-----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, HAI09LAaU7pIulbOq6bLnNZjLKLHzDgx7kfgcV59zgyFHqaFys+zC5qRNCvBRENn 7di9f4occsoqwy010sbgoQ== 0001044885-98-000014.txt : 19980702 0001044885-98-000014.hdr.sgml : 19980702 ACCESSION NUMBER: 0001044885-98-000014 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980701 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-03718 FILM NUMBER: 98659432 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 10KSB 1 FORM 10KSB ANNUAL REPORT United States Securities and Exchange Commission Washington D.C. FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the fiscal year ended December 31, 1997 Commission File Number O-3718 Equity Growth Systems, inc. (Name of Small Business Registrant in its charter) Delaware (State or other jurisdiction of incorporation or organization) 11-2050317 (I.R.S. Employer Identification Number) 3821-B Tamiami Trail, Suite 201, Port Charlotte, Florida, 33952 (Address of principal executive offices including Zip Code) (941) 255-9582 (Registrant's telephone number) Securities registered under Section 12(b) of the Act: Title of each class: None Name of each exchange on which registered: None Securities Registered under Section 12(g) of the Act: Common Stock (Title of Class) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the past twelve months (or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days: Yes [_] No[X] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB: [X] State Registrant's revenues for its most recent fiscal year: $214,001 State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: $ 0 based on the absence of any bid price therefore during 1997. State the number of shares outstanding of each of the Registrant's classes of equity, as of the latest practicable date: 4,116,148 shares of common stock, as of June 22, 1998. This registration statement on Form 10-KSB, is comprised of 135 sequentially numbered pages, with the required exhibit index located at sequentially numbered page 68. Table of Contents Item Page Number Number Item Caption Item 1. 3 Description of Business Item 2. 10 Description of Properties Item 3. 24 Legal Proceedings. Item 4. 30 Submission of Matters to Vote of Security Holders Item 5. 30 Market for Common Equity and Related Stockholder Matters. Item 6. 31 Management's Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operation Item 7. 31 Financial Statements Item 8. 31 Changes in and Disagreements with Accountants Item 9. 34 Directors, Executive Officers, Promoters and control Persons; Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended. Item 10. 37 Executive Compensation Item 11. 43 Security Ownership of Certain Beneficial Owners and Management Item 12. 46 Certain Relationships and Related Transactions Item 13. 53 Exhibits, Financial Statements & Reports on Form 8-K (index) 58 Signatures 77-101 Exhibits and Additional Information This document incorporates into a single document the requirements of the Securities and Exchange Commission for the Annual Report to Stockholders and the Form 10-KSB. 2 PART I Item 1. Business (a) Historical Data Equity Growth Systems, inc. ("the Registrant"), was incorporated in Delaware on December 8, 1964, as Infotec, Inc. Its current address is 3821-B Tamiami Trail, Suite 201; Port Charlotte, Florida 33952 and its current telephone number is (941) 255-9582. On April 7, 1993, the Registrant and KSG Technologies, Inc., a Maryland corporation ("KSG") Then operating as Mercantile Realty Investors, Inc., "MRI")entered into a Plan and Agreement of Merger ("the Merger Agreement", pursuant to authorization by their respective Boards of Directors, providing for the merger of the Registrant into MRI ("the Merger"). The Merger was subsequently approved by the shareholders of MRI and MRI and the Registrant filed a registration statement with respect thereto (on FormS-4) with the Securities and Exchange Commission. Although the registration statement was declared effective, the Merger was canceled because the parties were unwilling to spend the funds required to prepare and file the applications with state securities regulatory authorities that would have been required. KSG has issued 200,000 shares of its common stock to the Registrant, as trustee for its stockholders of record as of March 23, 1995, as compensation for cancellation of the merger agreement. Such shares will be distributed to the beneficial owners at such time as management is assured that such shares can be distributed pursuant to exemptions from registration requirements under federal or state securities laws, as restricted securities subject to the holding period requirements of Securities and Exchange Commission Rule 144. The Registrant and KSG intend to seek a no action position from the staff of the Securities and Exchange Commission with reference to federal registration requirements, and to seek similar relief from state securities regulatory authorities in states where specific exemptions are not found, at such time as KSG becomes current in its reporting obligations under the Securities Exchange Act of 1934, as amended. If KSG and the Registrant obtain a satisfactory no action letter from the Securities and Exchange Commission but cannot obtain comparable relief from regulators in all states in which the Registrant has stockholders, then the 200,000 shares would be distributed pro rata, solely to stockholders residing in states where such distribution would be either exempt from registration requirements or distribution is permitted pursuant to a no-action agreement with state regulators. A copy of the agreement between the Registrant and KSG (then operating as Equity Growth Systems, Inc.; "EGSI") was filed as an exhibit to the Registrant's report on Form 10-KSB for the year ended December 31, 1994. 3 During March of 1995, the Registrant's Board of Directors elected Edward Granville-Smith, then president of KSG (then operating as EGSI), to the Registrant's Board of directors, after which, all directors other than Mr. Granville-Smith resigned. Mr. Granville-Smith, as the sole director, elected himself as president, chief executive officer and chairman of the Registrant's board of directors. Thereafter, Mr. Granville-Smith, as the sole stockholder, officer and director of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), caused Milpitas to assign interests in four leases involving five separate leased parcels of real estate (one lease covers two parcels), four promissory notes secured by mortgages on real estate leased to third parties, in each case subject to mortgages to third parties, and four demand notes with an aggregate original principal balance of approximately $163,415, to the Registrant in exchange for 1,616,000 shares of the Registrant's common stock, $0.01 par value. The demand notes are subject to an arrangement with Mr. Jerry C. Spellman (which the Registrant has agreed to honor) whereby payments thereon are used to repay a $104,000 loan by Mr. Spellman to a former holder. Milpitas thereafter distributed such stock to the Granville-Smith Trust, which thereafter transferred it to K. Walker, Ltd., a Bahamian corporation (affiliated with Mr. Granville-Smith) and Bolina Trading Company, a Panamanian corporation (affiliated with Jerry C. Spellman). Because it appeared that certain assets which Mr. Granville-Smith intended to include in such assignment may not have been included in the indenture, effective December 29, 1995, Mr. Granville-Smith, on his own behalf and as the statutory trustee and liquidating agent for Equity Growth Systems, inc., a dissolved Maryland corporation ("EGS Maryland"); and First Ken-Co Properties, Inc., a dissolved Delaware corporation ("FKP"); and as the current sole officer, director and stockholder of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), executed a corrective bill of sale (a copy of which was included as an exhibit to Registrant's Form 10-KSB for year ending December 31, 1995). The corrective bill of sale assigned the following to the Registrant: all of the assets owned by EGS Maryland and FKP, together with all of the rights of certain partnerships in which Milpitas served as sole general partner, to a series of notes secured by wrap mortgages (mortgages inferior to first mortgages) and to income from long term leases on the subject properties. The Registrant is now involved in the business of seeking to acquire and operate interests in income producing, commercial real estate. (b) Financial Information About Industry Segments. Not Applicable. (c) Narrative Description of Business. 1. The Registrant: During 1995, the Registrant issued 1,616,000 shares of its common stock, $0.01 par value, in exchange for all of the assets owned by Equity 4 Growth Systems, inc., a dissolved Maryland corporation (not to be confused with the Registrant), all of the assets owned First Ken-Co Properties, Inc., a dissolved Delaware corporation, and for all of the rights of certain partnerships in which Milpitas Investors, Inc. (a Delaware corporation) served as sole general partner), including lease income from five parcels of real estate, four promissory notes secured by mortgages on such real estate (in each case subject to mortgages to third parties), and four demand notes with an aggregate original principal balance of approximately $163,415.00 The demand notes are subject to an arrangement with Mr. Jerry C. Spellman (which the Registrant has agreed to honor) whereby payments thereon are used to repay a $104,000 loan by Mr. Spellman to a former holder thereof. One parcel and one note, (the Memphis Property), have been written off by the accountants due to non judicial foreclosure. (See litigation and Financial statements)and a second parcel and second note, (Kansas Property) is involved in litigation. (See page 6, Litigation and financial statements). Milpitas is wholly owned by Edward Granville-Smith, the Registrant's Chairman and President. Mr. Granville-Smith is one of the Registrant's two largest beneficial stockholders. Milpitas holds the following partnership interests: 1.98% general partnership interest in Montco Associates. 96.02% limited partnership interest in Montco Associates. 0.99% general partnership interest in Sound-Safe Associates. 97.01% general and limited partnership interest in Sound-Safe Associates. .495% limited partnership interest in Safe-Ten Associates .99666% limited partnership interest in San-Safe Associates .99666% limited partnership interest in Pay West Associates 0.99% general partnership interest in Paymont Associates 0.99% general partnership interest in Paynev Associates The Registrant also acquired all rights to unsecured advances aggregating $163,415 made by Milpitas to four of the limited partnerships in which it served as general partner (owning less than a 2% general partnership interest). The transactions were treated as purchases (rather than pooling of interests) for accounting purposes and consequently, the assets acquired were recorded at their estimated current values at the acquisition date. Such current values were based in part, upon the current values of the net assets and corporate interests acquired. See notes to the financial statements filed herewith. 5 2. The Notes Receivable: As of December 31, 1997, the following was true: The notes receivable were obligations of Pay West Associates, Safe-Ten Associates, San-Safe Associates and Paynor Associates, partnerships in which Milpitas has a less than 2% general partnership interest (the "Second Stage Milpitas Partnerships"). They owned the real estate which they acquired from Paymont Associates and Pay Nev Associates; Sound Safe Associates; First Ken-Co Properties, Inc.; and, Montco Associates (all either partnerships in which Milpitas served as general partner, or in the case of First Ken-Co Properties, Inc., affiliates of Milpitas, collectively referred to as the First Stage Milpitas Affiliates"). The properties were acquired by the First Stage Milpitas Affiliates through the issuance of long term notes secured by first mortgages on the properties (the "First Mortgages") to Sixth Ludingham Properties, Inc., a Delaware corporation; First Mortgage Corporation, a Washington corporation; Eleventh Wallingford Properties, Inc., a Delaware corporation; and, Sixth Basengstoke Properties, Inc., a Delaware corporation. They were then leased on a long term basis (the "Long Term Leases") and thereafter sold to the Second Stage Milpitas Partnerships, subject to the Long Term Leases and the First Mortgages, in exchange for long term notes secured by wrap mortgages (the "Wrap Mortgages;" the Second Stage Milpitas Partnerships not being obligors to the holders of the First Mortgages, but acquiring the properties subject to the rights of such holders). Consequently, the First Stage Milpitas Affiliates remain as the sole obligors on the first mortgages, but are the payees on the Wrap Mortgages and are entitled to all of the income from the Long Term Leases, including all renewals thereof. The Wrap Mortgage agreements, as currently in effect, contain repayment schedules which allocate each quarterly installment such that the interest rates vary over the term of the notes, from the stated effective interest rate. The current value of the notes on December 31, 1995 is the remaining balance reflected in the repayment schedule based on the actual effective interest rate over the effective remaining terms of the notes. SOUND SAFE ASSOCIATES, a Limited Partnership formed under the laws of Maryland, and a wholly owned subsidiary of registrant, defaulted on the mortgage on the property located in Memphis Tennessee because it was unable to satisfy the pay-off balloon payment that was due on December 31, 1996 in the amount of $174,801.00. The mortgage holder refused to negotiate with SOUND SAFE ASSOCIATES or extend the term of the mortgage and refused further amortization payments from the lessor of the underlying lease. Non Judicial Foreclosure was instituted and finalized in August, 7, 1997. Copies of the notice of foreclosure and advertisement of foreclosure are exhibits filed with form 10K-SB for 1997 6 However, as a result of foreclosure, the Registrant has written off the balance of the related wrap around mortgage receivable ($251,722) and promissory note receivable of ($93,686). See section on Description of Real Estate and Operating Data, 1. Lease Rights Currently Owned: b) Safeway Stores, Incorporated. On October 21, 1997, The District Court of Kansas entered an Order of Dismissal With Prejudice of Associated Wholesale Grocers, Inc., vs San Safe Associates, et. al. Case No. 972072WC. The order is based on a Joint Stipulation of parties involved in the litigation. A copy of the Order of Dismissal is filed as an Exhibit to Form 10-KSB for 1996. On October 20, 1997, In a mutual release, Associated Wholesale Grocers agreed to pay the sum of One Hundred Fifty Thousand Dollars ($150,000) to Fleet National Bank in exchange for the transfer of free, clear, insurable, and marketable title of the Subject Property to Four B Corporation, a Kansas corporation; Fleet National Bank receives Fifty-two Thousand ($52,000) of the above $150,000, with the remaining balance of $98,000.00 to be distributed to First Ken-Co Properties and San Safe. First Ken- Co Properties and San Safe the agreed to hold the $98,000.00 in escrow and First Ken-Co. Properties and San Safe would litigate in the State of Maryland all remaining issues between them, including the rightful disbursement of the $98,000.00 held in escrow.In that same matter, First Ken-Co. Properties seeks from the limited partners of San Safe an accounting and damages in the amount in excess of $300,000.00. Registrant holds the position that the ultimate rightful disbursement of a substantial portion of these funds is to registrant for the purposes of reduction of wrap around mortgage indebtedness and promissory note receivables. A lawsuit was filed January 7, 1998, a copy of which is attached as an Exhibit to 10-KSB for 1996,case No. 90-007033 in the Circuit Court of Maryland for Baltimore City. The attorney for Ken Co is Attorney David Albright. Mr. Albright is unwilling to communicate the status of this litigation with either a company principal or the Counsel preparing this filing. See letter dated April 22, 1998, and the letter dated May 28, 1998, attached as an exhibit to 10--KSB for 1997. The filing clerk of the Circuit Court of Maryland for Baltimore City has orally represented that there is no activity in this file since the filing in January, 1998: No service on Defendants, no responsive pleadings, no Defaults entered. The condition of this litigation is unknown. The following schedule discloses the imputed interest rates and the stated maturity dates for each loan: Effective Maturity Interest Rate Date Remaining Balance at Amount Stated Stated Maturity Date $ 910,415 12.904% 2005 $248,395 728,056 9.080% 2003 232,200 * Over the remaining effective term 7 The notes are payable in quarterly installments and total amounts due in the 8 years subsequent to December 31, 1997 and the principal portion thereof are as follows: Year Total Principal Portion * 1998 300,409 170,409 1999 300,409 180,944 2000 300,409 191,940 2001 166,861 110,996 2002 833,182 381,609 2003 60,221 47,775 2004 60,221 52,069 2005 445,616 441,252 - ------- * As specified by the repayment schedules. 3. Advances to Partnerships: The Second Stage Milpitas Partnerships were indebted to Milpitas as payors under a series of interest free loans from the general partner, called for by the respective partnership agreements. The loans were to be repaid upon sale of the real estate owned by the Second Stage Milpitas Partnerships, however, because the limited partners rejected a number of bone fide purchase offers, the Second Stage Milpitas Partnerships and Milpitas entered into an agreement during September of 1987, converting the loans into demand promissory notes, bearing no interest until called by Milpitas. Milpitas called all of the demand notes on October 1, 1987. Because the Second Stage Milpitas Partnerships were unable to make the required payments, the holders and the makers agreed that the notes would remain outstanding on a demand basis, yielding compound interest and that all funds in excess of those required to service secured debt received by the Second Stage Milpitas Partnerships, would be applied to payments on the notes. Advances to the Second Stage Milpitas Partnerships include an aggregate of $122,815 (face amount), with a current accrued amount due (based on principal plus accrued but unpaid interest as of December 31, 1996) of $148,058. The Registrant acquired all rights to such notes from Milpitas during 1995, as disclosed above. 4. Mortgages Payable: The table below summarizes the terms of the First Mortgages which are repayable in quarterly installments and are collateralized by real property owned and operated by the Second Stage Milpitas Partnerships. 8 Interest Maturity Remaining Balance at Amount Rate Date Maturity Date $ 753,493 9.75% 2001 $284,170 602,289 9.75% 2002 $226,674 $1,355,782 Total $510,844 Total Total installments due in the years subsequent to December 31, 1997 and the principal portion thereof are as follows: Year Total Principal Portion 1998 $ 299,409 $ 176,656 1999 $ 299,409 $ 194,529 2000 $ 374,919 $ 290,830 2001 $ 390,737 $ 355,520 2002 $ 337,840 $ 305,361 (d) Investment Policies: (1) The Registrant plans to invest in retail properties with a physical make-up of and improved area of between 65,000 and 400,000 square feet, and unimproved area sufficient to allow credit tenant expansion. The lease income must be 60% or more from credit tenants rated "B" or better by one of the major rating bureaus and have a duration of at least fifteen years remaining. Further, non credit leases must have at least one year remaining on their lease term. (2) The medium of exchange for the purchase will consist of cash and securities of the Registrant, as follows; a) Seventy-five percent (75%) of the purchase price is to be provided through institutional mortgages or other securitized funding. Such institutional paper must have a term of at least seven years or more and an amortization schedule of at least two to five years longer than the prime credit lease term(s). The capitalization rate of the purchased income streams (leases) must be at least one hundred and thirty percent (130%) of the financing obligation's pay rate. b) Ten to fifteen percent of the purchase price is to be provided through sale of shares of the Registrant's preferred stock (with an anticipated dividend rate of twenty-five basis points above the interest rate charged on the institutional mortgage or securitized paper) to institutional investors. In certain instances this funding may be raised through issuance of the Registrant's common stock or a combination of common and preferred securities. 