-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FiBAIILoJXQ/yuzsB0BPn0ZdWPVzIyNwhUjym2h9EHiwX/69RWWWrYY8S4m6t8D3 OISf4kF8qaUysh28wv8AjQ== 0001037979-98-000009.txt : 19980407 0001037979-98-000009.hdr.sgml : 19980407 ACCESSION NUMBER: 0001037979-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980406 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY GROWTH SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000050471 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 112050317 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03718 FILM NUMBER: 98587826 BUSINESS ADDRESS: STREET 1: 320 ISLAND WAY STREET 2: STE 210 CITY: CLEARWATER STATE: FL ZIP: 33767 BUSINESS PHONE: 9412559582 MAIL ADDRESS: STREET 1: 320 ISLAND WAY STREET 2: STE 210 CITY: CLEARWATER STATE: FL ZIP: 33767 FORMER COMPANY: FORMER CONFORMED NAME: INFOTEC INC DATE OF NAME CHANGE: 19930506 10-Q 1 EGS 09/30/97 10-Q FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from_________ to_____________ Commission file number 0-3718 Equity Growth Systems, Inc. (Exact name of registrant as specified in its charter) Delaware 11-2050317 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 3821-B Tamiani Trail, Suite 201; Port Charlotte, Florida 33952 (Address of principal executive offices) (561-416-7239) (Registrant's telephone number, including area code) 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As at September 30, 1997, the registrant had outstanding 3,771,148 shares of Common Stock, par value $0.01. Part I- FINANCIAL INFORMATION Item 1. Financial Statements Please see enclosed financial statements. EQUITY GROWTH SYSTEMS, inc. FINANCIAL STATEMENT SEPTEMBER 30, 1997 EQUITY GROWTH SYSTEMS, inc. FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 TABLE OF CONTENTS Page FINANCIAL STATEMENTS Accountant's Compilation Report 1 Balance Sheets 2 Statements of Income and Accumulated Deficit 3 Statements of Shareholders' Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6-16 To the Shareholders Equity Growth Systems, inc., Port Charlotte, Florida 33952 I have compiled the accompanying balance sheet of Equity Growth Systems, inc. as of September 30, 1997 and 1996 and the related statements of income and retained earnings and cash flows for the nine months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Leo J. Paul November 7, 1997 1 EQUITY GROWTH SYSTEMS, inc. BALANCE SHEET SEPTEMBER 30, 1997 AND 1996 1997 1996 A S S E T S CURRENT ASSETS Cash and cash equivalents $ 2,597 $ 5,459 Other receivables - 5,671 Mortgage receivable, current portion (Note 6 & 7) 147,945 178,345 Promissory notes, current portion (Note 8) 5,480 8,757 TOTAL CURRENT ASSETS 156,022 198,232 OTHER ASSETS Mortgages receivable (Note 6 & 7) 1,158,857 1,865,811 Promissory notes (Note 8) 239,132 346,964 Interest receivable 47,820 45,398 Escrow receivable 98,000 - TOTAL OTHER ASSETS 1,543,809 2,258,173 TOTAL ASSETS $1,699,831 $2,456,405 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities (Note 3) $ 24,058 $ 54,505 Mortgage payable, current portion (Note 7) 160,773 350,297 Note payable (Note 9) 105,500 104,000 TOTAL CURRENT LIABILITIES 290,331 508,802 LONG-TERM LIABILITIES Mortgage payable (Note 7) 1,084,695 1,364,379 TOTAL LIABILITIES 1,375,026 1,873,181 SHAREHOLDERS' EQUITY (Note 13) Preferred stock-no par value authoriz- ed-5,000,000 shares; zero issued and outstanding - - Common stock-$.01 par value author- ized-20,000,000 shares; issued and outstanding-3,771,148 shares in 1997 and 3,491,338 in 1996 37,711 34,914 Capital in excess of par value 2,892,195 2,695,178 Accumulated deficit (2,605,101) (2,146,868) TOTAL SHAREHOLDERS' EQUITY 324,805 583,224 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,699,831 $2,456,405 ========== ========== Read Accountant's Compilation Report The accompanying notes are an integral part of these financial statements. 2 EQUITY GROWTH SYSTEMS, inc. CONDENSED STATEMENT OF INCOME AND ACCUMULATED DEFICIT Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Income $ 54,785 $ 57,774 $ 168,251 $ 170,588 General and Adminis- trative Expenses 48,577 52,018 281,025 170,932 Net Income (Loss) Before Provisions for Income Taxes 6,208 5,756 (112,774) (344) Provisions for Income Taxes Note (10) - - - - Net Income (Loss) 6,208 5,756 (112,774) (344) Accumulated Deficit- Beginning (2,611,309)(2,152,624)(2,492,327)(2,146,524) Accumulated Deficit- Ending (2,605,101)(2,146,868)(2,605,101)(2,146,868) ========== ========== ========== ========== Earnings Per Share .002 .002 (.030) (.000) Weighted Average of Shares Outstanding 3,771,148 2,411,036 3,771,148 2,411,036 Read Accountant's Compilation Report The accompanying notes are an integral part of these financial statements. 