U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205490.
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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)
1941 Southeast 51st Terrace, Suite 800; Ocala, Florida 34471
----------------------------------------
(Address of principal executive offices)
(352)694-6714
------------
(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, 1998, the registrant had outstanding 4,116,148
shares of Common Stock, par value $0.01.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
EQUITY GROWTH SYSTEMS, inc.
Index
Page
----
Part I - Financial Information
Item 1. Financial Statements
Accountant's Compilation Report ............................. 2
Balance Sheets .............................................. 3
Statements Income and Accumulated Deficit.................... 4
Statements of Shareholders' Equity............. 5
Statements of Cash Flows..................................... 6
Notes to Financial Statements................................ 7 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 15
Part II -- Other Information
Item I. Legal Proceedings ............................................. 16
Item 3. Defaults Upon Senior Securities ................................ 19
Item 5. Other Information
1.Change in Control of Registrant
A. Director and CEO Incapacity ................................. 19
B. Biographies of New Directors and Officers ................. 20
2.Acquisition or Disposition of Assets
A. Reorganization as Holding Company ........................... 23
B. New Strategic Plan ......................................... 23
5. Other Events .................................................... 23
Item 6. Index of Exhibits............................................. 24
Signatures................................................... 25
1
To the Shareholders
Equity Growth Systems, inc.,
Boca Raton, Florida 33987
I have compiled the accompanying balance sheet of Equity Growth Systems, inc.
as of September 30, 1988 and 1997 and the related statements of income and
retained earnings and cash flows for the six 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 11, 1998
2
EQUITY GROWTH SYSTEMS, inc.
BALANCE SHEET
September 30, 1998 AND 1997
1998 1997
A S S E T S
CURRENT ASSETS
Cash and cash equivalents $ 6 $ 2,597
Mortgage receivable, current portion
(Note 6 & 7) 154,151 147,945
Promissory notes, current portion
(Note 8) 5,480 5,480
---------- ----------
TOTAL CURRENT ASSETS 159,637 156,022
OTHER ASSETS
Mortgages receivable (Note 6 & 7) 1,004,706 1,158,857
Promissory notes (Note 8) 265,249 239,132
Interest receivable 50,242 47,820
Escrow receivable 98,000 98,000
---------- ----------
TOTAL OTHER ASSETS 1,418,197 1,543,809
---------- ----------
TOTAL ASSETS $1,577,834 $1,699,831
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current
liabilities (Note 3) $ 35,409 $ 24,058
Mortgage payable, current portion
(Note 7) 181,636 160,773
Note payable (Note 9) 155,932 105,500
---------- ----------
TOTAL CURRENT LIABILITIES 372,977 290,331
LONG-TERM LIABILITIES
Mortgage payable (Note 7) 857,489 1,084,695
---------- ----------
TOTAL LIABILITIES 1,230,466 1,375,026
---------- ----------
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-4,116,148 shares in 1998
and 3,771,148 in 1997 41,161 37,711
Capital in excess of par value 2,891,645 2,892,195
Accumulated deficit (2,585,438) (2,605,101)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 347,368 324,805
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,577,834 $1,699,831
========== ==========
Read Accountant's Compilation Report
The accompanying notes are an integral part of these financial statements.
3
EQUITY GROWTH SYSTEMS, inc.
CONDENSED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------- -------------------
Income $ 40,677 $ 54,785 $ 121,509 $ 168,251
General and Adminis-
trative Expenses 40,226 48,577 141,677 281,025
--------- ---------- ---------- ----------
Net Income (Loss)
Before Provisions for
Income Taxes 451 6,208 (20,168) (112,774)
Provisions for Income
Taxes Note (10) - - - -
---------- ---------- ---------- ----------
Net Income (Loss) 451 6,208 (20,168) (112,774)
Accumulated Deficit-
Beginning (2,582,989) (2,611,309)(2,565,270)(2,492,327)
========== ========== ========== ==========
Accumulated Deficit-
Ending (2,582,538) (2,605,101)(2,585,438)(2,605,101)
========== ========== ========== ==========
Earnings Per Share 0.000 0.002 (0.005) (0.030)
Weighted Average of
Shares Outstanding 4,116,148 3,771,148 4,047,676 3,771,148
---------- ---------- ---------- ----------
Read Accountant's Compilation Report
The accompanying notes are an integral part of these financial statements.
