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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
 Commission file number           0-11777 FIRST EQUITY PROPERTIES, INC. 
  Nevada
    
    95-6799846(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer
Identification No.)
 1800 Valley View Lane, Suite 300, Dallas, Texas 75234 
  214-750-5800 
   
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No þ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: As
of August 16, 2004, registrant had 1,057,628 shares of Common Stock
issued and outstanding.




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FIRST EQUITY PROPERTIES, INC. & SUBSIDIARIES FORM 10-Q
June 30, 2004 INDEX Page No.Part I Financial Information:Item 1. Financial StatementsConsolidated Balance Sheets
June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statement of Earnings (Unaudited)
Three Months and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    8Item 4. Controls and Procedures
    
    
    9Part II Other Information:Item 4. Submission of Matters to a Vote of Security Holders
    
    
    9Item 6. Exhibits and Reports on Form 8-K
    
    
    10Certification Pursuant to Rule 13a-14 and 15(d)-14Certification Pursuant to 18 U.S.C. Section 1350
  2




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Part I Financial Information: 
 Item 1. Financial Statements FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 
  ASSETS June 30, 2004
    
    December 31,(Unaudited)
    
    2003Cash and cash equivalents
    
    $
    9,167
    
    
    $
    6,127Accounts receivable  affiliate
    
    
    
    
    
    
    83,386Notes and interest receivable
    
    
    2,520,700
    
    
    
    638,531Net assets held for sale
    
    
    
    
    
    
    40,003,656$
    2,529,867
    
    
    $
    40,731,700LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable  affiliate
    
    $
    2,427,828
    
    
    $
    2,784,176Total liabilities
    
    
    2,427,828
    
    
    
    2,784,176Shareholders equityPreferred stock, $0.01 par, 4,960,000 shares
authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par, 40,000,000 shares
authorized, 1,057,628 shares issued and outstanding
    
    
    10,576
    
    
    
    10,576Capital in excess of par value
    
    
    1,376,682
    
    
    
    1,376,682Retained earnings (deficit)
    
    
    (1,285,219
    )
    
    
    36,560,266Total shareholders equity
    
    
    102,039
    
    
    
    37,947,524$
    2,529,867
    
    
    $
    40,731,700
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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 
  
 Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003RevenueInterest income
    
    $
    45,045
    
    
    $
    14,587
    
    
    $
    59,632
    
    
    $
    24,04645,045
    
    
    
    14,587
    
    
    
    59,632
    
    
    
    24,046Operating expensesGeneral and administrative
    
    
    1,157
    
    
    
    854
    
    
    
    1,893
    
    
    
    1,687Legal and professional fees
    
    
    12,730
    
    
    
    25,781
    
    
    
    17,667
    
    
    
    26,469Total operating expenses
    
    
    13,887
    
    
    
    26,635
    
    
    
    19,560
    
    
    
    28,156Net income from continuing
operations
    
    
    31,158
    
    
    
    (12,048
    )
    
    
    40,072
    
    
    
    (4,110
    )Income from discontinued operations
    
    
    
    
    
    
    47,256
    
    
    
    45,715
    
    
    
    94,811Impairment loss
    
    
    
    
    
    
    
    
    
    
    (37,931,116
    )
    
    
    NET EARNINGS (LOSS)
    
    $
    31,158
    
    
    $
    35,208
    
    
    $
    (37,845,329
    )
    
    $
    90,701Earnings (loss) per shareNet earnings from continuing
operations
    
    $
    .03
    
    
    $
    (.01
    )
    
    $
    .04
    
    
    $
    Discontinued operations
    
    
    
    
    
    
    .04
    
    
    
    (35.82
    )
    
    
    .09Net earnings (loss)
    
    $
    .03
    
    
    $
    .03
    
    
    $
    (35.78
    )
    
    $
    .09Weighted average shares outstanding
    
    
    1,057,628
    
    
    
    1,057,628
    
    
    
    1,057,628
    
    
    
