 4,444,575
Basic Capital Management, Inc. -- 12,615,675
Others 64,949 157,463
------------ ------------
$ 3,020,755 $ 17,217,713
============ ============
</TABLE>
NOTE E - INVESTMENTS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Realty Advisors, Inc. preferred stock - at cost $ 39,952,000 $ 41,525,000
Real estate 620,000 --
Other - at cost 1,000 1,000
------------ ------------
$ 40,573,000 $ 41,526,000
============ ============
</TABLE>
The investment in Realty Advisors, Inc. preferred stock at December 31,
1998 and 1997 represents 363,200 and 377,500 shares, respectively, of
no par value, non-voting preferred stock with a liquidation value of
$110 per share. These shares do not earn dividends. Realty Advisors,
Inc. is an affiliated company
NOTE F - MOTEL PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements $ -- $ 984,578
Buildings and improvements -- 4,331,114
Furniture and fixtures 309,087 792,130
------------ ------------
309,087 6,107,822
Less accumulated depreciation and
amortization (105,074) (414,313)
------------ ------------
$ 204,013 $ 5,693,509
============ ============
</TABLE>
NOTE G - OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Goodwill, less accumulated amortization
of $151,749 and $75,874 at December 31,
1998 and 1997 $ 2,883,224 $ 2,959,099
Deposits 102,896 106,450
Other -- 446
------------ -------------
$ 2,986,120 $ 3,065,995
============ =============
</TABLE>
F-10
<PAGE> 35
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE H - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accrued payroll and payroll taxes $806,683 $524,952
Accrued interest -- --
Accrued property taxes -- 32,290
-------- --------
$806,683 $557,242
======== ========
</TABLE>
NOTE I - NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Mortgage notes payable to a bank, bearing interest at 3.5% in excess of
the U.S. T-Bill rate (as defined), payable in monthly installments of
$26,886 including interest through maturity on April 1, 1999;
subsequently extended, collateralized by certain motel property and
equipment
$ 2,637,298 $2,433,058
Bankruptcy claim payable, unsecured, at 10% per annum, payable in
annual installments of $15,812 through June 2000
54,952 62,990
Bankruptcy claims payable, unsecured, at 8% per annum, payable in
annual installments of $75,849 through June 2001
84,086 334,865
----------- ----------
$ 2,776,336 $2,830,913
=========== ==========
</TABLE>
At December 31, 1998 maturities of notes payable are as follows:
<TABLE>
<S> <C>
1999 $ 2,750,799
2000 25,537
------------
$ 2,776,336
============
</TABLE>
NOTE J - NOTES PAYABLE - AFFILIATE
The Company has a revolving line of credit with Nevada Sea Investments,
Inc., a shareholder. Amounts borrowed under the line bear interest at
8% per year and are due on demand.
F-11
<PAGE> 36
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE K - CAPITAL TRANSACTIONS
The Series A preferred stock was cumulative, non-voting shares that
were issued in 1997 in connection with the acquisition described in
Note P. The preferred stock has an annual dividend rate of $80 per
share, and may be redeemed at any time, at the option of the Company,
at a price equal to the liquidation value ($1,000 per share) plus all
cumulative dividends in arrears. The preferred stock has no right of
conversion into any other securities of the Company. The stock was
redeemed in 1998 for $32,500,000 in exchange for notes receivable and
cumulative dividends in arrears on the preferred stock totalling
$3,791,167 were also exchanged for notes receivable. Accordingly, total
cumulative dividends in arrears totaled $-0- at December 31, 1998.
In connection with the Modified Plan, the former public shareholders of
WesPac, other than Greenbriar Corporation ("Greenbriar"), formerly
Medical Resource Companies of America, were to hold, in the aggregate,
25% of the new equity interest in the reorganized entity. The former
public shareholders received the equivalent of 2,642,736 new shares of
Common Stock in the Company, with all old shares of beneficial interest
being canceled.