4
EQUITY GROWTH SYSTEMS, inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
September 30, 1998
Capital in
No. of Common Excess of Accumulated
Shares Stock Par Value Deficit
Balances
January 1, 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 55,000 550 (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)
Common Stock Issued 290,000 2,900
Net income for the
six months ended
September 30, 1998 (17,268)
---------- ------- ---------- -----------
Balances
September 30, 1998 4,116,148 41,161 $2,891,645 $2,582,538
========== ======= ========== ===========
Read Accountant's Compilation Report
The accompanying notes are an integral part of these financial statements.
5
EQUITY GROWTH SYSTEMS, inc.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED September 30, 1998 AND 1997
1998 1997
Cash Flows From Operating Activities:
Net Profit (Loss) $ (20,168) $(112,774)
Adjustments to Reconcile Net Profit (Loss)
to Net Cash Used for Operating
Depreciation - -
Decrease in other receivable 580 -
Decrease in mortgages and notes
receivable 91,060 357,638
Increase (decrease) in accounts
payable and current liabilities 30,409 (5,378)
Increase (decrease) in mortgage
and notes payable (104,775) (237,851)
-------- --------
Net Cash Provided (Used) by Operations (2,894) 1,635
-------- --------
Cash Flows From Financial Activities
Capital stock issued 2,900 -
Additional paid in capital - -
-------- --------
Net Cash Provided by Financial
Activities 2,900 -
-------- --------
Net Increase (Decrease) in Cash 6 1,635
Cash-Beginning of Year - 962
-------- --------
Cash-End of Period $ 6 $ 2,597
======== ========
Supplemental Cash Flows Information
Cash paid for interest $ 96,909 $101,156
======== ========
Read Accountant's Compilation Report
The accompanying notes are an integral part of these financial statements.
6
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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, 1998, 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.
7
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 six
months ended September 30, 1998 and 1997 were $4,047,676 and $3,771,148,
respectively.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
1998 & 1997
Equipment $ 2,022
-------
Less: Accumulated depreciation (2,022)
-
=======
Depreciation expense charged during 1998 and 1997 was $-0- and $-0-,
respectively.
NOTE 3 - SETTLEMENT WITH CREDITORS
On October 31, 1996, the Company issued 200,000 shares 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 1997 , 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.
8
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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, 1997. 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 1997, the Company recruited two executive officers,
Messers. Gene 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
9
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 1997, 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.
10
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 (2) two 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 12.9041%. The underlying
mortgages bear interest at 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 30, September 30,
1998 1997
------- -------
Mortgages consist of the following:
Subordinate "wrap" mortgage receivables:
(a) Nevada/California Property 12.9041 $ 609,567 $ 703,842
(b) Oregon Property 9.080% 549,290 602,960
---------- ----------
1,158,857 1,306,802
Less: Current Portion 154,151 147,945
---------- ----------
$1,004,706 $1,158,857
========== ==========
Original Mortgages Payable:
(a) Nevada/California Property 9.750% $ 541,290 $ 678,694
(b) Oregon Property 9.750% 497,757 566,774
---------- ----------
1,039,125 1,245,468
Less: Current Portion 181,636 160,773
---------- ----------
$ 857,489 $1,084,695
========== ==========
11
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 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.
NOTE 8 - NOTES RECEIVABLE
1998 1997
Nevada/California Property
Quarterly payments of $868.55
4% above prime, currently 12.40%
original amount $63,000 $165,866 $149,170
Oregon
Quarterly payments of $501.13
4% above prime, currently 12.40%
original amount $38,742
104,863 95,442
-------- --------
270,729 244,612
Less Current Portion 5,480 5,480
-------- --------
$265,249 $239,132
======== ========
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
$155,932 $105,500
======== ========
12
EQUITY GROWTH SYSTEMS, inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 September 30, 1998 and 1997 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 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
(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, 1998
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 $875,300, 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 could 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 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 note 7 and 8).