9 c) The balance of the purchase price is expected to be funded through the issuance of shares of the Registrant's preferred stock to the Seller. d) Day to day management of the Registrant's properties is expected to be carried out on location by local management companies supervised by the Registrant's personnel and affiliates. e) Asset management is expected to be supervised directly by the Registrant's officers, especially Messrs. Granville-Smith, Homan, and Scimeca . (see Item 8, Directors, Executive Officers, Promoters and Control Persons). f) Although the Registrant currently owns three wrap-around first mortgages (the fourth wrap around was subject to foreclosure see Legal proceedings and accountants Financial Statements)), secured by two absolute institutional net leases from Safe-way, Inc. (See "Item 3: Legal Proceedings" for a discussion of problems experienced by the Registrant in obtaining estoppel statements from Safe-way, Inc., and other matters), and two from the Payless Group, it does not intend to invest in mortgage instruments in the future, absent unusual opportunities. Rather, the Registrant's objectives are investments in credit lease income and related retail property. As indicated, any retail property purchased must be covered by leases from institutionally rated credit tenant(s) in a ratio of at least 60% of the total income stream (lease income). It is not the intent of the Registrant to venture into any other area of the real estate industry other than warehouse space leased to credit tenants and signature office space (both "land mark" or space leased on a long term basis to credit tenants). (d) Financial Information About Foreign and Domestic Operations and Export Sales. Not applicable. Item 2. Properties. Administrative Facilities As of December 31, 1997: The Registrant has moved it's principal administrative facility. The Registrant's principal administrative facility is situated on 1000 square feet leased from Kay Walker, LTD on a gross lease basis at $500.00 per month. This is a monthly rental without a written lease and started in June, 1997. The address of the facility is 3821-B Tamiami Trail, Suite 10 201, Port Charlotte, Florida. The current facilities are, in management's opinion, in adequate condition to meet the Registrant's current requirements. Investment Property The Registrant is currently engaged in the business of acquiring interests in real estate that meet the investment parameters described in "Item I, Description of Business: .... (d) Investment Policies" above. All of the Registrant's current property rights were obtained from Mil- pitas Investors, Inc., a Delaware corporation ("Milpitas") wholly owned by Edward Granville-Smith, the Registrant's Chairman and President, or from Mr. Granville-Smith, as the statutory trustee and liquidating agent for Equity Growth Systems, inc., a dissolved Maryland corporation ("EGS Maryland"); and, First Ken-Co Properties, Inc., a dissolved Delaware corporation ("FKP"), in exchange for 1,616,000 shares of the Registrant's common stock, $0.01 par value. The demand notes included among such assets are subject to an arrangement with Mr. Jerry C. Spellman (which the Registrant has agreed to honor) whereby profits generated therefrom are used to repay a $104,000.00 loan by Mr. Spellman, to a former holder thereof. Milpitas serves as the general partner in a number of limited partnerships (the "Milpitas Partnerships"), of which now own or lease the real estate in which the Registrant has a current leasehold interest (the "Partnership Properties"). The Partnership Properties were acquired by Milpitas or its affiliates (the "First Stage Milpitas Affiliates") in exchange for purchase money notes secured by mortgages (the "First Mortgages"). The Partnership Properties were then leased to third parties and sold (subject to such leases) to related limited partnerships (in which Milpitas or its affiliates served as general partner, hereinafter referred to as the "Second Stage Milpitas Partnerships") for promissory notes secured by wrap mortgages (subordinate to the mortgages in place from Milpitas or its affiliates to the original property owners, the Wrap Mortgages"). In each case, the rights to income from the long term leases in place were retained by the First Stage Milpitas Affiliates but are now owned by the Registrant. The Registrant also now owns the Wrap Mortgages; however, the Registrant is responsible for all payments due on the First Mortgages, as described in the following tables (as of January 1, 1997): 11 A. Leases P.L. Drug Stores of Nevada and Payless Drug Stores, Inc., Lease Registrant's Lessee's Registrant's Aggregate Future Aggregate Term Aggregate Term Date Obligations Obligations (5) Net Income (2) October 1, 2000 $ 353,187 $ 247,500 $ (105,687) October 1, 2005(3) None $ 238,900 $ 238,900 October 1, 2009(4) None $ 192,500 $ 192,500 October 1, 2010(3) None $ 192,500 $ 192,500 October 1, 2015(3) None $ 192,500 $ 192,500 October 1, 2020(3) None $ 192,500 $ 192,500 October 1, 2025(3) None $ 192,500 $ 192,500 - -------- (1) Balance of underlying mortgage payments owed by the Registrant on such date. (2) Balance of underlying mortgage payments owed by the Registrant at end of then current term, after applying all lease payments to debt service. (3) Represents renewal on parcel one (4) Represents renewal on parcel two. (5) Payment of rent to the Registrant during balance of then current term. The total cumulative net income of the Registrant from the P.L. Drug Stores of Nevada and Payless Drug Stores, Inc., lease for both parcels, assuming exercise of all of the option terms, would be $1,175,072 Pay Less Drug Stores, North West, Inc., Lease Registrant's Lessee's Registrant's Aggregate Future Aggregate Term Aggregate Term Date Obligations (1) Obligations(2) Net Income October 1, 2002 None $ 262,500 $ 262,500 October 1, 2007 None $ 157,500 $ 157,500 October 1, 2012 None $ 157,500 $ 157,500 October 1, 2017 None $ 157,500 $ 157,500 October 1, 2022 None $ 157,500 $ 157,500 October 1, 2027 None $ 157,500 $ 157,500 - -------- (1) Balance of underlying mortgage payments owed by the Registrant on such date. 12 (2) Payment of rent to the Registrant during balance of then current term. The total cumulative net income of the Registrant from the Payless lease, assuming exercise of all of the option terms, would be $1,050,000 Associated Wholesale Grocers, Inc., Lease Registrant's Lessee's Registrant's Aggregate Future Aggregate Term Aggregate Term Date Obligations (1) Obligations (2) Net Income April 1, 1998 None $ 208,878 $ 208,878 April 1, 2003 None $ 133,682 $ 133,682 April 1, 2008 None $ 133,682 $ 133,682 April 1, 2013 None $ 133,682 $ 133,682 April 1, 2018 None $ 133,682 $ 133,682 April 1, 2023 None $ 133,682 $ 133,682 April 1, 2028 None $ 133,682 $ 133,682 April 1, 2033 None $ 133,682 $ 133,682 - -------- (1) Balance of underlying mortgage payments owed by the Registrant on such date. (2) Payment of rent to the Registrant during balance of then current term. The total cumulative net income of the Registrant from the Associated Wholesale Grocers, inc., lease, assuming exercise of all of the option terms, would be $1,144,652; however, Associated Wholesale Grocers, Inc., has indicated to the Registrant that it intends to exercise buy out rights pursuant to which it would only be required to pay the Registrant an aggregate sum of $150,000, from which the Registrant would be required to pay the remaining $137,000 due on underlying notes. The limited partners have retained legal counsel and are seeking to replace the general partner. Counsel for the Registrant and the general partner do not believe that the limited partners have the legal capacity to effect such change. On October 21, 1997, The District Court of Kansas entered an Order of Dismissal With Prejudice of Associated Wholesale Grocers, Inc., vs San Safe Associates, et. al. Case No. 972072WC. The order is based on a Joint Stipulation of parties involved in the litigation. A copy of the Order of Dismissal is filed as an Exhibit to this Form 10-KSB for 1996. On October 20, 1997, In a mutual release, Associated Wholesale Grocers agreed to pay the sum of One Hundred Fifty Thousand Dollars ($150,000) to Fleet National Bank in exchange for the transfer of free, clear, insurable, and marketable title of the Subject Property to Four B Corporation, a Kansas corporation; Fleet National Bank receives Fifty-two Thousand ($52,000) of the above $150,000, with the remaining balance of $98,000.00 to be distributed to First Ken-Co Properties and San Safe. First Ken- Co Properties and San Safe the agreed to hold the $98,000.00 in escrow and First Ken-Co. Properties and San Safe would 13 litigate in the State of Maryland all remaining issues between them, including the rightful disbursement of the 98,000.00 held in escrow. In that same matter, First Ken-Co. Properties is expected to seek from the limited partners of San Safe an accounting and damages in the amount in excess of $300,000.00. Registrant holds the position that the ultimate rightful disbursement of a substantial portion of these funds is to registrant for the purposes of reduction of wrap around mortgage indebtedness and promissory note receivables. As a material Subsequent event: A lawsuit was filed January 7, 1998, entitled First Ken Co Properties v. Morton, a copy of which is attached as an Exhibit to 10--KSB for 1996, case No. 90-007033 in the Circuit Court of Maryland for Baltimore City. The attorney fro Ken Co is Attorney David Albright. Mr. Albright is unwilling to communicate the status of this litigation with either a company principal or the Counsel preparing this filing. See letters dated April 22 1998 and letter dated May 28, 1998 attached as an exhibit to 10--KSB for 1997. The filing clerk of the Circuit Court of Maryland for Baltimore City has orally represented that there has been no activity in this file since the filing in January, 1998: No service on Defendants; no responsive pleadings, no Defaults entered. The condition of this litigation is unknown. B. Description of Real Estate and Operating Data 1. Lease Rights Currently Owned: The following information pertains to the lease income rights currently owned by the Registrant and described in the tables above: a) P.L. Drug Stores of Nevada and Pay Less Drug Stores. A portion of the property is owned by Pay Nev Associates and Paymont Associates, Maryland limited partnerships, and the balance is leased by Pay Nev Associates and Pay Mont Associates from Montebello Plaza Company, a California general partnership and subleased to P.L. Drug Stores of Nevada and Pay Less Drug Stores. The combined parcels are leased (and subleased) to P.L. Drug Stores of Nevada and Pay Less Drug Stores, subject to the Registrant's rights to all lease income therefrom and to the Registrant's obligations to pay the underlying note and mortgage obligations (see table above). (1) The lease is dated as of May 26, 1975 with the primary term terminating on October 1, 2000. Thereafter, the lessee has the right to extend the lease for 5 additional five year terms, ending on October 1, 2025, except for the subleased portion of the property, the term of which can only be extended for one additional nine year period. The lessee may, upon not less than 12 months' notice to the Registrant, offer to purchase the property on October 31, 2000, at a price calculated in accordance with a formula set forth in an exhibit to the lease (a copy of the lease being included as an exhibit to this report. (2) The following legal description pertains to the portion of the 14 leased property owned by Pay Nev Associates and Paymont Associates: Real property situated in the City of Sparks, County of Washoe, State of Nevada and described as follows: PARCEL A: Lot 3 of SUTTER HILL SUBDIVISION, (Subdivision Tract No. 1438), according to the map thereof, filed in the office of the County Recorder of Washoe County, State of Nevada, on November 1, 1973, under Filing No. 306755. Excepting therefrom that portion of Lot 3 described as follows: Beginning at the Southeast corner of Lot 2 of said Sutter Hill Subdivision; thence North 00 degrees 47'27" East along the Easterly line of said Lot 2; said Easterly line being common with Lot 3, a distance of 186.32 feet; thence leaving said Easterly line and proceeding South 89 degrees 12'33" East 2.52 feet; thence North 89 degrees 12'33"West 2.52 feet to the point of beginning. PARCEL B: Together with the following described parcel being a portion of Lot 2 of said Sutter Hill Subdivision being more particularly described as follows: Beginning at the most easterly NE corner of said Lot 2, as the same is shown on Sheet 2 of 2, of the map entitled "Official Platt, Sutter Hill Subdivision", filed in the Official Records of Washoe County, Nevada, November 1, 1973, as File No. 306755, and proceeding, Thence N 89 degrees 12'33" W along the northerly line of said Lot 2, a distance of 127.58 feet to a lot corner as shown on the above mentioned map, Thence leaving said northerly line and proceeding S 00 degrees 47'27" W 3.68 feet, Thence S 89 degrees 12'33" E, and parallel to the above mentioned northerly line 127.58 feet to the easterly line of said Lot 2, Thence N 00 degrees 47'27" E along said easterly line 3.68 feet to the point of beginning and containing 469.5 square feet. (3) The following legal description pertains to the portion of the leased (technically subleased) property leased by Pay Nev Associates and Paymont Associates to the sublessees: Real property situated in the City of Montebello, County of Los Angeles, State of California, described as: Parcel 1 of Parcel Map No. 5149 as shown in Maps filed in Book 54, page 67 of Parcel Maps of Los Angeles County (subject to ground lease dated October 4, 1974 and recorded November 12, 1974 in Book M4836 of Official Records, Los Angeles County Records, Page 354. (4) Basic Rent Allocations Annually Quarterly Fee Property $ 113,515.00 $ 28,378.75 15 Leasehold Property $ 60,908.50 $ 15,227.13 Total $ 174,423.50 $ 43,605.88 The lease calls for payments to the Registrant during the Basic Term of an annual basic rent (see table above) equal to the sum of the Basic Allocations described in the table above, payable in advance in equal quarterly installments on the 1st day of January, April, July, and October in each year, until October 1, 2000. (5) Lessee Renewal Options If the lessee is not in default(as defined in the lease), it will have the right to renew the term of the lease to the Fee Property, for five successive periods of five years each; and, as to the Leasehold Property, for one period of nine years, in each case by giving the Registrant notice of it's election to renew not less than six months prior to the expiration of the Basic Term or of the then current renewal term, as the case may be, each renewal term to be upon the same terms, covenants and conditions as in the Lease provided, except that: (a) there is no right to renew the term of the lease as to any Property for any period of time beyond the expiration of the last renewal term; (b) in the case of the Fee Property, the annual basic rent will be $49,500 during the first renewal term and $38,500 during each successive renewal term; and, (c) in the case of the Leasehold Property, the annual basic rent will be $26,550 during the renewal term, payable in each case in equal quarterly installments in advance. (6) Assignment of Lease Income The lease income is assigned by the Registrant to service a 30 year wrap around mortgage (the "Wrap Mortgage"). The Wrap Mortgage was issued by Paymont Associates and Paynev Associates (both Maryland limited partnerships in which Milpitas serves as general partner) to Pay West Associates, for the sum of $1,541,000 with an effective interest rate of 12.94% per annum. The Wrap Mortgage is payable quarterly on the first day of each April, July, October and January. The final payment of $248,395.00 is due January 1, 2007. The Wrap Mortgage is subordinate to a Deed of Trust dated May 20, 1975, from Paymont Associates and Paynev Associates, (collectively referred to for purposes of this paragraph as the "Grantor") to Title Insurance and Trust Company as trustee for Sixth Ludingham Properties, Inc., a Delaware corporation. The Deed of Trust secures a note of the Grantors in the original principal amount of $1,656,000 bearing interest at 16 the rate of 9.75% per annum. It matures on January 1, 2001 (the "Trust Note"). The difference between payments on the Wrap Mortgage and the Trust Note has, since October 1, 1987 when the note was called has been credited towards payment of the debt service on a demand note due to the Registrant from Pay-West Associates, a Maryland limited partnership. b) Safeway Stores, Incorporated As of December 31, 1997 the following is reported: The lease is dated as of October 15, 1975, with the primary term of the lease terminating December 31, 1996. The lease provides for six additional five year option terms; however, the lessee made an irrevocable offer to purchase the leased premises on December 31, 1996 at a price of $250,845.48. Of this amount, $179,007.48 was required to satisfy the first mortgage, also due on December 31, 1996. The Registrant rejected such offer to purchase by proper notice to lessee given prior to August 31, 1996. The legal description of the subject property is as follows: Real property and buildings and improvements thereon in the City of Memphis, County of Shelby, State of Tennessee designated as SWC Winchester Road & Mill Branch Road, to-wit: A part of Parcel No. 11, a 114,165 acre tract, as described in Deed of Warranty in Book 3142, Page 551, in Office of Register, Shelby County, Tennessee, more particularly described as follow: Beginning at a point on the West right-of-way line of Mill Branch Road, said point being the Southeast corner of Chevron Oil Company property, (also said point being 200 feet south of the intersection the West right-of-way line of Mill Branch Road and the South right-of-way line of Mill Branch Road a distance of 257.0 feet; thence S 89 degrees 55' W a distance of 379.08 feet; thence North a distance of 487.22 feet to a point on the South right-of-way line of Winchester Road; thence N 87 degrees 44' E and along said South right-of-way line of Winchester Road a distance of 72.20 feet a chord bearing and distance of N 88 degrees 49'36" E 106.82 feet to the Northwest corner of Chevron Oil Company property a distance of 200.0 feet to the point of beginning, containing 145,580 square feet of 3.342, more or less. During the year ending on December 31, 1996 (the last year of the initial term), the lease called for payment of $95,659.65 payable in equal quarterly installments of $23,914.91. The lessee extended the term of the lease for seven additional periods of five years each, at annual rentals as follows: During the initial five year option term, the annual lease payments due will be $55,312.50, payable in quarterly installments of 17 $13,828.125; and During the following six, five year renewal periods, the annual lease payments due will be $35,400, payable in quarterly installments of $8,850. The lease income has been assigned to service a 30 year wrap around mortgage owned by a wholly owned subsidiary of the Registrant, (SOUND-SAFE ASSOCIATES, a Limited Partnership formed under the Laws of Maryland) for the sum of EIGHT HUNDRED THOUSAND DOLLARS ($800,000) with an effective interest rate of 13.4983% per annum; payable quarterly with the first payment due on the last day of June 1976 with all subsequent payments due the last day of each March, June, September and December up to and including December 2006; as set forth on the amortization schedule included among the exhibits filed with the Registrant's report on Form 10-KSB for 1995 (the Sound Safe Associates Amortization Schedule). The final payment of the remaining balance of $173,128.17 is due on December 31, 2006. Each payment is credited to interest and principal as indicated on the Amortization Schedule. The above inclusive promissory note wraps and is subordinate to a note and Deed of Trust dated February 1, 1976 between the Registrant (through it's wholly owned subsidiary SOUND-SAFE ASSOCIATES, a Maryland Limited Partnership) as Grantor and Mid-South Title Company, Inc. as Trustee, and First Mortgage Corporation, a Washington Corporation, as Beneficiary, which Deed of Trust secures a note of the Grantor in the original principal amount of $875,300 bearing an interest rate of 9 3/4 per annum, due December 31, 1996. The difference between payments on the wrap around mortgage and the underlying mortgage has been (since October 1, 1987 when the note was called) and continues to be credited towards payment of the debt service of a Demand Note due the Registrant from SAFE-TEN ASSOCIATES, a Maryland Limited Partnership, (including the schedule of uncollected principal and interest which has been, and continues to accrued and being added back to the note). A copy of such note is included among the exhibits filed as a part the Registrant's report on Form 10-KSB for 1995. SOUND SAFE ASSOCIATES. A Limited Partnership formed under the Laws of the State of Maryland, defaulted on the mortgage on the property located in Memphis Tennessee because it was unable to satisfy the pay-off balloon payment that was due on December 31, 1996 in the amount of $174,801.00. The mortgage holder, Lutheran Brotherhood, refused to negotiate with SOUND SAFE ASSOCIATES, or extend the term of the mortgage and refused further amortization payments from the lessor of the underlying lease. Non Judicial Foreclosure was instituted and finalized in August, 7, 1997. Copies of the notice of foreclosure and advertisement of foreclosure are included as exhibits filed with this 10K-SB for 1996. First Bank as assignor, granted, conveyed, assigned and transferred 18 to Lutheran Brotherhood, Inc., a Minnesota corporation ("Lutheran Brotherhood"), as assignee, all First Banks rights, title and interest in and to the Original Deed of Trust, under that certain Assignment of Deed of Trust dated May 19, 1976, and filed for record as Instrument Number L2 9160 on May 28, 1976, in the Register's Office of Shelby County, Tennessee ; and Assignment of Leases under that certain Assignment of Assignment of Leases and/or Rents dated May 19, 1976, and filed for record as Instrument Number L2 9161 on May 28, 1976 and in the Register's of Shelby County, Tennessee; and to Tripartite Agreement under that certain Assignment of Tripartite, Agreement dated May 19, 1976, and recorded as Instrument Number L2 9162 in the Register's Office of Shelby County, Tennessee. A copy of the these documents are set forth as an Exhibit to10-KSB for Calender Year 1996. On August 7, 1997, the mortgage holder, Lutheran Brotherhood, foreclosed on the mortgage and purchased the fee at the scheduled foreclosure sale. As a result of these events, the Registrant has lost it's equitable interest in the property, lost it's lease income, lost income equal to the payments of the first mortgage and lost income equal to the difference between payment of the mortgage and the amount of the underlying mortgage. As a result of these events of foreclosure, the Registrant wrote off the balance of the related wrap around mortgage receivable ($251,722) and promissory note receivable of ($93,686). The Registrant, through it's new president, is considering future negotiation with Lutheran Brotherhood and the possibility of purchasing the fee. Without a successful repurchase from Lutheran Brotherhood the equity associated with this real property is lost . In addition, the Registrant is considering an action to recover the amounts due on a promissory note due from San Safe and the difference between the wrap around mortgage and the underlying mortgage foreclosed. In addition, Through August 1997, the Registrant had received funds from Sun West N.O. P. the lessee on the underlying lease which represented the monthly rent payments on the underlying lease by the tenant of the Memphis property. Because the mortgage holder would not accept any amortization payments on their