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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 5
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Gen-Net Lease Income Trust, Inc.
(Exact Name of Registrant as Specified in Governing Instruments)
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24081 West River Road, First Floor
Grosse Ile, Michigan 48138
(734) 362-0175
(Address, Including Zip Code, and Telephone Number, Including Area Code of
Registrant's Principal Executive Offices)
Jerry D. Bringard
24081 West River Road, First Floor
Grosse Ile, Michigan 48138
(734) 362-0175
(Name, Address, Including Zip Code and Telephone Number, Including Area Code,
of Agent For Service)
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Copies to:
John D. Ellsworth, Esq.
2027 Dodge Street, Suite 100
Omaha, Nebraska 68102
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit Offering Price Fee
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Shares of common stock... 2,500,000 $10.00 $25,000,000 $6,250.00
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
Gen-Net Lease Income Trust
A Real Estate Investment Trust Offering
2,500,000 SHARES OF COMMON STOCK
$10.00 PER SHARE
Gen-Net Lease Income Trust, Inc. ("Gen-Net") is a Michigan corporation which
intends to operate as a self-managed and self-advised real estate investment
trust ("REIT"). This Prospectus describes Gen-Net's offering of its shares of
common stock to persons who, as purchasers of the shares, will become voting
shareholders of Gen-Net. Unless Gen-Net receives a minimum commitment from
investors to purchase a minimum of 300,000 shares (or $3,000,000) within one
year after the date of this prospectus, all investor funds will be returned
with interest. Prior to reaching this minimum amount, investor funds will be
held in an interest bearing escrow account with Citizens First Savings Bank,
Port Huron, Michigan.
Gen-Net's shares will not be listed on any national or regional securities
exchange or on the NASDAQ National Market. THE SHARES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SEC OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. The use of forecasts in this offering is
prohibited. Any representations to the contrary and any predications, written
or oral, as to the amount or certainty of any present or future cash benefit or
tax consequence which may flow from an investment in Gen-Net is not permitted.
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AN INVESTMENT IN GEN-NET INVOLVES SIGNIFICANT RISKS AND YOU SHOULD PURCHASE
SHARES IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT: SEE THE "RISK
FACTORS" SECTION ON PAGE 7 OF THIS PROSPECTUS FOR A DETAILED DISCUSSION OF THE
RISKS ASSOCIATED WITH AN INVESTMENT IN GEN-NET. RISK FACTORS INCLUDE:
.. There will be no market for Gen-Net's shares, and shares may not be able to
be resold at the offering price.
.. Gen-Net may not raise the maximum amount of proceeds sought in this offering,
which will limit its ability to fully pursue its investment strategy.
.. Gen-Net does not yet own and has not yet identified any properties in which
to invest.
.. Gen-Net has not yet qualified, for treatment as a REIT, and has not
requested a ruling from the IRS as to its qualification as a REIT.
.. Gen-Net may use debt for up to 80% of the acquisition cost of its properties.
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Selling Proceeds to
Price to Public Commissions(1) Company(2)
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Per Share.... $10.00 $.725 $9.275
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Total Minimum $3,000,000(2) $217,500 $2,782,500
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Total Maximum $25,000,000 $1,812,500 $23,187,500
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(1) Investors Capital Corporation, a member of the National Association of
Securities Dealers, Inc. ("NASD") will serve as managing underwriter on a
"best efforts" basis, and expects to engage other members of the NASD (the
"Selected Dealers") to offer the shares. Investors Capital will receive a
fee of 1.5% of the gross proceeds from share sales to serve as managing
underwriter, plus .25% for due diligence expenses. Additionally, Investors
Capital will receive a selling commission of 5.5% which may be reallowed to
the Selected Dealers if they sell shares.
(2) If Gen-Net raises the minimum of $3,000,000, it will invest a net of
$2,672,500 in properties. See "Investment and Policies" and "Estimated Use
of Proceeds."
The offering will terminate on the earlier of either: (1) the acceptance by
Gen-Net of offers for the purchase of $25,000,000 in shares or (2) the date
which is one year after the initial date of this prospectus. If the offering is
terminated because the $3,000,000 minimum has not been raised within the one
year time period, all investor funds will be returned to the investors promptly
with accrued interest from the date of collection.
The date of this prospectus is , 2002
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. GEN-NET MAY NOT SELL THE SHARES UNTIL THE REGISTRATION STATEMENT IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE SHARES AND IT IS NOT
SOLICITING AN OFFER TO BUY THE SHARES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
TABLE OF CONTENTS
SUMMARY OF THE OFFERING.................................................................. 1
Introduction.......................................................................... 1
The Net Lease Real Estate Business.................................................... 1
Risks and Other Important Factors..................................................... 1
Who May Invest........................................................................ 3
Capitalization and Estimated Use of Proceeds.......................................... 3
Investment Objectives and Policies.................................................... 3
Properties............................................................................ 4
Management............................................................................ 4
Competition for Time and Services..................................................... 5
Compensation to Management and Others................................................. 5
Income Tax Considerations............................................................. 5
RISK FACTORS............................................................................. 7
Risks Associated With This Offering................................................... 7
Other Real Estate Investment Risks.................................................... 9
Corporate Risks....................................................................... 12
Tax Risks............................................................................. 13
INVESTOR SUITABILITY..................................................................... 14
CONFLICTS OF INTEREST.................................................................... 15
Competition for the Time and Services of Directors, Officers, Genesis and the Bartons. 15
Holdings of Certain Persons........................................................... 15
Common Counsel........................................................................ 16
THE COMPANY.............................................................................. 16
CAPITALIZATION........................................................................... 16
SELECTED FINANCIAL DATA.................................................................. 17
ESTIMATED USE OF PROCEEDS................................................................ 17
DILUTION................................................................................. 18
GEN-NET'S OBJECTIVES AND POLICIES........................................................ 18
Operational Objectives................................................................ 18
Investment Objectives................................................................. 19
Investment Policies................................................................... 20
Acquisition of Properties............................................................. 20
Dividends............................................................................. 21
Sale of Properties.................................................................... 21
Borrowing Policies--Restriction of Leverage........................................... 22
Reserves for Operating Expenses....................................................... 22
Management of Properties.............................................................. 23
Changes in Investment Objectives and Policies......................................... 23
Certain Financial Activities Not Permitted............................................ 23
PROPERTY UNDERWRITING.................................................................... 24
MANAGEMENT............................................................................... 27
Fiduciary Responsibility of the Directors............................................. 27
The Directors' Duties Generally....................................................... 27
Gen-Net's Directors and Executive Officers............................................ 29
Daily Management Responsibility....................................................... 30
Services of Genesis................................................................... 30
PRIOR PERFORMANCE OF GEN-NET AND GENESIS................... 32
ERISA CONSIDERATIONS....................................... 33
INCOME TAX CONSIDERATIONS.................................. 35
General................................................. 35
Requirements for Qualification and Taxation as a REIT... 36
Distribution Requirements............................... 39
Termination or Revocation of REIT Status................ 40
Taxation of the Company................................. 40
Tax Deferred Exchanges.................................. 41
Taxation of Domestic Shareholders....................... 42
Taxation of Foreign Shareholders........................ 44
United States Report Requirements....................... 44
State and Local Taxes................................... 44
DESCRIPTION OF ORGANIZATIONAL DOCUMENTS AND SHARES......... 44
Description of Shares................................... 44
Transfer Agent.......................................... 45
Meetings and Special Voting Requirements................ 45
Limitations on Holdings and Transfer.................... 46
REPORTS TO SHAREHOLDERS.................................... 46
PLAN OF DISTRIBUTION....................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GEN-NET'S FINANCIAL
CONDITION................................................. 48
SALES MATERIALS............................................ 48
EXPERTS.................................................... 48
LEGAL MATTERS.............................................. 48
FURTHER INFORMATION........................................ 49
GLOSSARY................................................... 49
EXHIBITS................................................... 53
Order Form.............................................. Exhibit A
Prior Performance Tables................................ Exhibit B
Financial Statements.................................... Exhibit C
ii
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this prospectus. The information appearing
in the rest of the prospectus follows in the same order as the topics appear in
this "SUMMARY." See "GLOSSARY" for definitions of capitalized terms used
throughout the prospectus. Certain technical terms capitalized in this
prospectus that are not defined within the text are defined in the Glossary.
Introduction
Gen-Net is a Michigan corporation organized on September 28, 1998. Its sole
shareholder at present is Genesis Financial Group, Inc, ("Genesis"), the
organizer of Gen-Net and the Sponsor of this offering. Genesis does not intend
to purchase shares in the offering, although there is nothing to prohibit it
from doing so.
Gen-Net is offering a total of 2,500,000 shares for sale at the price of
$10.00 per share. Unless Gen-Net receives commitments from investors to
purchase a minimum of 300,000 shares (or $3,000,000) on or before a date that
is one year after the date of this prospectus, all investor funds held in
escrow will be returned with interest to the investors.
Investors Capital Corporation will assit Gen-Net in selling the shares by
acting as managing underwriter of this offering on a "best efforts" basis.
Gen-Net will acquire, own and manage properties located in the continental
United States which are already leased, or are acquired on the condition that
they will be leased, to certain qualifying tenants pursuant to "Net Leases."
Gen-Net will hold and manage the properties and intends to eventually sell
them. The net proceeds from the sale of such properties may be reinvested in
other properties which meet Gen-Net's investment criteria.
The Net Lease Real Estate Business
Under a typical Net Lease, the tenant is responsible for all or a
substantial portion of real estate taxes, insurance and ordinary maintenance
but not for capital expenses. Investments in Net Leased properties may offer
more predictable returns than investments in properties which are not Net
Leased since rising costs of operating Net Leased properties are absorbed by
the tenants rather than the owner.