14
EQUITY GROWTH SYSTEMS, inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
During the six months ended September 30, 1998, the registrant reported
income of approximately $81,000 as compared to income from all sources of
$113,000 during the prior six months ended.
During the six months ended September 30, 1998, the registrant's cost of
revenue was approximately $99,000 as compared $232,000 during the prior six
months ended. The decrease was attributable to the decrease in interest expense.
During the six months ended September 30, 1998, the registrant reported a
net income of approximately ($18,000) or $(.005) per share, compared to
($119,000) or $(0.032) per share prior to six months ended. The $101,000 in net
loss reflects the decrease in cost of operations.
Liquidity and Capital Resources
As of September 30, 1998, the registrant has a working capital position of
approximately ($195,000) as compared to a working capital position of ($130,000)
as of September 30, 1997. This reflects the write off of the Tennessee and
Kansas wrap around mortgages, notes receivable and underlying mortgages. 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 fulfill all of the
registrant's obligations. No officer of the registrant has been receiving or
accruing compensation at this time.
15
Part II -- Other Information
As a material subsequent event, as of December 9, 1998, the Company has
changed it's office address and office telephone. The Company will be sharing
space at the office of the Registrant's Secretary and General Counsel at no cost
for the use of space until June 30, 1999. The new address for the Company is
Equity Growth Systems, inc. 1941 SE 51st Terrace, Suite 800; Ocala, Florida
34471. Telephone is 352-694-6714.
Item I. Legal Proceedings
The Company is currently not a party to any legal proceedings. Although the
Company is not a party to the following proceedings directly, they have been
involved in real estate located in Kansas and Tennessee in which the Company has
an interest.
A. 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"), and First Ken Co
Properties, Inc. v. J.J. Martin, et. al., case number 98-007033-CC130 in the
Circuit Court of Maryland for Baltimore City, ("Baltimore City Case"). The above
mentioned legal matters are discussed in detail in the 10-KSB for 1997 under
legal proceedings.
In summary, 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.
A lawsuit was filed January 7, 1998, entitled, First Ken-Co Properties,
Inc., v. J.J. Martin, et. al., case No. 98-007033-CC130 in the Circuit Court of
Maryland for Baltimore City a copy of which is attached as an Exhibit to 10-KSB
for 1996.
The Baltimore City lawsuit is a Complaint for Declaratory Judgment by First
Ken-Co Properties, Inc. against certain limited partners of San Safe Limited
Partnership, a Maryland Limited Partnership for the purposes of determining
whether San Safe is entitled to receive any monies from the Escrow Fund in view
of the default in the secured promissory note. The Complaint also alleges that
an actual controversy exists between the parties as to whether First Ken-Co is
entitled to receive any further monies by way of accounting and damages from the
Limited Partners of San Safe by reasons of their acts and omissions causing loss
to the property and assets of San Safe.
16
The attorney for Ken-Co is Attorney David Albright. 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 of the case in January, 1998:
No service on Defendants; no responsive pleadings, no Defaults entered. The
condition of this litigation is unknown. The clerk also informed our office that
unless action is taken by January 7, 1999, the case will be dismissed for lack
of prosecution.
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 $875,300, 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. The
above mentioned legal matters are discussed in detail in the 10KSB for 1997
under legal proceedings.
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.
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.
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.
C. 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 could 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 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 note 7 and 8).
D. 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.
E. The Board of Directors of the Registrant dismissed and removed Rafi
Weiss from the position of Senior Vice President of Acquisitions. For whatever
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.
Item 2. Changes in Securities and Use of Proceeds
18
(a) As a material subsequent event, during the period commencing November
1, 1998 and ending on or about November 20, 1998, the Registrant issued
1,750,000 shares of its common stock at a price of $0.02 per share (a total of
$35,000) to the persons listed below, in order to pay certain obligations
required to be discharged in order to induce the Registrant's recently elected
officers and directors to become associated with the Registrant, and in order to
secure the assistance of the subscribers in restructuring the Registrant's
operations and strategic plans, required as a result of the medical emergency
suffered by Edward Granville-Smith, until recently the Registrant's sole
director and chief executive officer. No underwriter was used, nor were
commissions paid or offering expenses incurred.