matured loan from Sun West N.O.P., the Registrant was using proceeds to reduce the related wrap around mortgage receivable. c) Safeway Stores, Incorporated As of December 31, 1997, (1) The lease is dated as of January 1, 1976 with the primary term 19 of the lease extending to and including the last day of March, 1998. The Lessee made an irrevocable offer to purchase the property on December 31, 1995, at a price of $136,999.93. In July and August 1995, notices of rejection of the offer to purchase were sent. A dispute has arisen concerning the sufficiency of the notices. The Lessee increased its offer to purchase the property to $150,000; however, the limited partners of San-Safe Associates objected to the sale. The partnership is currently negotiating with holder of the underlying mortgage on the property for a determination that such mortgage has been satisfied (see "Item 3: Legal Proceedings"). (2) Fee Property All buildings, structures and other improvements including all building equipment and building equipment and building fixtures owned by Lessor, if any (including, without limitation, equipment and fixtures constituting a portion of the heating, ventilation or air conditioning systems installed in such buildings, structure or other improvement, located on that part of Tract 4031-1-1 REPLAT OF PART OF WHITE OAKS SUBDIVISION, a subdivision of land, and part of the Southwest 1/4 of the Southwest 1/4 of Section 32, Township 10, Range 24, in Kansas City, Wyandotte County, Kansas, described as follows: COMMENCING at the Southeast corner of said 1/4 Section; thence North 89 degrees 46'08" along the South line of said 1/4 1/4 Section, a distance of 275.34 feet; thence North 0 degrees 13'52" East, a distance of 60.01 feet to a point on the North right-of-way line of Parallel Avenue (as now established), and the TRUE POINT OF BEGINNING of the Tract of land to be herein described; thence continuing North 0 degrees 13'52" East, a distance of 474.81 feet to a point on the North line of said Tract 403a-1-1; thence South 89 degrees 38'40" East along the North line of said Tract 403A-1-1, a distance of 122.14 feet to an angle point therein; thence North 89 degrees 06'33" East and continuing along the North line of said Tract 403A-1-l, a distance of 125.02 feet to a point on the East right-of-way line of 81st Street, (as now established) said point being North 89 degrees 34'40" West, 30.00 feet from the East line of said 1/4 1/4 section; thence South 0 degrees 25' 20" West along the West right-of-way line of said 81st street, a distance of 23.90 feet to the point of curve in said right-of-way line; thence Southerly and Southwesterly along said right-of-way line along a curve to the right, an arc distance of 229.70 feet; thence South 7 degrees 25'20" West, tangent to the last described curve and continuing along said right-of-way line, a distance of 178.17 feet to the point of curve in said right-of-way line; thence Southwesterly along a curve to the 20 right, tangent to the last described course, having a radius of 88.31 feet, and arc distance of 67.01 feet to the intersection of said West right-of-way, a distance of 164.55 feet to a jog therein; thence North ) degrees 25'20" East along said jog, a distance of 10.00 feet; thence North 89 degrees 46'08" West and continuing along said North right-of-way line, a distance of 13.83 feet to the POINT OF BEGINNING. (3) Basic Lease Schedule For the period commencing January 1, 1976 and ending on March 31, 1998, the amount of $75,554.92 per annum, payable in equal quarter-annual installments of $18,888.73, payable on the first day of each January, April, July and October during such period. (4) Assignment of Lease Income The lease Income has been and continues to be assigned to service a thirty (30) wrap around mortgage owned by a wholly owned subsidiary of the Registrant, FIRST KEN-CO PROPERTIES, INC., A Delaware Corporation for the sum of SIX HUNDRED SIXTY-EIGHT THOUSAND FOUR HUNDRED TEN DOLLARS ($668,410.00) with an effective interest rate of 12.32% per annum; payable quarterly, due on the first day of January, June, July, and January up to and including January 1, 2005 as set as set forth on the amortization schedule included among the exhibits filed as a part the Registrant's report on Form 10-KSB for 1995 (the First Ken-Co Properties Amortization Schedule). The final payment of the remaining balance of $173,128.17 is due on December 31, 2006. Each payment is credited to principal and interest. The above inclusive promissory note wraps and is subordinate to a note and Deed of Trust dated October 29, 1990 (a revision of an inclusive Promissory Note dated November 6, 1975) between the Registrant (FIRST KEN-CO PROPERTIES, INC.), a Delaware Corporation as Mortgagor, and ELEVENTH WALLINGFORD PROPERTIES, Inc., a Delaware Corporation as Mortgagee, which Mortgage secures a note of the Mortgagor in the original principal amount of $685,000 bearing an interest rate 9 3/4% per annum, due December 31, 1995. The partnership is currently seeking a determination that such obligation has been satisfied or as to any remaining balance due claimed. The difference between payments on the wrap around mortgage and the underlying mortgage has been (since October 1, 1987 when the note was called) and continues to be credited towards payment of the debt service of a Demand Note due the Registrant from SAN-SAFE ASSOCIATES, a Maryland Limited Partnership. (including the schedule of uncollected interest and principal which is accruing and being added back to the note). A copy of such note was included among the exhibits filed as a part the Registrant's report on Form 10-KSB for 1995. 21 On October 21, 1997, The District Court of Kansas entered an Order of Dismissal With Prejudice of Associated Wholesale Grocers, Inc., vs San Safe Associates, et. al. Case No. 972072WC. The order is based on a Joint Stipulation of parties involved in the litigation. A copy of the Order of Dismissal is filed as an Exhibit to this Form 10-KSB for 1996. On October 20, 1997, Associated Wholesale Grocers , Inc., a Missouri Corporation; First Ken-Co Properties, Inc., a Delaware corporation; Fleet National Bank , a national banking association; Safeway Inc., a Delaware corporation, and San Safe Associates, a Maryland limited partnership; entered a mutual release involving the Kansas litigation and Maryland litigation and the First Ken-Co., and Safeway lease dated October 15, 1975. A copy of that mutual release is filed as an Exhibit to this Form 10-KSB for 1996. In the mutual release, Associated Wholesale Grocers agreed to pay the sum of One Hundred Fifty Thousand Dollars ($150,000) to Fleet National Bank in exchange for the transfer of free, clear, insurable, and marketable title of the Subject Property to Gour B Corporation, a Kansas corporation; Fleet National Bank receives Fifty-two Thousand ($52,000) of the above $150,000, with the remaining balance distributed to First Ken-Co Properties and San Safe at closing on October 16, 1997; On October 20, 1997, Ken-Co and San Safe agreed to settle the Kansas City Litigation, Case No. 97-2072-JWL, with Associated Wholesale Grocers,Inc., Fleet National Bank, and Safeway, Inc., but reserved claims against each other. A copy of that agreement is filed as an Exhibit. The parties agreed that $98,000.00 is to be distributed to First Ken-Co. Properties and San Safe to be held in escrow; The parties also agreed that First Ken-Co. Properties and San Safe would litigate in the State of Maryland all remaining issues between them, including the rightful disbursement of the 98,000.00 held in escrow. In that same matter, First Ken-Co. Properties is expected to seek from the limited partners of San Safe an accounting and damages in the amount in excess of $300,000.00. Registrant holds the position that the ultimate rightful disbursement of a substantial portion of these funds is to go to the registrant for the purpose of reduction of wrap around mortgage indebtedness and promissory note receivables. A lawsuit was filed January 7, 1998, a copy of which is attached as an Exhibit to the 10-KSB for 1996. A lawsuit was filed January 7, 1998, entitled First Ken Co Properties v. Morton, a copy of which is attached as an Exhibit to 10--KSB for 1996, case No. 90-007033 in the Circuit Court of Maryland for Baltimore City. The attorney for Ken Co is Attorney David Albright. Mr. Albright is unwilling to communicate the status of this litigation with either a company principal or the Counsel preparing this filing. See letters dated April 22 1998 and letter dated May 28, 1998 attached as an exhibit to 10-- KSB for 1997. The filing clerk of the Circuit Court of Maryland for Baltimore City has orally represented that there has been no activity in this file since the filing; No service on Defendants; no responsive pleadings, no Defaults entered. The condition of this litigation is unknown. d) Payless Drug Stores Northwest, Inc. 22 (1) The lease dated as of April 1, 1977 with the primary term of the lease terminating October 1, 2002. (2) Fee Property: All buildings, structures and other improvements (other than Additions) presently situated or hereafter constructed upon the Land (the "Leased Improvements"); and all easements, rights and appurtenances relating to the Land and the leased Improvements; and, all fixtures, including all components thereof, now or hereafter located in, on or used in connection with Leased Improvements, together with all replacements, modifications and alterations thereof made pursuant to the lease (collectively, the "Fixtures"). The above improvements, etc., are located on a parcel of land located in the Northeast quarter of Section 2, Township 2 South, Range 1 West, Willamette Meridian, Washington County, Oregon, more particularly describe as follows: Beginning at the most Southerly corner of Parcel II PAY LESS SHOPPING CENTER, a plat of record in Washington County, Oregon; thence following the Southeasterly line of said Parcel II North 44 degrees 50'05" East 125.69 feet; thence Northeast 45 degrees 09'55" West 4.54 feet; thence 44 degrees 50'05" East 104.00 feet to the most Easterly corner of said Parcel II; thence along the Northeasterly line of said Parcel II, North 45 degrees 09' 55" West 495.16 feet to the most Northerly corner of said Parcel II; said point being located on the Southeasterly right of way line of S.W. Main Street as shown on the plat of the aforementioned PAY LESS SHOPPING CENTER; thence following said right of way line 21.28 feet along the arc of a 150.00 foot radius curve concave to the Northwest (long chord bears South 81 degrees 00' 24" West 21.26 feet) to a point of reverse curve; thence 55.68 feet along the arc of a 380.23 foot radius curve concave to the Southeast (long chord bears South 80 degrees 53' 14" West 55.63 feet); thence South 14 degrees 36' 10" East 106.97 feet; thence South 44 degrees 31' 30" West 114.00 feet to a point on the Southwesterly line of said Parcel II; thence South 45 degrees 16' 18" East 45.225 feet to the point of beginning. (3) Basic Lease Terms The Lessee is obligated to pay to the Registrant an annual fixed rental (the "Fixed Rent") in advance of $107,964.00 payable in equal quarter-annual installments of $26,991.00 each, on the 1st day of April, July, October and January to and including October 1, 2002. The Basic Rent is paid absolutely net to the lessor, so that the lease shall yield the Lessor the full amount of the installments of Basic Rent throughout the Term. (4) Lessee Renewal Options 23 If no Event of Default has occurred and be continuing, lessee has been granted the right to extend the lease for five successive terms of five years each, upon giving written notice to the Registrant of one or more of such extensions at least one hundred eighty (180) day prior to the termination of the then current Term. During each such extended term all of the terms and conditions of the lease shall continue in full force and effect except that the annual basic rent during the first extended term is $52,500 and during each of the remaining four extended terms the annual basic rent will be $31,500, payable each extended term in equal quarter-annual installments in advance. (5) Assignment of Lease Income The lease Income has been and continues to be assigned to service a thirty (30) year wrap around mortgage issued by a wholly owned subsidiary of the Registrant, MONTCO ASSOCIATES, a Limited Partnership formed under the Laws of Maryland for the sum of ONE MILLION FIFTY-EIGHT THOUSAND TWO HUNDRED AND FIFTEEN DOLLARS ($1,058,215.00) with an effective interest rate of 9.0825 percent per annum; payable quarterly on the first day of March, June, July up to and including January 1, 2003 as set forth on the amortization schedule include among the exhibits filed as a part the Registrant's report on Form 10-KSB for 1995 (the Montco Associates Amortization Schedule). The final payment of the remaining balance $266,320.98 is due on December 31, 2002. Each payment will be credited to principal and interest as set forth in the Amortization Schedule. The above inclusive promissory note wraps and is subordinate to a note and Deed of Trust dated April 1, 1977 between the Registrant (MONTCO ASSOCIATES) as Mortgagor, and SIXTH BASINGSTOKE PROPERTIES, INC., as Mortgagee, which Mortgage secures a note of the Mortgagor in the original principal amount of $1,029,000 bearing an interest rate of 9.75% per annum, due January 1, 2003. The difference between payments on the wrap around mortgage and the underlying mortgage has been (since October 1, 1987 when the note was called) and continues to be credited towards payment of the debt service of a Demand Note due the Registrant from PAYNOR ASSOCIATES, A Maryland Limited Partnership. (including the schedule of uncollected interest and principal which is accruing and being added back to the note). A copy of such note is included among the exhibits filed as a part the Registrant's report on Form 10-KSB for 1995. Item 3. Legal Proceedings. Litigation: As of December 31, 1997; The Registrant was not a party to any legal proceedings. Although 24 the Registrant is not a party to the following proceedings directly, they involve real estate in which the Registrant has an interest: First Ken-Co Properties, Inc., v Safeway Stores, Inc., case number 96351021/CL221148, in the Circuit Court for Baltimore County, Maryland (the "Maryland Case"); and, Associated Wholesale Grocers, Inc., v San Safe Associates, et. al., case number 97-2072-JWL , in the United States District Court for the District of Kansas (the "Kansas Case"). The current tenant (by assignment from the original tenant) for the Registrant'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 Registrant) 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 original 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 defendant/tenant has answered, alleging that because of subsequent assignments of the lease, notice to prior parties in interest was not adequate and consequently, that the Registrant's counsel failed to take the steps required to properly reject such offer as to all potential parties involved. 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 initiated 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 Case has contested 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). Because the Registrant is not a party, its potential exposure ap pears to be limited to sharing in the proceeds of a forced sale, if the litigation is determined in favor of the current tenant. 1. On October 21, 1997, The District Court of Kansas entered an Order of Dismissal With Prejudice of Associated Wholesale Grocers, Inc., vs San Safe Associates, et. al. Case No. 972072WC. The order is based 25 on a Joint Stipulation of parties involved in the litigation. A copy of the Order of Dismissal is filed as an Exhibit to Form 10-KSB for the year ending December 31, 1996. On October 20, 1997, Associated Wholesale Grocers , Inc., a Missouri Corporation; First Ken-Co Properties, Inc., a Delaware corporation; Fleet National Bank, a national banking association; Safeway Inc., a Delaware corporation, and San Safe Associates, a Maryland limited partnership; entered a mutual release involving the Kansas litigation and Maryland litigation and the First Ken-Co .And Safeway lease dated October 15, 1975. A copy of that mutual release is filed as an Exhibit to Form 10-KSB for the year ending 1996. In the mutual release, Associated Wholesale Grocers agrees to pays the sum of One Hundred Fifty Thousand Dollars ($150,000) to Fleet National Bank in exchange for the transfer of free, clear, insurable, and marketable title of the Subject Property to Gour B Corporation, a Kansas corporation; Fleet National Bank receives Fifty-two Thousand ($52,000) of the above $150,000, with the remaining balance distributed to First Ken-Co Properties and San Safe at closing on October 16, 1997; On October 20, 1997, Ken-Co and San Safe agreed to settle the Kansas City Litigation, Case No. 97-2072-JWL, with Associated Wholesale Grocers,Inc., Fleet National Bank, and Safeway, Inc., but reserved claims against each other. A copy of that agreement is filed as an Exhibit to this Form 10-KSB for the year ending December 31, 1996. The parties agreed that $98,000.00 is to be distributed to First Ken-Co. Properties and San Safe to be held in escrow; The parties also agree that First Ken-Co. Properties and San Safe will litigate in the State of Maryland all remaining issues between them, including the rightful disbursement of the 98,000.00 held in escrow; The litigation to take place inn the Circuit Court for Baltimore City. Maryland; As a Material Subsequent event; A lawsuit was filed January 7, 1998, entitled First Ken Co Properties v. Morton, a copy of which is attached as an Exhibit to 10--KSB for 1996, case No. 90-007033 in the Circuit Court of Maryland for Baltimore City. The attorney fro Ken Co is Attorney David Albright. Mr. Albright is unwilling to communicate the status of this litigation with either a company principal or the Counsel preparing this filing. See letters dated April 22, 1998, and letter dated May 28, 1998, attached as an exhibit to 10--KSB for 1997. The filing clerk of the Circuit Court of Maryland for Baltimore City has orally represented that there has been no activity in this file since the filing since January, 1998: No service on Defendants; no responsive pleadings, no Defaults entered. The condition of this litigation is unknown. 2. Sound Safe Associates, defaulted on the property located in Memphis Tennessee because it was unable to satisfy the pay-off balloon payment that was due on December 31, 1996 in the amount of $174,801.00. Non Judicial Foreclosure was instituted and finalized in August, 7, 1997. Copies of the Notice of Foreclosure and advertisement of Foreclosure are included as exhibits filed with 10K-SB for 1996. Sound Safe may have certain rights under Tennessee Law concerning equity of concerning any 26 procedural defects in the non-judicial foreclosure. It is possible after examination of the legal issues by Tennessee counsel this matter might result in further legal action. Furthermore, Sound Safe is obligated to pay a wrap around mortgage that is more than the above described mortgage. The difference between the payment due and the wrap around mortgage has reduced the amount of a certain debt owed by San Safe to the Registrant. The Registrant may have a cause of action against either San Safe or Sound Safe or both for payment of the San Safe indebtedness. In addition, the Registrant is considering an action to recover the amounts due on a promissory note due from San Safe and the difference between the wrap around mortgage and the underlying mortgage foreclosed The registrant has used its best efforts to obtain information concerning the litigation and potential litigation issues now pending and reported above, however , David Albright, Jr., the lead counsel on most of these issues described in litigation and potential litigation, has been unwilling to effectively comment or communicate with Registrant's officers, attorney's and agents concerning the litigation and potential litigation. It is possible that Registrant is unaware of certain actions taken by Mr. Albright on behalf of Registrant concerning litigation or potential litigation.. Unless communication improves Registrant is considering appropriate action against Mr Albright for his failure to effectively communicate. Copy of letter to Mr. Albright is attached as an Exhibit to this 10-KSB for 1996, and other letters are attached as Exhibits to 10-KSB for 1997. Potential Litigation: As of December 31, 1997, Based on information available to the Registrant, it believes that there is a potential for litigation involving: 1. San Safe Associates limited partners (who have retained counsel to assist them in removing an affiliate of the Registrant as general partner). Management has retained legal counsel who is negotiating with counsel for the limited partners on behalf of the Registrant and the general partner. See Item 2, Description of Properties Investment Property - A. Leases - Associated Wholesale Grocers, Inc., Lease. 2. The Registrant's predecessors in interest (the Milpitas partnerships) entered into negotiations with Exten Ventures, Inc., a Delaware corporation, during 1990, for sale of the assets subsequently assigned to the Registrant. The Milpitas Partnerships have advised the Registrant's management that the transactions were never concluded due to the inability or refusal of Exten Ventures, Inc., to comply with its commitments. While management notes that applicable status of limitation on any alleged transactions with Exten Ventures, Inc., have probably expired, management cannot 27 provide any assurances that Exten Ventures, Inc., will not initiate litigation in the future. 3. The Registrant has not made the final payments required under the mortgage for its Kansas City property, although it continues to make periodic payments which the mortgagor has continued to accept. 4. The Registrant has used its best efforts to obtain information concerning the assets it obtained from Milpitas; however, much of the information was under the control of Charles Schnepfe, Milpitas' accountant, who served for material periods as its chief executive officer and as the chairman of its board of directors. Mr. Schnepfe refuses to provide any information with respect to activities by Milpitas during the time it was under his control, to the Registrant. It is possible that the Registrant is unaware of matters performed or ignored by Mr. Schnepfe which could prove material in the future. Mr. Schnepfe was provided with a copy the Registrant's report on Form 10-KSB for 1995 with instructions to comment on any inaccuracies or deficiencies but did not indicate that any existed, having refused to respond. 