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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 endedDecember 31, 2003
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to Commission File Number 0-11777 FIRST EQUITY PROPERTIES, INC. 
  Nevada
    
    95-6799846(State of other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1800 Valley View Lane, Suite 160
    
    75234(Address of principal executive offices)
    
    (Zip Code)
 Registrants
telephone number, including area code 214 750-5800Securities
registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredNone
 Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $0.01 per share 
  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   o 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.   o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).   Yes   o   No   x As of March 5, 2004, 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 not to be affiliated, but the
aggregate market value of such shares held by non-affiliates as of March 25,
2004 is not ascertainable since no trading market existed on that date or
presently exists for the shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE None




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TABLE OF CONTENTS  Item 1. Business.Item 2. Properties.Item 3. Legal Proceedings.Item 4. Submission of Matters to a Vote of Security Holders.PART IIItem 5. Market for Common Equity and Related Stockholder Matters and Issuer Purchaser of Equity Securities.Item 6. Selected Financial Data.Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.Item 7A. Quantitative and Qualitative Disclosures about Market Risk.Item 8. Financial Statements and Supplementary Data.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Item 9A. Controls and Procedures.PART IIIItem 10. Directors and Executive Officers of the Registrant.Item 11. Executive Compensation.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.Item 13. Certain Relationships and Related Transactions.Item 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.SIGNATURESCode of Ethics for Senior Financial OfficersSubsidiaries of the RegistrantCertification of Principal Executive OfficerRule 1350 Certification    Table of Contents  
 Item 1. Business. First Equity Properties, Inc. (We or FEPI 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 Companys only business consisted of the
management and operation of three motel properties in the Spokane, Washington
area. Until June 30, 1998, the Company 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 years ended December 31, 1998 and 1999,
the Company, through its subsidiaries 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). Since October
1999, the Company and its subsidiaries have conducted no substantial business,
but are available to engage in property management and real estate brokerage
activities. 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, and shareholders approval, Wespac was converted
from a California business trust into a Nevada corporation, coupled with a
change of the name of the resulting entity. 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. 2




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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. During March 2001, the
underlying indebtedness to U.S. Bank was paid in full through a refinancing of
the properties and the contract for deed satisfied; at that time, FEPI ceased
to hold any record title to the real property and received second lien notes
for the balances owed. Also during June, 1998, FEPI exchanged the Rodeway Inn hotel to an
unaffiliated party for a residential property in Couer dAlene, Idaho which has
since been sold. 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
the Notes 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 to and for performs administrative services for three
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 maintained the management responsibility for five hotels
totaling 1,000 rooms and approximately 15,000,000 square feet of commercial
real estate through September 30, 1999. CRSL managed multi-family portfolios
which included over 32,000 multi-family units through seven third-party
regional management companies through September 30, 1999. 3




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Both Carmel and CRSL provided management services primarily to four
publicly-traded real estate entities throughout the continental United States
through September 30, 1999. Under such arrangements Carmel or CRSL received a
fee of 5% or less of the monthly gross rents collected on the properties under
Management. CRSL subcontracted with other entities for the provision of
property level services. Effective October 1, 1999, the four publicly traded
real estate entities transferred management of their properties to another
entity and Carmel and CRSL ceased all such management activities. 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 25, 2004, Carmel and CRSL had no employees. Real Estate Brokerage Carmel also provides real estate brokerage services (on a nonexclusive
basis) to three 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. During the fourth quarter of 1999, the four
publicly-traded real estate entities transferred their brokerage operations to
another entity. 
 Item 2. Properties. The Companys principal offices are located at 1800 Valley View Lane,
Suite 160, Dallas, Texas 75234. In the opinion of the Companys management,
the Companys offices are suitable and adequate for its present operations. 4




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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
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. 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 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 5




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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). 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 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 and Issuer Purchaser of Equity Securities. 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. 6




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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 25, 2004, the 10,570,944 shares of Common Stock of FEPI issued
and outstanding were held by approximately 2,400 holders of record. During the three years ended December 31, 2003, FEPI did not issue or sell
any securities. 
 Item 6. Selected Financial Data. The selected consolidated historical financial data presented below for
the five fiscal years ended December 31, 2003 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, which resulted in a short
period from June 15, 1996 (fresh start) through December 31, 1996, (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. 7