3 EQUITY GROWTH SYSTEMS, inc. STATEMENTS OF SHAREHOLDERS' EQUITY SEPTEMBER 30, 1997 Capital in No. of Common Excess of Accumulated Shares Stock Par Value Deficit Balances January 1, 1995 $2,000,000 $20,000 $2,125,537 $(2,201,723) Reverse Split (1,800,000) (18,000) 18,000 Common Stock Issued 2,622,072 26,221 737,955 Net (loss) for the year ended December 31, 1995 (41,045) Balances, December 31, 1995 2,822,072 28,221 2,881,492 (2,242,768) Common Stock Issued 949,076 9,490 10,703 Net (loss) for the year ended December 31, 1996 (249,559) Balances, December 31, 1996 3,771,148 37,711 2,892,195 (2,492,327) Net (loss) for the nine months ended September 30, 1997 (112,774) Balances September 30, 1997 $3,771,148 $37,711 $2,892,195 $(2,605,101) ========== ======= ========== =========== Read Accountant's Compilation Report The accompanying notes are an integral part of these financial statements. 4 EQUITY GROWTH SYSTEMS, inc. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 1997 1996 Cash Flows From Operating Activities: Net Profit (Loss) $(112,774) $ (344) Adjustments to Reconcile Net Profit (Loss) to Net Cash Used for Operating Depreciation - - Decrease in mortgages and notes receivable 357,638 133,581 Increase (decrease) in accounts payable and current liabilities (5,378) (19,499) ` Increase (decrease) in mortgage and notes payable (237,851) (128,902) Net Cash Provided (Used) by Operations 1,635 (15,164) Cash Flows From Financial Activities Capital stock issued - 6,693 Additional paid in capital - 13,930 Net Cash Provided by Financial Activities - 20,623 Net Increase (Decrease) in Cash 1,635 5,459 Cash-Beginning of Year 962 - Cash-End of Period $ 2,597 $ 5,459 ======== ======== Supplemental Cash Flows Information Cash paid for interest $101,156 $141,398 ======== ======== Read Accountant's Compilation Report The accompanying notes are an integral part of these financial statements. 5 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization The Company (formerly known as InfoTech, Inc.) was organized under the laws of the State of Delaware on December 8, 1964. The principal business of the Company is specializing in structuring and marketing mortgaged backed securities as well as, the acquisition of select commercial real estate for its own account. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash in banks, and any highly liquid investments with a maturity of three months or less at the time of purchase. The Company maintains cash and cash equivalent balances at a financial institution which is insured by the Federal Deposit Insurance Corporation up to $100,000. At September 30, 1997, there is no concentration of credit risk from uninsured bank balances. Fixed Assets The fixed assets are depreciated over their estimated allowable useful lives, primarily over five to seven years utilizing the modified acceleration cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of fixed assets are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred. Income Taxes In February 1992, the Financial Accounting Standards Board issued a Statement on Financial Accounting Standards 109 of "Accounting for Income Taxes". Under Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective bases. 6 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings/Loss Per Shares Primary earnings per common share are computed by dividing the net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The number of shares used for the nine months ended September 30, 1997 and 1996 were $3,771,148 and $2,411,036, respectively. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT 1997 & 1996 Equipment $ 2,022 Less: Accumulated depreciation (2,022) $ - ======= Depreciation expense charged during 1997 and 1996 was $-0- and $-0-, respectively. NOTE 3 - SETTLEMENT WITH CREDITORS On October 31, 1996, the Company issued 200,000 charges of it common stock in consideration for the cancellation of $107,393 owed by the Corporation to Diversified Corporate Consulting Group, LLC for professional services rendered since 1994. Additionally, in June and October of 1996 , the Company issued an aggregate of 460,000 shares of the Company's $.01 par value common stock for advisory services performed on its behalf with a value of $4,600. On August 15, 1995, the Company issued 200,000 shares of the Company's $.01 par value of common stock for significant services to the Corporation at the request of its President with a value of $2,000. 