5. From August to October, 1997 the Registrant has received additional funds from Sun West N.O.P. for rent on the Tennessee property that had been subject to the non-judicial foreclosure on August 7, 1997. Demand for return of these rents paid after the date of the Non- Judicial foreclosure. The Registrant has not returned the rents as of the filing of this 1996 10KSB. 6. The registrant has used its best efforts to obtain information concerning the litigation and potential litigation issues now pending and reported above, however, David Albright, Jr., the lead counsel on most of these issues described in litigation and potential litigation, has been unwilling to effectively comment or communicate with Registrant's officers, attorney's and agents concerning the litigation and potential litigation. It is possible that Registrant is unaware of certain actions taken by Mr. Albright on behalf of Registrant concerning litigation or potential litigation. Unless communication improves Registrant is considering appropriate action against Mr Albright for his failure to effectively communicate. Copy of letter to Mr. Albright is attached as an Exhibit to this 10-KSB for 1996, and other letters are attached as Exhibits to 10-KSB for 1997. 7. Other Legal Matters: As of December, 31 1997, The Registrant is seeking to determine the remaining balance due on underlying mortgages involving the Safe-way, Inc., property and believes that the remaining balance is approximately $40,000. However, a trustee involved in the transaction has advised the Registrant's counsel that it should be compensated for services associated with such mortgage. Consequently, the Registrant cannot currently quantify the total costs 28 that will be required to discharge such mortgage. During August of 1997, Mr. Gene R. Moffitt resigned as the Registrant's President, Asset Manager and Chief Operating Officer of the Registrant. It is the Company's position that this resignation violated the terms of his employment and acquisition agreements, the Registrant is of the opinion that Mr Moffitt should voluntarily return all of the Registrant's common stock that has been issued to him. Should such securities not be voluntarily returned, the Registrant would probably sue Mr. Moffitt for its return alleging breach of contract. Mr. Moffitt submitted his letter of resignation dated August 1, 1997, In his letter Mr. Moffitt stated the resignation was due to a failure to communicate concerning certain operations of business and business activities of the Chairman of the Board. Mr Moffit gave no specific reasons for his resignation. A Copy of the letter of Resignation is attached as an Exhibit to Form 10-KSB for the year ending December 31, 1996. It is the Registrant's position that Mr. Moffitt failed to properly communicate with the Registrant. On the 28th day of November, 1997, The Board of Directors of the Registrant accepted the resignation of Gene R. Moffitt on the basis that Mr. Moffitt, individually and through the entity known as Moffitt Properties, LTD., exercised poor judgement in recent efforts to acquire certain properties and Mr. Moffitt has failed to communicate with the Board of Directors in a timely and appropriate fashion. Copy of the Board of Directors"s Resolution is attached as an Exhibit to Form 10-KSB for the year ending December 31, 1996. On the same day, The Board of Directors of the Registrant dismissed and removed Rafi Weiss from the position of Senior Vice President of Acquisitions. For what ever reason, known only to Mr. Weiss, he failed or refused to cooperate with counsel in an effort to prepare a basic due diligence package concerning this filing. A copy of the Board of Director's Resolution is attached as an Exhibit. To form 10-KSB for the year ending December 31, 1996. Mr. Weiss's failure to cooperate is in direct violation of his employment agreement, and as such, the registrant will negotiate with Mr. Weiss for the voluntary return of the common stock of the Registrant that has been issued to him. Non Judicial Matters of Concern: The Real Property and building improvements, thereon in the City of Memphis, County of Shelby, designated as SWC Winchester Road & Mill Branch Road, were subject to a Non Judicial Foreclosure on August 7, 1997. See Description of Real Estate and Operating data, Safeway Stores, Inc. 29 Item 4. Submission of Matters to a Vote of Security Holders. The Registrant did not submit any matter to a vote of security holders during its fiscal year ended December 31, 1997. PART II Item 5. Market for Registrant's Common Equity and Related Stock- holder Matters. (a) Market Information. The Registrant's Common Stock has been traded in the past in the over-the-counter market. However, there is currently no established public trading market for the Common Stock. Information regarding quotations of bid and asked prices for the Common Stock is not currently reported by the National Quotation Bureau. Accordingly, there is no information available to the Registrant as to bid quotations during the quarterly periods in the years 1993, 1994, 1995 or 1996, 1997 as called for by this Item. Immediately following filing of this report, the Registrant intends to prepare a disclosure document complying with the requirements of Securities and Exchange Commission Rule 15c2-11, and to have a Form 15c2-11 filed with the National Association of Securities Dealers, Inc., by a member thereof, permitting resumption of trading in the Registrant's securities. Management can provide no predictions as to the trading value of the Registrant's securities, if and when trading resumes. (b) Holders. The number of holders of record of Common Stock, $.01 par value, of the Registrant (its sole class of common equity) as of the close of business on March 31, 1998 was approximately 2,230. (c) Dividends. The Registrant has not declared any dividends on its Common Stock, and does not expect to do so at any time in the foreseeable future. The Registrant expects to pay dividends on its preferred stock after its issuance, in order to permit its use as a method to pay for real estate acquisitions. (d) Selected Financial Data. The following selected financial data should be read in conjunction with the financial statements of the Registrant and the notes thereto included elsewhere herein. 1994 1995 1996 1997 Net Revenues * ** $ 0 154 225 214 Income/(loss) from Operations (17,136) (41) (250) (73) Income/(loss) from Operations Per Share *** ( .01) (.0167) (.072) (.019) 30 Total Assets 4,843 2,584,527 2,055,534 1,669,468 Total Liabilities 61,029 1,917,582 1,618,255 1,304,832 Stockholders' Equity (Deficit) (56,186) 666,945 437,579 364,636 * As noted in Part I Item 1 above, in March 1974, the Registrant was forced to discontinue its operations as a result of the foreclosure by the Registrant's principal creditor, on its security interest in the Registrant's operating assets. Until March of 1995, the Registrant's activities were limited to the collection of royalties under the License Agreement and the Victor Agreement and the disbursement of funds under the Creditors Plan as described in Item 1 in Part I. Those activities ceased in August 1991. ** Revenue for 1997 includes lease, interest and wrap mortgage income. *** Earnings per share were calculated using the weighted average of common stock issued and outstanding. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operation During the year ended December 31, 1997 the Registrant reported income of approximately $214,000 as compared to income from all sources of $225,000 during the prior year ended. During the year ended December 31, 1997 the Registrant's cost of revenue was approximately $142,317, as compared to $300,090 during the prior year. The increase was attributable to the bad debt expense incurred for the year ending December 31, 1997. During the year ended December 31, 1997 the Registrant reported a net loss of approximately $(73,000.00), or $(.019) per share, compared to 250,000 or (.073) per share during the prior year end. The increase in net loss primarily reflects the bad debt expense previously discussed. Liquidity and Capital Resources As of December 31, 1997 the Registrant had a working capital position of approximately $(50,000) as compared to a working capital position of $(243,000) for the year ended December 31, 1996. ACCOUNTANT GIVE DETAILS: The Company has sustained loses of properties each of the last two years, however, the write off resulting from the loss of property was greater in the 1996 than in the year 1997. Item 7. Financial Statements. Inserted at item 13. Item 8. Changes in and Disagreements with Accountants. 31 General In conjunction with the change in control of the Registrant during 1995, it replaced the auditor used by former management, William C. Kugler, C.P.A., of Woodbury, New York, with Leo J. Paul, P.A., of Miami, Florida. There were no disputes or disagreements associated with such change. During March of 1996, Mr. Paul advised the Registrant that despite having committed to prepare the audit for 1995, other commitments made it impossible for him to perform his duties, whereupon the registrant retained its current auditor, Joel S. Baum, P.A. Correspondence pertaining to Mr. Paul was filed with the Securities and Exchange Commission in a 12b-25 Notification during March of 1996 and is incorporated herein by reference. Mr. Kugler Mr. Kugler's report on the financial statements for either of the past two years contained no adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the Registrant's two most recent fiscal years and any subsequent interim period preceding Mr. Kugler's resignation, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Mr. Kugler would have caused him to make a reference to the subject matter of the disagreement(s) in connection with his report. None of the following events occurred during the Registrant's two most recent fiscal years and any subsequent interim period preceding Mr. Kugler's resignation, reportable events"): (A) Mr. Kugler's having advised the Registrant that the internal controls necessary for the Registrant to develop reliable financial statements do not exist; (B) Mr. Kugler's having advised the Registrant that information had come to Mr. Kugler's attention that led him to no longer be able to rely on management's representations, or that made him unwilling to be associated with the financial statements prepared by management; (C) (1) Mr. Kugler's having advised the Registrant of the need to expand significantly the scope of its audit, or that information came to Mr. Kugler's attention during the time period covered by Item 304(a)(1)(iv) of Securities and Exchange Commission Regulation SK, that if further investigated might have (i) materially impacted the fairness or reliability of either: a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that might have prevented him 32 from rendering an unqualified audit report on those financial statements), or (ii) caused him to be unwilling to rely on management's representations or be associated with the Registrant's financial statements, and (2) due to Mr. Kugler's resignation (due to audit scope limitations or otherwise) or dismissal, or for any other reason, Mr. Kugler did not so expand the scope of his audit or conduct such further investigation; or (D) (1) Mr. Kugler's having advised the Registrant that information came to Mr. Kugler's attention that he has concluded materially impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to Mr. Kugler's satisfaction, would prevent him from rendering an unqualified audit report on those financial statements), and (2) due to Mr. Kugler's resignation or for any other reason, the issue was not resolved to Mr. Kugler's satisfaction prior to his resignation, dismissal or declination to stand for re-election. Mr. Paul Mr. Paul's report on the financial statements for either of the past two years contained no adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the Registrant's two most recent fiscal years and any subsequent interim period preceding Mr. Paul's resignation, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Mr. Paul would have caused him to make a reference to the subject matter of the disagreement(s) in connection with his report. None of the following events occurred during the Registrant's two most recent fiscal years and any subsequent interim period preceding Mr. Paul's resignation, reportable events"): (A) Mr. Paul's having advised the Registrant that the internal controls necessary for the Registrant to develop reliable financial statements do not exist; (B) Mr. Paul's having advised the Registrant that information had come to Mr. Paul's attention that led him to no longer be able to rely on management's representations, or that made him unwilling to be associated with the financial statements prepared by management; 33 (C) (1) Mr. Paul's having advised the Registrant of the need to expand significantly the scope of its audit, or that information came to Mr. Paul's attention during the time period covered by Item 304(a)(1)(iv) of Securities and Exchange Commission Regulation SK, that if further investigated might have (i) materially im- pacted the fairness or reliability of either: a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that might have prevented him from rendering an unqualified audit report on those financial statements), or (ii) caused him to be unwilling to rely on management's rep- resentations or be associated with the Registrant's financial statements, and (2) due to Mr. Paul's resignation (due to audit scope limitations or otherwise) or dismissal, or for any other reason, Mr. Paul did not so expand the scope of his audit or conduct such further investigation; or (D) (1) Mr. Paul's having advised the Registrant that information came to Mr. Paul's attention that he has concluded materially Impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to Mr. Paul's satisfaction, would prevent him from rendering an unqualified audit report on those financial statements), and (2) due to Mr. Paul's resignation or for any other reason, the issue was not resolved to Mr. Paul's satisfaction prior to his resignation, dismissal or declination to stand for re-election. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons#; Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended. Name Age Term Positions Edward Granville-Smith, Jr. 65 * Chairman of the Board of Directors, Director, Chief Executive Officer; Gene R. Moffitt 55 *** President, Asset Management, Chief Operating Officer; Rafi Weiss 36 ** Senior Vice President, Acquisitions; Donald E. Homan 55 ** Vice President & Chief Financial Officer; Charles J. Scimeca 53 ** Secretary & Treasurer - ------ # In addition to the Directors, Executive officers, are the following control persons or potential control persons: Jerry C. Spellman, 34 William A. Calvo, III, Joseph D. Radcliffe, Diversified Corporate Consulting Group, L.L.C. Elected on March 23, 1995, by the board of directors of the Registrant, to serve as a director until the next annual meeting of the Registrant's stockholders, and until his successors are elected, qualified and assume their offices. Service as an officer is at the pleasure of the board of directors. In November, 1997 was elected as President and Chief Operating Officer. ** Elected on March 31, 1996, and hold office at the pleasure of the Registrant's Board of Directors. In November, 1997 Rafi Weiss was removed from his position with the Registrant in November, 1997. *** Elected on March 31, 1996, and resigned on August 2, 1997. Resignation accepted by the Registrant's Board of Directors in November, 1997. Biographies of Directors, Officers and Director Nominees 1. Edward Granville-Smith, Jr. As of December 31, 1997, E. Granville-Smith, Jr., age 66, has since March 23, 1995, served as the Registrant's president, as a member of its Board of Directors (in which he serves as Chairman) and as the Registrant's Chief Executive Officer. He was President of Equity Growth Systems, Inc., a Registrant specializing in structuring and marketing mortgage backed securities as well as the acquisition of select commercial real estate for its own account. From 1981 to the present, he has been a real estate consultant and principal involved in various aspects of commercial real estate financing and syndication, both internationally and domestically. One primary accomplishment during this period was the successful sale of the real estate assets of some twenty-nine limited partnerships to both domestic and foreign investors. From 1972 through 1980, he was Chairman of the Board, Chief Executive Officer and President of United Equity Corporation, a Registrant which was primarily involved in the structuring, financing and marketing, through the syndication of various tax incentive ventures with an aggregate valuation in excess of $100 million. From 1959 through 1972, Mr. Granville-Smith, Jr. built the Washington Insurance Agency, Inc., and became the Chairman of one of the top one percent of insurance brokerage houses in the Washington area. Mr. Granville-Smith, attended Brown University from September, 1951 through June, 1952 at which time he entered the United States Marine Corps. Upon discharge from the Marine Corps in 1955, he enrolled in the Georgetown University School of Foreign Service and graduated in June of 1959 with a B.S.F.S. degree. Mr. Granville-Smith's professional affiliations include CLU and CPCL. E. Granville Smith, Jr. was elected President an Chief operating Officer of the Registrant to serve at the pleasure of the Registrant's Board of Directors in addition to his duties as of December 31, 1996. 35 Gene R. Moffitt As of December 31, 1997, Gene R. Moffitt, age 55, no longer serves as the Registrant's Executive Vice President for Asset Management and Chief Operating Officer. On August 2, 1997 Mr. Moffitt resigned as President and Chief Operating Officer of the Registrant. On the 29th day of November, 1997, the Registrant accepted the resignations. Rafi Weiss As of December 31, 1997, Mr. Weiss, age 38, no longer serves as the Registrant's vice president for acquisitions. In November, 1997, the Board of Directors removed Mr. Weiss from the above positions. Donald E. Homan Mr. Homan, age 57, is the Vice-President and Chief Financial Officer of the Registrant. Mr. Homan has been in the Mortgage Banking business since 1980. In that period of time Mr. Homan has been a regional manager and senior vice president for the national mortgage company, Waterfield/RealAmerica Mortgage Corporation of Fort Wayne, Indiana. Mr Homan has also served as President of his own Registrant, Homan Financial Corporation located in Kansas City, Missouri. Prior to entering the mortgage banking business, Mr. Homan was a real estate appraiser for Job Real Estate Appraisers and O'Flaherty Company, both of Kansas City, Missouri. Mr. Homan's appraisal expertise has been primarily focused in commercial and income producing properties. Mr. Homan started his real estate career in 1969 in the commercial real estate brokerage business. Mr. Homan graduated from Rockhurst College in 1965 with a Bachelor of Arts Degree. Mr. Homan has been a member of the Mortgage Bankers Association since 1980 and a member of the National Association of Review Appraisers from 1986 through 1993. Charles J. Scimeca Charles J. Scimeca, age 56, serves as the secretary and treasurer of the Registrant and as the president of Equity Growth Systems Realty, Inc., a wholly owned subsidiary of the Registrant formally named Coast To Coast Realty. Equity Growth Systems Realty, Inc., was acquired by the Registrant during 1996 and is headquartered in Clearwater, Florida. Mr. Scimeca has served as the president of Equity Growth Systems Realty, Inc., since its formation in 1982. From 1980 until 1982, Mr. Scimeca was on sabbatical, exploring business opportunities in various industries. From 1975 until 1980, Mr. Scimeca served as chief operating officer for Andy Frain Maintenance & Security, Inc., headquartered in Chicago, Illinois. His responsibilities included budgeting and implementing cleaning services for high rise office, retail and industrial properties for such notable clients as Standard Brands, JMB Realty, John Hancock Insurance Company and 36 other Fortune 500 companies. From 1965 until 1975, Mr. Scimeca was the owner and manager of the Mecca Restaurant, a full-service family owned multi-unit restaurant business headquartered in Chicago, Illinois. He is a member of the Clearwater Association of Realtors and International Council of Shopping Centers. He holds a degree in Business Administration. Family Relationships. There are no family relationships among the current officers and directors of the Registrant. Involvement in Certain Legal Proceedings. Based on information provided in response to questionnaires filed as exhibits to this report, except as otherwise disclosed in this Report, during the five year period ending on December 31, 1997, no current director, person nominated to become a director, executive officer, promoter or control person of the Registrant has been a party to or the subject of: (1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) Any conviction in a criminal proceeding or has been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) Been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. Compliance with Section 16(a) of the Securities Exchange Act of 1934, as Amended To the best of the Registrant's knowledge, no one engaged in any transactions in the Registrant's securities during 1996, except with reference to receipt of securities from the Registrant, as described in this report. Item 10. Executive Compensation. 