Net Leased properties are often acquired through sale/leaseback
transactions. Generally in a sale/leaseback transaction, the purchaser/landlord
(such as Gen-Net) acquires a property from an operating company and
simultaneously leases the property back to the operating company under a
long-term lease. A sale/leaseback transaction is structured to provide the
purchaser with a consistent stream of income that usually increases over time
under to the terms of the lease.
Risks and Other Important Factors
There are significant risks associated with being a shareholder in Gen-Net.
The "RISK FACTORS" section of this prospectus contains a detailed discussion of
the most important risks. The risk factors are organized into Risks Associated
with this Offering, Other Real Estate Investment Risks, Corporate Risks, and
Tax Risks. Please refer to the "RISK FACTORS" section of this prospectus for a
more complete discussion of these risks, which are summarized below:
Risks Associated with this Offering.
. Gen-Net may be unable to raise the maximum proceeds. As a result, fewer
properties may be acquired and Gen-Net may not be able to diversify as
planned and/or fully pursue its investment strategy given the fact that
Gen-Net has never previously raised equity capital from public investors.
1
. Investing in real estate that is subject to mortgage debt, or leveraging,
risks that a lender can foreclose on the property in which it holds a
mortgage if Gen-Net does not repay the mortgage loan.
. The offering price of $10.00 per share was determined arbitrarily by
Gen-Net. Thus, there is no assurance the shares will maintain a value
after the offering that compares favorably to the offering price.
. The value of a share will be reduced by offering costs and can be further
reduced by poor acquisitions by Gen-Net or the issuance of more shares in
subsequent offerings.
. Gen-Net does not have any operating history.
. Gen-Net is likely to be undercapitalized if it raises substantially less
than the maximum offering proceeds, such that it will not diversify as
planned and will have higher operating cost ratios.
. The properties to be purchased are not known at this time. An investor
will have no economic or other financial information available to assist
in evaluating Gen-Net's prospective property purchases.
. If Gen-Net distributes cash dividends to its shareholders, a portion is
likely to be deemed a return of capital under applicable accounting rules.
See INCOME TAX CONSIDERATIONS.
Other Real Estate Investment Risks.
. Because Gen-Net will lease to single tenants who will be largely
responsible for maintaining the property leased to them, Gen-Net may be
exposed to more financial risk due to a tenant's failure to perform under
its lease than if a property were leased to multiple tenants.
. The future value of real estate, and, consequently, Gen-Net's profits
cannot be predicted. Investors cannot be sure that they will recover their
original investment.
. Because Gen-Net may acquire properties built for a special purpose and
intended for particular tenants, the property may be hard to dispose of
when the lease terminates or in the event of a tenant default.
. Gen-Net may incur extraordinary expenses to comply with the Americans With
Disabilities Act.
Other Corporate Risks.
. Gen-Net's Board of Directors and officers together will exercise all
management rights subject only to the ability of the shareholders to elect
the Directors.
. Gen-Net may have insufficient working capital, which could result in
Gen-Net having to borrow funds or receive additional capital through the
sale of shares or subsequently authorized debt securities. There is no
assurance that such additional capital can be obtained through the sale of
additional shares or debt securities.
. A shareholder will not likely be able to sell his or her investment
because there is presently no organized market for the shares, no Gen-Net
share buy-back program, and no planned date for termination of Gen-Net or
a roll-up transaction. There is also a risk that if a shareholder is able
to sell his or her shares in the future, the shareholder may have to sell
them for less than the offering price.
. The shareholders holding a majority of the shares may exercise certain
voting rights, including the election of Directors, the amendment of
Gen-Net's governing documents and a change in the investment objectives
even if holders of 49% of the shares object.
. The Directors have limited liability under Gen-Net's Articles of
Incorporation and Bylaws.
Tax Risks.
. If Gen-Net fails to qualify or maintain its qualification as a REIT under
the federal income tax laws, it will be taxed as a regular corporation and
distributions to its shareholders will not be deductible by Gen-Net in
computing its taxable income.
2
. Gen-Net may incur tax liability and penalties for non-compliance with
certain REIT provisions, including those relating to dividend payments and
Prohibited Transactions (as defined in "INCOME TAX CONSIDERATIONS.").
. There may in the future be adverse changes in the tax laws affecting
Gen-Net and its shareholders.
See "RISKS FACTORS" for further details.
Who May Invest
Each investor must, at a minimum, have:
. gross income of $45,000 and a $45,000 net worth; or
. a net worth of $150,000
Certain states require investors to meet higher standards. See "INVESTOR
SUITABILITY" for details.
This type of investment requires a long-term holding period, is considered
to be illiquid and cannot be readily resold. The shares are not listed on any
national market exchange or on NASDAQ. There are certain modest tax benefits
claimed for this investment, but it is not a tax shelter and will not benefit a
shareholder's tax situation as to the shareholder's other income. See the
section in the prospectus entitled "INVESTOR SUITABILITY" for details.
Capitalization and Estimated Use of Proceeds
The amount raised in this offering will affect Gen-Net's use of the offering
proceeds. The more funds Gen-Net raises in the offering, the better able
Gen-Net will be to locate and purchase suitable properties. If Gen-Net sells
only the minimum number of shares, it will have cash available of approximately
$2,672,500 to use for the purchase of properties, and expects to purchase
approximately 2 properties. If Gen-Net is able to sell the maximum amount of
shares, it is anticipated that Gen-Net will have cash available for property
purchases of $22,437,500 after deduction of approximately $2,312,500 for
selling commissions and expenses, other organization and offering costs, and
expects to purchase approximately 30 properties. See "CAPITALIZATION" and
"ESTIMATED USE OF PROCEEDS" for further details.
Investment Objectives and Policies
Gen-Net's investment objectives include:
. to provide regular dividends to the shareholders of no less than 90% of
Gen-Net's taxable income and which may be in amounts exceeding Gen-Net's
taxable income due to the non-cash character of depreciation as an expense;
. to provide shareholders with long term appreciation on their investment;
. to provide shareholders with an inflation hedge by entering into leases
which contain clauses for scheduled rent escalations, permitting Gen-Net
to increase dividends and realize capital growth;
. to preserve shareholder capital.
There is no assurance these objectives can be achieved.
In attempting to achieve these objectives, Gen-Net will abide by the
following requirements:
. The properties acquired will be purchased for cash supplied by Gen-Net and
loans encumbering the property not to exceed eighty percent (80%) of the
property's total purchase price.
3
. The properties, which will be used primarily for distribution and office
purposes, will be leased to credit-worthy tenants, each of whom will have
at least $100 million of net worth or be a municipal/state/federal
government agency.
. Net Leases with a tenant will provide that the tenant pays all or a
significant portion of the operating costs associated with a property,
including utilities, real estate taxes, insurance, maintenance but not
capital expenditures such as roof replacement. In some cases, the leases
may include an allowance in the base rent structure to cover such
operational costs with any costs in excess of the allowance to be paid for
by the tenant.
. The leases will be for an extended period of time, typically ten or more
years, and some will include increases in the rent during the lease period
based on various formulas.
There are also provisions in Gen-Net's Bylaws that impose conditions on
possible joint ventures, and that prohibit numerous financial activities. See
"GEN-NET'S OBJECTIVES AND POLICIES" for details.
Properties
Gen-Net will attempt to acquire only certain types of properties. The
properties it intends to acquire will be:
. primarily distribution or office;
. leased or to be leased on a long-term basis to a single tenant;
. have certain required terms in the lease;
. have a tenant that meets certain creditworthy criteria;
. satisfy certain conditions as to their prospects for appreciation.
The properties Gen-Net intends to acquire may be located anywhere in the
United States. See "PROPERTY UNDERWRITING" for details.
Management will diversify Gen-Net's portfolio by geographical location,
tenant industry segment, lease term expiration and property type with the
intention of providing steady revenue growth with low volatility. Management
believes that such diversification should help reduce exposure from regional
recession, industry specific downturns and price fluctuations by property type.
Prior to effecting any acquisitions, management will analyze:
. property design, construction quality, efficiency, functionality and
location with respect to the immediate market, city and region;
. lease integrity with respect to term, rental rate increases, corporate
guarantees and property maintenance provisions;
. present and anticipated conditions in the local real estate market;
. prospects for selling or releasing the property on favorable terms in the
event of a vacancy.
Management also evaluates each potential tenant's financial strength and
position within its respective industry and a property's strategic position and
function within a tenant's operation or distribution systems.
Management
Jerry D. Bringard is the President of Gen-Net, and is responsible for its
management and day-to-day business affairs. Mr. Bringard will be assisted by
Bruce Baum, who will be responsible for managing financial affairs. Both
Messrs. Bringard and Baum are under the direction of the Board of Directors.
See MANAGEMENT for information on the Directors. The Directors have a fiduciary
duty under Michigan law to the shareholders,
4
must exercise reasonable care and act in good faith. If the officers and
Directors are found to be acting in a non-negligent manner and not in violation
of the corporate governing documents, Michigan law or common law, they are
entitled to indemnification from Gen-Net in covering the costs of defending
themselves and any claims.
Certain administrative aspects of Gen-Net's business and affairs as well as
the analysis and selection of properties, negotiation of property acquisition
terms, arranging debt financing terms and property management have been
contracted to Genesis. Genesis is the Sponsor of this offering and the initial
shareholder of Gen-Net. Genesis is owned by D. James Barton and Gregg S.
Barton, his son (the "Bartons").
Competition for Time and Services
Gen-Net will depend on the Directors, officers, and Genesis for its
operation and the acquisition and management of its investments. Gen-Net's
Directors and officers are all separately employed by other unrelated entities
who require substantial amounts of their time. The Bartons are officers,
directors and the sole owners of Genesis. The Bartons are active through
Genesis in acquiring and operating Net Leased properties for Affiliates of
Genesis. See "CONFLICTS OF INTEREST" for details.