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Year Ended December 31,CONSOLIDATED STATEMENT OFOPERATIONS DATA:
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Revenues
    
    $
    260,795
    
    
    $
    189,264
    
    
    $
    153,614
    
    
    $
    285,733
    
    
    $
    19,638,650Operating Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,234,044General and
Administrative
    
    
    32,079
    
    
    
    34,408
    
    
    
    121,420
    
    
    
    70,554
    
    
    
    1,655,537Loss on Sale of Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,128
    )Interest Expense
    
    
    
    
    
    
    
    
    
    
    29,107
    
    
    
    326,471
    
    
    
    448,477Earnings (loss) before
income taxes
    
    
    228,716
    
    
    
    154,856
    
    
    
    3,087
    
    
    
    (111,292
    )
    
    
    2,203,464Income tax (expense)
(current)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,906Net Earnings (loss)
    
    $
    228,716
    
    
    $
    154,856
    
    
    $
    3,087
    
    
    $
    (111,292
    )
    
    $
    2,002,558Net Earnings (loss) per
share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.19Weighted Average
Shares Outstanding
    
    
    10,570,944
    
    
    
    10,570,994
    
    
    
    10,570,994
    
    
    
    10,570,944
    
    
    
    10,570,944CONSOLIDATED BALANCE SHEET
DATA:Total Assets
    
    $
    41,519,453
    
    
    $
    41,465,237
    
    
    $
    47,282,650
    
    
    $
    55,259,416
    
    
    $
    58,970,877Short Term Debt
    
    
    
    
    
    
    
    
    
    
    9,171,201
    
    
    
    2,048,559
    
    
    
    2,234,040Stockholders Equity
    
    $
    37,947,524
    
    
    $
    37,718,807
    
    
    $
    37,563,951
    
    
    $
    37,560,864
    
    
    $
    37,672,156Minority Interest in
Subsidiary
    
    
    547,498
    
    
    
    547,498
    
    
    
    547,498
    
    
    
    10,074,447
    
    
    
    10,074,447
 8




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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, 2003 Compared to Year ended December 31, 2002 Liquidity and Capital Resources At December 31, 2003, the Company had total assets of $41,519,453. Of that
amount $6,127 was held in cash. The Company had no long-term debt at December
31, 2003. During the first quarter of 2003, the Company exchanged an
investment in stock for a note receivable from a related party in the amount of
$585,000. At September 30, 2003 the Company had total illiquid investments of
$40,528,449, which consists of preferred stock of Realty Advisors, Inc., an
affiliated company, and a note receivable including interest receivable of
$53,531, in the amount of $638,531 that is due on January 31, 2005. Results of Operations Net earnings was $228,716 in 2003 compared to prior year earnings of
$154,856. The increase in net earnings resulted from an increase in management
fees, and an increase in interest income related to a note receivable obtained
during 2003. 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. 9




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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, 2003, 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. Not applicable. 
 Item 9A. Controls and Procedures. Based on their most recent evaluation, which was completed as of the end
of the period covered by this Form 10-K, the acting Principal Executive Officer
and Chief Financial Officer have concluded that the Companys disclosure
controls and procedures were effective at December 31, 2003, to ensure that
information required to be disclosed in reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There were no changes in the Companys
internal controls over financial reporting during the quarter ended December
31, 2003, that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. 10




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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 (both 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 within the last twelve months
and was elected by the Board of Directors to fill a vacancy created by a prior
resignation. None of the Directors originally named in the Articles of
Incorporation of the Company filed December 19, 1996 are currently Directors.
A vacancy existed on the Board of Directors following the resignation effective
March 1, 1997 of Georgie Liebelt. See Item 13. Certain Relationships and
Related Transactions. On April 5, 2001, F. Terry Shumate, a Director since
inception, resigned creating a second vacancy. On February 1, 2002, acting in
his capacity as the sole remaining Director, Karl Blaha, then President and a
Director, elected Ronald E. Kimbrough to fill the vacancy created by the
resignation of Georgie Liebelt and elected Ken Joines to fill the vacancy
created by the resignation of F. Terry Shumate. Such action filled all three
positions on the Board of Directors with Messrs. Kimbrough, Joines and Blaha.
Kimbrough was also elected Vice President and Treasurer, and Joines was elected
Secretary. On February 7, 2002, Karl L. Blaha resigned as a member of the
Board of Directors and President of the Company. A vacancy exists on the Board
of Directors following the resignation effective February 7, 2002 of Karl
Blaha. Name
    