Pursuant to the Modified Plan, Greenbriar received 25% (2,642,736
shares) of new common stock in exchange for 5,724,692 shares of old
common stock acquired from U.S. Real Estate Advisors ("USREA"). USREA
received its shares through exercise of warrants issued in connection
with the 1988 Reorganization. Nevada Sea was deemed to exercise an
option to receive all such shares. In addition, in the compromise of
its claim as a judgment creditor, Greenbriar was to receive, pursuant
to the Modified Plan, 50% of the issued and outstanding shares, but
prior to the effective time of the Modified Plan, Greenbriar entered
into an arrangement pursuant to which Greenbriar conveyed to Nevada Sea
one-half of that claim, resulting in an undivided 25% out of an
aggregate of 50% of the new equity of the resulting entity to be issued
to each of Nevada Sea and Greenbriar in consideration of the
cancellation of certain indebtedness. As a result, prior to the
implementation of the Modified Plan, the former public shareholders
held an undivided 25% ownership in the reorganized entity, Greenbriar
held an undivided 25% ownership in the reorganized entity, and Nevada
Sea held an undivided 50% ownership interest in the reorganized entity.
F-12
<PAGE> 37
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE L - INCOME TAXES
Income tax expense (benefit) differed from the amounts computed
by applying the U.S. federal income tax rate of 35% to pretax
income in 1998, 1997 and 1996 as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Computed expected tax expense $ 5,655,000 $ 8,110,000 $ --
Alternative minimum tax -- 596,215 --
Federal income tax 238,500 -- --
Miscellaneous timing differences (499,877) -- --
Reduction of valuation allowance -- (13,410,000) --
------------ ------------ -------------
$ 5,393,623 $ (4,703,785) $ --
============ ============ =============
</TABLE>
The tax effects of temporary differences that give rise to the
significant portion of the deferred tax asset at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $ -- $5,300,000
Less valuation allowance -- --
---------- ----------
Net deferred tax asset $ -- $5,300,000
========== ==========
</TABLE>
During 1998, the Company utilized the net operating loss carryforwards
available to offset current year income. Accordingly, no deferred tax
asset exists at December 31, 1998 and the reduction of the asset is
included in income tax expense in the accompanying consolidated
statement of operations.
NOTE M - RELATED PARTY TRANSACTIONS
Effective January 1, 1997 the Company contracted with Regis Management
Corporation (Regis) to manage the day to day operations of the motel
properties for 5% of gross revenues. Regis is a subsidiary of Carmel
Realty, Inc. Such contract terminated at the time of disposition of the
motel properties.
F-13
<PAGE> 38
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE N - FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accounts receivable - affiliates $ 3,020,755 $ 3,020,755 $17,217,713 $17,217,713
Investments 40,573,000 40,573,000 41,526,000 41,526,000
Note receivable 3,348,468 3,348,468 -- --
Notes payable 2,776,336 2,776,336 2,830,913 2,830,913
Notes payable - affiliate 2,747,347 2,747,347 2,279,578 2,279,578
</TABLE>
The carrying values of cash and cash equivalents, accounts receivable
and payable, and accrued liabilities approximate fair value due to
short-term maturities of these assets and liabilities.
Investments are accounted for using the cost method and pertain to
investments in companies for which fair values are not readily
available, but are believed to exceed carrying amounts.
The aggregate fair value of notes payable and notes payable-affiliate
approximate carrying amounts due to their short maturities.
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company leases office and storage space, under operating leases,
which expire at various dates through May 2013. During the periods
ended December 31, 1998, 1997 and 1996, total rent expense was
approximately $255,000, $338,000 and $50,000, respectively. The
estimated annual minimum lease payments remaining on the initial lease
terms as of December 31, 1998 are:
<TABLE>
<S> <C>
1999 $ 1,032,935
2000 981,922
2001 639,101
2002 624,385
2003 606,000
Thereafter 7,454,606
-----------
$11,338,949
===========
</TABLE>
F-14
<PAGE> 39
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company provides management services primarily to five affiliated
publicly traded real estate entities throughout the United States.
Under such arrangements, the Company receives a fee of 5% or less of
the monthly gross rents collected on the properties under management.
The Company subcontracts with other entities for the provision of
property level services. All property management contracts with the
five publicly traded real estate entities are subject to cancellation
with 30 days notice.
The Company also provides real estate brokerage services to the five
affiliated publicly traded real estate entities and a number of other
entities, and receives brokerage commissions under varying arrangements
from a fixed amount to a sliding scale on a percentage basis. In
general, such services include providing assistance in locating,
leasing or purchasing real estate. The Company receives fees equal to
the lesser of (i) a percentage of the cost of acquisition, inclusive of
commissions, if any, paid to nonaffiliated brokers, or (ii) the
compensation customarily charged in similar transactions by others
rendering similar property acquisition services.