37 (a) Prior to March 23, 1995 In March 1993, the Board of Directors of the Registrant authorized the issuance of 25,000 shares of Common Stock (valued for this purpose at $.01 per share) to Solomon Manber as compensation for various consulting services which he had performed for the Registrant. Such shares were issued in May 1993. Except as set forth in the preceding paragraph, neither Mr. Wulfing nor Mr. Manber received any cash or other compensation whatsoever from the Registrant for services rendered during the fiscal years ending December 31, 1991, 1992, 1993 or 1994 as an officer or director, or in any other capacity. There is no compensation plan or arrangement which would result in a payment to either Mr. Wulfing or Mr. Manber upon his resignation, retirement or termination of employment, or a change in his responsibilities following a change in control of the Registrant. (b) After March 23, 1995 No current officers or directors of the Registrant have ever received any compensation from the Registrant, except, as follows: Edward Granville-Smith Employment Agreement On May 22, 1995, the Registrant entered into a five year employment agreement with Edward Granville-Smith, its current sole director, president and chief executive officer. A copy of such agreement is filed as an exhibit to this report. The agreement provided the following compensation: (a) 110,000 shares of the Registrant's newly authorized common stock, $0.01 par value, the shares to be registered on Securities and Exchange Commission Form S-8 and listed with any exchange or trading system on which other shares of the Registrant's Common Stock are subsequently listed. (b) An annual bonus payable in shares of the Registrant's common stock, determined by dividing 5% of the Registrant's pre-tax profits for the subject calendar year by the average bid price for the Registrant's common stock during the last five trading days prior to the end of the last day of each year and the first five days of the new year, provided, however, that the employment agreement must have been in effect for at least one business day during the subject year. (c) An annual salary in a sum equal to the lesser of 5% of the Registrant's annual gross income, on a calendar basis, or 15% of its 38 net pre-tax profit, all as determined for federal income tax purposes, without taking depreciation or tax credits into account, to be paid on or before the 30th day of March of the year following the calendar year for which such salary is due; provide, however, that subject to availability of cash flow, Mr. Granville-Smith will be entitled to a monthly draw against his salary rights of $2,500 per month, but subject to review on a quarterly basis, with the expectation of the parties that it will be substantially increased as increased profits and cash flow from operations permit. (d) Mr. Granville-Smith shall, in addition to the foregoing, be entitled to a benefit package equal to the most favorable benefit package provided by the Registrant or its subsidiaries to any of their employees, officers, directors, consultants or agents. (e) The Registrant will defend, indemnify and hold Mr. Granville-Smith Mr. Granville-Smith and his personal advisors and attorneys harmless from any and all liabilities, suits, judgments, fines, penalties or disabilities, including expenses associated directly, indirectly or incidentally therewith (e.g. legal fees, court costs, travel, lodging and meal expenses, investigative costs, witness fees, etc.) resulting from any actions or failures to act on behalf of the Registrant, whether in the past or future, to the fullest extent legally permitted, and in conjunction therewith, shall assure that all required expenditures are made by the Registrant in a manner making it unnecessary for Mr. Granville-Smith or his personal advisors or attorneys to incur any out of pocket expenses. Pursuant to the terms of the employment agreement, Mr. Granville-Smith was entitled to receive $27,863 in cash and an amount of the Registrant's common stock equal to $27,863 divided by the average bid price for the Registrant's common stock during the last five trading days prior to the end of 1996 and the first five trading days of 1997. Because there was no bid price during such period (and the resulting number would therefore have been infinite), Mr. Granville-Smith has agreed to defer determination of his stock compensation until the first day that bids for the Registrant's common stock are quoted on the NASDAQ bulletin board system. Consequently, the quantity of stock issuable to him cannot currently be determined. In addition, because management deemed that the Registrant's cash flow should be conserved, Mr. Granville-Smith has agreed to defer payment of his annual bonus. Stock Issued in Exchange for Assets Mr. Granville-Smith, as the sole stockholder, officer and director of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), caused Milpitas to assign interests in four leases involving five separate leased parcels of real estate (one lease covers two parcels), four promissory notes secured by mortgages on such real estate (in each case subject to mortgages to third parties), and four demand notes with an aggregate original principal balance of approximately $160,000 to the Registrant, in exchange for 1,616,000 shares of the Registrant's common stock, $0.01 par value. 39 The demand notes are subject to an arrangement with Mr. Jerry C. Spellman (which the Registrant has agreed to honor) whereby payments thereon are used to repay a $104,000 loan by Mr. Spellman to a former holder thereof. Milpitas thereafter distributed such stock to the Granville-Smith Trust, which thereafter transferred it to K. Walker, Ltd., a Bahamian corporation (affiliated with Mr. Granville-Smith) and Bolina Trading Company, a Panamanian corporation (affiliated with Jerry C. Spellman). Because it appeared that certain assets which Mr. Granville-Smith intended to include in such assignment may not have been included in the indenture, effective December 29, 1995, Mr. Granville-Smith, on his own behalf and as the statutory trustee and liquidating agent for Equity Growth Systems, inc., a dissolved Maryland corporation ("EGS Maryland"); and First Ken-Co Properties, Inc., a dissolved Delaware corporation ("FKP"); and as the current sole officer, director and stockholder of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), executed a corrective bill of sale (a copy of which is included as an exhibit to this registration statement). The corrective bill of sale assigned the following to the Registrant: all of the assets owned by EGS Maryland and FKP, together with all of the rights of certain partnerships in which Milpitas Investors, Inc. (a Delaware corporation) served as sole general partner, to a series of notes secured by wrap mortgages (mortgages inferior to first mortgages) and to income from long term leases on the subject properties. Bolina Trading Co., S.A. On May 26, 1995, the Registrant entered into a consultant agreement with Bolina Trading Co., S.A., a Panamanian corporation. A copy of such consulting agreement is filed as an exhibit to this report. Pursuant to the terms of the consulting agreement, Bolina Trading Co., S.A., will serve as a special advisor to Mr. Granville-Smith, in conjunction with Mr. Granville-Smith's role as an officer and director of the Registrant, with special responsibilities in the areas of strategic planning and raising debt or equity capital required to implement the Registrant's strategic plans. In conjunction wit the foregoing, the consultant will make available to Mr. Granville-Smith, the services of J. C. Spellman, its managing director, or of other personnel acceptable to Mr. Granville-Smith, on an as needed basis, provided that, such services shall not exceed 520 hours per year without an additional payment of $100 per additional hour. As compensation for the consultant's services, the Registrant is required to register on Securities and Exchange Commission Form S-8 and thereafter, immediately issue to the consultant, 84,000 shares of its common stock, no further payments being required unless the Registrant requires the consultant to provide more than 520 hours of services per year, in which case the consultant will be entitled to an additional payment of $100 per additional hour. 40 Messrs. Scimeca, Moffitt and Homan During June of 1996, the Registrant recruited three executive officers, Messrs. Charles J. Scimeca, Gene R. Moffitt and Donald E. Homan. Mr. Scimeca is a Florida resident and Messrs. Homan and Moffitt both have offices in Kansas City, Missouri. Such recruitment was effected in two parts, first, the Registrant exchanged 100,000 shares with each person (300,000 shares in the aggregate), for all of the capital stock in their corporations (Mr. Scimeca's corporation was formed in 1983 and its name was recently changed to Equity Growth Realty, inc.; Messrs. Homan's and Moffitt's corporations, Moffitt Properties, Ltd., and Homan Equities, Inc., are both recently organized Missouri corporations). Immediately following such acquisitions the Registrant and the subject corporation entered into employment agreements with the respective officer. Each employment agreement was materially identical and provides for the following compensation (the subject corporation being identified a the "Subsidiary"): .... (a) An annual bonus payable in shares of the Registrant's common stock, determined by dividing 10% of the Subsidiary's pre-tax profits for the subject calendar year by the average bid price for the Registrant's common stock at during the last five trading days prior to the end of the last day of each year and 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 Subsidiary's parent, the common stock of such entity will be issuable hereunder, rather than that of the Registrant. (b) An annual cash bonus equal to 40% of the Subsidiary'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 that $6,250; subject to availability of cash flow. During August of 1997, Mr. Moffitt resigned as an officer of the Registrant because of delays in implementing its proposed plan of operation. Because such resignation violated the terms of his employment and acquisition agreements, as described above, the Registrant is negotiating for him to voluntarily return all of the Registrant's common stock that has been issued to him (as described above). Should such securities not be voluntarily returned, the Registrant would probably suit Mr. Moffitt for its return alleging breach of contract (see Item 3, Legal Proceedings). In November, 1997, The Board of Directors terminated Mr. Rafi Weiss as an officer of the Registrant because of unwillingness to communicate with the Registrant. Because such resignation violated the terms of his employment and acquisition agreements, as described above, the Registrant is negotiating 41 for him to voluntarily return all of the Registrant's common stock that has been issued to him (as described above). Should such securities not be voluntarily returned, the Registrant would probably suit Mr. Moffitt for its return alleging breach of contract (see Item 3, Legal Proceedings). Compensation Committee Interlocks and Insider Participation. Except as described above or the subsequent event described below, the only decision which was made by the Registrant's Board of Directors since January 1, 1993 regarding compensation of an executive officer was the determination to issue stock to Mr. Manber, as described above. Mr. Manber abstained from voting on such matter. In view of the foregoing, the remaining information called for by this Item is inapplicable. Long-Term Incentive Plan ("LTIP") Awards Table Neither the Registrant nor any subsidiary thereof has any long term incentive plans, except as described above or the subsequent event described below. Compensation of Directors Standard Arrangements In the future, subject to availability of funds, all members of the Registrant's board of directors will be paid a per diem fee of $300 dollars for attendance at meetings of the board of directors and committees thereof. Such compensation will, at the option of the Registrant, be paid in cash or in shares of the Registrant's common stock, based on the mean closing bid price therefore reported on the date of the meeting. In addition, if required, members of the Registrant's board of directors will be reimbursed for travel expenses and lodging is arranged for them, at the Registrant's expense. At such time as adequate funds are available, all directors (and officers) of the Registrant will be covered by liability insurance. Outside directors (those who are not officers or employees of the Registrant) will generally be issued 10,000 shares of the Registrant's common stock (post reverse split) as an inducement to become directors; however, the stock will be subject to total forfeiture in the event that the director does not serve in such role for at lease 365 days. Directors will be reimbursed for all out of pocket expenses incurred in the performance of their roles, subject to provision of receipts in form and substance adequate to satisfy Internal Revenue Service audit requirements (e.g., long distance telephone, postage, etc.). Other Arrangements Neither the Registrant nor any of its subsidiaries have any other 42 arrangements to compensate its directors. Employment contracts, termination of employment & change-in-control arrangements. The Registrant does not have any compensatory plan or arrangement, including payments to be received from the Registrant, with respect to a named executive officer that results or will result from the resignation, retirement or any other termination of such executive officer's employment with the Registrant and its subsidiaries or from a change-in-control of the Registrant or a change in the named executive officer's responsibilities following a change-in-control, which, including all periodic payments or installments, exceeds $104,000, except as follows: Section 1.4 of the Registrant's employment agreement with Mr. Granville-Smith provides as follows: "In the event that this Agreement is terminated by the Registrant for any reason, including those set forth in Section 1.3, or, if it is terminated because of a discontinuance of business as a result of a corporate reorganization or change in management, then the Chief Executive Officer will be entitled to all of the compensation called for by this Agreement, payable, to the extent possible, in one lump sum payment to be provided concurrently with such termination. In conjunction with such termination, any stock options to which the Chief Executive Officer will be entitled at the time of termination will be converted into the immediate right to receive the difference between the exercise price therefor and the average offering price for the Registrant's common stock during the ten days preceding such termination, but in no event less than $1.00 per share option." Item 11. Security Ownership of Certain Beneficial Owners and Management. As of December 31, 1996, the Registrant had 3,771,148 shares of common stock outstanding. The following information pertains to the ownership of such securities by the Registrant's principal stockholders, officers and directors. As a material subsequent event, as of December 18, 1997, the Registrant had 3,826,148 shares of common stock outstanding. (a) Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of the date of this Registration Statement, the number and percentage of shares of common stock owned of record and beneficially by any group (as that term is defined for purposes of Section 13(d)(3) of the Exchange Act), person or firm that owns more than five percent (5%) of the Registrant's outstanding common stock (the Registrant's only class of voting securities). 43 Name and Address of Amount of Nature of Percent of Beneficial Owner * Shares Ownership Class ++ Edward Granville-Smith 1,055,000# ** 27.6% 3821-B Tamiami Trail, Suite 201 Port Charlotte Florida, 33952 Jerry C. Spellman 867,691## *** 22.7% 2510 Virginia Avenue, NW Washington, D.C. 20037 Charles J. Scimeca 450,000 *** 10.93% 23698 US Highway 19 North Clearwater, 34265 Cyndi N. Calvo and William A. Calvo, III 365,000 + 8.87% 1941 Southeast 51st Terrace **** Ocala, Florida 34471 Joseph D. Radcliffe 365,000 + 8.87% 84 Clum Hill Road ***** Elka Park, New York 12427 - ----- # The 1995 10-KSB erroneously showed the amount of shares to be 954,000. The correct amount was 945,000. Scrivener's error transposed the 954,000 for 945,000 ON THE 1995 10-ksb. ## The 1995 10-KSB erroneously reports that Mr Spellman is erroneously reported the amount of shares to be 954,000 shares. The same scriveners error mentioned above is partially responsible for the error, but a second error is the number of shares issued. The correct number of shares issued to persons or entities controlled by Mr. Spellman was 867,691. * Includes all stock held either personally or by affiliates. ** Beneficial ownership, record ownership is held by K. Walker, Ltd., a Bahamian corporation and also 110,000 shares of stock in the record ownership of Warren McFaddin. *** Beneficial ownership, record ownership is held by Bolina Trading Company, a Panamanian corporation of all but 2701 shares. 2400 shares are held by Mr Spellman personally and 301 shares held by First Investment Planning Company.. **** Record ownership of 40,000 shares, and joint record ownership with wife, Cyndi N.Calvo of 100,000 shares. in addition, wife, Cyndi N. Calvo has record ownership of 40,000 shares. Three children have 40,000 shares each in Trust with Mr Calvo as Trustee. 65,000 shares effectively transferred to Southeast Companies, Inc., from Diversified Corporate Consulting Group, Inc., on June, 16, 1998, are included. Mrs. Calvo is the principal stockholder, Sole Director, and Chief Executive Officer of Southeast Companies, Inc. ***** Record ownership of 200,000 shares. In addition, son, Michael Radcliffe has record ownership of 50,000 shares and son, Dennis Radcliffe has record ownership of 50,000 shares. 65,000 shares 44 effectively transferred to Vanessa Radcliffe, from Diversified Corporate Consulting Group, Inc., on June, 16, 1998, are included. + Does not include an additional 150,000 shares held by other members of Diversified Corporate Consulting Group, LLC, or their families Which effectively divested it's shares on June 16, 1998. (see Item 12: Certain Relationships and Related Transactions). Messrs. Calvo and Radcliffe are principals in Diversified Corporate Consulting Group, LLC. As a material subsequent event, on June 16, 1998, Diversified Corporate Consulting Group, LLC. Divested itself of the 150,000 shares in order to clarify that it was not acting in concert with and member of the Radcliffe or Calvo families. The 150,000 shares held by diversified and transferred as follows: 65,000 shares to Vanessa Radcliffe, daughter of Joseph Radcliffe and 65,000 shares were conveyed to Southeast Companies, Inc., a company owned by Cyndi N. Calvo. These shares are listed in the totals of Calvo or Radcliffe, respectively, however as of the date of this 10-K, the stock transfer though effectuated by Diversified, has not been changed by the stock transfer company. (b) Security Ownership of Management The following table sets forth, as of the date of this Registration Statement, the number and percentage of the equity securities of the Registrant, its parent or subsidiaries, owned of record or beneficially by each officer, director and person nominated to hold such office and by all officers and directors as a group. Title of Name of Amount Nature of Percent of Class Beneficial Owner Shares Ownership Class + Common Edward Granville-Smith 1,055,000 ** 27.6% Common Gene R. Moffitt 100,000 *** 2.6% + Common Rafi Weiss 50,000 *** 1.3% ++ Common Donald E. Homan 100,000 *** 2.6% Common Charles J. Scimeca 450,000 *** 10.93% Common All officers and directors as a group (5 people) 1,605,000 ** *** 41.95% ----- * Includes all stock held either personally or by affiliates. ** Beneficial ownership, record ownership is held by K. Walker, Ltd., a Bahamian corporation. *** Record & Beneficial. + Because Mr. Moffitt has resigned without meeting the terms of his employment or acquisition agreements, the Registrant intends to recover all of the securities heretofore issued to him (see Item 3, Legal Proceedings"). ++ Because Mr. Weiss has been removed from his position with the company and has violated his employment or acquisition agreements the Registrant intends to recover all of the securities heretofore 45 issued to him (see item 3, legal proceedings). To the best knowledge and belief of the Registrant, there are no arrangements, understandings, or agreements relative to the disposition of the Registrant's securities, the operation of which would at a subsequent date result in a change in control of the Registrant. (c) Parents of the Registrant The following table discloses all persons who are parents of the Registrant (as such term is defined in Securities and Exchange Commission Regulation C), showing the basis of control and as to each parent, the percentage of voting securities owned or other basis of control by its immediate parent if any. Percentage Other of Voting Basis Basis for Securities For Name Control Owned Control Edward Granville-Smith, Jr. Office 27.6% Officer & Director ** J. C. Spellman Shares Held 22.7% Consultant * ** Charles J. Scimeca Share 10.93 Officer ------- Mr. Spellman is the Managing Director of Bolina Trading Co., S.A., a Panamanian corporation, which owns the subject shares. Control is effectively in the hands of Kay Walker, LTD. Bolina Trading Company. Edward Granville Smith is the Managing Director of and US Registered Agent for Kay Walker, LTD. Edward Granville Smith, Jr., is also the sole director, Chief Executive Officer, of the issuer. Mr Spellman is the Managing Director ogf Bolina Trading Co., S.A. (d) Changes in Control. There are no arrangements, known to the Registrant, the operation hich mat at a subsequent date result in a change in control of the Registrant, except that on January 30, 1998 Charles J. Scimeca was issued the 150,000 shares of company common stock bringing his total stock holding to 450,000 shares. Item 12. Certain Relationships and Related Transactions. Prior to March 23, 1995 In March 1993, the Registrant's Board of Directors authorized the issuance of 22,848 shares of Common Stock (valued for this purpose at $.01 per share) to certain shareholders who had agreed to accept such shares in full settlement of their unpaid claims for accrued interest aggregating $24,354 on the Debentures and Note described in Item 1(a)(i) of the 1991 10-K. The number of shares to be issued to each payee was determined pro 46 rata in accordance with the respective amounts of the claims. 