Name Shares Consideration Exemption
Blue Lake Capital Corp. (1) 630,000 $12,600 4(6)
The Yankee Companies, Inc. (1)(2) 435,000 $ 8,750 4(6)
Michelle Tucker, custodian
For Shayna Tucker, a minor 108,750 $ 2,175 4(6)
Michelle Tucker, custodian
For Montana Tucker, a minor 108,750 $ 2,175 4(6)
The Calvo Family Spendthrift
Trust(2) 217,500 $ 4,350 4(6)
G. Richard Chamberlin, Esquire(3) 125,000 $ 2,500 4(6)
Penny Field (3) 62,500 $ 1,250 4(6)
Anthony Q. Joffe (3) 62,500 $ 1,250 4(6)
_______
(1) Blue Lake Capital Corp., is owned by Mrs. Tucker, whose husband owns
50% of the Yankee Companies, Inc..
(2) The Yankee Companies, Inc., is owned 50% by members of the Tucker
family and 50% by the Calvo Family Spendthrift Trust.
(3) Recently elected member of the Registrant's Board of Directors.
Item 3. Defaults upon Senior Securities
The Registrant has no senior securities nor is it directly a debtor under
any mortgages. However, the Registrant has a beneficial interest in certain
properties, or resulting from certain properties, where third parties are
obligors under mortgages and in certain cases the status of such mortgages, or
interest pertaining to said mortgages are foreclosed, disputed or in litigation.
See litigation above and also litigation in 10-KSB for 1997.
Item 5. Other Information
The following information is presented under the Item Number designations
of SEC Form 8-K.
Item 1. Change in Control of Registrant
A Director and CEO Incapacity
During October of 1998, Edward Granville-Smith, then the Registrant's sole
director and chief executive officer started negotiations with principals of the
Yankee Companies, Inc., to obtain its assistance in recruiting additional
officers and directors, arranging for funding and helping to develop an expanded
strategic business plan, based on Mr. Granville-Smith's concern that his
personal health problems were impeding his ability to adequately manage the
Registrant's operations.
19
Based on Mr. Granville-Smith's oral assurances, the Yankee Companies, Inc.,
contacted a number of persons willing to become materially involved in the
Registrant's operations, and, on November 6, 1998, Mr. Granville-Smith, as the
Registrant's sole director, elected the following persons as members of the
Registrant's Board of Directors: Charles J. Scimeca (the Registrant's
secretary), Penny Field, Anthony Q. Joffe and G. Richard Chamberlin (formerly
the Registrant's securities counsel). On November 13, 1998, after learning that
Mr. Granville-Smith, had been incapacitated, Mr. Scimeca, at the suggestion of
Mr. Chamberlin, called a special meeting of the Board of Directors, in order to
replace Mr. Granville-Smith as the Registrant's president and chief executive
officer, principally in order to assure that the Registrant could file this
quarterly report within a reasonable time after its due date. At such meeting,
Mr. Scimeca was elected as the acting president and Mr. Chamberlin was elected
as the acting secretary. In addition, the Board voted to reorganize the
Registrant by reorganizing as a holding company, to ratify the subscription
agreements disclosed in this report, to enter into a formal consulting agreement
with the Yankee Companies, Inc., and to enter into a settlement agreement with
Mr. Granville-Smith, as a result of which all his current agreements with the
Registrant would be terminated. All agreements other than the settlement
agreement have been entered into. The settlement agreement is being negotiated
with Mr. Granville-Smith's son, inlight of Mr. Granville-Smith's incapcity, and
a number of issues remain largely based on lack of familiarity with underlying
facts. Consequently, no assurances can be provided as to whether or not the
settlement agreement will be entered into as proposed or at all. In the event
that no settlement is reached with Mr. Granville-Smith, then the Registrant's
Board of Directors would probably seek to resolve the issues involved (together
with other open issues involving other creditors and former principals of the
Registrant) in a reorganization under Chapter 11 of the United States Bankruptcy
Code.
