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