15,011 of such shares were issued in May 1993 to George Wulfing (President and a director of the Registrant, and the beneficial owner of 6.98% of its outstanding voting securities). Mr. Wulfing abstained from voting on such matter insofar as it pertained to the issuance of shares to himself. Subsequent to March 23, 1995 Mr. George Wulfing, the Registrant's president until March 23, 1995, has represented to current management that, except for liabilities to the Registrant's attorneys and accountants associated with compliance with Securities and Exchange Commission reporting obligations, all of the Registrant's liabilities to creditors are older than six years, and are no longer enforceable as a result of the expiration of applicable statutes of limitation. Edward Granville-Smith, the Registrant's president since March 23, 1995, has negotiated a settlement agreement with the Registrant's attorneys pursuant to which they accepted the right to receipt of 20,000 shares of the Registrant's common stock, immediately after an increase in the Registrant's authorized capitalization is effected, in lieu of all outstanding obligations as of March, 1995. A copy of the subject agreement is included as an exhibit to 10-KSB for the year ending December 31, 1995. Mr. Granville-Smith, Registrant's Chairman, President and Chief Executive Officer, loaned the Registrant approximately $45,000, $14,800 of which was used for legal expenses, and $8,000 of which was used to pay the registrant's accountants for prior work and for the costs of updating the Registrant's reports under the Securities Exchange Act of 1934, as amended, including this Report. Mr. Granville-Smith has converted such loan into additional capital contributions (i.e., he has elected to neither require repayment of such debt nor issuance of additional common stock in consideration therefor; rather, only the tax basis for the common stock he already owns has been increased). In addition, the Registrant's prior accountants have agreed to accept the right to receipt of 3,072 shares of the Registrant's common stock, immediately after an increase in the Registrant's authorized capitalization is effected, in lieu of all outstanding obligations as of March, 1995. Issuance of Securities to Related Parties Edward Granville-Smith Employment Arrangement On May 22, 1995, the Registrant entered into a five year employment agreement with Edward Granville-Smith, its current sole director, president and chief executive officer. A copy of such agreement is filed as an exhibit to this current report. The agreement provided the following compensation: 47 (a) 110,000 shares of the Registrant's newly authorized common stock, without par value, the shares to be registered on Securities and Exchange Commission Form S-8 and listed with any exchange or trading system on which other shares of the Registrant's Common Stock are subsequently listed. (b) An annual bonus payable in shares of the Registrant's common stock, determined by dividing 5% of the Registrant's pre-tax profits for the subject calendar year by the average bid price for the Registrant's common stock during the last five trading days prior to the end of the last day of each year and the first five days of the new year, provided, however, that the employment agreement must have been in effect for at least one business day during the subject year. (c) An annual salary in a sum equal to the lesser of 5% of the Registrant's annual gross income, on a calendar basis, or 15% of its net pre-tax profit, all as determined for federal income tax purposes, without taking depreciation or tax credits into account, to be paid on or before the 30th day of March of the year following the calendar year for which such salary is due; provide, however, that subject to availability of cash flow, Mr. Granville-Smith will be entitled to a monthly draw against his salary rights of $2,500 per month, but subject to review on a quarterly basis, with the expectation of the parties that it will be substantially increased as increased profits and cash flow from operations permit. (d) Mr. Granville-Smith shall, in addition to the foregoing, be entitled to a benefit package equal to the most favorable benefit package provided by the Registrant or its subsidiaries to any of their employees, officers, directors, consultants or agents. (e) The Registrant will defend, indemnify and hold Mr. Granville-Smith and his personal advisors and attorneys harmless from any and all liabilities, suits, judgments, fines, penalties or disabilities, including expenses associated directly, indirectly or incidentally therewith (e.g. legal fees, court costs, travel, lodging and meal expenses, investigative costs, witness fees, etc.) resulting from any actions or failures to act on behalf of the Registrant, whether in the past or future, to the fullest extent legally permitted, and in conjunction therewith, shall assure that all required expenditures are made by the Registrant in a manner making it unnecessary for Mr. Granville-Smith or his personal advisors or attorneys to incur any out of pocket expenses. To date, only the stock compensation has been paid. Acquisition of Assets Mr. Granville-Smith, as the sole stockholder, officer and director of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), caused Milpitas to assign interests in four leases involving five separate leased parcels of real estate (one lease covers two parcels), four promissory notes secured by mortgages on such real estate (in each case subject to 48 mortgages to third parties) and four demand notes with an aggregate original principal balance of approximately $160,000 to the Registrant, in exchange for 1,616,000 shares of the Registrant's common stock, $0.01 par value. The demand notes are subject to an arrangement with Mr. Jerry C. Spellman (which the Registrant has agreed to honor) whereby payments thereon are used to repay a $100,000 loan by Mr. Spellman to a former holder. Milpitas thereafter distributed such stock to the Granville-Smith Trust, which thereafter transferred it to K. Walker, Ltd., a Bahamian corporation (affiliated with Mr. Granville-Smith) and Bolina Trading Company, a Panamanian corporation (affiliated with Jerry C. Spellman). Because it appeared that certain assets which Mr. Granville-Smith intended to include in such assignment may not have been included in the indenture, effective December 29, 1995, Mr. Granville-Smith, on his own behalf and as the statutory trustee and liquidating agent for Equity Growth Systems, inc., a dissolved Maryland corporation ("EGS Maryland"); and First Ken-Co Properties, Inc., a dissolved Delaware corporation ("FKP"); and as the current sole officer, director and stockholder of Milpitas Investors, Inc., a Delaware corporation ("Milpitas"), executed a corrective bill of sale (a copy of which is included as an exhibit to this registration statement). The corrective bill of sale assigned the following to the Registrant: all of the assets owned by EGS Maryland and FKP, together with all of the rights of certain partnerships in which Milpitas Investors, Inc. (a Delaware corporation) served as sole general partner, to a series of notes secured by wrap mortgages (mortgages inferior to first mortgages) and to income from long term leases on the subject properties. Bolina Trading Co., S.A. On May 26, 1995, the Registrant entered into a consultant agreement with Bolina Trading Co., S.A., a Panamanian corporation. A copy of such consulting agreement is filed as an exhibit to the current report. Pursuant to the terms of the consulting agreement, Bolina Trading Co., S.A. ("Bolina"), serves as a special advisor to Mr. Granville-Smith, in conjunction with Mr. Granville-Smith's role as an officer and director of the Registrant, with special responsibilities in the areas of strategic planning and raising debt or equity capital required to implement the Registrant's strategic plans. In conjunction with the foregoing, Bolina is required to make available to Mr. Granville-Smith, the services of J. C. Spellman, its managing director, or of other personnel acceptable to Mr. Granville-Smith, on an as needed basis, provided that, such services may not exceed 520 hours per year without an additional payment of $100 per additional hour. As compensation for Bolina's services, the Registrant registered (on Securities and Exchange Commission Form S-8) and converted to Bolina, 84,000 shares of its common stock. The Registrant has agreed to honor an obligation owed by Mercantile Realty Investors, Inc., to the WEFT Trust, an off shore trust affiliated with Bolina. The obligation, in the original amount of $102,000, was based on loans made by such trust, to be repaid from income generated by leases that have subsequently been acquired by the Registrant. To date, 49 only interest payments have been made. The Registrant has recently memorialized its obligations in an instrument requiring it to repay the $102,000 in loans plus 10% interest. A copy of such instrument is filed as an exhibit to this report. Diversified Corporate Consulting Group, LLC On April 2, 1996, the Registrant entered into an agreement with Diversified Corporate Consulting Group, LLC, a Delaware limited liability Registrant ("Diversified"), pursuant to which it agreed to provide the Registrant with a broad range of assistance and in consideration for which the Registrant agreed to provide Diversified with the following compensation: payment at Diversified's standard hourly rates for all work as to which a prior written arrangement with different terms has not been entered into; payment for documents prepared by Diversified on existing forms at $50 per page (as an initial licensing fee) augmented by the time spent in personalizing the subject form; and, an option to purchase 200,000 shares of the Registrant's common stock registered on Securities and Exchange Commission Form S-8, for the aggregate sum of $80,000. In addition, in an unrelated transaction, Diversified acquired 110,000 shares of the Registrant's free trading securities from Mr. Warren A. McFadden, in exchange for an agreement to discharge $30,000 in liabilities assumed by Mr. McFadden to creditors of the Registrant. From April to September of 1997, the Registrant and Diversified entered into a settlement agreement pursuant to which, in extinguishment of approximately $110,000 owed by the Registrant to Diversified for services rendered under the engagement agreement and $30,000 owed by Diversified to the Registrant (as a result of assumption of a promissory note from Mr. McFadden to the Registrant), Diversified accepted the 200,000 shares registered on Form S-8 and assigned to Mr. Granville-Smith, the 110,000 shares of the Registrant's common stock acquired from Mr. McFadden. Such transaction was more particularly described in a current report on Form 8-K filed by the Registrant with the Securities and Exchange Commission during September of 1997. In addition to the shares described above, principals of Diversified and their families own an additional 600,000 restricted shares of the Registrant's common stock, although the holding period requirements under SEC Rule 144 pertaining thereto have been met. As a material subsequent event, on June 16, 1998, Diversified terminated it's consulting function with the company and divested itself of 150,00 shares of the common stock. As a material subsequent event, on January 30, 1998, the company transferred to Sara Sanders wife of Al Sanders, Trustee for Liberty Transfer Company, 100,000 shares of the company common stock for the purposes of securing Mr Sanders services as a consultant to the Company. The stock was issued in lieu of compensation. A Director's Resolution providing that 75,000 of these shares were to bear a restriction per rule 144d and 25,000 shares were to be issued as free trading. A form 8 S--B was to be filed with the S.E.C. Mrs Sanders declined the tender concerning the free trading stock and instead, had all 100,000 shares are issued 50 pursuant to exemptions 4(2) under the securities Act of 1933 as amended. Mr. Sanders is married to Sara Sanders, who is the sole owner of Liberty Transfer Company. A copy of the resolution of the Board of Directors is attached as an Exhibit to this 10-KSB for 1997. As a material subsequent event, on January 30, 1998, Charles J. Scimeca was issued 150,000 additional shares of company common stock bringing his total stock holdings to 450,000 shares of the company common stock. This 150,000 shares were issued bearing a restriction per 144d as compensation for efforts made to by Scimeca to secure acqursiton targets and for other purposes. Mr. Scimeca is secretary and treasurer of the company. A copy of the resolution of the Board of Directos is attached as an Exhibit to this 10-KSB for 1997. Employment contracts, termination of employment & change-in-control arrangements. Termination Arrangements Section 1.4 of the Registrant's employment agreement with Mr. Granville-Smith provides as follows: "In the event that this Agreement is terminated by the Registrant for any reason, including those set forth in Section 1.3, or, if it is terminated because of a discontinuance of business as a result of a corporate reorganization or change in management, then the Chief Executive Officer will be entitled to all of the compensation called for by this Agreement, payable, to the extent possible, in one lump sum payment to be provided concurrently with such termination. In conjunction with such termination, any stock options to which the Chief Executive Officer will be entitled at the time of termination will be converted into the immediate right to receive the difference between the exercise price therefor and the average offering price for the Registrant's common stock during the ten days preceding such termination, but in no event less than $1.00 per share option." Messrs. Scimeca and Homan will enjoy similar rights after they have been in the employ of the Registrant for two years (approximately June of 1998). Additional Employment Agreements During June of 1996, the Registrant recruited three executive officers, Messrs. Charles J. Scimeca, Gene R. Moffitt and Donald E. Homan. Mr. Scimeca is a Florida resident and Messrs. Homan and Moffitt both have offices in Kansas City, Missouri. Such recruitment was effected in two parts, first, the Registrant exchanged 100,000 shares with each person (300,000 shares in the aggregate), for all of the capital stock in their corporations (Mr. Scimeca's corporation was formed in 1983 and its name was recently changed to Equity Growth Realty, inc.; Messrs. Homan's and Moffitt's corporations, Moffitt Properties, Ltd., and Homan Equities, Inc., are both recently organized Missouri corporations). Immediately following such acquisitions the Registrant and the subject corporation entered into employment agreements with the respective officer. Each employment agreement was materially identical and provides for the 51 following compensation (the subject corporation being identified a the "Subsidiary"): (a) An annual bonus payable in shares of the Registrant's common stock, determined by dividing 10% of the Subsidiary's pre-tax profits for the subject calendar year by the average bid price for the Registrant's common stock at during the last five trading days prior to the end of the last day of each year and 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 Subsidiary's parent, the common stock of such entity will be issuable hereunder, rather than that of the Registrant. (b) An annual cash bonus equal to 40% of the Subsidiary'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, subject to availability of cash flow. The initial guaranteed draws are $2,000 for Mr. Scimeca and $6,250 for Messrs. Homan and Moffitt. As a material subsequent event, during August of 1997, Mr. Moffitt resigned as an officer of the Registrant because of delays in implementing its proposed plan of operation. Because such resignation violated the terms of his employment and acquisition agreements, as described above, the Registrant is negotiating for him to voluntarily return all of the Registrant's common stock that has been issued to him (as described above). Should such securities not be voluntarily returned, the Registrant would probably suit Mr. Moffitt for its return alleging breach of contract (see Item3, Legal Proceedings"). Mercantile Realty Settlement On June 20, 1995, the Registrant and Equity Growth Systems, inc., a Maryland corporation formerly operating under the name Mercantile Realty Investors (SEC File Number 33-64526) but now operating as KSG Technologies, Inc., entered into an agreement for settlement of any potential claims resulting from their mutual decision to cancel a merger agreement between them. A copy of the agreement has been incorporated by reference as an exhibit to the 10-KSB for the year ending December 31, 1995. Recapitalization On May 18, 1995, the holders of 1,018,106 of the 2,000,000 shares of the Registrant's common stock adopted a resolution by execution of a written consent in lieu of stockholders meeting pursuant to which they authorized amendments to the Registrant's certificate incorporation be amended as required to change the name of the Registrant to "Equity Growth 52 Systems, inc." and to change the Registrant's authorized capitalization as follows: (a) The 2,000,000 shares of common stock, $0.001 par value then authorized, all of which were currently outstanding, were reverse split into 200,000 shares, $0.01 par value; and, immediately thereafter; (b) The Registrant'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 Registrant was authorized to issue 5,000,000 shares of preferred stock, the attributes of which are to be determined by the Registrant'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. In addition, the actions taken by the Registrant's immediately past board of directors during March of 1995, as reflected in the secretarial certificate executed by Solomon Mamber, then the Registrant's secretary, on March 23, 1995, were ratified, approved and confirmed; and, Registrant's officers were authorized, empowered and directed to take all actions either necessary or expedient to accomplish all of the foregoing directives. During the week of May 22, 1995 through May 26, 1995, the Registrant's officers filed a certificate of amendment accomplishing the foregoing amendments, with the Delaware Secretary of State, and filed a notification pursuant to Securities and Exchange Commission Rule 10b-17 with the National Association of Securities Dealers, Inc. Copies of the certificate of amendment and 10b-17 notification have been incorporated by reference as exhibits to the 10-KSB for the year ending December 31, 1995. Item 13. Exhibits, Financial Statements and Reports on Form 8-K. (a) Index to financial statements and financial statement schedules. The audited balance sheet of the Registrant for its years ended December 31, 1997, and 1996 and related statements of operations, stockholder's equity and cash flows for the years ended December 31, 1997, and 1996 follow in sequentially numbered pages numbered 62 through 66. The page numbers for the financial statement categories are as follows: 53 Exhibit Description Page Description 59 Cover Page (Joel S. Baum, C.P.A.) 60 Table of Contents 61 Report of Independent Accountants - December 31, 1997 and 1996; 62-63 Balance Sheet - December 31, 1997 and 1996; 64 Statements of Income and Accumulated Deficit, December 31, 1997 and 1996; 65 Statements of Shareholders' Deficit, December 31, 1997 and 1996; 66 Statementof Cash Flows - December 31, 1997 and 1996; and 67-76 Notes to Financial Statements - December 31, 1997 and 1996. (b) 8-K Reports No reports on Form 8-K were filed during the last quarter of the calendar year ended December 31, 1997. One report on Form 8-K dealing with the settlement agreement between the Registrant and Diversified was filed during the third quarter of 1997. (c) Exhibits: Exhibit Description 2.1 Plan and Agreement of Merger dated April 7, 1993 between the Registrant and Mercantile Realty Investors, Inc. (1) 2.2 Amendment dated May 25, 1993 to Plan and Agreement of Merger. (3) 2.3 Agreement pertaining to cancellation of the merger between the Registrant and Equity Growth Systems, Inc. (4) 2.4 Stock Exchange Agreement re Homan Equities, Inc., (6) 2.5 Stock Exchange Agreement re Moffitt Properties, Ltd.. (6) 2.6 Stock Exchange Agreement re Equity Growth Realty, inc.. (6) 3.1 Certificate of Incorporation of the Registrant. (2) 3.11 Certificate of Amendment to Certificate of Incorporation (May, 1995). (4) 10.1 Agreement for settlement of outstanding claims with the Registrant*s attorneys. (4) 10.2 Agreement for settlement of outstanding claims with the Registrant*s accountants. (4) 10.3 Employment Agreement with Edward Granville--Smith. (4) 54 10.4 Consultant Agreement with Bolina Trading Co., S.A. (4) 10.5 Settlement Agreement between Registrant and Equity Growth Systems, inc., a Maryland corporation. (5) 10.6 Assignment of Indenture of Trust by Milpitas, Inc., including Indenture of Trust. (6) 10.7 Engagement agreement with Diversified Corporate Consulting Group, LLC. (6) 10.8 Corrective Bill of Sale. (6) 10.9 (a) Employment Agreement with Gene R. Moffitt. (6) (b) Resignation of Gene R. Moffitt 10.10 Employment Agreement with Donald E. Homan. (6) 10.11 Employment Agreement with Charles J. Scimeca. (6) 10.12 Repayment Agreement with WEFT Trust. (6) 10.13 Settlement between Registrant, Diversified, and Trustee (8) 10.14 Assignment of Deed of Trust: L29160 (7) 10.15 Assignment of Leases and! or Rents L2 9161 (7) 10.16 Assignment of Tripartite Agreement L29162 (7) 10.17 Agreement: First Ken--Co with San Safe dated Oct 20, 1997 (7) 10.18 Statement of Unanimous Consent by Ken--Co Properties (7) 10.19 General Warranty Deed dated October 20, 1997, Kansas property (7) 10.20 Termination of Memorandum of lease., Kansas property (7) 10.21 Mutual Release dated October 20 1997 (7) 16.01 Letter re: Change in Certifying Accountant. (6) 17.01 Moffett Letter of Resignation (7) 17.02 Corporate Resolution Dismissing Vice President for Acquisitions. (7) 55 21 Subsidiaries.(6) 23.1 Auditor*s Consent (Baum).(6) 23.2 Auditor*s Consent (Kugler).