    Age
    
    Position with the CompanyRonald E. Kimbrough
    
    
    51
    
    
    Vice President and TreasurerKen Joines
    
    
    36
    
    
    Secretary
 11




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Ronald E. Kimbrough is acting Principal Executive Officer (since February
2002), and Executive Vice President and Chief Financial Officer (since January
2002) of American Realty Investors, Inc. (ARL), a New York Stock Exchange
(NYSE) listed entity engaged in real estate; Executive Vice President and
Chief Financial Officer (since January 2002) of Basic Capital Management, Inc.
(BCM), a contractual advisor to many entities engaged in the real estate
business, Executive Vice President and Chief Financial Officer (since July
2003) of Prime Income Asset Management, Inc., a contractual advisor to three
publicly-held entities engaged in the real estate business, Income Opportunity
Realty Investors, Inc. (IOT), which has its common stock listed on the an
American Stock Exchange, Transcontinental Realty Investors, Inc. (TCI), which
has its common stock listed on the NYSE; Controller (September 2001  January
2002) of BCM; Vice President and Treasurer (January 1998  September 2001) of
Syntek West, Inc., a real estate company, and One Realco Corporation (One
Realco) a real estate company. Ken Joines is Vice President and Director (since April 2001) of Syntek
West, Inc., a real estate company based in Dallas, Texas; for more than five
years prior thereto through March 2001, Mr. Joines was employed by Whitson
Management Group, a fee-only financial planning and business consulting firm
based in Phoenix, Arizona, in various financial advisory capacities, the last
of which was as Vice President and Chief Financial Officer. Mr. Joines has
been a director of IOT since October 2003. There are no family relationships among the directors or executive
officers of the Company. Meetings and Committees of Directors; Code of Ethics for Senior Financial
Officers The
Companys Board of Directors acted upon seven  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. The Board of Directors adopted on February 23, 2004 Code of Ethics for
Senior Financial Officers that applies to the principal executive officer,
president, principal financial officer, chief financial officer, principal
accounting officer and controller. FEPI does not have a website, but a copy of
such document may be obtained by written request to the Secretary of FEPI.
Those requests should be sent to Secretary, First Equity Properties, Inc., 1800
Valley View Lane, Suite 160, Dallas, Texas 75234. Shareholders may also send communications to Board members by either
sending a communication to the Board, a particular Board member or the
Secretary of First Equity Properties, Inc. at 1800 Valley View Lane, Suite 100,
Dallas, Texas 75234. 12




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##### Table of Contents



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, 2003, 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 and
Related Shareholder Matters. The Companys voting securities consist of the shares of common stock, par
value $0.01 per share. As of March 25, 2004, 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: Amount and NatureTitle of Class
    
    Name and Address of Beneficial Owner
    
    of Beneficial Ownership
    
    Percent of ClassShares of Common
    
    Nevada Sea Investments, Inc.Stock, par value
    
    1800 Valley View Lane$0.01 per share
    
    Suite 300Dallas, Texas 75234
    
    5,285,472 shares
    
    
    50
    %Shares of Common
    
    Greenbriar CorporationStock, par value
    
    1755 Wittington Place, Suite 340$0.01 per share
    
    Dallas, Texas 75248
    
    2,642,736 shares
    
    
    25
    %
  (1)
    
    Based on 10,570,944 shares of common stock outstanding on March 25, 2004. 13




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##### Table of Contents



As of March 25, 2004, 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: Amount and NatureTitle of Class
    