7 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 3 - SETTLEMENTS WITH CREDITORS (Continued) In March of 1995, the Company issued 20,000 shares of the Company's $.01 par value of common stock after the reverse split in payment of legal bills of $45,734 and 6,072 shares of $.01 par value stock in payment of accounting bill of $15,360. The remaining balance of $67,832 was written off as the Company was not able to locate creditors. NOTE 4 - EMPLOYMENT AGREEMENT The Company entered into an employment agreement with Edward Granville-Smith, a chief executive officer for an initial term of five years commencing June 1, 1995. The Company registered with the Securities and Exchange Commission to issue 110,000 shares of common stock to Edward Granville-Smith for compensation for services prior to June 1, 1996. In addition, annual salary is a sum equal to the lesser of 5% of the Company's annual gross income on a calendar basis or 15% of its net pre-tax profit as determined for federal income tax purposes, without taking depreciation or tax credits into account to be paid on or before March 30, following the calendar for which salary is due; subject to availability of cash flow. Edward Granville-Smith would also be entitled to an annual bonus payable in shares of the Company's common stock, determined by dividing 5% of the Company's pre-tax profits for the subject calendar year by the average bid price for the Company's common stock during the last five trading days prior to the end of the last day of each year and the first days of the new year. During May of 1996, the Company recruited two executive officers, Messers. Gener R. Moffitt and Donald E. Homan, both with offices in Kansas City, Missouri. Such recruitment was effected in two parts, first, the Company exchanged 100,000 shares with each (200,000 shares in the aggregate), for all of the capital stock in their recently formed corporations (Moffitt Properties, Ltd., and Homan Equities, Inc., both Missouri corporations), and then the Company and the subject corporation entered into employment agreements. Each employment agreement was identical and provides for the following compensation. (a) An annual bonus payable in shares of the Company's common stock, determined by dividing 10% of the Company's pre-tax profits for the subject calendar year by the average bid price for the Company's common stock at during the last five trading days prior to the end of the last day of each year and 8 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 4 - EMPLOYMENT AGREEMENT (Continued) the initial five days of the new year, provided, however, that the employment agreement shall have been in effect for at least one half of the subject year; and, provided further that in the event of a reorganization pursuant to which another entity becomes the Company's parent, the common stock of such entity shall be issuable hereunder, rather than that of the Company. (b) An annual cash bonus equal to 40% of the Company's pre-tax profits for the subject calendar year, provided, however, that the employment agreement shall have been in effect for at least one half of the subject year. (c) A guaranteed minimum monthly draw against the annual bonus described above, in a sum equal to not be less than $6,250; subject to availability of cash flow. NOTE 5 - CONSULTING AGREEMENTS The Company had entered into two consulting agreements. One with Bolina Trading Company, S.A., a Panamanian Corporation and the second one with Warren A. McFadden. Each consultant serves as a special advisor to Mr. Granville-Smith, in conjunction with Mr. Granville-Smith's role as an officer and director of the Company, with special responsibilities in the areas of strategic planning and raising debt on equity capital required to implement the Company's strategic plans. The agreements' terms called for Bolina Trading Company, S.A. to receive as compensation 84,000 shares of the Company's common stock plus $100 per hour after 520 hours of service per year and Warren A. McFadden to receive as compensation 110,000 shares of the Company's common stock plus $100 per hour after 520 hours of service per year. Subsequent to December 31, 1995, all of the above shares of the Company's common stock were issued. In 1996, the consulting agreement with Warren A. McFadden was terminated and the 110,000 shares of common stock he received, which were subsequently acquired by Diversified Consulting, were used by Diversified as consideration to cancel a $30,000 promissory note liability owed to the Company. 