Likewise, Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C., L.L.O., is
counsel to both Gen-Net and Genesis. Other counsel will be retained by one or
more parties in the event of an apparent conflict between the interests of
Gen-Net and Genesis.
Compensation to Management and Others
Gen-Net will pay salaries for the services of the President and the
Treasurer and reimburse certain expenses. Mr. Bringard's initial annual salary
for serving as the President has not yet been established but will not exceed
$25,000 the first year. Mr. Baum's initial annual salary for serving as the
Treasurer has not yet been established but initially will not exceed $25,000
annually.
The Directors shall each receive an annual fee of $25,000 for serving as
Directors which shall be in lieu of fees for attending each meeting of the
Board of Directors in person or telephonically.
For its services to Gen-Net, Genesis will receive compensation based upon a
percentage of property sales prices and gross rental income. Genesis will also
receive reimbursement for its expenses in connection with the organization of
Gen-Net and this offering, Acquisition Expenses in connection with the
acquisition of properties, administrative expenses in connection with providing
administrative support to Gen-Net, and disposition expenses in connection with
sales of properties. See MANAGEMENT for details.
There have been no arm's length negotiations between Gen-Net and its
officers and Directors or with Genesis in setting salaries, Directors' fees or
fees to Genesis.
Gen-Net will pay Investors Capital Corporation a fee equal to 1.5% of the
gross sales price of shares for serving as managing underwriter, plus a fee of
..25% for due diligence expenses. Gen-Net will also pay Investors Capital a
selling commission of 5.5%, which may be reallowed by Investors Capital to the
Selected Dealers that sell shares. The total amount of selling compensation
will not exceed 7.25%.
Income Tax Considerations
The complexity of the federal income tax laws causes potentially material
tax issues associated with an investment in Gen-Net. The principal tax
consequences involved with an investment Gen-Net are that if Gen-Net is treated
as a REIT for income tax purposes, investors may receive dividends that are
partially sheltered from federal income taxation. These reductions in the
taxable income are generated as a result of deductions from
5
various operating expenses and from depreciation, and such deductions could be
challenged by the IRS. Also, there could be changes in the federal tax laws
which could either increase or decrease the tax impact from income received
from Gen-Net.
A discussion of the federal income tax issues which may be important to
shareholders is set forth in the "INCOME TAX CONSIDERATIONS" section of this
Prospectus. This section includes a discussion of the many rules Gen-Net must
follow in order to continue to qualify as a REIT and timely avoid paying
federal income taxes.
6
RISK FACTORS
An investment in Gen-Net involves certain risks, some of which are peculiar
to Gen-Net and others of which are inherent in all similar real estate
investments. In analyzing the offering, prospective investors should consider
carefully, among other factors, the effect, if any, of the following:
Risks Associated with this Offering
Gen-Net has no operating history. Although Gen-Net was formed in 1998, it
has been dormant and does not have any operating history. Several Directors of
Gen-Net and the Bartons have had experience in acquiring, developing, leasing
and managing properties, but have no prior experience in managing and operating
a public real estate investment trust.
Shareholders are totally reliant on Gen-Net's management. The shareholders
will not have any active participation in Gen-Net's management or in the
investment of the proceeds of this offering, and, therefore, must rely on the
management, acquisition expertise, and decisions regarding property investments
provided by the Directors and the officers. See "THE COMPANY," "MANAGEMENT,"
"PRIOR PERFORMANCE" AND "DESCRIPTION OF ORGANIZATIONAL DOCUMENTS AND SHARES."
Gen-Net's dividends, if any, will affect shareholders' tax situations. If
Gen-Net generates cash from its operations and thereafter distributes the cash
to shareholders in the form of dividends, a portion of those dividends will be
deemed to be a return of capital to the extent the distribution exceeds net
income as defined by generally accepted accounting principles. Moreover, a
return of capital will also have the effect of reducing a shareholder's tax
basis in his or her shares. See "INCOME TAX CONSIDERATIONS."
There is no market for Gen-Net's shares, no share buy-back program and no
planned date for a termination of Gen-Net or a roll-up transaction limiting the
shareholders' ability to liquidate their investment. Although the shares are
expected to be freely transferable, there is not expected to be a public market
for the shares in the foreseeable future and, therefore, the shares are
illiquid and considered to be long-term investments. Accordingly, a regular
market for the shares will not likely develop during this offering and may not
develop thereafter.
Risks Associated with Leverage. On an aggregate basis, Gen-Net may borrow
up to 80% of the purchase price of properties. The use of borrowed funds in the
purchase of properties is referred to as "leverage." See "GEN-NET'S OBJECTIVES
AND POLICIES--Acquisition of Properties."
Greater use of leverage could result in less funds distributed to
shareholders. The effects of utilizing leverage are to increase the number of
properties that may be purchased with Gen-Net's funds available for investment,
to increase the potential for gain, to increase the aggregate amount of
depreciation available to Gen-Net and to increase the risk of loss. Also, while
higher leverage should enable Gen-Net to acquire a greater number of
investments, Gen-Net would need to utilize greater funds to make payments on
the borrowed funds, which could result in less funds available for
distributions to the shareholders. To the extent that Gen-Net uses leverage or
increased amounts of leverage in the purchase of its properties, the potential
for gain and risk of loss will be increased accordingly. If Gen-Net defaults on
secured indebtedness such as a mortgage, the lender may foreclose, and Gen-Net
could lose its investment in the property. Furthermore, mortgage market
conditions and the policies of the Federal Reserve Board may make it difficult
to obtain mortgages on acceptable terms. See "GEN-NET'S OBJECTIVES AND
POLICIES."
Certain forms of mortgage financing may require Gen-Net to sell properties
or arrange for alternative financing. In purchasing properties subject to
financing, Gen-Net may obtain financing with "due-on-sale" and/or
"due-on-encumbrance" clauses which, upon future refinancing or sale of the
properties, may cause the maturity date of such mortgage loans to be
accelerated and such financing to become due. In such
7
event, Gen-Net may be required to sell its properties on an all-cash basis, to
acquire new financing in connection with the sale, or to provide seller
financing. It is not Gen-Net's intent to provide seller financing, although it
may be necessary or advisable in certain instances. It is unknown whether the
holders of mortgages encumbering properties will require such acceleration or
whether other mortgage financing will be available. Such factors will depend on
the mortgage market and on financial and economic conditions existing at the
time of the sale or refinancing.
Gen-Net's ability to repay a balloon loan may depend on its ability to sell
the property or obtain refinancing. Gen-Net may finance acquisitions of
properties with mortgages that do not provide for the repayment of the entire
principal amount of the mortgage loan or a substantial portion thereof during
its term and therefore require "balloon" payments at maturity. Balloon payments
are payments of a significant portion of the amount originally borrowed when
the loan is due. The ability of Gen-Net to repay at maturity the outstanding
principal amount of the balloon loan may be dependent on its ability to sell
the property or obtain adequate refinancing, which in turn will be dependent
upon economic conditions in general and the value of the property in particular
at the time the loan is due. There is no assurance that Gen-Net will be able to
refinance a balloon loan at maturity or that the terms of any new loan will be
as favorable as the prior loan.
If Gen-Net is unable to refinance a balloon loan at maturity, it may be
forced to sell the property securing repayment of the balloon loan (or another
property), which sale would be affected by economic conditions in general and
possibly by the availability of financing to the purchaser. There is no
assurance that the proceeds of such a sale would be sufficient to fully repay
the balloon loan. Any refinancing or sale may affect the rate of return to
shareholders and the projected time of disposition of Gen-Net's assets. To the
extent that properties are subject to balloon mortgages, Gen-Net's objective of
increasing equity through the reduction of mortgage debt on properties may be
more difficult to achieve. See "GEN-NET'S OBJECTIVES AND POLICIES."
Gen-Net's properties may not be geographically diversified, which could
increase the risks to Gen-Net in the event of adverse economic
conditions. Although it is not limited to investing in any particular area or
region, Gen-Net may invest in properties primarily located in the same state or
general geographical area. If Gen-Net's concentration of investments are in a
single state or general geographical area, it will substantially increase the
risks to Gen-Net in the event of any adverse change in the economic conditions
and real estate markets within that state or general geographical area. Adverse
trends in these economic factors could adversely affect rental income and
appreciation in value of these properties, which in turn would materially
affect Gen-Net's continued viability and profit potential. See "GEN-NET'S
OBJECTIVES AND POLICIES" AND "PROPERTY UNDERWRITING."
The offering price was determined arbitrarily and there is no assurance the
shares will have a price determined by market factors. The Directors have
arbitrarily determined the offering price for the shares. The offering price
does not bear any relationship to objective factors or groups of objective
factors, such as Gen-Net's financial condition. There is no assurance that the
shares will have a price determined by market factors.
An investment in Gen-Net will be immediately diluted. The offering price is
$10.00 per share. There will be an immediate dilution of $1.06 in book value
per share after the payment of all estimated offering expenses, and 10.60% of
equity assuming that the minimum number of shares is sold. If the maximum
number of shares is sold, the immediate dilution in book value will be $1.02
per share and 10.20% of equity. See "DILUTION." Investors will pay the same
price for shares whether they acquire them before or after Gen-Net has made any
investments. If investments previously acquired by Gen-Net have depreciated in
value, the value of the shares purchased by the investor later in the offering
will be diluted immediately upon the purchase of the shares. The Directors may
authorize the issuance of shares in addition to shares issued in this offering,
which would have the effect of diluting the interests of the existing
shareholders.