Copies of the minutes of the Board of Directors' meetings of November 6,
1998 and November 13, 1998, the subscription agreements, the Yankee Companies,
Inc., agreement and the proposed settlement agreement with Mr. Granville-Smith
are filed as exhibits to this report.
B. Biographies of New Directors and Officers
Charges J. Scimeca, age 54, serves as the acting president and as a
director of the Registrant. Since 1982 he has been a licensed real estate
broker. He is managing director of Coast to coast Realty Group, Inc., located in
Sarasota, Florida. The company is involved in residential and commercial real
estate development as well as general real estate brokerage and business
acquisition. He has been involved in real estate transactions totaling over one
billion dollars, representing Fortune 500 clients, such as , Equitable Life
Insurance Company, Walt Disney Corporation, Paramount Studios and TRW Real
Estate Group. 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 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, Sarasota and Manatee County Association of Realtors,
the International Council of Shopping Centers and other local, regional and
national real estate and mortgage related organizations. He holds a degree in
Business Administration.
20
G. Richard Chamberlin. age 52, has since November 1998, served as the
Registrant's secretary, as a member of it's Board of Directors (in which he
serves as Chairman) and also as it's general counsel. From 1973 to 1974 he
served as Trust Officer with Central Bank & Trust Company, Jonesboro, Georgia.
Mr. Chamberlin is a practicing attorney and is a member of the Georgia Bar,
(since 1974), and the Florida Bar, (since 1990). He is also a member of the Bars
for the Federal District Court for the Northern District of Georgia, (since
1974) and the Federal District Court for the Northern District of Florida (since
1995), the Court of Appeals for the State of Georgia, (since 1974) and the
Supreme Court for the State of Georgia (since 1974). Mr. Chamberlin is also a
member of the Bar for the Eleventh District Court of Appeals, (since 1982). He
is a graduate of Eastern Military Academy, Huntington, New York (College Prep
Diploma, 1964); The Citadel, The Military College of South Carolina, (B.A.,
political science, 1968); and the University of Georgia School of Law, (J.D.,
1971). Mr. Chamberlin earned a Certificate from the American Bankers
Association, National Trust School, (1974). Mr. Chamberlin is a two term former
member of the Georgia House of Representatives, (1979-1983). In the State House,
Mr. Chamberlin served on the Following committees: House Journal Committee,
Natural Resources Committee, Special Judiciary Committee and Labor Committee. He
is a former member of the Counsel for National Policy. He is the founder of the
Georgia Roundtable, Inc., and served as President from 1981 to 1986.; He is the
founder of the Georgia Heritage Foundation, and served as President from 1982 to
1986. He is the former Principal of Soul's Harbor Christian Academy, Belleview,
Florida, (1990-1992). Mr. Chamberlin served as National Music Chairman for the
Religious Roundtable, Inc. at the premier event known as the 1992 National
Affairs Briefing in Dallas, Texas wherein President George Bush was the keynote
speaker.
Mr. Chamberlin has received Resolutions of Commendation from the House of
Representatives for the Commonwealth of Kentucky, (1985) and from the House of
Representatives for the State of Georgia, (1982). He presently serves as
President of the Citadel Club of Central Florida, Inc.. Mr. Chamberlin is former
president and director for Atrieties Development Company, Inc., a publicly held
corporation involved in the real estate industry, (1986-87), and has held
licenses as a real estate agent, (Georgia and Florida).
Penny Adams Field, age 43, since November, 1998, serves as a member of
Registrant's Board of Directors.. Penny Adams Field is a principal and
co-founder of Executive Concepts, a management consulting and investment banking
advisory firm. Ms. Adams Field has technical expertise in designing and
implementing financial management systems, acquisition and divestiture models,
cash flow management, information systems assessment and implementations, and
operational and cost system audits. Her background in strategic planning,
performance measurement, comprehensive business planning, and cost structure
analysis add to the breadth and depth of the Executive Concepts team skills. Ms.