The Company has various motel franchise agreements calling for between
5% and 6% of gross room receipts, plus certain other costs, to be paid
for marketing and reservation services and royalty fees.
The Company is involved in various legal actions incidental to its
business. In Management's opinion, none of these actions will have a
material adverse effect on the Company's financial position.
NOTE P - ACQUISITION
Effective January 1, 1997, the Company acquired from a related party,
100% of the outstanding common stock of Carmel Realty, Inc. and an
81.6% limited partnership interest in Carmel Realty Services, Ltd. (the
"Acquired Companies"), for a purchase price of $32,500,000, consisting
of 32,500 shares of Series A 8% Cumulative Preferred Stock having a
liquidation value of $1,000 per share (the "Preferred Stock"). The
Preferred Stock has a right to cumulative cash dividends of $80 per
share per annum; payment of $1,000 per share in the event of
dissolution, liquidation or winding up of the Company before any
distribution is made by the Company to its common shareholders;
optional redemption at any time at a price of $1,000 per share, plus
cumulative dividends; no right of conversion into any other securities
of the Company; and no voting rights, except as may be required by law.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the Acquired Companies' results of operations
are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price over assets acquired
approximated $3,035,000 and is being amortized over 40 years. During
1998, the Company redeemed all of its $32,500,000 of preferred stock in
exchange for reduction of receivables from Syntek West, Inc.
F-15
<PAGE> 40
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE Q - SALE AND FORECLOSURE OF HOTEL PROPERTY
Effective June 1, 1997, the Company sold one of its motel properties to
a former officer and director of the Company, and paid off the
underlying mortgage, in return for a note receivable from the buyer
with a face amount of $1,475,000. The note initially bore interest at
5%, increasing by 1% per year until it reached 9% for the period from
June 1, 2001 to July 10, 2002, and was collateralized by a deed of
trust on the property and a security agreement on the related personal
property. Interest only was due in monthly installments beginning in
July, 1997, for a period of 60 months. The entire balance was to be due
on July 10, 2002. At the maturity of the note, the buyer was obligated
to pay the lower of the total of unpaid principal and interest due on
the note, or the appraised value of the property as of June 1, 2002.
Accordingly, the note receivable was initially recorded at an amount
equal to the book value of the related motel property, resulting in no
gain or loss on the transaction. In addition, the Company loaned the
buyer $160,000 to fund needed renovations on the property. Commencing
March 1, 1997, the buyer became the operator of the property, retaining
all income and paying all expenses related to operation of the
property.
In January 1998, the Company foreclosed on the property following a
lack of performance by the buyer on the related note receivable. It was
management's intent to hold the property for the production of income.
The property was recorded at the amount of the net receivable, which is
lower than the fair value of the property, in the accompanying
financial statements. The $160,000 loan was written off and included in
the 1997 consolidated statement of operations. Results of operations
for the property for the period from March 1, 1997 through December 31,
1997 were retained by the buyer and are not included in the
accompanying consolidated statement of operations for the year ended
December 31, 1997.
During June 1998, FEPI entered into a contract for deed to sell the two
Comfort Inn hotels (Comfort Inn North and Comfort Inn Valley) to an
unaffiliated Washington corporation for a total of $4,000,000 with a
small down payment and an all inclusive wrap-around note which
"wraps" certain existing underlying indebtedness. As a part of the
transaction, FEPI ceded the management of the properties to the
unaffiliated Washington corporation and it assumed the underlying
indebtedness due to US Bank.
Also during June, 1998, FEPI exchanged the Rodeway Inn hotel to an
unaffiliated party for a residential property near Couer d'Alene,
Idaho. The Rodeway Inn is a 90-room hotel located at W. 4301 Sunset
Boulevard, Spokane, Washington.
F-16
<PAGE> 41
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE R - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 518,476 $ 288,742 $ 174,211
Income taxes -- -- --
Noncash investing and financing activities:
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 --
Dividend paid for notes payable 3,791,167 -- --
Preferred stock investment exchanged
for notes payable 1,573,000 -- --
Receivables exchanged for
preferred stock 32,500,000 -- --
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 --
============ ============ ============
Details of sale of motel properties
Sales price 4,520,776 -- --
Note receivable (3,600,000) -- --
Residential property (620,000) -- --
Expenses paid (111,575) -- --
Note payable assumed 299,224 -- --
------------ ------------ ------------
Net cash from sale of motel properties $ 488,425 $ -- $ --
============ ============ ============
</TABLE>
NOTE S - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan for the benefit of its employees.