Gen-Net may be undercapitalized and unable to pursue its investment
strategy. If Gen-Net raises a minimal amount of proceeds through this
offering, it will be less able to achieve a planned diversification of
8
properties, the percentage of the gross offering proceeds applied to property
acquisition expenses will be higher, and Gen-Net may not be able to fully
pursue its investment strategy. See "ESTIMATED USE OF PROCEEDS" AND "GEN-NET'S
OBJECTIVES AND POLICIES."
Gen-Net has not identified any properties so investors cannot investigate
specific properties. Gen-Net has not identified any specific properties in
which to invest. Because properties are not identified, prospective investors
are unable to investigate any specific properties. However, this prospectus
will be amended or supplemented at any time a reasonable probability exists
that a specific property will be acquired. See "GEN-NET'S OBJECTIVES AND
POLICIES."
Gen-Net's operations involve various conflicts of interests. Genesis, the
sponsor, engages in a separate business of acquiring, managing, and selling Net
Leased properties for other entities with similar investment objectives to
those of Gen-Net. Genesis, and the Bartons (who control Genesis) do not have to
favor Gen-Net. Genesis owns 10,000 shares of Gen-Net and can purchase
additional shares under the terms of this offering. Gen-Net's Directors and
Officers can also purchase shares and, subject to certain limitations, can be
expected to vote any such shares in their respective interests. See "CONFLICTS
OF INTEREST."
Other Real Estate Investment Risks
Single tenant leases depend upon the continued financial condition of one
tenant. In leases with single tenants, the continued viability of the lease
will depend directly on the continued financial viability of one tenant. If the
tenant fails and the lease is terminated, Gen-Net would incur a reduction in
cash flow from the property and the value of the property would be decreased.
Also, where two or more properties have the same tenant, or related tenants,
the continued viability of each property would depend directly on the financial
viability of a single tenant. To help reduce these risks, Gen-Net will continue
to consider the creditworthiness and financial strength of the tenants of its
properties at the time they are acquired. See "GEN-NET'S OBJECTIVES AND
POLICIES."
Net leases provide greater tenant discretion and are typically for longer
terms. Net Leases frequently provide the tenant greater discretion in using
the leased property than ordinary property leases, such as the right to freely
sublease the property, to make alterations in the leased premises, and to
obtain early termination of the lease under specified circumstances. Further,
Net Leases are typically for longer lease terms and thus, there is an increased
risk that any rental increase clauses in future years will fail to result in
fair market rental rates during those years.
In leases with single tenants, the financial failure of a tenant could
result in the termination of its lease with Gen-Net which, in turn, might cause
a reduction in Gen-Net's cash flow and/or decrease the value of the property.
In evaluating a possible investment, the creditworthiness, or financial
strength, of a tenant generally will be a more significant factor than the
value of the property without a lease with the tenant and the appraised value
of a property will probably reflect the value of the tenant's ongoing lease of
the property. See "GEN-NET'S OBJECTIVES AND POLICIES."
If a tenant defaults on its lease payments, Gen-Net would not only lose the
net cash flow from the tenant but also might divert cash flow generated by
other properties to meet the mortgage payments on the defaulted property in
order to prevent a foreclosure. See "GEN-NET'S OBJECTIVES AND POLICIES."
If a lease is terminated, there can be no assurance that Gen-Net would be
able to lease the property for the rent previously received or would be able to
sell the property without incurring a loss. Gen-Net could also experience
delays in enforcing its rights against tenants. Furthermore, the federal income
tax laws may restrict Gen-Net's ability to deal with a new tenant after
termination of a lease. See "INCOME TAX CONSIDERATIONS." In addition, there can
be no assurance that Gen-Net could recover the property promptly in any
bankruptcy proceedings or that Gen-Net would receive rent in such proceedings
sufficient to cover its expenses with respect to the property.
9
Real estate investments are expected to limit the ability of Gen-Net to vary
its portfolio promptly in response to changing economic, financial and
investment conditions. Real estate investments will be subject to risks such
as adverse changes in general economic conditions or local conditions (for
example, excessive building resulting in an oversupply of existing space or a
decrease in employment, reducing the demand for real estate in the area), as
well as other factors affecting real estate values (i.e., rent controls,
increasing labor, materials and energy costs, the attractiveness of the
neighborhood, etc.) Investments will also be subject to risks such as adverse
changes in interest rates, the availability of long-term mortgage funds and
additional debt financing, and Gen-Net's ability to provide for adequate
maintenance of its properties. To the extent that Gen-Net utilizes less amounts
of debt to acquire properties, the risks relating to interest rates and
long-term financing will be reduced.
Gen-Net has not yet identified any specific properties in which to invest.
Because properties are not identified, prospective investors are unable to
investigate the properties. Like all real estate equity investments, Gen-Net's
investments will be subject to the risk of inability to attract or retain
tenants and to the risk of a decline in rental income as a result of adverse
changes in the economic conditions, local real estate markets and other
factors. Also, certain expenditures associated with equity investments
(principally mortgage payments, real estate taxes, maintenance and utility
costs) are not necessarily decreased by events adversely affecting Gen-Net's
income from its investments. Should such events occur, Gen-Net's investments
could become a burden, and distributions to shareholders may be impaired. In
the event that mortgage payments are not met with respect to a property,
Gen-Net could sustain a loss as a result of a foreclosure of mortgages secured
by the property.
There is no assurance that properties will appreciate in value, that Gen-Net
will be profitable or pay dividends. While it is Gen-Net's policy to buy
leased, income-producing properties at a price (inclusive of expenses) at or
below the Appraised Value and below the replacement cost of similar structures,
there is no assurance that any properties acquired by Gen-Net will operate at a
profit, will appreciate in value or will ever be sold at a profit, or that
dividends will be paid by Gen-Net. The marketability and value of any
properties will be dependent upon many factors beyond Gen-Net's control. There
is no assurance that there will be a ready market for the properties.
There is no assurance that Gen-Net will receive sufficient subscriptions to
be able to diversity its investments. This offering is being made on a "best
efforts" basis, and there is no assurance that Gen-Net will receive
subscriptions for all of the shares being offered. Gen-Net's potential
profitability and its ability to diversify its investments both geographically
and by number and type of investment purchased will be in part determined by
the amount of funds at its disposal by virtue of the sale of shares in this
offering.
The value of special purpose properties will be adversely affected by the
tenant's failure to renew or honor its lease. Gen-Net may acquire properties,
which are specifically suited to the needs of particular tenants. The value of
these properties would be adversely affected by the failure of the specific
tenant for which they are suited to renew or honor its lease. Such properties
would typically require extensive renovations to adapt them for new uses by new
tenants. Also, it may be difficult for Gen-Net to sell special purpose
properties to persons other than the present tenant.
Gen-Net could suffer severe losses if hazardous materials are discovered on
a property. Under federal law, a landowner has certain liabilities with
respect to the presence of improperly disposed hazardous substances. This
liability is present without regard to the landowner's fault or knowledge of
such substances and may be imposed jointly or severally upon all succeeding
landowners from the date of the improper disposal. Moreover, the requirements
of state and local environmental laws governing the properties which Gen-Net
acquires can be expected to differ from location to location. There can be no
assurance that hazardous substances or wastes, contaminants, pollutants or
sources thereof will not be discovered on properties during the time they are
owned by Gen-Net or after its sale of them to third parties. In the event
hazardous materials are discovered on a property, Gen-Net may be required to
remove these substances or sources and clean up the property. In doing so,
Gen-Net may incur liability to the full extent of its assets for the entire
cost of removal and cleanup. Gen-Net
10
could also be liable to tenants or other users of the property, and may find it
difficult or impossible to sell the property before or after removal or cleanup.
Gen-Net may make loans to purchasers of its properties and risks that a
purchaser could default on the loan. Gen-Net may provide financing to
purchasers of its properties in order to effect their sale. This financing
would result in a delay of receipt of the proceeds from the sale of the
property and, in essence, would result in Gen-Net's investing in a loan to the
purchaser. Gen-Net may provide financing in circumstances where lenders are not
willing to make loans secured by commercial real estate, or Gen-Net may find it
desirable where a purchaser is willing to pay a higher price for the property
than it would without the financing. As a result of making loans to purchasers,
Gen-Net risks that the purchaser could default on the loan and have a negative
affect on Gen-Net's profits.
Gen-Net could suffer a loss if it cannot re-lease a property following early
termination or default in a leaseback transaction. Gen-Net, on occasion, may
lease a property back to the seller for a certain period of time or until
stated rental income objectives are reached. A default by the seller/lessee or
other early termination of the leaseback agreement could, depending on the size
of the property and Gen-Net's ability to manage and re-lease it successfully,
result in a loss. In the event of a default or early termination, there is no
assurance that Gen-Net would be able to find new tenants for the property
without incurring a loss.
Gen-Net could face increased costs in complying with the Americans With
Disabilities Act. Title III of the Americans with Disabilities Act of 1990
("Title III") prohibits discrimination in the private ownership and operation
of real estate. Title III addresses the design, construction and use of places
of public accommodation and commercial facilities by private entities. In
general, Title III provides that private entities who own, operate, or lease to
a place of public accommodation cannot discriminate against persons with
disabilities in the facility itself or the activities and operations conducted
within the facility. Title III mandates that persons with disabilities be
provided accommodations and access equal to, or similar to, to the general
public. In order to ensure that its properties comply with Title III, Gen-Net
may incur costs necessary to remove "architectural barriers," that is,
everything that prevents a person with a disability from enjoying full and
equal use of a facility. These costs may be prohibitive in certain situations
and thereby prevent Gen-Net from buying a property that it might otherwise wish
to purchase. In addition, the costs of compliance with the Title III may have a
significant adverse impact on Gen-Net's profits.
Certain accounting standards may make leaseback transactions less desirable
for the seller of a property and thus reduce the number of properties available
to Gen-Net. Certain accounting standards require leases to be classified for
financial reporting purposes as either capital leases or operating leases.