Adams Field is an experienced and accredited business valuation specialist and
is a member of the Institute of Business Appraisers. She serves on numerous
not-for- profit and corporate boards. As a management consultant, Ms. Adams
Field has consulted with firms such as Monsanto, Mallinckrodt,
McDonnell-Douglas, MEMC Electronic Materials Company, Maytag, Mark Andy,
CyberTel, and numerous other small firms in the healthcare, manufacturing,
construction, and service industries. Prior to founding Executive Concepts, Ms.
Adams Field was an administrator for the John M. Olin School of Business at
Washington University in St. Louis, where she helped to establish the Executive
Programs division. Her responsibilities included program development in the Far
East. Previous to her administrative role she served at a full-time accounting
faculty instructing in financial accounting and cost management for
undergraduate and graduate programs at the Olin School.
Prior to graduate study at Washington University, Ms. Adams Field worked in
healthcare administration and banking, including positions at Childrens'
Hospital National Medical Center in Washington, D.C. and Harris Bank in Chicago.
After earning a B.B.A. in Accounting and Finance, Ms. Adams Field earned her
M.B.A. from the Olin School of Business at Washington University in St. Louis.
Ms. Adams Field also posted several hours of Ph.D. level coursework in
accounting and finance prior to making a full-time commitment to consulting.
21
Anthony Q. Joffe, age 56, since November, 1998, serves as a member of
Registrant's Board of Directors. Mr. Joffe holds a degree in Aeronautical
Engineering Management from Boston University, Boston, Massachusetts. Subsequent
to his graduation, Mr. Joffe was employed as the Quality Control Manager for
Cognitronics Corporation, a computer manufacturer, where he was responsible for
overseeing the U.S. Air Force compliance testing program as well as normal
day-to-day management. In 1967, Mr. Joffe was employed by General Electric as a
production engineer in the insulating materials field. In 1970, Mr. Joffe was
employed by King's Electronics, a RF coaxial connector manufacturer, where he
was responsible for major accounts and guided the field sales force.
In 1973, Mr. Joffe was one of the founders and Vice-President of J.S. Love
Associates, Inc., a commodity brokerage house no longer in operation (then
headquartered in New York City). In 1976, Mr. Joffe formed and served as
President and Chief Operating Officer of London Futures, Ltd., a commodity
broker with 275 employees in nine offices. London Futures, Ltd. was closed in
1979 and Mr. Joffe moved to Florida. From 1979 until 1986, Mr. Joffe was Vice
President of Gramco Holdings, Inc. (and its predecessor companies), a firm which
owned and operated a variety of companies. These companies included five
cemeteries and funeral homes in Broward County, Florida, a 33 acre marina, a
general contracting company, a boat title insurance underwriting firm, three
restaurants, a real estate brokerage company, a mortgage brokerage company and a
leasing company. His responsibilities involved supervision of the day-to-day
operations and new business development. From 1986 to 1991, Mr. Joffe served as
consultant and/or principal to a variety of small businesses in the South
Florida area. In 1989 Mr. Joffe became President of Windy City Capital Corp., a
small publicly traded, reported company that was originally formed as a "blind
pool" for the express purpose of finding an acquisition candidate. Eventually, a
reverse merger was consummated with a computer software company from
Pennsylvania. Mr. Joffe then took the position of President of Rare Earth
Metals, Inc. (and its predecessor companies), a small publicly traded company
which has purchased Spinecare, Inc. a medical clinic in New York. Spinecare
changed its name to Americare Health Group and relocated its state domicile to
Delaware. Since March of 1993, Mr. Joffe has performed consulting services for
First Commodities, Inc., an Atlanta based commodities firm, and has been
involved in fund raising for the Multiple Sclerosis Foundation. He also assisted
Digital Interactive Associates and IVDS Partnership with financial affairs in
conjunction with their successful bid to the Federal Communications Commission
for licenses in the cities of Atlanta, Georgia, Minneapolis/St. Paul, Minnesota,
and Kansas City, Missouri. Mr. Joffe served as the interim president of Madison
Sports & Entertainment Group, Inc., a publicly held Utah corporation then
headquartered in Fort Lauderdale, Florida, from September 1, 1994, until
February 16, 1994, at which time he became its vice president and vice chairman,
chief operating officer, treasurer and chief financial officer until he resigned
in 1996. Since 1996, he has founded a boat financing company and joined
NorthStar Capital ("Northstar") as Managing Director. NorthStar is an investment
banking firm with offices in Stamford, Connecticut and Boca Raton, Florida which
specializes in assisting small to mid size private and publicly traded companies
with business and financial planning; acquisition and divestiture; financial
public relations and market position advice; and, treasury services.