    1,057,628
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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 
  
 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet earnings (loss)
    
    $
    (37,845,329
    )
    
    $
    90,701Adjustments to reconcile net income to net cash
provided by (used for) operating activitiesImpairment loss
    
    
    37,931,116
    
    
    
    (Increase) decrease inInterest receivable
    
    
    (59,629
    )
    
    
    (24,041
    )Accounts receivable  affiliate
    
    
    
    
    
    
    12,590Increase (decrease) inAccounts payable  affiliate
    
    
    (273,118
    )
    
    
    (77,500
    )Net cash provided by (used for) operating activities
    
    
    (246,960
    )
    
    
    1,750CASH FLOWS
FROM INVESTING ACTIVITIESProceeds from sale of subsidiaries
    
    
    250,000
    
    
    
    Net cash
provided by (used for) investing activities
    
    
    250,000
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    3,040
    
    
    
    1,750Cash and cash equivalents at beginning of period
    
    
    6,127
    
    
    
    5,450Cash and cash equivalents at end of period
    
    $
    9,167
    
    
    $
    7,200Noncash investing and financing activities:Note received in sale of subsidiaries
    
    $
    1,822,540
    
    
    $
    Exchange of investment for note receivable
    
    
    
    
    
    
    585,000
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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 
  
 NOTE A  BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements
have been prepared by First Equity Properties, Inc. (the Company)
pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments that are,
in the opinion of management, necessary to fairly present such
information. All such adjustments are of a normal recurring nature.
Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and
footnote disclosures, including a description of significant accounting
policies normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2003
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for interim periods are not
necessarily indicative of the results for any subsequent quarter or the
entire fiscal year ending December 31, 2004. NOTE B  DISCONTINUED OPERATIONS Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), established a single
accounting model for the impairment or disposal of long-lived assets
including discontinued operations. This statement requires that the
operations related to segments that have been sold, or segments that are
intended to be sold, be presented as discontinued operations in the
statement of operations for all periods presented, and the segments
intended to be sold are to be designated as held for sale on the
balance sheet. In the event of a future asset sale, the company is
required to reclassify portions of previously reported operations to
discontinued operations within the Statements of Operations. For the six
months ended June 30, 2004, income from discontinued operations relates
to the disposition of subsidiaries providing management services. In May 2004, the Company sold the subsidiaries of the Company that
provide management services for $250,000 cash and a note receivable in
the amount of $1,822,540. In the quarter ended March 31, 2004, the
Company recorded an impairment of $37,931,116, representing the write
down of certain assets of the those two subsidiaries that provided the
management services to the value agreed to between the related party
buyer and seller. The primary asset written down was the investment in
preferred stock of an affiliate. 6




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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited) NOTE B  DISCONTINUED OPERATIONS  continued The impairment loss resulted in the generation of a deferred tax asset of
approximately $13,000,000 for which a valuation allowance of the entire
amount has been provided since management cannot be assured of the
utilization of the deferred tax asset. December 31, 2003 balances have been reclassed to present the assets of
the two subsidiaries under the caption net assets held for sale. The
following table details the assets and liabilities comprising net assets
held for sale in the financial statements at June 30, 2004 and December
31, 2003 for the entities sold. June 30,
    
    December 31,2004
    
    2003Accounts receivable  affiliate
    
    $
    
    
    
    $
    262,960Investments  affiliate
    
    
    
    
    
    
    40,528,349Accounts payable and minority interest
    
    
    
    
    
    
    (787,653
    )Net equity in subsidiaries to be sold
    
    $
    
    
    
    $
    40,003,656
 The results of discontinued operations of the subsidiaries consisted of
the following for the three months and six months ended June 30, 2004 and
June 30, 2003: Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Operating revenues
    
    $
    
    
    
    $
    47,256
    
    
    $
    45,715
    
    
    $
    94,811Net income from
discontinued
operations
    
    $
    
    
    