Capital leases are required to appear as assets and liabilities on the lessee's
balance sheet. Transactions in which Gen-Net acquires a deed to a property may
or may not be recognized as a sale for financial reporting purposes due to
certain provisions in the lease of the property. These accounting standards
might make sale-leaseback transactions less desirable for the seller-tenant
that wants to treat the sale-leaseback as an operating lease, and, therefore,
might reduce the prospective number of properties available to Gen-Net.
Energy shortages may adversely affect the operations of Gen-Net's
properties. There may be shortages or increased costs of fuel, natural gas,
water, or electric power or allocations thereof by suppliers or governmental
regulatory bodies in the areas where Gen-Net purchases properties. This may
adversely affect the operation of the properties. Gen-Net will endeavor, where
feasible, to provide in leases for the pass-through of any such increases to
tenants of the properties, but there is no guarantee that Gen-Net will be
successful.
Gen-Net may not succeed in competing with other financial institutions with
similar objectives. The results Gen-Net operations will depend upon the
availability of suitable properties for investment, which in turn depends to a
large extent on the type of property involved, the condition of the money
market, the nature and geographical location of the property, competition and
other factors, none of which can be predicted with certainty. Gen-Net will be
competing for acceptable investments with other financial institutions,
including
11
insurance companies, pension funds and other institutions, real estate
investment trusts and limited partnerships which have similar investment
objectives. Many of these competitors have greater resources than Gen-Net and
may have greater collective experience than the Directors.
Gen-Net may suffer losses to properties that are not covered by
insurance. Gen-Net will arrange for comprehensive insurance, including fire,
liability and extended coverage on all properties. However, there are certain
types of losses (generally of a catastrophic nature) which may be either
uninsurable or not economically insurable. These losses generally include those
resulting from war, earthquakes and floods, in addition to punitive damages. If
any such disaster occurs and is not covered by insurance, Gen-Net might suffer
a loss of capital invested and any profits which might be anticipated from the
property.
Corporate Risks
Gen-Net may have insufficient working capital and may be unable to obtain
funds through other means to sustain operations. There is no assurance Gen-Net
will have sufficient working capital. A deficiency in working capital may be
caused by a decrease in revenues, by an increase in expenses, or by an
uninsured casualty to a property or by other unanticipated events. During times
of insufficient working capital, there is no assurance Gen-Net could borrow
funds or receive additional capital through the sale of its shares. Further,
loan covenants and other restrictions included in any financing agreements
relating to the acquisition of properties or otherwise, could restrict
Gen-Net's ability to borrow or its ability to draw funds from working capital
reserves.
Certain provisions in Gen-Net's organizational documents limit the
shareholders' ability to take certain actions. Under Gen-Net's organizational
documents, shareholders voting specified percentages of the shares may take
certain actions, including amending the Articles of Incorporation and Bylaws
and causing Gen-Net's dissolution and liquidation. Certain provisions cannot be
amended without a "super majority" vote of 66 2/3% of the shares entitled to
vote. All actions approved by the requisite number of shares would be binding
on all of the shareholders, whether or not they voted their shares for such
action, including votes to sell all or substantially all of Gen-Net's assets,
to dissolve and liquidate, or to merge or reorganize. In certain mergers and
reorganizations, dissenting shareholders may not have appraisal rights with
respect to their shares under applicable Michigan state law. The Directors have
the power to cause the issuance of additional shares without obtaining
shareholder approval. See "DESCRIPTION OF ORGANIZATIONAL DOCUMENTS AND SHARES."
The Bylaws provide that with respect to shares owned by the Directors, or
any Affiliates, neither the Directors or any Affiliate may vote or consent on
matters submitted to the shareholders regarding the removal of any Director, or
any Affiliate, or any transaction between Gen-Net and any of them. In
determining the applicable percentage in interest of shares necessary to
approve a matter in which a Director and any Affiliate may not vote or consent,
any shares owned by any of them shall not be included.
The Directors enjoy limited liability which may result in inadequate
remedies being available to shareholders in the event of a claim. The
Directors are directors of a Michigan business corporation and as such are
required to perform their duties in good faith, in a manner believed by the
Directors to be in Gen-Net's best interests and with such care, including
reasonable inquiry, as an ordinary prudent person in a like position would use
under similar circumstances. A Director who performs his duties in accordance
with these standards will not be liable to Gen-Net or any other person for
failure to discharge his obligations as a Director. Without regard for the
additional responsibilities of Independent Directors, an Independent Director
will not have any greater liability than that of a Director who is not
independent.
The Directors may in the future obtain insurance at Gen-Net's expense and in
reasonable amounts, against losses from tort claims or other claims which may
be made against a Director, officer, employee or agent of Gen-Net.
Under its Bylaws, Gen-Net will, under specified conditions, indemnify its
Directors, officers, employees and other agents against all liabilities
incurred in connection with their serving in such capacities. Shareholders
12
may be entitled to more limited rights of action than they would otherwise have
absent the limitations on Directors' liability set forth in the Bylaws.
A delay between receipt of investor funds and the purchase of properties
will delay Gen-Net's receipt of income from the properties. Although Gen-Net
will be constantly reviewing available properties, there will be a delay
between the time investors purchase their shares and the time the net proceeds
of the offering are invested in real estate interests. A delay in the
investment of offering proceeds in real estate will delay Gen-Net's receipt of
rents from properties and will delay the time that distributions would
otherwise be made to shareholders.
Additional financing may dilute shareholders' interests. Gen-Net is
intended to be an "open-end" REIT in that the Directors are authorized, from
time to time, and without shareholder approval, to obtain capital by issuing
additional shares, notes, debentures, or other obligations which may be
convertible into shares or accompanied by warrants or rights to purchase
shares. The issuance of additional equity interests will be made at such times
and under such terms as the Directors determine to be in the best interests of
Gen-Net. It is possible, however, that the issuance of additional interests may
result in dilution of the current shareholders interests. Gen-Net will not,
however, issue any debt shares or additional mortgage debt which would increase
Gen-Net's leverage above specified limits on indebtedness, and in any event
will not issue shares unless Gen-Net's historical or substantiated future cash
flow, excluding extraordinary items, is sufficient to cover the interest on the
debt shares.
Gen-Net may have to limit its investments to keep from being subject to
regulation under the Investment Company Act of 1940. The Directors intend to
operate Gen-Net so that it will not be subject to regulation under the
Investment Company Act of 1940. Gen-Net may therefore have to forego certain
investments which could produce a more favorable return. Should Gen-Net fail to
qualify for an exemption from registration under the Investment Company Act of
1940, it would be subject to numerous restrictions. A failure to qualify for an
exemption under the Investment Company Act of 1940 could adversely affect
Gen-Net and the shareholders.
Tax Risks
Shareholders may suffer adverse tax consequences if Gen-Net fails to qualify
as a REIT. Gen-Net intends to operate so as to qualify for taxation as a REIT.
As a REIT, it will be allowed a deduction for dividends paid to its
shareholders in computing its taxable income. Should Gen-Net fail to qualify as
a REIT for any tax year, its previous election to be taxed as a REIT would
terminate and it would generally not be able to elect to be taxed as a REIT
until the fifth year after the beginning of the first year of the
disqualification. Without REIT qualification, Gen-Net would be taxed as a
regular corporation, and distributions to its shareholders would not be
deductible in computing its taxable income. The payment of any tax by Gen-Net
resulting from its failure to qualify as a REIT would reduce the funds
available for distribution to shareholders or for investment and, if
shareholder distributions had been made in anticipation of Gen-Net's qualifying
for taxation as a REIT, could force Gen-Net to borrow additional funds or to
liquidate certain of its investments in order to pay the applicable tax. See
"INCOME TAX CONSIDERATIONS."
There could be future tax law changes that adversely affect Gen-Net. The
discussions of the federal income tax considerations of this offering are based
on current law, including the Internal Revenue Code, federal tax regulations,
certain administrative interpretations thereof and court decisions. Future
events, such as court decisions, administrative rulings and interpretations and
changes in the Internal Revenue Code or regulations, that change or modify
these provisions could result in treatment under the federal income tax laws
for Gen-Net and/or the shareholders that differs materially and adversely from
that described in this prospectus, both for taxable years arising after and
before such event. There is no assurance that future legislation,
administrative interpretations or court decisions will not be retroactive in
effect.
13
An investment in Gen-Net may not satisfy the diversification requirements of
ERISA or be authorized by the governing instrument of a particular form of
IRA. Fiduciaries of a pension, profit sharing or other employee benefit plan
subject to ERISA should consider whether the investment in Gen-Net's shares
satisfies the diversification requirements of ERISA, whether the investment is
prudent in light of possible limitations on the marketability of the shares,
whether the investment would be an improper delegation of control over or
responsibility for plan assets and whether such fiduciaries have authority to
acquire such shares under the appropriate governing instrument and ERISA. Also,
fiduciaries of an IRA should consider that an IRA may only make investments
that are authorized by the appropriate governing instrument. See "ERISA
CONSIDERATIONS."
INVESTOR SUITABILITY
It is important that investors recognize the possible illiquidity of the
shares and likelihood of a long-term holding period in order to achieve
Gen-Net's investment objectives. Accordingly, the purchase of shares is not
suitable for any prospective investor whose funds must remain liquid or whose
investment objectives for such funds do not include a long-term holding period.
For the form of written agreement required to purchase shares, see the Order
Form attached as Exhibit A to this prospectus. Gen-Net and each person selling
shares on Gen-Net's behalf shall make every reasonable effort to determine that
shares will only be sold to an investor who represents in writing that, at the
time he executes the Order Form, he meets the applicable suitability
requirements and is purchasing the shares for his or her own account or the
account of a qualified retirement plan.