Employees can contribute to the plan up to 15% of their salary, subject
to certain maximum dollar amounts set forth by the Internal Revenue
Service, pursuant to a salary reduction agreement, upon meeting age and
length of service requirements. The Companies' matching contribution is
a discretionary percentage of electing employees' contributions, and
totaled $9,923, $4,320 and $-0- in 1998, 1997 and 1996, respectively.
F-17
<PAGE> 42
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE T - BUSINESS SEGMENTS
Prior to January 1, 1997, the Company's only business consisted of the
management of three motels in the Spokane, Washington area. In 1998 and
1997, the Company's operations have been classified into three business
segments: hospitality, property management and real estate brokerage.
These segments have separate financial information and, to a large
extent, separate management and operating groups. Hospitality relates
to the operations of the Company's three motel properties, which were
sold in 1998. Property management relates to services rendered
primarily to five publicly-traded real estate entities, in connection
with the management of commercial real property, including retail
centers, office buildings, industrial properties and hotels. Real
estate brokerage relates to services rendered primarily to five
publicly-traded real estate entities, in connection with locating,
leasing and purchasing real estate. Summarized financial data by
segment for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------------
Hospitality Property Real Estate Adjustments
Business Management Brokerage Other & Eliminations Consolidated
------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,014,091 $ 23,183,685 $ 15,088,330 $ 628,040 $ (4,350,937) $ 35,563,209
============ ============ ============ ============ ============
Operating profit (loss) $(1,756,678) $ 16,195,171 $ 10,540,089 $ 628,040 $ -- $ 25,606,622
============ ============ ============ ============ ============
General corporate expenses (6,701,681)
Minority interest in earnings of subsidiary (2,753,250)
------------
Earnings before income taxes $ 16,151,691
============
Identifiable assets $ 5,829,462 $ 1,668,392 $ -- $ 7,497,854
============ ============ ============
Corporate assets 44,200,937
------------
$ 51,698,791
============
</TABLE>
Corporate assets include cash and cash equivalents, notes receivable
and investments.
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Hospitality Property Real Estate Adjustments
Business Management Brokerage Other & Eliminations Consolidated
------------ ------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,926,227 $ 18,815,921 $ 16,054,816 $ 253,034 $ (3,679,278) $ 33,370,720
============ ============= ============ ============ ============
Operating profit (loss) $ (288,995) $ 14,356,856 $ 12,256,353 $ 253,037 $ (45,000) $ 26,532,251
============ ============= ============ ============ ============
General corporate expenses (1,500,567)
Minority interest in earnings of subsidiary (2,100,338)
------------
Earnings before income taxes $ 22,931,346
============
Identifiable assets $ 12,998,401 $ 14,214,196 $ -- $ 27,213,597
============ ============ ============
Corporate assets 46,935,383
------------
$ 74,148,980
============
</TABLE>
Corporate assets include cash and cash equivalents, investments and
deferred tax assets.
F-18
<PAGE> 43
FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1998 and 1997
NOTE T - BUSINESS SEGMENTS - CONTINUED
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------------------------
Hospitality Property Real Estate Adjustments
Business Management Brokerage Other & Eliminations Consolidated
----------- ----------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,475,831 $ -- $ -- $ -- $ -- $ 1,475,831
=========== =========== =========== =========== ===========
Operating profit (loss) $ (319,692) $ -- $ -- $ -- $ -- $ (319,692)
=========== =========== =========== =========== ===========
General corporate expenses --
Minority interest in earnings of
subsidiary --
-----------
Earnings before income taxes $ (319,692)
===========
Identifiable assets $ 5,822,865 $ -- $ -- $ 5,822,865
=========== =========== =========== -----------
Corporate assets --
-----------
$ 5,822,865
===========
</TABLE>
NOTE U - SUBSEQUENT EVENT
In April 1999, the mortgage note secured by certain motel property
scheduled to mature on April 1, 1999 was amended to reflect a maturity
date of April 1, 2000.