9 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 6 - INDENTURE OF TRUST AND WRAP AROUND MORTGAGES RECEIVABLE On June 30, 1995, the Company issued 1,616,000 shares of common stock in payment of an indenture of trust and wrap around mortgages subject to the underlying mortgages, from the following partnerships: Pay-West Associates, Montco Associates, San-Safe Associates and San-Ten Associates. The indenture of trust consists of (4) four demand notes bearing interest at prime plus 4%. These notes are payable from the rental of the various properties less payment on the wrap around mortgages. The payment does not cover the accrued interest which is added back to the notes. The wrap around notes bear interest of 9.08% to 13.50%. The underlying mortgages bear interest at 9.625 to 9.75%. The difference between payments on the wrap around mortgages and underlying mortgages are applied to debt service of the demand notes. NOTE 7 - MORTGAGES September September 30, 30, 1997 1996 Mortgages consist of the following: Subordinate "wrap" mortgage receivables: (a) Nevada/California Property 12.9041 $ 703,842 $ 793,089 (b) Tennessee Property-Note 14 13.500% - 268,455 (c) Kansas Property-Note 14 12.320% - 330,593 (d) Oregon Property 9.080% 602,960 652,019 1,306,802 2,044,156 Less: Current Portion 147,945 178,345 $1,158,857 $1,865,811 ========== ========== Original Mortgages Payable: (a) Nevada/California Property 9.750% $ 678,694 $ 777,250 (b) Tennessee Property-Note 14 9.625% - 193,580 (c) Kansas Property-Note 14 9.750% - 129,619 (d) Oregon Property 9.750% 566,774 614,227 1,245,468 1,714,676 Less: Current Portion 160,773 350,297 $1,084,695 $1,364,379 ========== ========== 10 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 7 - MORTGAGES (Continued) (a) The mortgage secures a promissory note and is payable in equal quarterly installments of $42,701.69 with a final payment of $291,096.92, maturing January 1, 2001. There is also an underlying "wrap" mortgage that is payable in equal quarterly installments of $42,826.50, maturing July 1, 2005, with quarterly payments decreasing to $9,314.75 for the last five years. (b) The mortgage secured a promissory note and was pay- able in equal quarterly installments of $23,437.01, with a final payment of $198,238.33 maturing Decem- ber 31, 1996. There also was an underlying "wrap" mortgage that was payable in equal quarterly install- ments of $23,562.25 maturing December, 2006, with quarterly payments decreasing to $7,329 for the last 10 years. At March 31, 1997, the mortgage payable was in default and in 1997, the mortgage holder foreclosed on it. Therefore, the mortgage payable and related wrap mortgage receivable were written off. (See Note 14) (c) The mortgage secures a promissory note and was pay- able in equal quarterly installments of $18,508.87 with a final payment of $136,999 maturing Decem- ber 31, 1995. There is also an underlying "wrap" mortgage that is payable in annual installments of $74,482, maturing October 1, 2005, with annual pay- ments decreasing to $22,962 the last 10 years. The mortgage payable is currently in default and the re- maining balance has been classified as current. (See Note 14). (d) The mortgage secures a promissory note and is payable in equal quarterly installments of $26,409.87 with a final payment of $232,199.50, maturing January 1, 2002. There is also an underlying "wrap" mortgage that is payable in equal annual payments of $106,640 maturing December 31, 2002. 11 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 8 - NOTES RECEIVABLE 1997 1996 Nevada/California Property Quarterly payments of $868.55 4% above prime, currently 12.40% original amount $63,000 $149,170 $135,371 Tennessee Quarterly payments of $477.90 4% above prime, currently 12.40% original amount $40,000. At Decem- ber 31, 1996, the note was deemed to be uncollectible and was written off (See Note 14). - 91,333 Kansas Quarterly payments of $341.73 4% above prime, currently 12.40% original amount $21,073. At June 30, 1997, the note was deemed to be uncollectable and was written off (See Note 14) - 43,667 Oregan Quarterly payments of $501.13 4% above prime, currently 12.40% original amount $38,742 95,442 85,350 244,612 355,721 Less Current Portion 5,480 8,757 $239,132 $346,694 ======== ======== NOTE 9 - NOTE PAYABLE A secured note payable including accrued interest, due on demand on interest payable