In order to meet the suitability requirements for this offering, each
investor not a resident of states discussed specifically below must, at a
minimum, have (i) gross income, as defined in the Internal Revenue Code, of
$45,000 and a $45,000 net worth (excluding home, furnishings and automobiles)
or (ii) net worth of $150,000 (excluding home, furnishings and automobiles).
In the case of sales to fiduciary accounts, these suitability requirements
must be met by the beneficiary, the fiduciary account, or by the donor or
grantor who directly or indirectly supplies the funds to purchase the shares if
the donor or grantor is the fiduciary. Gen-Net and Investors Capital will make
every reasonable effort to determine suitability and will, in part, rely on the
investor's representations in establishing the investor's suitability under the
standards described in the prospectus. If one or both of these parties has
reason to believe otherwise, the Order Form may be rejected. These suitability
standards are guidelines established by Gen-Net and various state securities
regulators to assure that investors have the financial means to assume the
risks involved for an investment.
Investors who are residents of California must, at a minimum, have (i) gross
income of $60,000 and a $60,000 net worth or (ii) net worth of $225,000.
Investors who are residents of Maine must, at a minimum, have (i) gross
income, as defined in the Internal Revenue Code, of $50,000 and a $50,000 net
worth (excluding income, furnishings and automobiles) or (ii) net worth of
$200,000 (excluding income, furnishings and automobiles).
Investors who are residents of Missouri must, at a minimum, have (i) gross
income of $60,000 and a net worth of $60,000 or minimum net worth of $225,000.
Additionally, no more than 10% of a Missouri investor's liquid net worth can be
invested in these securities.
Investors who are residents of North Carolina must either have a minimum net
worth of $225,000, or a minimum net worth of $60,000 and had during the last
tax year or estimates that the investor will have during the current tax year,
taxable income of at least $60,000, without regard to the investment in
Gen-Net. Net worth shall be determined exclusive of principal residence,
mortgage thereon, home furnishings and automobiles.
An investment in Gen-Net by a Pennsylvanian cannot exceed 10% of the
investor's net worth.
Investors who are residents of Tennessee must, at a minimum, have (i) annual
gross income of $60,000 and a net worth of $60,000 (not including home, home
furnishings and automobiles) or (ii) net worth of $225,000 (excluding home,
home furnishings and automobiles).
14
Executing the Order Form shall not constitute a completed transaction until
five (5) business days after the date the investor receives the prospectus.
Investors will receive written confirmation their purchase of shares.
If an investor were to later decide that the shares were not suitable,
Gen-Net, or Investors Capital may nevertheless choose to rely on the investor's
representation that he is a suitable purchaser, given the various
considerations discussed above and in the Order Form.
Investors who wish to transfer their shares after their initial investment
may be subject to the securities laws of the state in which the transfer is to
take place, including the imposition of suitability standards of the type
described above.
CONFLICTS OF INTEREST
Gen-Net's operation will involve various conflicts of interest. The
Independent Directors will determine how Gen-Net will participate in any
transaction or situation. The Directors have a fiduciary obligation to act on
behalf of the shareholders and have an obligation to determine the Gen-Net's
course of action in all situations in which a conflict of interest may arise.
The conflicts of interest include the following:
Competition for the Time and Services of Directors, Officers, Genesis and the
Bartons
Gen-Net will depend on the Directors and officers and, initially at least,
Genesis for maintaining its internal operations and for the acquisition,
management and disposition of the properties. The Directors and officers will
devote such time to Gen-Net's affairs as they, within their sole discretion
exercised in good faith, determine to be necessary for the benefit of Gen-Net
and its shareholders. See "MANAGEMENT." The Independent Directors may serve in
similar capacities on the Boards of Directors of other investment programs.
Genesis engages in a separate business of acquiring, managing and selling
Net Leased property for Affiliates of Genesis other than Gen-Net. The
Affiliates of Genesis are those 18 entities described in the Prior Performance
section of this prospectus. All of those Affiliates have investment objectives
similar to those of Gen-Net and seek to invest in similar properties. The
arrangements between Genesis and Gen-Net do not require that 1) Gen-Net's needs
and business activities take precedence over those of Genesis' other clients
and Affiliates or 2) Genesis provide Gen-Net with a right of first refusal with
respect to prospective properties that are found by Genesis and may be suitable
for a number of its clients or Affiliates.
Likewise, the Bartons, who control Genesis, hold no positions or offices
with Gen-Net and are under no obligation to favor Gen-Net over any other
Genesis Affiliate.
Holdings of Certain Persons
Genesis, the Sponsor of this offering, previously acquired 10,000 shares of
Gen-Net which are not included in this offering for an aggregate purchase price
of $100,000. Genesis is not restricted from acquiring additional shares
pursuant to the purchase terms of this offering. Gen-Net's Directors, officers
and employees are also not restricted from acquiring shares and may acquire an
unlimited number of shares in the future. Shares owned by these persons can be
expected to be voted in the respective best interests of these persons in
matters requiring the approval of the holders of a majority of shares and in
any other matter submitted to a vote of the shareholders.
The Bylaws provide that with respect to shares owned by Directors, or any
Affiliate, neither the Directors nor any Affiliate may vote or consent on
matters submitted to the shareholders regarding the removal of Directors, or
any Affiliate on any transaction between Gen-Net and any of them. In
determining the requisite percentage in interest of shares necessary to approve
a matter in which the Directors and any Affiliate may not vote or consent, any
shares owned by any of them shall not be included.
15
Genesis will hold 3.333% of the outstanding common stock of Gen-Net,
assuming that the minimum amount of shares is sold in the offering, and that
Genesis does not purchase any additional shares. Genesis will hold .4% of the
outstanding common stock of Gen-Net, assuming that the maximum amount of shares
is sold in the offering, and that Genesis does not purchase any additional
shares. Genesis will not have the ability to control, by virtue of its voting
power, the election of directors following the offering.
Common Counsel
Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C., L.L.O., counsel for
Gen-Net in connection with this offering, also serves as counsel to Genesis. In
the event any legal controversy arises in which Gen-Net's interests appear to
be in conflict with those of Genesis or its Affiliates, other counsel will be
retained for one or more parties.
THE COMPANY
Gen-Net was organized on September 28, 1998 as a Michigan business
corporation and has a perpetual existence. The incorporator of Gen-Net, David
Bernard, is deceased.
Prior to the commencement of this offering, Gen-Net filed Restated Articles
of Incorporation with the State of Michigan on August 30, 2001. Since its
formation in 1998 and through the commencement date of this offering, Gen-Net
did not engage in any operating activities. Its corporate existence has been
maintained in good standing by Genesis, its sole shareholder. However, the
Bartons, who control Genesis, have not in the past, do not now, and do not in
the future intend to, hold positions as officers with Gen-Net. Gen-Net's
principal office is 24081 West River Road, First Floor, Grosse Ile, Michigan
48138. Its telephone number is (800) 546-2630.
Genesis does not intend to purchase shares in this offering, but there is
nothing prohibiting it from doing so.
As of the date of this prospectus, Gen-Net does not own any properties nor
has any property been selected for purchase by Gen-Net. Management expects that
all of the properties to be acquired by Gen-Net will be leased to single
tenants.
This prospectus will be supplemented whenever a reasonable probability
arises that Gen-Net will invest in a particular property.
CAPITALIZATION
Gen-Net was formed with $100,000 in cash contributed by Genesis in exchange
for 10,000 shares based on an assumed price per share of $10.00. Gen-Net's
capitalization at December 31, 2001 and after the issuance and sale of the
minimum 300,000 shares or the maximum 2,500,000 shares will be as follows:
December 31,
2001 Minimum Maximum
------------ ---------- -----------
Initial Capital.................... $100,000 $ 100,000 $ 100,000
Retained Earnings.................. 615 615 615
Investor's Capital, net of costs(1) $2,702,500 $22,687,500
-------- ---------- -----------
Total Equity.................... 100,615 $2,803,115 $22,788,115
======== ========== ===========
- --------
(1) See footnotes (1), (2) and (3) under "ESTIMATED USE OF PROCEEDS."
16
SELECTED FINANCIAL DATA
The following selected financial data for and as of the three years ended
December 31, 2001, are derived from the Company's audited consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The Company's
consolidated financial statements were examined by Zwick & Steinberger,
P.L.L.C., whose report with respect to the three years ended December 31, 2001
and as of December 31, 2000 and 2001 appears in this prospectus. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto and other financial
information appearing elsewhere in this prospectus.
Year ended December 31, Four months ended
-------------------- April 30, 2002
1999 2000 2001 (unaudited)
----- ----- -------- -----------------
Statement of Income Data
Revenues..................................... -- -- $ 1,340 $ 82
Income taxes................................. -- -- 725 44
Net income................................... -- -- $ 615 38
-------- ---------
Net income per share......................... -- -- .06 .00
-------- ---------
Weighted average number of shares outstanding -- -- 10,000 10,000
December 31,
-------------------- April 30, 2002
1999 2000 2001 (unaudited)
----- ----- -------- -----------------
Balance Sheet Data:
Working capital.............................. -- -- (79,530) (132,944)
Total assets................................. -- -- 181,101 243,638
-------- ---------
Shareholders' equity......................... -- -- 100,615 100,653
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use of
proceeds from the sale of shares, assuming that the minimum of 300,000 shares
are sold and that the maximum of 2,500,000 shares are sold. Certain of the
figures set forth on the following table cannot be precisely calculated at the
present time and could vary materially from the amounts shown.
After the deduction from the offering proceeds of all fees and expenses
associated with Gen-Net's organization and the offering and the acquisition of
the properties and for a working capital reserve, a minimum of $2,672,500 (89%)
of the remaining offering proceeds will be invested into the properties
themselves.