(6) 23.3 Auditor*s Consent (Baum) (7) 24.4 Auditor*s Consent (Baum) (9) 99.1 Notifications to National Association of Securities Dealers, Inc., pursuant to Securities and Exchange Commission Rule IOh--17. (4) 99.2 Real Estate Title Reports for Nevada/California, Tennessee, Kansas and Oregon properties subject to Wrap Mortgages and Leases. (6) 99.03 Substitute Trustee*s Deed , Memphis Property (7) 99.04 Proof of Publication, Memphis Property (7) 99.05 Order of Dismissal with Prejudice: Case No 97--2072 (7) 99.6 Letter to David Aibright, Esq. Dated December 18, 1997. (7) 99.7 Complaint for Declaratory Judgement: First Ken Co. V. JJ Martin et. al. (7) 99.8 Letter to David Aibright, Esq. Dated April 22, 1998. (9) 99.9 Letter to David Aibright, Rsq. Dated May 28, 1998. (9) 99.10 Real Estate Title Reports for Nevada/California, Tennessee, Kansas and Oregon properties subject to Wrap Mortgages and Leases. (9) 99.11 Director's Resolution as to shares of company common stock to officer and transfer agent 56 (1) Filed as exhibit 2 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992; incorporated by reference herein as an Exhibit hereto. (2) Filed as an exhibit to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (3) Filed as an exhibit to the Registrant's registration statement on Form S-4, filed together with Mercantile Realty Investors, registration number 33-64526, declared effective by the Securities and Exchange Commission on June 24, 1994, at the identical exhibit designation numbers; and, incorporated by reference herein as an exhibit hereto. (4) Filed as an exhibit to the Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1994, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (5) Filed as an exhibit to the Registrant's Report on Form 8-K dated July 14, 1995, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (6) Filed as an exhibit to the Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1995, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (7) Filed as an exhibit to the Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1996, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (8) Filed as an exhibit to the Form 8-K for period dated September 8, 1997, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. (9) Filed as an exhibit to the Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1997, bearing the exhibit designation number shown above; incorporated by reference herein as an exhibit hereto. 57 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized. Dated: June 25, 1998 Equity Growth Systems, inc. By: /s/ Edward Granville-Smith --------------------------------- Edward Granville-Smith, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Edward Granville-Smith Chairman & Chief Executive June 25, 1998 - -------------------------- Officer and Sole Director Edward Granville-Smith /s/ Donald E. Homan Vice President & Chief - ------------------------- Financial Officer June 26, 1998 Donald E. Homan 58 EQUITY GROWTH SYSTEMS, INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 59 EQUITY GROWTH SYSTEMS, INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 TABLE OF CONTENTS Page FINANCIAL STATEMENTS Independent auditor's report 1 Balance sheets 2 - 3 Statements of operations 4 Statements of shareholders' equity 5 Statements of cash flows 6 Notes to financial statements 7 - 16 60 BAUM & COMPANY, P.A. Certified Public Accountant 1515 University Drive, suite 209 Coral Springs, Florida 33071 (954) 752-1712 INDEPENDENT AUDITOR'S REPORT To the Shareholders of Equity Growth Systems, Inc. Port Charlotte, Florida We have audited the balance sheets of Equity Growth Systems, Inc. at December 31, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We were unable to obtain a discussion or evaluation from the Company's outside legal counsel of pending or threatened litigations described in Note 14. In our opinion, except for the effects on the 1997 and 1996 financial statements of such adjustments, if any, as might have been determined to be necessary have we been able to obtain a discussion or evaluation of pending or threatened litigation from the Company's outside legal counsel as discussed in the preceding paragraph, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Equity Growth Systems, Inc., as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. May 4, 1998 Coral Springs, Florida 61 EQUITY GROWTH SYSTEMS, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ---- ---- Current Assets Cash and cash equivalents $ - 0 - $ 962 Other receivables 98,580 - 0 - Mortgage receivable, current portion(Notes 6 and 7) 150,380 160,436 Promissory notes, current portion (Note 8) 5,480 6,844 ----------- ----------- Total Current Assets 254,440 168,242 ----------- ----------- Equipment Net of $2,022 accumulated depreciation at December 31, 1997 and 1996 - 0 - - 0 - ----------- ---------- Other Assets Mortgages receivable (Notes 6 and 7) 1,121,257 1,577,559 Promissory Notes (Notes 8) 245,345 264,029 Interest Receivable 48,426 46,004 ----------- ----------- Total Other Assets 1,415,028 1,887,592 ----------- ----------- Total Assets $ 1,669,468 $ 2,055,834 =========== =========== 62 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Cash Overdraft $ 4 $ - 0 - Accounts Payable And Other Current liabilities(Note 3) 5,000 12,990 Mortgage payable, current portion (Note 7) 164,693 276,605 Note Payable (Note 9) 135,476 121,946 ----------- ----------- Total Current Liabilities 305,169 411,541 Long-Term Liabilities Mortgage payable (Note 7) 999,663 1,206,714 ----------- ----------- Total Liabilities 1,304,832 1,618,255 ----------- ----------- Shareholders' Equity (Note 13) Preferred Stock - no par value authorized-5,000,000 shares; zero issued and outstanding - 0 - - 0 - Common stock - $.01 par value authorized-20,000,000 shares; issued and outstanding-3,826,148 and 3,771,148 shares in 1997 and in 1996, respectively 38,261 37,711 Capital in excess of par value 2,891,645 2,892,195 Accumulated deficit (2,565,270) (2,492,327) ---------- --------- Total Shareholders' Equity 364,636 437,579 ---------- --------- Total Liabilities and Shareholders' Equity $ 1,669,468 $ 2,055,834 =========== =========== The accompanying notes are an integral part of these financial statements. 63 EQUITY GROWTH SYSTEMS, INC. STATEMENTS OF OPERATIONS DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- Revenue $ 214,001 $ 225,031 ---------- --------- Loss on Noncollectable Financial Instruments -Net 144,440 170,657 General and Administrative Expenses 142,504 300,090 ---------- ---------- 286,944 470,747 ---------- ---------- Loss before provision for income taxes (72,943) (245,716) Provisions for income taxes (Note 10) - 0 - 3,843 ---------- ---------- Net Loss $ (72,943) $ (249,559) ========== ========== Loss per share $ (.019) $ (.073) ========== ========== Weighted average of shares outstanding 3,807,814 3,402,810 ---------- ---------- The accompanying notes are an integral part of these financial statements. 64 EQUITY GROWTH SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Capital In No. of Common excess of Accumulated Shares Stock Par Value Deficit ------ ------ ---------- ----------- 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) Common Stock Issued 55,000 500 (550) Net Loss For the Year Ended December 31, 1997 (72,943) ---------- --------- -------------- ----------- Balances December 31, 1997 3,826,148 $ 38,211 $ 2,891,645 $(2,565,270) ========== ========= ============== =========== The accompanying notes are an integral part of these financial statements. 65 EQUITY GROWTH SYSTEMS, INC. STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- Cash Flows from Operating Activities: Net Loss $ (72,943) $ (249,559) Adjustments to Reconcile Net Loss to Net Cash Used for Operating Activities: Depreciation - 0 - - 0 - Loss on Noncollectable Financial Instruments - Net 144,440 170,657 (Increase) Decrease in Other Receivables (98,580) 5,671 (Increase) Decrease in Mortgage and Notes Receivable 339,544 178,526 (Decrease) in Accounts Payable and Current Liabilities (7,990) (28,168) Increase (Decrease) in Mortgages and Note Payable (305,437) (96,358) ---------- --------- Net Cash Used for Operations (966) (19,231) ---------- --------- Cash Flow From Financing Activities: Issuance of Common Stock - 0 - 9,490 Additional Paid in Capital Generated As a result of Issuance of Common Stock - 0 - 10,703 ---------- --------- Net Cash Provided by Financing Activities - 0 - 20,193 ---------- --------- Net Increase (Decrease) in Cash (966) 962 Cash - Beginning of Year 962 - 0 - ---------- --------- Cash - End of Year $ (4) $ 962 ========== ========= Supplemental Cash Flows Information: Cash Paid for Interest $ 99,602 $ 183,735 Cash Paid for Income Taxes - 0 - 2,551 The accompanying notes are an integral part of these financial statements. 66 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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, 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 December 31, 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. 67 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ------------------------------------------------------ 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. 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 Share 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 fiscal years ended December 31, 1997 and 1996 were 3,807,814 and 3,402,810, respectively. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT ----------------------------- 1997 and 1996 --------- Equipment $ 2,022 ------- Less Accumulated Depreciation (2,022) ------- $ - 0 - ======= Depreciation expense charged during 1997 and 1996, was $ - 0 -. 68 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 3 - SETTLEMENTS WITH CREDITORS -------------------------- On October 31, 1996, the Company issued 200,000 shares of its 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. NOTE 4 - EMPLOYMENT AGREEMENTS --------------------- 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, 1995. In addition, annual salary in 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 first five trading days prior to the end of the last day of each year and the first five 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 69 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 4 - EMPLOYMENT AGREEMENTS (Continued) -------------------------------- 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 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. (d) On November 28, 1997, the Board of Directors accepted the resignation of Mr. Moffitt. NOTE 5 - CONSULTING AGREEMENTS --------------------- The Company had entered into two consulting agreements. One with the 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 hours 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. 70 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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 consisted 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 mortgage notes bear interest of 9.08% to 13.50%. The related 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 --------- Mortgages consist of the following: 12/31/97 12/31/96 -------- -------- Subordinate "wrap" mortgage receivables: (a) Nevada/California Property 12.904% $ 681,212 $ 771,716 (b) Tennessee Property (Note 14) 13.500% - 0 - - 0 - (c) Kansas Property (Note 14) 12.320% - 0 - 325,717 (d) Oregon Property 9.080% 590,425 640,562 ---------- ---------- 1,271,637 1,737,995 Less Current Portion (150,380) (160,436) ---------- ---------- $1,121,257 $1,577,559 ========== ========== Original Mortgages Payables: (a) Nevada/California Property 9.750% $ 625,774 $ 753,493 (b) Tennessee Property (Note 14) 9.625% - 0 - - 0 - (c) Kansas Property (Note 14) 9.750% - 0 - 127,037 (d) Oregon Property 9.750% 538,582 602,789 ---------- ---------- 1,164,356 1,483,319 Less Current Portion (164,693) (276,605) ---------- ---------- $ 999,663 $1,206,714 ========== ========== 71 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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 payable in equal quarterly installments of $23,437.01, with a final payment of $198,238.33 maturing December 31, 1996. There also was an underlying "wrap" mortgage that was payable in equal quarterly installments of $23,562.25 maturing December, 2006, with quarterly payments decreasing to $7,329 for the last 10 years. At December 31, 1996 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 payable in equal quarterly installments of $18,508.87 with a final payment of $136,999 maturing December 31, 1995. There is also an underlying "wrap" mortgage that is payable in annual installments of $74,482, maturing October 1, 2005, with annual payments decreasing to $22,962 the last 10 years. (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, 2003. There is also an underlying "wrap" mortgage that is payable in equal annual payments of $106,640 maturing December 31, 2002. 72 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 8 - NOTES RECEIVABLE ---------------- 1997 1996 ---- ---- Nevada/California Property $ 153,803 $ 138,699 -------------------------- Quarterly payments of $868.55 4% above prime, currently 12.40% original amount $63,000 Tennessee - 0 - - 0 - -------------------------- Quarterly payment of $477.90 4% above prime, currently 12.40% original amount $40,000. At 12/31/96 the Note was deemed to be uncollectable and was written off (See Note 14). Kansas - 0 - 44,680 -------------------------- Quarterly payments of $341.73 4% above prime, currently 12.40% original amount $21,073 (See Note 14) Oregon 97,022 87,494 -------------------------- Quarterly payments of $501.13 4% above prime, currently 12.40% original amount $38,742 ------- ------- 250,825 270,873 Less Current Portion (5,480) (6,844) ------- ------- $ 245,345 $ 264,029 ========= ========== NOTE 9 - NOTE PAYABLE ------------ 1997 1996 ---- ---- A secured note payable including accrued interest, due on demand with 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 claus on any short fall in payment being added to the original principal amount of $104,000. To date no payments have been made. $116,049 $105,500 A secured note payable, due on demand, including accrued interest at a rate of 10% per annum. 19,427 16,446 -------- -------- $135,476 $121,946 ======== ======== 73 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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 years ended December 31, 1997 and 1996 arising from net operating losses follows: 1997 1996 ---- ---- Deferred Tax Benefit $ 36,664 $ 11,800 Valuation Allowance 36,664 11,800 -------- -------- $ - 0 - $ - 0 - ======== ======== The Company has operating loss carry forwards in excess of two million dollars that can be used to offset future taxable income. 1996 income tax expense consist of prior years' Federal income tax of $1,292 and prior years' Delaware franchise tax of $2,551. 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. 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 outstanding, 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 74 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 13 - STOCKHOLDERS' EQUITY (Continued) ------------------------------- (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. 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. On October 20, 1997, the various parties to a wrap around mortgage transaction with the company and the current tenant agreed to settle, but certain parties reserved claims against each other. The settlement calls for a payment from the current tenant of $150,000 in exchange for the transfer of a clear and free title of the underlying real estate. The mortgage holder Fleet National Bank received $52,000 and the balance to be held in escrow between the other parties. The Company holds the position that the ultimate disbursement of a substantial portion of these escrowed funds should be earmarked for the reduction of the wrap around mortgage and promissory note receivable. 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 mortgage and would not accept any further amortization payments 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. Because the mortgage holder would not accept any amortization payments on their matured loan from Sun West N.O.P., the Company was using such proceeds to reduce the related wrap mortgage 75 EQUITY GROWTH SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 14 - LEGAL MATTERS (Continued) ------------------------ 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 related wrap mortgage receivable ($251,722) and promissory note receivable ($93,686) at December 31, 1996. (See Notes 7 and 8). 76 EXHIBITS TO 10-KSB FOR 1997 77 EX-23.4 2 INDEPENDENT AUDITORS CONSENT EXHIBIT 23.4 INDEPENDENT AUDITORS CONSENT (Baum) 78 BAUM & COMPANY, P.A. Certified Public Accountants 1515 University Drive, Suite 209 Coral Springs, Florida 33071 voice 954-752-1712 (fax) 954-344- INDEPENDENT AUDITORS CONSENT To the Securities and Exchange Commission Washington, D.C. Equity Growth 0-3718 I consent to the use in the Form 10-K for the year ending December 31, 1997 of our report dated May 4, 1998 accompanying the financial statements of Equity Growth Systems, inc. June 26, 1998 Certified Public Accountant Baum & Company, P.A. 79 EX-99.08 3 LETTER TO DAVID ALBRIGHT, ESQ., APRIL 22, 1998 EXHIBIT 99.08 LETTER TO DAVID ALBRIGHT, JR. April 22, 1998 80 G. Richard Chamberlin, Esq*. 14950 South Highway 441 Summerfield, Florida 34491 352-245-6044 (voice) 352-245-8155 (fax) Mail to: P.O. Box 3370 Belleview, Florida 34421-3370 * Florida & Georgia Bars only OVERNITE MAIL April 21, 1998 David Albright, Esq. Albright, Brown and Goetemiller 120 East Baltimore Street Suite 2150 Baltimore, Maryland 21202 Cover letter sent by facsimile transmission to: (410) 244-0356 Re: Equity Growth Systems, inc.; Form 10-KSB for 1996/1997 Dear Mr Albright I have been assured by Edward "Ted" Granville Smith Jr. that you will cooperate and respond to this due diligence effort to properly in form stockholders, the Securities and Exchange Commission and the World of the condition of Equity Growth Systems, inc. and any potential or present litigation that might impact this public company. Enclosed and attached to this letter is a copy of the 10K for 1996. Our present efforts are to verify and update that prospectus. The 1997 10K is now past due and must be filed immediately. Please review the prospectus and indicate any information that should believe is inaccurate , misleading or should be updated. If I do not hear from you by April 28, 1998, I will assume all information is correct as it relates to your involvement. Please pay particular attention to: the proposed language concerning the following: Safeway Stores, Incorporated, Legal proceedings, Potential Litigation, other legal matters, and non judicial matters of concern. Please make comments on any of the above and forward your comments to me no latter than April 28, 1998. If you have any additional information or disclosures, please make your appropriate comments. If you know of any omissions please disclose the omissions. In addition, please respond to the following, On October 21, 1997, The District Court of Kansas entered an Order of Dismissal With Prejudice of Associated Wholesale Grocers, Inc., vs San Safe Associates, et. al. Case No. 972072WC. 81 The order is based on a Joint Stipulation of parties involved in the litigation. Have the terms of that Joint stipulation been carried out? Have any terms of the agreement not been carried out? Please send me copies of any appropriate signed documents. On October 20, 1997, Associated Wholesale Grocers , Inc., a Missouri Corporation; First Ken-Co Properties, Inc., a Delaware corporation; Fleet National Bank , a national banking association; Safeway Inc., a Delaware corporation, and San Safe Associates, a Maryland limited partnership; entered a mutual release involving the Kansas litigation and Maryland litigation and the First Ken-Co., and Safeway lease dated October 15, 1975. Has all of that litigation been resolved? Please send copies of any signed documents?. On October 20, 1997, Ken-Co and San Safe agreed to settle the Kansas City Litigation, Case No. 97-2072-JWL, with Associated Wholesale Grocers, Inc., Fleet National Bank, and Safeway, Inc., but reserved claims against each other.The parties agreed that $98,000.00 was to be distributed to First Ken-Co. Properties and San Safe to be held in escrow; The parties also agreed that First Ken-Co. Properties and San Safe would litigate in the State of Maryland all remaining issues between them, including the rightful disbursement of the 98,000.00 held in escrow. You have filed a complaint or petition in a Maryland court. Please inform us as to the condition of that litigation at this time. Please forward a case number or case numbers and a copy of all pleadings. Has the money been disbursed, if so provide details and any written evidence? Has any other litigation been instituted? If so, where and when? Please send a copy of the pleadings? Please provide us with a due diligence file on the non judicial foreclosure involving property in Memphis, Tennessee? As you are aware, SOUND SAFE ASSOCIATES. defaulted on the mortgage on the property located in Memphis Tennessee because it was unable to satisfy the pay-off balloon payment that was due on December 31, 1996 in the amount of $174,801.00. The mortgage holder, Lutheran Brotherhood, refused to negotiate with SOUND SAFE ASSOCIATES, or extend the term of the mortgage and refused further amortization payments from the lessor of the underlying lease. Non Judicial Foreclosure was instituted and finalized in August, 7, 1997. Please fax at 352-245-8155 or E-Mail at GRCHAMBERL@aol.com. I use WordPerfect 7.0 or Microsoft Word. The mortgage holder, Lutheran Brotherhood, refused to negotiate with SOUND SAFE ASSOCIATES, or extend the term of the mortgage and refused further amortization payments from the lessor of the underlying lease. Non Judicial Foreclosure was instituted and finalized in August, 7, 1997. Do you have any reason to believe this foreclosure was not properly or legally conducted? Have you taken any legal action concerning the setting aside of this non judicial foreclosure? If so, what action have you taken? As a result of these events, the Registrant has lost it's equitable interest in the property, lost it's lease income, lost income equal to the payments of the first mortgage and lost income equal to the difference between payment of the mortgage and the amount of the underlying mortgage. Is there any cause of action you would recommend concerning the recovery of this loss on behalf of Equity Growth Systems, inc? 82 Is there any litigation concerning Equity Growth Systems, inc., or any subsidiary or related Company of Equity Growth Systems, inc?? Are you aware of any other information not mentioned in 10K for 1996, or any facts or situations or legal issues since the filing of the 10K for 1996 on January 15, 1998 that might adversely affect the stockholders of Equity Growth Systems, inc.? If you have any other disclosure information concerning the filing of this registration please provide me with the information as soon as possible. If I do not here from you by April 28, 1998, concerning this information request I will assume the information in the attachment is correct. You may feel free to contact Edward "Ted" Granville Smith at (941) 505-8633, concerning any question as to my representation. Sincerely, G. Richard Chamberlin , Esq. 83 EX-99.09 4 LETTER TO DAVID ALBRIGHT, ESQ., MAY 28, 1998 EXHIBIT 99.09 LETTER TO DAVID ALBRIGHT, JR. May 28, 1998 84 G. Richard Chamberlin, Esq*. 