quarterly at a rate of 10% per annum. This loan was assumed by the Company as part of the asset acquisition. The note has a cumulative interest clause on any short fall in payment being added to the original principal amount of $104,000 $105,500 $104,000 ======== ======== 12 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 10 - INCOME TAXES As discussed in Note 1, the Company has applied the provisions of Statement 109. The significant components of deferred income tax expense benefit for the ninr months ended September 30, 1997 and 1996 arising from net operating losses as follows: Deferred tax benefit $11,800 $ 6,200 Valuation allowance 11,800 6,200 $ - $ - ======= ======= The Company has operating loss carry forwards in excess of two million dollars that can be used to offset future taxable income. NOTE 11 - RELATED PARTY TRANSACTION The chief executive officer of the Company is also an officer of the general partner in all the partnerships involved in the wrap around mortgages subject to the underlying mortgages and promissory notes. NOTE 12 - COMPENSATION No officer or director has received any compensation to date, except as discussed in Note 4. NOTE 13 - STOCKHOLDERS' EQUITY On May 18, 1995, the Company adopted a resolution to change the authorized capitalization as follows: (a) The 2,000,000 shares of common stock, $0.01 par value then authorized, all of which were currently outstand- ing, were reverse split into 200,000 shares, $0.01 par value; and immediately thereafter; (b) The Company's authorized common stock was increased from 200,000 shares, $0.01 par value, to 20,000,000 shares of common stock, $0.01 par value, and (c) The Company was authorized to issue 5,000,000 shares of preferred stock, the attributes of which are to be determined by the Company's Board of Directors from time to time, prior to issuance, in conformity with the requirements of Sections 151 of the Delaware General Corporation Law. 13 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 14 - LEGAL MATTERS The Company is currently not a party to any legal proceedings. Although the Company is not a party to the following proceedings directly, they involve real estate located in Kansas and Tennessee in which the Company has an interest. A. The Company is currently in default of the mortgage on the property located in Kansas City because it did not have the funds to satisfy the balloon payment, in the amount of $136,999, that was due on December 31, 1995. However, the mortgage holder has continued to accept quarterly amortization payments equal to the quarterly proceeds from the related wrap mortgage receivable. Even though the aforementioned mortgage payments are currently being accepted without protest, the mortgage holder still retains the right to demand full and immed- iate payment of the total principal due. Presently, there are two ongoing legal proceedings involv- ing the Kansas City property. First, Associated Wholesale Grocers, Inc., -vs- San Safe Associates, et al, in the US District Court for the District of Kansas (the "Kansas Case") and second, Ken-Co Properties, Inc., -vs- Safeway Stores, Inc., in the Circuit Court for Baltimore County, Maryland (the "Maryland Case"). (a) The current tenant (by assignment from the original tenant) for the Company's Kansas City property (located at 8120 Parallel, in the City of Kansas City, Wyandotte County, Kansas), claims to have had a conditional right to purchase such property (based on the rights of the original tenant) and allegedly submitted an irrevocable offer to purchase. The plaintiff (a predecessor in interest to the rights of the Company) alleged that the assignment of lease rights to the current tenant had not been adequately effected and that it was, pursuant to the terms of the lease, entitled to continue dealing with the orig- inal tenant for, among other purposes, provision of required notices. The plaintiff alleged that it exercised its right to reject the tenant's offer to purchase through notice of rejection tendered to the original tenant. The de- fendant/tenant has answered, alleging that because of subsequent assignments of the lease, notice to prior 14 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 14 - LEGAL MATTERS (Continued) parties in interest was not adequate and consequently, that the Company's counsel failed to take the steps required to properly reject such offer as to all potential parties involved. (b) The Corporation in whose name record ownership was originally registered, as general partner