Minimum Shares Maximum Shares
----------------- ------------------
Dollars Percent Dollars Percent
---------- ------- ----------- -------
GROSS OFFERING PROCEEDS............................. $3,000,000 100% $25,000,000 100%
Less Organizational and Offering Expenses(1) (2) (3) $ 297,500 10% $ 2,312,500 9%
Amount Available for Investment..................... $2,702,500 90% $22,687,500 91%
Working Capital Reserve............................. $ 30,000 1% $ 250,000 1%
CASH AVAILABLE FOR PURCHASE OF PROPERTIES(4)........ $2,672,500 89% $22,437,500 90%
- --------
(1) Investors Capital will be paid compensation aggregating up to 7.25%. This
includes a managing underwriter's fee of 1.5%, a sales commission of 5.5%,
and .25% as an expense reimbursement allowance for bona fide, accountable
due diligence expenses. The Selling commission may be allowed to Selected
Dealers selling shares.
17
(2) The sum of all organization and offering expenses, including selling
commissions incurred by Gen-Net, will not exceed 11% of the gross offering
proceeds.
(3) Includes up to 2% or an estimated maximum of $500,000, whichever is less,
to cover payments for the federal and state securities registration fees,
fees of counsel, accountant's fees, printing expenses, and other
out-of-pocket expenses paid by Gen-Net, at cost, in organizing and
arranging for the sale of shares.
(4) In each property purchase transaction there will be Acquisition Expenses
and Fees that are not reimbursed to Gen-Net. Such expenses and fees do not
include expenses associated with property acquisitions that are part of the
purchase price of the properties and are included in the basis of the
properties.
DILUTION
The purchasers of the shares of common stock offered hereby will experience
immediate dilution in the net book value of their shares of common stock. At
December 31, 2001, the net book value of the Company was $10.06 per share. The
purchasers will pay the same price per share ($10.00) as the existing
shareholders paid for theirs. However, the Company estimates that the net
proceeds after all expenses in the event the maximum number of shares is sold
will be $22,687,500 and the net proceeds in the event the minimum number of
shares is sold will be $2,702,500. Therefore, the book value at the time of
completion of the offering in the event the maximum number of shares is sold
will be $8.98, which represents a reduction of $1.02 from the original purchase
price and a dilution of 10.20% of equity. In the event the minimum number of
shares is sold, the book value will be $8.94, which represents a reduction of
$1.06 from the original purchase price and a dilution of 10.60% of equity.
GEN-NET'S OBJECTIVES AND POLICIES
Operational Objectives
Gen-Net's primary operational objectives are to increase funds from
operations and cash available for distribution to shareholders. Management will
focus on the following activities to achieve these objectives:
. Acquiring properties that meet Gen-Net's acquisition criteria. See
"GEN-NET'S OBJECTIVES AND POLICIES--Acquisition of Properties" and
"PROPERTY UNDERWRITING."
. Effectively managing properties through lease extensions, revenue
enhancing property expansions, opportunistic property sales and
redeployment of assets, when advisable; and
. Financing properties at lower cost of capital, and increasing the
Gen-Net's access to capital to finance property acquisitions and
expansions.
Gen-Net intends to acquire primarily existing or newly-developed
distribution and office properties within the United States and to lease the
properties to operating tenants pursuant to long-term Net Leases of typically
seven or more years. Gen-Net expects that most properties will be leased by
single entities rather than multiple tenants and will be acquired in
sale-leaseback transactions. Gen-Net may acquire properties anywhere in the
United States.
If only a minimal amount of shares are sold, Gen-Net anticipates that it
will acquire at least 2 properties. If the maximum number of offered shares are
sold, Gen-Net anticipates that it will acquire up to 20 properties. Except as
set forth in this prospectus, Gen-Net does not have a policy, and there is no
limitation, as to the amount or percentage of its assets that may be invested
in any one property.
Gen-Net intends to purchase or develop only properties that are either
currently leased or are committed to be leased on completion of the development
activities. No leases will be entered into with a sole proprietor or
18
franchisee who will operate a business on the property. Each non-governmental
tenant of a property will be required to have a net worth of not less than $100
million, based on the tenant's most recent audited financial statement or other
similar evidence establishing net worth.
Gen-Net's procedures with respect to environmental due diligence are to
require, prior to the purchase of a property, that all conditions imposed by a
lender loaning funds toward the acquisition of the property, if applicable,
have been satisfied and that all conditions imposed by the title insurer which
exclude coverage due to environmental conditions are either removed, waived or
found acceptable by a majority of the Directors. If neither the lender nor the
title insurer raise issues regarding environmental due diligence, Gen-Net may
nevertheless require certain protective representations from the seller,
including an acceptable environmental study of the property.
Investment Objectives
Gen-Net's principal investment objectives are:
. To provide regular dividends to shareholders. To the extent possible,
Gen-Net seeks to avoid the fluctuations in dividends that might result if
dividends were based on actual cash received during the dividend period.
To implement this policy Gen-Net may use cash received during prior
periods, or cash received subsequent to the dividend period and prior to
the payment date for such dividend, in order to pay annualized dividends
consistent with the dividend level established from time to time by the
Directors. Gen-Net's ability to maintain this policy is dependent upon its
cash flow and applicable REIT rules. There can be no assurance that there
will be cash flow available to pay dividends or that dividend amounts will
not fluctuate. Quarterly dividends will be calculated with daily record
and dividend declaration dates. However, the Directors could, at any time,
elect to reduce administrative costs. As a matter of policy, Gen-Net,
subject to applicable REIT rules, will seek to reinvest proceeds from the
sale, financing, refinancing or other disposition of its properties
through the purchase of additional properties.
. To provide shareholders with long-term appreciation on their
investment. Management believes that Gen-Net can realize its objective of
long-term appreciation of its properties in light of the lowering of
commercial real estate prices in recent years. There is, of course, no
assurance Gen-Net will, in fact, realize appreciation in its portfolio of
properties. Moreover, an individual investing directly in real estate
would not have to pay the offering expenses expected to be paid by Gen-Net
(up to 9% of the gross offering proceeds) and therefore Gen-Net would need
to realize greater appreciation of the value of its properties in order
for such an investor to realize the same return he might realize if he
were able to invest directly in the real estate.
. To provide investors with an inflation hedge. During times of inflation,
it is management's experience that rental real estate experiences price
increases commensurate with increases in inflation. However, inflation has
become a less significant factor in recent years as rates of inflation
have been low. Also, real property which is subject to long-term leases
requiring fixed rents over future years may not experience an increase in
price commensurate with inflation or commensurate with similar properties
which are not subject to such leases.
. To preserve capital. Gen-Net will attempt to preserve capital by
endeavoring to continue to invest in a diversified portfolio of quality
real estate under long-term leases to creditworthy tenants. The amount of
money raised in this offering will affect the number of properties Gen-Net
will be able to purchase. The more properties Gen-Net acquires, the more
diversified it will be and the less it will be affected by any single
property that does not perform as expected.
There can be no assurance that any or all of the foregoing objectives will
be achieved as each, to some extent, is dependent upon factors and conditions
which are beyond Gen-Net's control. Management will
19
endeavor to purchase properties under terms which will provide it with positive
cash return and management will endeavor to acquire quality properties in areas
of projected growth. However, Gen-Net's realization of cash flow and
appreciation of value from its properties will depend on a number of factors,
including short-term and long-term economic trends, federal income tax law,
governmental regulations, local real estate and financial market conditions and
property operating expenses. Moreover, the preservation of shareholders'
capital will largely depend upon management's ability to invest in a
diversified portfolio of real estate, which will in turn depend upon the amount
of proceeds realized from the offering.
Investment Policies
Gen-Net's investments must be made in accordance with the applicable REIT
provisions in order for it to qualify as a REIT. With certain exceptions,
equity interests in entities which do not qualify as REITs, but which own,
develop or improve real property (as contrasted with direct equity interests in
real property itself) are not includable in permitted classes of assets in
applying the 75% test described in "INCOME TAX CONSIDERATIONS," and dividends
from such investments are not includable in the 75% gross income test described
in "INCOME TAX CONSIDERATIONS."
Gen-Net's specific investment policies are:
(1) The acquisition of income-producing improved real estate properties
using borrowed capital only where prudent as determined by the Directors and
in any event where borrowed funds will not constitute more than eighty
percent (80%) of the purchase price of the property;
(2) To utilize shareholder equity to purchase primarily income-producing
distribution and office properties at prices (including pro rata acquisition
and organizational costs) that are at or below Appraised Values; and
(3) To purchase properties subject to long-term, Net Leases with tenants
who are not sole proprietors or franchisees and who have a stated net worth
of at least $100,000 million as expressed in their most recently issued
audited financial statement or other reliable evidence establishing net
worth on the date Gen-Net contracts to acquire the property, or are
governmental entities.
There can be no assurance that such objectives can be attained. It is not
Gen-Net's objective to shelter taxable income of investors that is derived from
other sources.
Acquisition of Properties
Gen-Net will use the net offering proceeds (after payment of selling
commissions and offering costs), which will be approximately $2,672,500 if only
the minimum number of shares are sold and approximately $22,437,500 if the
maximum number of shares are sold, for the purchase of qualifying real estate.
Management will seek to diversify the portfolio by geographical location,
tenant industry segment, lease term expiration and property type with the
intention of providing steady, dependable cash flow. Management believes that
such diversification should help insulate Gen-Net from regional recession,
industry specific downturns and price fluctuations by property type.
Properties could be located throughout the United States. Prior to effecting
any acquisitions, management analyzes the (i) property's design, construction
quality, efficiency, functionality and location with respect to the immediate
submarket, city and region; (ii) lease integrity with respect to term, rental
rate increases, corporate guarantees and property maintenance provisions; (iii)
present and anticipated conditions in the local real estate market; and (iv)
prospects for selling or releasing the property on favorable terms in the event
of a vacancy. Management has retained Genesis, and may retain other third party
acquisition specialists, to assist in this process.