22
E. Granville-Smith, Jr., age 66, is member of Registrant's Board of
Directors. 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.
Item 2. Acquisition or Disposition of Assets
A. Reorganization as Holding Company
The Registrant's Board of Directors have authorized the reorganization of
the Registrant as a holding company, with all current operations conducted
through a wholly owned operating subsidiary. It is anticipated by the Board of
Directors that the Registrant will seek to acquire additional operating
subsidiaries, with the assistance of its newly elected Directors and the Yankee
Companies, Inc.
B. New Strategic Plan
The Registrant has retained the Yankee Companies to assist it in developing
and implementing a new strategic plan. The Yankee Companies has suggested that
the Registrant's activities be divided into three different areas. First, that
the current real estate operations be segregated in a new subsidiary, to be
presided over by Mr. Scimeca, the Registrant's president. Second, that the
Registrant's new management and directors provide consulting services to third
parties that desire to attain public trading status by assisting them in
preparation of Forms 10 and 10-SB in exchange for securities to be distributed
directly by the client issuer to the Registrant's stockholders. Third, that the
Registrant acquire operating companies that could benefit from the Registrant's
public trading status and from the experience of the Registrant's directors.
The Yankee Companies have also indicated that in light of the incapacity of
Mr. Granville-Smith, the Registrant's ability to continue its prior operations
will be impaired unless new management is able to obtain detailed information of
such operations and to resolve a number of factual questions concerning such
operation, including the matters currently in litigation. The Yankee Companies
have suggested to the Registrant's Board of Directors that a proceeding under
Chapter 11 of the Federal Bankruptcy Code would be the most effective and
definitive manner for attaining such goal and the Board is considering and
evaluating such proposal.
Item 5.Other Events
The Registrant's Board of Directors were advised that the Registrant's
Bylaws on file with the Securities and Exchange Commission had been replaced at
an unknown date and were provided with a copy thereof. Minutes of such
replacement were not available, consequently, a special meeting of the Board was
held and the subject Bylaws were ratified. A copy of the amended and restated
bylaws are filed herewith.
23
Item 6. Index of Exhibits
Exhibit Page Description
3.2 __ Amended & Restated Bylaws as of December, 1998.
10.22 __ Recent stock subscription agreements
10.23 __ Consulting agreement with the Yankee Companies
10.24 __ Recent settlements and releases with creditors
10.25 __ Proposed Settlement agreement and release with
Mr. Granville-Smith
10.26 __ Stock purchase option agreement with Mr. Scimeca
99.12 __ Written Consent in Lieu of Special Meeting of Board of
Directors for November 6, 1998
99.13 __ Minutes of Special Meeting of Board of Directors for
November 27, 1998
99.14 __ Minutes of Special Meeting of Board of Directors for
December 8, 1998
99.15 __ Amended Notice Special Meeting of Board of Directors
for December 8, 1998
99.16 __ Minutes of Special Meeting of Board of Directors Part 1,
for December 11, 1998
99.17 __ Notice of Special Meeting of Board of Directors for
December 11, 1998
99.18 __ Minutes of Special Meeting of Board of Directors Part 2,
for December 11, 1998
24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
had duly caused the report to be signed on its behalf by the undersigned
thereunto duly authorized.
Equity Growth Systems, inc.
Dated: December 14, 1998
/s/ Charles J. Scimeca
--------------------------
Charles J. Scimeca
President
25