    $
    47,256
    
    
    $
    45,715
    
    
    $
    94,811
 NOTE B  REVERSE STOCK SPLIT On
June 7, 2004, the members of the Board of Directors of the
Company proposed
and recommended to the stockholders a reverse-split on a 1-for-10 basis
of the shares of Common Stock, par value $0.01 per share, without any
adjustment to the par value per share, and without any reduction in the
authorized number of shares of Common Stock at the same par value. The
proposal was approved by the shareholders and became effective July 12,
2004. This resulted in a reclassification between Common Stock and
Additional Paid in Capital on the accompanying balance sheet in the
amount of $95,133. The share amounts in the accompanying financial
statements and notes give effect to this reverse split as if it occurred
at the beginning of earliest period presented. 7




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FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three months ended June 30, 2004 compared to three months ended June 30, 2003 Revenues from operations increased to $45,045 from prior year of $14,587 due to
increased interest income because of a new note receivable. Total operating
expenses decreased to $13,887 in 2004 from $26,635 in 2003. The decrease in
operating expenses was due to lower legal and professional fees in 2004. Six months ended June 30, 2004 compared to six months ended June 30, 2003 Revenues from operations increased to $59,632 from prior year of $24,046 due to
increased interest income because of a new note receivable. Total operating
expenses decreased to $19,560 in 2004 from $28,156 in 2003. The decrease in
operating expenses was due to lower legal and professional fees in 2004. The
discontinued operations represent the income from the management contracts of
the company that were sold in May 2004. Financial Condition and Liquidity At June 30, 2004, the Company had total assets of $2,529,867 compared to
$40,731,700 at December 31, 2003. Cash and cash equivalents were $9,167. The
decrease in assets results from the Company, in May 2004, selling to a related
party the subsidiaries of the Company that provide management services for cash
of $250,000 and a note receivable of $1,822,540. As a result, the Company
recorded an impairment of $37,931,116, representing the write down of certain
assets of the two subsidiaries that provided the management services to the
value agreed to between the related party buyer and seller. The primary asset
written down was the investment in preferred stock of an affiliate. Total
liabilities were $2,427,828 versus $2,784,176 at December 31, 2003. Effective May 1, 2004,
the Company sold all of the issued and outstanding Common Stock of Carmel Realty,
Inc., a Texas corporation (Carmel) and a 99% limited partnership interest in
Carmel Realty Services, Ltd., a Texas limited partnership (CRSL) for an
aggregate sale price of $2,072,540 (a basis equivalent to a ten times
capitalization of the management fees collected by Carmel and CRSL during 2003)
to Regis Realty I LLC, a Texas limited liability company (Regis). The
general partner of CRSL is Basic Capital Management, Inc. a Nevada corporation
(BCM). The Purchaser, Regis, is related to BCM and performs certain property
management and real estate and brokerage activities for other entities. Regis
paid cash of $250,000 to the Company and delivered a promissory note dated May 1, 2004
in the stated principal amount of $1,822,540 payable to the order of the Company on
demand or, if no demand is made prior thereto, on April 30, 2009, with interest
payable monthly as it accrues. Such promissory note is secured by a pledge of
the Common Stock of Carmel and partnership interest of CRSL sold. 8




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Item 4. Controls and Procedures  (a)
    
    Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Vice President, Treasurer
and Chief Accounting Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the evaluation, the Companys Vice
President, Treasurer and Chief Accounting Officer concluded that the
Companys disclosure controls and procedures are effective in timely
alerting him to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Companys
periodic SEC filings.(b)
    