of a limited partnership, initiated suit against the tenant in Baltimore, Maryland for declaratory relief that notice of rejection was adequate. The defendant then initia- ted action in the United States District Court for the District of Kansas to the same subject matter seeking judgment requiring the plaintiff in the Maryland action to sell the property. That action has been contested. The defendant/tenant in the Maryland Case has filed a motion seeking to have the venue of that law suit changed to Kansas City and to consolidate the actions, and the plaintiff in the Maryland has con- tested such motion. Lease payments continue to be made. The plaintiff in the Maryland action is also considering interposing counterclaims in the Kansas action, including claims alleging violations of the lease (unapproved improvements that detrimentally affected the lessor's business). (c) Prior to October 16, 1997, the tenants purchased the subject property for $150,000. With the under- lying mortgage receiving $52,000 of the above $150,000 with the remaining $98,000 will be de- posited with the Circuit Court for Baltimore City, Maryland pending the outcome of litigation in the State of Maryland between First Ken-Co and San Safe. The Company wrote off the balance on the mortgage payable and related wrap receivable $320,768 and promissory note receivable $46,065 at June 30, 1977 and recorded an escrow receivable of $98,000 (see Notes 7 and 8). B. The Company was also in default of the mortgage on the property located in Memphis, Tennessee because it could not satisfy the balloon payment, in the original amount of $193,580, that was due on December 31, 1996. ($174,801 at 12/31/96). The mortgage holder (Lutheran Brotherhood) had refused to renegotiate or extend the term of the mort- 15 EQUITY GROWTH SYSTEMS, inc. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 14 - LEGAL MATTERS (Continued) gage and would not accept any further amortization pay- ments from the lessor of the underlying lease, other than the one made in December, 1996, which was based upon the old repayment schedule's terms. Through August 1997, the Company had received funds from Sun West N.O.P., the lessor on the underlying lease, which represented the monthly rent payments made on such lease ($4,609.38) by the tenant of the Memphis Property. Be- cause the mortgage holder would not accept any amortiza- tion payments on their matured loan from Sun West N.O.P., the Company was using such proceeds to reduce the related wrap mortgage receivable. In August of 1997, the mortgage holder foreclosed on the mortgage payable, which resulted in a foreclosure sale of the Memphis, Tennessee property. As a result of these events of foreclosure, the Company wrote off the balance on the mortgage payable and the re- lated wrap mortgage receivable ($251,722) and promissory note receivable ($93,686) at December 31, 1996. (See Notes 7 and 8). 16 PART II- OTHER INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations During the nine months ended September 30, 1997, the registrant reported income of approximately $168,000 as compared to income from all sources of $170,000 during the nine months ended. During the nine months ended September 30, 1997, the registrant's cost of revenue was approximately $281,000 as compared to $171,000 during the prior nine months ended. The increase was attributable to the write off of the Tennessee and Kansas wrap around mortgages, notes receivable and the underlying mortgages payable. During the nine months ended September 30, 1997, the registrant reported net income of approximately ($113,000) or ($0.03) per share, compared to (1,000) or (0.000) per share prior to the nine months ended. The $112,000 in net loss reflects the increase in the cost of operations. Liquidity and Capital Resources As of September 30, 1997, the registrant has a working capital position of approximately ($134,000) as compared to working capital position of ($310,000) for the nine months ended September 30, 1996. This reflects the write off of the Tennessee and Kansas wrap around mortgages, note receivable and underlying mortgage. To date, the cash flow generated from operations have been adequate to meet the registrant's mortgage obligations. A shareholder has been contributing funds to meet various general and administrative expenses required to fullfill all of the registrant's obligations. No officer of the registrant has been receiving or accruing compensation at this time. -----END PRIVACY-ENHANCED MESSAGE-----