NOTE V - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, (SFAS 130), requires that total comprehensive
income be reported in the financial statements. For the years ended
December 31, 1998 and December 31, 1997, and the period from June 15,
1996 (fresh start) through December 31, 1996, the Company's
comprehensive income (loss) was equal to its net income (loss) and the
Company does not have income meeting the definition of other
comprehensive income.
F-19
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
2.1 Plan of Reorganization (as modified) dated March 22,
1996 (incorporation by reference is made by Exhibit
2.1 to Form 8-K of First Equity Properties, Inc. for
event reported June 19, 1996).
2.2 First Amended Disclosure Statement (as modified)
dated March 22, 1996 (incorporation by reference is
made to Exhibit 2.2 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
2.3 Order Confirming Plan of Reorganization dated May 15,
1996 entered May 20, 1996 (incorporation by reference
is made to Exhibit 2.3 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
2.4 First Modification to Plan of Reorganization (as
modified) dated October 29, 1996 (incorporation by
reference is made to Exhibit 2.4 to Form 8-K of First
Equity Properties, Inc. for event reported June 19,
1996).
2.5 Ex parte Order approving modification to Plan of
Reorganization (as modified) entered October 29, 1996
(incorporation by reference is made to Exhibit 2.5 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
2.6 Certificate of Substantial Consummation dated January
21, 1997 (incorporation by reference is made to
Exhibit 2.6 to Form 8-K of First Equity Properties,
Inc. for event reported June 19, 1996).
2.7 Final Decree issued by the Court on February 11, 1997
(incorporation by reference is made to Exhibit 2.7 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
3.1 Articles of Incorporation of Wespac Property
Corporation as filed with and endorsed by the
Secretary of State of California on December 16, 1996
(incorporation by reference is made to Exhibit 3.1 to
Form 8-K of First Equity Properties, Inc. for event
reported June 19, 1996).
3.2 Articles of Incorporation of First Equity Properties,
Inc. filed with and approved by the Secretary of
State of Nevada on December 19, 1996 (incorporation
by reference is made to Exhibit 3.2 to Form 8-K of
First Equity Properties, Inc. for event reported June
19, 1996).
3.3 Bylaws of First Equity Properties, Inc. as adopted
December 20, 1996 (incorporation by reference is made
to Exhibit 3.3 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
3.4 Agreement and Plan of Merger of Wespac Property
Corporation and First Equity Properties, Inc. dated
December 23, 1996 (incorporation by reference is made
to Exhibit 3.4 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3.5 Articles of Merger of Wespac Property Corporation
into First Equity Properties, Inc. as filed with and
approved with the Secretary of State in Nevada
December 24, 1996 (incorporation by reference is made
to Exhibit 3.5 to Form 8-K of First Equity
Properties, Inc. for event reported June 19, 1996).
3.6 Certificate of Designation of Preferences and
Relative Participating or Optional of Other Special
Rights and Qualifications, Limitations or
Restrictions thereof of the Series A 8% Cumulative
Preferred Stock (incorporation by reference is made
to Exhibit 3.6 to Form 10-KSB of First Equity
Properties, Inc. for the fiscal year ended December
31, 1996.)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
The following is a list of all subsidiaries of First Equity Properties,
Inc., the state or other jurisdiction of organization or incorporation and the
names under which such subsidiaries do business (indention means direct parent
relationship):
<TABLE>
<CAPTION>
Jurisdiction of
Organization or
Name of Entity Incorporation
- ------------------------------------------------------------------------- ----------------
<S> <C>
First Equity Properties, Inc.* Nevada
Carmel Realty, Inc. Texas
Regis Management Corporation (formerly Williamsburg Nevada
Management Corporation)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 325,699
<SECURITIES> 0
<RECEIVABLES> 1,240,736
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 309,087
<DEPRECIATION> 105,074
<TOTAL-ASSETS> 51,698,791
<CURRENT-LIABILITIES> 0
<BONDS> 5,523,683
0
0
<COMMON> 105,710
<OTHER-SE> 35,563,888
<TOTAL-LIABILITY-AND-EQUITY> 51,698,791
<SALES> 35,563,209
<TOTAL-REVENUES> 35,563,209
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,772,582
<LOSS-PROVISION> 1,152,206
<INTEREST-EXPENSE> 486,730
<INCOME-PRETAX> 16,151,691
<INCOME-TAX> 5,393,623
<INCOME-CONTINUING> 10,758,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,758,068
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