    There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the Companys internal
controls subsequent to the date the Company carried out this evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses. 
 Part II Other Information 
 Item 4. Submission of Matters to a Vote of Security Holders Pursuant to the requirement of NRS 78.2055, on June 7, 2004, the members of
the Board of Directors of the Company proposed and recommended to the stockholders a
reverse-split on a 1-for-10 basis of the shares of Common Stock, par value
$0.01 per share, without any adjustment to the par value per share, and
without any reduction in the authorized number of shares of Common Stock at
the same par value. The recommendation was submitted to the holder of
approximately 75% of the outstanding common stock, Nevada Sea Investments,
Inc., which executed a written consent dated June 8, 2004, pursuant to NRS
78.320 adopting and approving the 1-for-10 reverse stock split of the shares
of Common Stock without any change in the par value and without any reduction
in the authorized number of shares of common Stock of the Company pursuant to the
Articles of Incorporation. The 1-for-10 reverse stock split was to effective
on the date (the Effective Date) which was the later to occur of (I) the
date of filing with the Secretary of State of Nevada of an amendment to the
Certificate of Incorporation, or (ii) the last day of any required waiting
period under Rule 14c-2(b) under the Securities Exchange Act of 1934. Under
that rule, the reverse stock split could not become effective until 20 days
after the mailing of an Information Statement pursuant to Section 14c under
the Securities Exchange Act of 1934 to existing stockholders of the Company. The
Effective Date of the reverse stock split is July 12, 2004. The CUSIP number
for the post-split shares is 320097-20-7. 9




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Item 4. Submission of Matters to a Vote of Security Holders  continued Under the approved action, based upon the 10,570,944 old shares outstanding
on the Effective Date, the 1-for-10 reverse stock split would decrease the
number of outstanding shares by approximately 90%, which, after giving effect
to an upward adjustment of rounding up for any fractional shares, added 534
shares to result in 1,057,628 post-split shares outstanding. The 1-for-10
reverse stock split did not adversely effect any stockholders proportionate
equity interest in the Company subject to the provisions for elimination of
fractional shares by rounding up to the next whole share which slightly
increased the proportionate holdings of all stockholders other than Nevada
Sea Investments, Inc. Each post-split share continues to be entitled to one
vote at each stockholders meeting as was the case with each outstanding old
share. In connection with the implementation of the 1-for-10 reverse stock split, no
certificate or script representing any fractional share interest will be
issued, but a holder of the old shares received in lieu of any fraction of a
post-split share to which the holder would otherwise be entitled a single
whole post-split share on a rounding up basis without regard to any price.
The result of this rounding up process increased slightly the holdings of
those stockholders who held a number of old shares which was not evenly
divisible by 10, resulting in an increase of 534 shares. The Companys old shares of Common Stock, while available for trading in the
over-the-counter market, to the knowledge of management, have not resulted in
any material trading activity since their initial issuance in 1997. The old
shares were issued pursuant to the terms of an Order Confirming Plan of
Reorganization dated May 15, 1996, entered May 20, 1996, as modified by the
First Modification Plan of Reorganization (the Confirmed Plan) resulting
from 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. 
 Item 6. Exhibits and
Reports on Form 8-K  (a)
    
    ExhibitsExhibit 3.3  Certificate of Amendment to Articles of Incorporation as filed with the Secretary of State
of Nevada on July 12, 2004 (incorporation by reference is made to Exhibit 3.3 to Current Report
on Form 8-K, for event occurring on May 1, 2004)Exhibit 31.1  Certification Pursuant to Rules 13a-14 and 15d-14 Under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.Exhibit 32.1  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.(b)
    
    Reports on Form 8-KCurrent Report of Form 8-K, dated May 1, 2004, was filed with respect to
Item 2 Acquisition of Disposition of Assets, Item 5 Other Events and
Regulation FD Disclosure and Item 7 Financial Statements and Exhibits
which reports the Companys disposal of two subsidiaries, a 1-for-10
reverse stock split and the resignation of Ronald E. Kimbrough, one of
the Companys directors, as Vice President, Treasurer and Chief
Accounting Officer and the election of Louis J. Corna as a director and officer. 10




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to he signed on its behalf by the
undersigned thereunto duly authorized. FIRST EQUITY PROPERTIES, INC.August 19, 2004
    /s/ Ken L. JoinesKen L. JoinesVice President, Secretary and ChiefAccounting Officer 11