    Name and Address of Beneficial Owner
    
    of Beneficial Ownership
    
    Percent of Class (a)Shares of Common
    
    Ronald E. KimbroughStock, par value
    
    1800 Valley View Lane, Suite 300$0.01 per share
    
    Dallas, Texas 75234
    
    none
    
    noneShares of Common
    
    Ken JoinesStock, par value
    
    1755 Wittington Place, Suite 340$0.01 per share
    
    Dallas, Texas 75234
    
    none
    
    noneShares of CommonStock, par value$0.01 per share
    
    All officers and directors as a group
    
    none
    
    none
  (a)
    
    Based on 10,570,944 shares of common stock outstanding on March 25, 2004. 
 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. 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. During 1999,
the Company repaid all amounts advanced together with interest 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 $22,500,000, 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
the Notes to the Financial Statements. During 1998, the Company redeemed all
of its $32,500,000 preferred stock in exchange for reduction of receivables
from Syntek West, Inc. 14




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##### Table of Contents



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 Roadway 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 Roadway 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 in
Couer dAlene, Idaho (since sold). See also the Notes to the Consolidated
Financial Statements. 
 Item 14. Principal Accounting Fees and Services The following table sets forth the aggregate fees for professional services
rendered to FEPI for the years 2003 and 2002 by FEPIs principal accounting
firm, Farmer, Fuqua, & Huff, P.C. Type of Fees
    
    2003
    
    2002Audit Fees
    
    $
    10,000
    
    
    $
    9,500Audit related fees
    
    
    
    
    
    
    Tax feespreparation of corporate federal income tax return
    
    $
    1,650
    
    
    $
    1,650All other fees
    
    
    
    
    
    
    
 There is currently no standing audit committee. The Board of Directors fulfills that responsibility. As a result, there are no audit committee pre-approval policies and procedures in existence. 15




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##### Table of Contents



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements. The following documents are filed as part of
this report: 1. Consolidated Financial Statements.
    
    PageIndependent auditors report
    
    
    F-1Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Operations for the three years ended
December 31, 2003
    
    
    F-3Consolidated Statements of Changes in Shareholders Equity for the
three years ended December 31, 2003
    
    
    F-4Consolidated Statements of Cash Flows for the three years ended
December 31, 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
 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: ExhibitDesignation
    
    Description of Exhibit2.1
    
    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).
 16




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##### Table of Contents



ExhibitDesignation
    
    Description of Exhibit2.3
    
    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).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).
 17




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##### Table of Contents



ExhibitDesignation
    
    Description of Exhibit3.4
    
    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).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.)14*
    
    Code of Ethics for Senior Financial Officers21*
    
    Subsidiaries of the Registrant31*
    
    Certification of Acting Principal Executive Officer and Chief
Financial Officer32*
    
    Rule 1350 Certification by Acting Principal Executive Officer
and Chief Financial Officer
 *filed herewith 18




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##### Table of Contents



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.By /s/Ronald E. KimbroughDated: March 30, 2004
    
    Ronald E. Kimbrough, Director,Vice President 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/ Ronald E. Kimbrough

Ronald E. Kimbrough
    
    Director, Vice President
and Treasurer (Principal
Executive and Financial and
Accounting Officer)
    
    March 30, 2004/s/ Ken Joines

Ken Joines
    
    Director and Secretary
    
    March 30, 2004
 19




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS PageIndependent Auditors Report
    
    
    F-1Consolidated Financial StatementsBalance sheets as of December 31, 2003 and 2002
    
    
    F-2Statements of operations for the years ended December 31, 2003, 2002 and 2001
    
    
    F-3Statements of changes in shareholders equity for the years ended
December 31, 2003, 2002 and 2001
    
    
    F-4Statements of cash flows for the years ended December 31, 2003, 2002 and 2001
    
    
    F-5Notes to financial statements
    
    
    F-6
 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. 20




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##### Table of Contents



INDEPENDENT AUDITORS 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, 2003 and 2002 and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for the years ended December 31, 2003, 2002 and 2001. 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 U.S. 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, 2003 and 2002 and
the results of their operations and their cash flows for the years ended
December 31, 2003, 2002 and 2001, in conformity with U.S. generally accepted
accounting principles. /s/ Farmer, Fuqua, & Huff, P.C. March 23, 2004
Plano, Texas F-1