14950 South Highway 441 Summerfield, Florida 34491 352-245-6044 (voice) 352-245-8155 (fax) Mail to: P.O. Box 3370 Belleview, Florida 34421-3370 * Florida & Georgia Bars only May 28, 1998 David Albright, Esq. Albright, Brown and Goetemiller 120 East Baltimore Street Suite 2150 Baltimore, Maryland 21202 Cover letter sent by facsimile transmission to: (410) 244-0356 Re: Equity Growth Systems, inc.; Form 10-KSB for 1997 and Case No. 98-007033; First Ken Co Properties V Martin, et. al., Circuit of Maryland for Baltimore City Dear Mr Albright We have disclosed to the SEC, the general public, and 2,200 Investors of Equity Growth Systems, Inc. that the above referenced lawsuit was filed in January, 1998. Edward "Ted" Granville Smith, Jr., represents that he is uninformed as to the progress or lack of progress in this matter. The clerk at the Circuit Court of Maryland for Baltimore City indicates that their has been no activity in the file since the date of filing. The clerk indicates that there has been no service on Defendants, no answers, no defaults and no other filings. Please provide either myself or Ted an update as to action taken in this matter after the initial filing. I need this information immediately for the purposes of filing Equity's 10K for 1997. 85 A telephone call or a return fax would be appreciated. Time is of the essence. If I have not heard from your office within five days, a copy of this letter will be filed as an exhibit with Equity's 10k for 1997. Sincerely, G. Richard Chamberlin, Esq. cc: Edward "Ted" Granville Smith, Jr. 86 EX-99.10 5 TITLE EXAMINATION FOR REAL PROPERTY EXHIBIT 99.10 TITLE EXAMINATION FOR REAL PROPERTY 87 Chicago Title Insurance Company PRELIMINARY TITLE REPORT April 22, 1998 To: CHICAGO TITLE INSURANCE CO. Order No: 184048 1129 20TH ST., STE 300 Escrow No: #NBU-180 98039 WASHINGTON, D.C. 20036 Ref: Payless Drug Attention: TRACI HARRIS Phone No: 202-466-2266 Extended Owners Coverage $1,000.00 Premium $330.00 Service Fee $25.00 We are prepared to issue a title insurance policy in ALTA (1992) form and amount shown above insuring the title to the property described herein. This report is preliminary to the issuance of a policy of title insurance and shall become null and void unless a policy is issued, and the full premium therefore paid. Vestee: MONTCO ASSOCIATES, a Maryland limited partnership Dated as of: April 10, 1998 at 8:00 A.M. Subject to the exceptions, exclusions, conditions and stipulations which are part of said policy, and to exceptions as shown herein CHICAGO INSURANCE COMPANY OF OREGON By: All inquiries regarding this commitment Should be directed to: Rollie Feuchtenberger: Chicago Title Ins. Co.; 1129 20th Street, Suite 300; Washington, DC 20036, 202.466.2266 ext 27 88 Order No: 184048 DESCRIPTION (Continued) GENERAL EXCEPTIONS (Standard Coverage Policies only) 1. a. Taxes or assessments which are not shown as existing liens by the records of any taxing authority that levies taxes or assessments on real property or by the public records. b. Proceedings by a public agency which may result in taxes or assessments, or notices of such proceedings, whether or not shown by the records of such agency or by the public records. 2. a. Easements, liens, encumbrances, interests or claims thereof which are not shown by the public records. b. Any facts, rights, interests or claims which are not shown by the public records but which could be ascertained by an inspection of the land or by making inquiry of persons in possession thereof. 3. Discrepancies, conflicts in boundary lines, shortage in area, encroachments, or any other facts which a correct survey would disclose, and which are not shown by the public records. 4. a. Un-patented mining claims; b. Reservations or exceptions in patents or in Acts authorizing the issuance thereof; c. Water rights, claims or title to water; whether or not the matters excepted under (a), (b), or (c) are shown by the public records. 5. Any lien or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by the public records. SPECIAL EXCEPTIONS 6. City liens, if any, of the city of Tigard. (An inquiry has been directed to the City Clerk concerning the status of said liens and a report will follow if such liens are found.) 7. The premises herein described are within and subject to the statutory powers including the power of assessment of the Unified Sewerage Agency. 8. Easements as dedicated or delineated on the recorded plat. For: Utility Affects: A strip 15 feet in width through subject property 9. Declaration of establishment of protective covenants, conditions and restrictions and grants of easements, including the terms and provisions thereof; Dated: August 31, 1976 Recorded: December 16, 1976 Book: 1132 Page: 456 89 10. Reciprocal Easement Agreement, including the terms and provisions thereof; Dated: July 9, 1975 Recorded: December 16, 1976 Book: 1132 Page: 485 Amended by instrument; Recorded: November 30, 1977 Book: 1220 Page: 712 11. Lease, including the terms and provisions thereof; Dated: April 1, 1977 A memorandum of which was: Recorded: April 26, 1977 Book: 1160 Page 740 Lessor: Montco Associates, a Maryland limited partnership Lessee: Pay Less Drug Stores Northwest, Inc., a Maryland corporation The present ownership of said leasehold and other matters affecting the interest of the lessee are not shown herein. (Continued) Order No: 184048 SPECIAL EXCEPTIONS (Continued) 12. The terms and provisions of Assignment of Lease and Agreement Agreement , including the terms and provisions thereof; Recorded: April 26, 1977 Book: 1160 Page: 746 Which instrument was modified by Reassignment of Lease and Agreement; Recorded: April 26, 1977 Book: 1160 Page: 805 13. Mortgage, including the terms and provision thereof, give to secure an indebtedness with interest thereon and such future advances as may be provided therein. Dated: April 1, 1977 Recorded: April 26, 1977 Book: 1160 Page: 762 Amount: $1,029,000.00 Mortgagor: Montco Associates, a limited partnership Mortgagee: Sixth Basingstoke Properties, Inc., a Delaware corporation Said Mortgage was assigned by instrument; Recorded: April 26, 1977 Book: 1160 Page: 800 To: The Monumental Life Insurance Company, a Maryland corporation and Volunteer State Life Insurance Company, a Tennessee corporation 90 14. Pylon Sign Lease Agreement, including the terms and provisions thereof; Dated: July 15, 1984 Recorded: May 3, 1985 Recorder's Fee No.: 85016315 By and Between: Bissett and Bissett, Ltd., an Oregon limited partnership, et al and Albertson's Inc., a Delaware corporation, et al The terms and provisions of said Agreement were modified by instrument; Recorded: May 3, 1985 Recorder's Fee No.: 86061443 15. Reciprocal Easement Agreement, including the terms and provisions thereof; Dated: June 27, 1985 Recorded: December 30, 1986 Recorder's Fee No.: 86061443 16. The terms and provisions of the partnership agreement of Monco Associates, a copy of which should be furnished for our examination prior to closing. Any conveyance or encumbrance of partnership property must be executed by all of the general partners, unless otherwise provided for in the partnership agreement. (Continued) Order No: 184048 SPECIAL EXCEPTIONS (Continued) 17. Note: An inquiry of the Corporation Department of the State of Oregon reveals no record of Montco Associates, a Maryland limited partnership. Our offices shall require evidence as to its nature and parties of authority thereunder. 18. Any encroachments, unrecorded easements, violations of covenants, conditions and restrictions, and any other matters which would be disclosed by a correct survey. 19. Proof that there are no parties in possession, or claiming to be in possession, other than above vestees. 20. Any statutory liens for labor or material, including liens for contributions due to the State of Oregon for unemployment compensation and for workmen's compensation, which have now gained or hereafter may gain priority over the lien of the insured mortgage, which liens do not now appear of record. 91 NOTE: Taxes for the fiscal year 1997-98, paid in full; Amount: $17,469.87 Levy Code: 023-74 Account No.: R450218 Map No.: 2812AA Tax Lot No.: 00906 NOTE: Any transfer of the herein described property is subject to the payment of Washington County Transfer Tax at the rate of $1.00 per $1,000.00 or fraction thereof of stated consideration. NOTE: This report is subject to any amendments which might occur when the names of prospective purchasers are submitted to us for examination. END OF REPORT cc: Chicago Title-Malcolm Newkirk DCO/cl April 22, 1998 92 Order No: 184048 LEGAL DESCRIPTION A parcel of land located in the Northeast quarter of Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon, more particularly described as follows: Beginning at the most Southerly corner of Parcel II PAY LESS SHOPPING CENTER, a plat of record in Washington County, Oregon; thence following the Southeasterly line of said Parcel II North 44(degree)50'05" East 125.69 feet; thence North 43(degree)09'55" West 4.54 feet; thence North 44(degree)50'05" East 104.00 feet to the most Easterly corner of said Parcel II; thence along the Northeasterly line of said Parcel II, North 45(degree)09'55" West 495.16 feet to the most Northerly corner of said Parcel II; said point being located on the Southeasterly right of way line of S.W. Main Street as shown on the plat of the aforementioned PAY LESS SHOPPING CENTER; thence following said right of way line 21.28 feet along the arc of a 150.00 foot radius curve concave to the Northwest (long chord bears South 81(degree)00'24" West 21.26 feet) to a point of reverse curve; thence 55.68 feet along the arc of a 380.23 foot radius curve concave to the Southeast (long chord bears South 80(degree)53'14" West 55.63 feet); thence South 14(degree)36'10" East 106.97 feet; thence South 44(degree)31'30" West 114.00 feet to a point on the Southwesterly line of said Parcel II; thence South 45(degree)16'18" East 452.25 feet to the point of beginning. 93 PRELIMINARY REPORT (Rev. 1/95) PRELIMINARY REPORT All inquiries regarding this commitment Should be directed to: Rollie Feuchtenberger: Chicago Title Ins. Co.; Order No. R95336TJS 1129 20th Street, Suite 300; Washington, Assessor's Parcel No. 033-151-16 DC 20036, 202.466.2266 ext 27 Escrow Officer: Your No. 180980391 In response to the above referenced application for a Policy of Title Insurance, TICOR TITLE INSURANCE COMPANY hereby reports that it is prepared to issue, or cause to be issued, as of the date hereof, a Policy or Policies of Title Insurance describing the land and the estate or interest therein, hereinafter set forth, insuring against loss which may be sustained by reason of any defect, lien or encumbrance not shown or referred to as an Exception below or not excluded from coverage pursuant to the printed Schedules, Conditions and Stipulations of said policy forms. The printed Exceptions and Exclusions from the coverage of said Policy or Policies are set forth on the attached cover. Copies of the Policy forms should be read. They are available from the office which issued this Report. Please read the exceptions shown or referred to below and the exceptions and exclusions set forth on the attached cover of this report carefully. The exceptions and exclusions are meant to provide you with notice of matters which are not covered under the terms of the title insurance policy and should be carefully considered. It is important to note that this preliminary report is not a written representation as to the condition of title and may not list all liens, defects, and encumbrances affecting title to the land. This Report (and any supplements or amendments thereto) is issued solely for the purpose of facilitating the issuance of a Policy of Title Insurance and no liability is assumed hereby. If it is desired that liability be assumed prior to the issuance of a policy of Title Insurance, a binder or Commitment should be requested. Dated as of April 3, 1998 At 7:30 A.M. WESTERN TITLE COMPANY, INC., an authorized agent Countersigned By: - ------------- John H. Speck Authorized Officer The form of Policy of Title Insurance contemplated by this Report is: [ ] ALTA Residential Policy [XX] ALTA Loan Policy with ALTA endorsement Form 1 Coverage [ ] CLTA Standard Coverage Policy 94 [ ] ALTA Owner's Policy [ ] Short Term Rate Applicable: The estate or interest in the land hereinafter described or referred to covered by this report is: A Fee Title to said estate or interest at the date hereof is vested in: PAYNEV ASSOCIATES, a Maryland Limited Partnership 95 Order No. R95335TJS it the date hereof exceptions to coverage in addition to the printed Exceptions and Exclusions contained in said Policy form would be as follows: 1. The lien, if any, of supplemental taxes, assessed pursuant to the provision of the Nevada revised Statutes. 2. Any liens that may be created for Delinquent Sewer charges by reason of said premises lying withing the City of Sparks. 3. Rights of way for any existing roads, trails, streams, ditches, drain ditches, pipe, pole or transmission lines traversing said premises. 4. Water rights, claims or title to water, whether or not recorded. 5. Rights of parties in possession. 6. Matters which may be disclosed by an inspection or by survey of said land that is satisfactory to this Company, or by inquiry of the parties in possession thereof. 7. Easements, dedications, reservations, provisions, recitals, building set back lines, and any other matters as provided for or delineated on the subdivision map referenced in the legal description contained herein. Reference is hereby made to said plat for particulars. If one is not included herewith, one will be furnished upon request. 8. Covenants, conditions, restrictions, easements and building set-back lines as set forth in an instrument, Recorded: November 2, 1973, in Book 775, Page 76, Document No. 306896, Official Records of Washoe County, Nevada. BUT OMITTING ANY COVENANTS OR RESTRICTIONS IF ANY, BASED UPON RACE, COLOR, RELIGION, SEX, HANDICAP, FAMILIAL STATUS, OR NATIONAL ORIGIN UNLESS AND ONLY TO THE EXTENT THAT SAID COVENANT (A) IS EXEMPT UNDER CHAPTER 42, SECTION 3607 OF THE UNITED STATES CODE OR (B) RELATES TO HANDICAP BUT DOES NOT DISCRIMINATE AGAINST HANDICAPPED PERSONS. Said covenants, conditions and restrictions were amended in an instrument Recorded: December 12, 1974, in Book 863, Page 674, Document No. 349653, Official Records of Washoe County, Nevada. Said covenants, conditions and restrictions were amended in an instrument Recorded: June 13, 1975, in Book 897, Page 133, Document No. 367571, Official Records of Washoe County, Nevada. Said covenants, conditions and restrictions were amended in an instrument Recorded: August 12, 1977, in Book 1114, Page 472, Document No. 491345, Official Records of Washoe County, Nevada. Said covenants, conditions and restrictions were amended in an instrument Recorded: March 13, 1986, in Book 2306, Page 276, Document No. 1057985, Official Records of Washoe County, Nevada. 96 Western Title Company, Inc. Order No.: R95336TJS EXCEPTIONS (continued) Said covenants, conditions and restrictions were amended in an instrument Recorded: March 13, 1986, Document No. 1057987, Official Records of Washoe County, Nevada. Said covenants, conditions and restrictions were amended in an instrument Recorded: July 31, 1987, Document No. 1182460, Official Records of Washoe County, Nevada. Said covenants, conditions and restrictions were amended in an instrument Recorded: October 12, 1987, Document No. 1199251, Official Records of Washoe County, Nevada. 9. The matter set forth in a Common Area Maintenance Agreement, Recorded: November 2, 1973, in Book 775, Page 96, Document No. 349654, Official Records of Wahsoe County, Nevada. And amendment thereto, Recorded: December 12, 1974, in Book 863, Page 681, Document No. 349654, Official Records of Washoe County, Nevada. And amendment thereto, Recorded: July 31, 1987, Document No. 1182461, Official Records of Washoe County, Nevada. Said amendment was re-recorded in an instrument Recorded: October 12, 1987, Document No. 1199250, Official Records of Washoe County, Nevada. 10. A Deed of Trust to secure an indebtedness in the amount shown below: Amount: $1,200,000.00 Dated: February 10, 1975 Trustor: PAYNEV ASSOCIATES, a Maryland Limited Partnership Trustee: TITLE INSURANCE AND TRUST COMPANY, a California corporation Beneficiary: PAY LESS DRUG STORES, a California corporation Recorded: April 1, 1975, in Book 882, Page 320, Document No. 359648, Official Records of Washoe County, Nevada. 11. A Deed of Trust to secure an indebtedness in the amount shown below: Amount: $1,656,000.00 Dated: May 26, 1975 Trustor: PAYNEV ASSOCIATES, a Maryland Limited Partnership, and PAYMONT ASSOCIATES, a Maryland Limited Partnership Trustee: TITLE INSURANCE AND TRUST COMPANY Beneficiary: SIXTH LUDINGHAM PROPERTIES, INC. Recorded: July 16, 1975, in Book 903, Page 518, Document No. 370933, Official Records of Washoe County, Nevada, (Continued) 97 Western Title Company, Inc. Order No.: R95336TJS EXCEPTIONS (continued) 12. A Deed of Trust to secure an indebtedness in the amount shown below: Amount: $1,541,000.00 Dated: October 29, 1990 Trustor: PAY-WEST ASSOCIATES, a Maryland Limited Partnership Trustee: TITLE INSURANCE AND TRUST COMPANY Beneficiary: PAYMONT ASSOCIATES and PAYNEV ASSOCIATES, a partnership Recorded: June 6, 1991, in Book 3271, Page 218, Document No. 1484861, Official Records of Washoe County, Nevada. 13. The requirement that vestee is registered with Nevada Secretary of State and in good standing. 14. This report is preparatory to the issuance of an ALTA Policy of Title Insurance. We have no knowledge of any fact which would preclude the issuance of said ALTA Policy with Endorsements 100 and 116 attached. (Provided there is a valid Notice of Completion of record.) There is located on said land a commercial building, known as 590 E. Prater Way, Sparks, Nevada. NOTE: Taxes for the fiscal year 1997-1998, in the amount of $28,071.29 have been paid in full. (APN 033-151-16) NOTE: This report makes no representations as to water, water rights, minerals or mineral rights and no reliance can be made upon this report or a resulting title policy for such rights or ownership. 98 Order No. R95336TJS DESCRIPTION All that real property situate in the City of Sparks, County of Washoe, State of Nevada, described as follows: Lot 3 of SUTTER HILL SUBDIVISION, (Subdivision Tract No. 1438), according to the map thereof, filed in the office of the County Recorder of Washoe County, State of Nevada, on November 1, 1973, under Filing No. 306755. EXCEPTING THEREFROM that portion of Lot 3 described as follows: BEGINNING at the Southeast corner of Lot 2 of said Sutter Hill Subdivision; thence North 00(degree)47'27" East along the Easterly line of said Lot 2; said Easterly line being common with Lot 3, a distance of 186.32 feet; thence leaving said Easterly line and proceeding south 89(degree)12'33" East 2.52 feet; thence South 00(degree)47'27" West and parallel to the Easterly line of said Lot 2 a distance of 186.32 feet; thence North 89(degree)12'33" West 2.52 feet to the point of beginning. PARCEL B: BEGINNING at the most Easterly Northeast corner of said Lot 2, as the same is shown on Sheet 2 of 2, of the map entitle d "Official Plat, Sutter Hill Subdivision", filed in the Official Records of Washoe County, Nevada, November 1, 1973, as File No. 306755, and proceeding thence North 89(degree)12'33" West along the Northerly line of said Lot 2, a distance of 127.58 feet to a lot corner as shown on the above mentioned map; thence leaving said Northerly line and proceeding South 00(degree)47'27" West 3.68 feet; thence South 89(degree)12'33" East, and parallel to the above mentioned Northerly line 127.58 feet to the Easterly line of said Lot 2; thence South 89(degree)12'33" East, and parallel to the above mentioned Northerly line 127.58 feet to the Easterly line of said Lot 2; thence North 00(degree)47'27" East along said Easterly line 3.68 feet to the point of beginning and containing 469.5 square feet. 99 EX-99.11 6 BOARD OF DIRECTORS RESOLUTIONS EXHIBIT 99.11 BOARD OF DIRECTORS RESOLUTIONS 100 MEETING OF THE BOARD OF DIRECTORS OF EQUITY GROWTH SYSTEMS, INC. A meeting of the Board of Directors of Equity Growth Systems, inc., was held on January 30, 1998 at which meeting a quorum was present. Upon motion duly made, the following corporate resolution was adopted by the Board of Directors of the Corporation. "Resolved, that A. Al Sanders be issued 100,000 shares as compensation for acting and continuing to act as a consultant to Equity Growth Systems, inc. These shares are to be issued in lieu of cash compensation as ffollows: 75,000 shares shall bear a restriction per rule 144d and 25,000 shares shall be issued as free trading per form S-B which has been filed with the S.E.C." "Further Resolved: that Charles Scimeca shall be issued 150,000 shares which will bear a restriction per rule 144d as a reward for his tireless effort in finding acquisition targets for the corporation as well as during these days of delay in the issuance of the 10KSB96 and further delay in the issuance of the 15C211 now in the process of being rewritten and submitted to the NASD." There being no further business requiring action or consideration, and upon motion duly made, the meeting was adjourned. /s/ Edward Granville-Smith -------------------------- Edward Granville-Smith CEO and Chairman 101 EX-27 7 FDS --
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 0 0 254,440 0 0 254,440 2,022 2,022 1,669,468 305,169 0 0 0 38,261 2,891,645 364,636 214,001 214,001 0 286,944 0 0 0 (72,943) 0 (72,943) 0 0 0 (72,943) (.019) (.019)
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