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, ASSETS2003
    
    2002Cash and cash equivalents
    
    $
    6,127
    
    
    $
    5,450Notes and interest receivable  affiliate
    
    
    638,531
    
    
    
    Accounts receivable  affiliate
    
    
    346,346
    
    
    
    346,338Investments
    
    
    40,528,449
    
    
    
    41,113,449$
    41,519,453
    
    
    $
    41,465,237LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable  trade
    
    $
    239,999
    
    
    $
    239,999Accounts payable  affiliate
    
    
    2,784,432
    
    
    
    2,958,933Total liabilities
    
    
    3,024,431
    
    
    
    3,198,932Minority interest in subsidiary
    
    
    547,498
    
    
    
    547,498Shareholders equityPreferred 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
    
    
    
    105,710Capital in excess of par value
    
    
    1,281,548
    
    
    
    1,281,548Retained earnings
    
    
    36,560,266
    
    
    
    36,331,549Total shareholders equity
    
    
    37,947,524
    
    
    
    37,718,807$
    41,519,453
    
    
    $
    41,465,237
 The accompanying notes are an integral part of these financial statements. F-2




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003
    
    2002
    
    2001RevenueManagement fees
    
    $
    207,254
    
    
    $
    189,230
    
    
    $
    104,591Interest
    
    
    53,541
    
    
    
    34
    
    
    
    49,023260,795
    
    
    
    189,264
    
    
    
    153,614Operating expensesLegal and accounting
    
    
    28,825
    
    
    
    30,329
    
    
    
    34,951General and administrative
    
    
    3,254
    
    
    
    4,079
    
    
    
    9,669Bad debt expense
    
    
    
    
    
    
    
    
    
    
    76,800Total operating expenses
    
    
    32,079
    
    
    
    34,408
    
    
    
    121,420Earnings from operations
    
    
    228,716
    
    
    
    154,856
    
    
    
    32,194Other expensesInterest expense
    
    
    
    
    
    
    
    
    
    
    (29,107
    )NET EARNINGS
    
    $
    228,716
    
    
    $
    154,856
    
    
    $
    3,087Earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.00Weighted average shares outstanding
    
    
    10,570,944
    
    
    
    10,570,944
    
    
    
    10,570,944
 The accompanying notes are an integral part of these financial statements. F-3




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Years Ended December 31, 2003, 2002 and 2001 Common Stock
    
    Preferred Stock
    
    Capitalin excess
    
    Retainedearnings
    
    TotalShares
    
    Amount
    
    Shares
    
    Amount
    
    of par
    
    (deficit)
    
    equityBalances at January 1, 2001
    
    
    10,570,944
    
    
    
    105,710
    
    
    
    
    
    
    
    
    
    
    
    1,281,548
    
    
    
    36,173,606
    
    
    
    37,560,864Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,087
    
    
    
    3,087Balances at December 31, 2001
    
    
    10,570,944
    
    
    
    105,710
    
    
    
    
    
    
    
    
    
    
    
    1,281,548
    
    
    
    36,176,693
    
    
    
    37,563,951Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,856
    
    
    
    154,856Balances at December 31, 2002
    
    
    10,570,944
    
    
    $
    105,710
    
    
    
    
    
    
    
    
    
    
    $
    1,281,548
    
    
    $
    36,331,549
    
    
    $
    37,718,807Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,716
    
    
    
    228,716Balances at December 31, 2003
    
    
    10,570,944
    
    
    $
    105,710
    
    
    
    
    
    
    
    
    
    
    $
    1,281,548
    
    
    $
    36,560,266
    
    
    $
    37,947,524
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    $
    228,716
    
    
    $
    154,856
    
    
    $
    3,087Adjustments to reconcile net earnings
(loss) to net cash used for operating activitiesLoss on sale of assets and write-off
    
    
    
    
    
    
    
    
    
    
    76,800(Increase) decrease inAccounts receivable  affiliate
    
    
    (8
    )
    
    
    5,609
    
    
    
    (598,609
    )Interest receivable  affiliate
    
    
    (53,530
    )
    
    
    
    
    
    
    Increase (decrease) inAccounts payable  affiliate
    
    
    (174,501
    )
    
    
    (164,000
    )
    
    
    5,999Net cash used for operating activities
    
    
    677
    
    
    
    (3,535
    )
    
    
    (512,723
    )CASH FLOWS FROM INVESTING ACTIVITIESPayments received on notes receivable
    
    
    
    
    
    
    
    
    
    
    2,525,588Net cash provided by investing activities
    
    
    
    
    
    
    
    
    
    
    2,525,588CASH FLOWS FROM FINANCING ACTIVITIESPayments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (2,048,559
    )Net cash used for financing activities
    
    
    
    
    
    
    
    
    
    
    (2,048,559
    )Net increase (decrease) in cash and cash equivalents
    
    
    677
    
    
    
    (3,535
    )
    
    
    (35,694
    )Cash and cash equivalents at beginning of period
    
    
    5,450
    
    
    
    8,985
    
    
    
    44,679Cash and cash equivalents at end of period
    
    $
    6,127
    
    
    $
    5,450
    
    
    $
    8,985
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001 NOTE A  HISTORY  WesPac Investors Trust III (WesPac), a California business trust, was
originally organized on August 22, 1983. On January 24, 1994, WesPac
instituted a Chapter 11 bankruptcy proceeding in the United States
Bankruptcy Court for the Eastern District of Washington. A Plan of
Reorganization dated March 22, 1996 (as modified) was confirmed by order
dated May 15, 1996 and was amended by Order entered October 29, 1996
approving the First Modification to Plan of Reorganization (the Modified
Plan). Pursuant to the Modified Plan, WesPac was converted from a
California business trust into a Nevada corporation. First Equity
Properties, Inc. (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.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. 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 Certain 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. NOTE C  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Nature of OperationsThe Company and its subsidiaries provided management services to a
variety of commercial and residential real estate entities throughout the
continental United States. Effective October 1, 1999, substantially all
of the contracts for management services were transferred from the
Company. In addition, the Company indirectly invests in real estate
entities and marketable securities through its investment in the
preferred stock of Realty Advisors, Inc. F-6




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
December 31, 2003, 2002 and 2001 NOTE C  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued  Principles of ConsolidationThe consolidated financial statements include the accounts of First
Equity Properties, Inc., its wholly-owned subsidiary Carmel Realty, Inc.
and its majority-owned subsidiary, Carmel Realty Services, Ltd. All
significant intercompany accounts and transactions have been eliminated
in consolidation.Cash EquivalentsFor 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 AmortizationProperty 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.InvestmentsInvestments consist of non-marketable investments in private companies,
and are carried at the lower of cost or estimated net realizable value.Accounting EstimatesThe 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 TaxesThe 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. F-7




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
December 31, 2003, 2002 and 2001 NOTE C  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued  Credit RiskThe 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 ShareEarnings (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. NOTE D  ACCOUNTS RECEIVABLE  AFFILIATES 2003
    
    2002TRS, Ltd. and other
    
    
    62,818
    
    
    
    62,809Regis Realty
    
    
    283,528
    
    
    
    283,528$
    346,346
    
    
    $
    346,337
 NOTE E  INVESTMENTS  The investment in Realty Advisors, Inc. preferred stock at December 31,
2003 and 2002 is $41,113,449 and $41,113,449, respectively, and
represents 416,632 and 416,632 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 who invests in real estate directly and indirectly
through investments in real estate entities. At June 30, 2003, Realty
Advisors, Inc. had total assets of $194,823,808, total liabilities of
$90,509,701 and total shareholders equity of $104,314,107. The Company
redeemed 48,257 shares of the preferred stock valued at their cost of
$110 per share to pay an account payable to an affiliate in 2002. In
2001, the value of the preferred stock was reduced as a result of the
application of the purchase method of accounting for the acquisition of
the minority interest of the subsidiary which holds the preferred stock.
The Company acquired all but a 1% minority interest from a related party
in Carmel Realty Services, Ltd. The Company paid $4,225,879 for the
17.4% interest in Realty Advisors, Inc. F-8




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
December 31, 2003, 2002 and 2001 NOTE E  INVESTMENTS  Continued  Investments at December 31, 2002 included 58,500 shares of preferred
stock in North American Mortgage, a related party, valued at $585,000.
The shares have a par value of $10, are non-voting shares with a
liquidation value of $10 per share and do not earn dividends. NOTE F  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. NOTE G  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
2003, 2002 and 2001 as a result of the following: 2003
    
    2002
    
    2001Computed expected tax expense
    
    $
    80,000
    
    
    $
    54,000
    
    
    $
    Net operating loss carryforward
    
    
    (80,000
    )
    
    
    (54,000
    )
    
    
    $
    
    
    
    $
    
    
    
    $
    
  Deferred income taxes reflect the effects of temporary differences
between the tax bases of assets and liabilities and the reported amounts
of those assets and liabilities for financial reporting purposes.
Deferred income taxes also reflect the value of net operating losses and
an offsetting valuation allowance. The Companys total deferred tax
asset and corresponding valuation allowance at December 31, 2003, 2002,
and 2003 consisted of the following: 2003
    
    2002
    
    2001Deferred tax assetNet operating loss carryforward
    
    $
    6,427
    
    
    $
    86,447
    
    
    $
    Less: Valuation Allowance
    
    
    (6,427
    )
    
    
    (86,447
    )Net deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
  The deferred tax asset that arose related to the net operating loss
carryforward has been reduced to $-0- as management cannot be assured of
the utilization of the deferred tax asset. F-9




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
December 31, 2003, 2002 and 2001 NOTE H  RELATED PARTY TRANSACTIONS  The Company provided management services primarily to five affiliated
publicly traded real estate entities throughout the United States. Under
such arrangements, the Company received 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, constituting
substantially all management service revenues, with the five publicly
traded real estate entities were cancelled effective October 1, 1999. NOTE I  FINANCIAL INSTRUMENTS  The estimated fair values of the Companys financial instruments at
December 31, 2003 and 2002 follow: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAccounts receivable  affiliates
    
    $
    366,914
    
    
    $
    366,914
    
    
    $
    366,906
    
    
    $
    366,906Investments
    
    
    40,528,449
    
    
    
    40,528,449
    
    
    
    46,421,719
    
    
    
    46,421,719Note and interest receivable
    
    
    638,531
    
    
    
    638,531
    
    
    
    
    
    
    
    
  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. NOTE J  COMMITMENTS AND CONTINGENCIES  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. F-10




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##### Table of Contents



FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
December 31, 2003, 2002 and 2001 NOTE K  SUPPLEMENTAL CASH FLOW INFORMATION 2003
    
    2002
    
    2001Cash paid during the year for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    29,107Noncash investing and financing activities:Exchange of investments for note
receivable
    
    
    585,000
    
    
    
    
    
    
    
    Redemption of preferred stock to settle
an account payable to affiliate
    
    
    
    
    
    
    5,308,225
    
    
    
    Exchange of account payable
for accounts receivable affiliate
    
    
    
    
    
    
    500,000
    
    
    
    Exchange of account payable from affiliate
for minority interest in subsidiary
    
    
    
    
    
    
    
    
    
    
    4,225,879Effective writedown of investment due to
application of purchase method of
accounting for the acquisition of
minority interest
    
    
    
    
    
    
    
    
    
    
    5,301,071Exchange of a note receivable for an
investment in preferred stock of
an affiliate
    
    
    
    
    
    
    
    
    
    
    585,000
 NOTE L  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 $-0- in 2003, 2002 and 2001, respectively. NOTE M  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, 2003, 2002, and 2001, the Companys comprehensive income was
equal to its net income and the Company does not have income meeting the
definition of other comprehensive income. NOTE N  NOTE AND INTEREST RECEIVABLE  AFFILIATE  In 2003, the company exchanged an investment in stock for a note
receivable from a related party. The note receivable bears interest at a
rate of 10% per year and is due January 31, 2005. The amount on the
balance sheet includes interest receivable of $53,531. F-11