The ability to diversify will be limited by the number of properties that
can be acquired with the available proceeds. Because investments will be made
in Net Leased properties, Gen-Net does not presently anticipate establishing a
large reserve for working capital.
20
Gen-Net will purchase properties using not more than eighty percent (80%)
borrowed capital. It will not subsequently mortgage properties unless it is
determined by the Directors to be in Gen-Net's best interests, in order to
obtain funds necessary to maintain Gen-Net's financial viability or any of its
properties and, in any event, such borrowings will not exceed eighty percent
(80%) of the purchase price of the property. The amount that may be borrowed
will be determined by a number of factors, including the use of the proceeds,
the lenders' restrictions, the likelihood that the loan can be readily serviced
from rents at the property where the proceeds are applied and similar factors.
Gen-Net presently does not own any properties and has not yet identified a
property it intends to purchase. Although there can be no assurance as to when
the proceeds from this offering will be fully invested, the Directors do not
anticipate that there will be an inordinate amount of time required to complete
the evaluation of properties prior to their acquisition. Genesis initially will
be responsible for making property acquisition investigations and preparing
acquisition reports for use by Gen-Net's management See "MANAGEMENT" AND "PRIOR
PERFORMANCE OF GEN-NET AND GENESIS" for a discussion of its qualifications and
experience in this regard. The purchase price of each property will be
supported by the Director's determination of the fair market value of the
property which may be supported by an independent Appraisal. Where a majority
of the Independent Directors require an Independent Appraisal, such an
appraisal must be obtained. Copies of such appraisals will be retained at
Gen-Net's offices for at least five years and will be available for inspection
and duplication by any shareholder at the shareholder's expense.
Any transaction with Genesis, or with a Director, officer or Affiliate of
Gen-Net, including transactions that involve the acquisition of a property from
such person, must be approved by a majority of the Independent Directors as
being fair, competitive and commercially reasonable and no less favorable to
Gen-Net than transactions with third parties under similar circumstances and
must be supported by an independent Appraisal.
Prior to the acquisition of any property, Gen-Net will be provided with
evidence satisfactory to the Directors that it will acquire marketable title to
the property, subject only to such liens and encumbrances as are acceptable to
the Directors. Such evidence may include a policy of title insurance, an
opinion of counsel or such other evidence as is customary in the locality in
which the property is situated.
Dividends
Gen-Net intends to distribute as dividends earnings from operations to the
shareholders within 30 days after the close of each quarter. During the
offering and acquisition phase of Gen-Net's operations, the Directors intend to
distribute interest income earned on proceeds that are temporarily invested.
The ultimate amount of such dividends will depend upon Gen-Net's profitable
operation and cash flow needs. In order to preserve Gen-Net's qualification as
a REIT, Gen-Net is required to distribute at least 90% of its distributable
REIT taxable income. Because of the possible receipt of such income without
corresponding distributable cash it is possible that Gen-Net may make such
required dividends from borrowed funds or working capital reserves. There can
be no assurance that funds for required dividends will be available from any
such sources. See "INCOME TAX CONSIDERATIONS--Distribution Requirements."
Sale of Properties
Gen-Net expects to sell some or all of its properties over time. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of performance of the property,
existing market conditions and also the economic benefits of continued
ownership. In deciding whether to sell properties, the Directors will consider
factors such as potential capital appreciation, cash flow and federal income
tax consequences. Affiliates of one or more Directors may be selected to
perform various substantial real estate brokerage functions in connection with
the sale of properties. Gen-Net will not sell any property to the Directors or
their Affiliates, or to Genesis.
21
Net proceeds from the sale of any property may, at the election of the
Directors based upon their then current evaluation of real estate market
conditions, either be distributed to the shareholders or be reinvested in other
properties. A reinvestment in other properties would be feasible only if it can
be accomplished on a tax-deferred basis so that Gen-Net will not suffer any
significant adverse tax consequences. Any properties in which net proceeds from
a sale are reinvested will be subject to the same acquisition guidelines as
properties initially acquired by Gen-Net. See "PROPERTY UNDERWRITING."
In connection with the sale of a property owned by Gen-Net, purchase money
obligations secured by mortgages may be taken as partial payment. The terms of
payment to Gen-Net will be affected mainly by prevailing economic conditions.
To the extent Gen-Net receives notes and property other than cash on sales,
such proceeds will not be included in net proceeds of sale until and to the
extent the notes or other property are actually collected, sold, refinanced or
otherwise liquidated. Gen-Net may receive payments (cash and other property) in
the year of sale in an amount less than the full sales price and subsequent
payments may be spread over several years. Therefore, dividends to shareholders
of the proceeds of a sale may be delayed until the notes or other property are
collected at maturity, sold, refinanced or otherwise converted to cash. The
entire balance of the principal may be a balloon payment due at maturity. For
federal income tax purposes, unless Gen-Net elects otherwise it will report the
gain on such sale ratably as principal payments are received under the
installment method of accounting.
Borrowing Policies--Restriction on Leverage
In the exercise of their fiduciary duties, the Directors may elect to borrow
funds in order to take advantage of particular acquisition opportunities, cover
the cost of improving a property, cover costs not met by insurance or cover
operating costs. In any event, the Directors will not encumber any property in
excess of eighty percent (80%) of its purchase price. Furthermore, the
Directors will not borrow funds in order to use the proceeds from the borrowing
to pay dividends to shareholders.
Gen-Net may not borrow from a Director, officer or any Affiliate thereof, or
from Genesis unless a majority of Directors, including a majority of
Independent Directors, not otherwise interested in such transaction approve the
transaction as being fair, competitive, and commercially reasonable and no less
favorable to Gen-Net than loans between unaffiliated parties under the same
circumstances.
Gen-Net will not issue any senior shares nor will it invest net proceeds of
this offering in junior mortgages, junior deeds of trust or similar obligations.
Reserves for Operating Expenses
Gen-Net expects that approximately one percent (1%) of the gross proceeds of
this offering will be reserved initially to meet operating costs and expenses
of the properties, capital expenditures and initial cash distributions. To the
extent that such reserve and any income are insufficient to defray costs and
other obligations and liabilities, it will be necessary to attempt to finance
or refinance properties or, in the event financing or refinancing is not
available on acceptable terms, to liquidate the investment in certain
properties on possibly unfavorable terms. During the holding period of a
property, Gen-Net may increase reserves from rental income to meet anticipated
costs and expenses and other economic contingencies. If, in any fiscal quarter,
the Directors determine that reserves are in excess of the amount necessary for
operations, such excess may be included in and distributed as dividends. The
Directors will use their best efforts to restore the reserves if they fall
below 1% of adjusted capital contributions by replenishing such reserves out of
rental income before any further distributions of dividends.
22
Gen-Net's total operating expenses, including, but not limited to, certain
administration items such as personnel salaries shall (in the absence of a
satisfactory showing to the contrary) be deemed to be excessive if they exceed
in any fiscal year the greater of:
(a) 1.66% of its average invested assets or 15.76% of its net income for
such year if the minimum amount of shares are sold; and
(b) .0035% of its average invested assets or 3.5% of its net income for
such year if the maximum number of shares are sold.
The Independent Directors shall have the fiduciary responsibility of
limiting such expenses to amounts that do not exceed such limitations unless
such Independent Directors shall have made a finding that, based on such
unusual and non-recurring factors which they deem sufficient, a higher level of
expenses is justified for such year. Any such finding and the reasons in
support thereof shall be reflected in the minutes of the meeting of the
Directors.
Management of Properties
Each property will initially be managed on Gen-Net's behalf by Genesis. This
arrangement with Genesis will include providing services in connection with
negotiating leases, providing monthly statements as to the income and expense
applicable to each property, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and insurance
coverage, and periodic inspection of properties and tenants' maintenance
records where applicable. The tenants will be responsible at their expense for
day-to-day oversight and maintenance of the properties.
Genesis is also empowered to enforce, on behalf of Gen-Net, the tenants'
responsibilities under the leases. It will be authorized to hire attorneys,
accountants, administrative personnel and other professionals or contractors as
they deem necessary or appropriate to effect its duties under the contract. It
also has authority to hire such persons as may be necessary to fulfill
Gen-Net's responsibility as owner and lessor of the property, including
contractors, subcontractors, materialmen, laborers, surveyors, architects and
engineers.
Genesis has entered into a written services contract with Gen-Net to provide
these services. It is further described in "MANAGEMENT."
Changes in Investment Objectives and Policies
Shareholders have voting rights with respect to the establishment,
implementation or alteration of Gen-Net's investment objectives and policies.
The Directors will not make any material changes in the investment objectives
and policies described above without first obtaining the written consent or
approval of shareholders owning in the aggregate more than 50% of the then
outstanding shares, excluding shares held by officers, Directors and Affiliates.
The Bylaws provide that in the event the Directors call a special meeting of
the shareholders, the meeting shall be called for a time and place reasonably
believed convenient to a majority of the shareholders.
Certain Financial Activities Not Permitted
It is Gen-Net's policy not to engage in the following financial or
investment activities, except to the extent indicated:
(a) invest in unimproved real property or mortgage loans on unimproved
real property;
(b) invest in commodities or commodities futures contracts;
(c) make loans to Genesis, the Directors, or Affiliates thereof except as
permitted under (d) below or to wholly owned subsidiaries of Gen-Net;
(d) make mortgage loans unless certain specific procedures and policies
are followed, which may include obtaining an appraisal of the underlying
property;
23
(e) issue redeemable equity securities;
(f) issue debt securities unless the historical debt service coverage (in
the most recently completed fiscal year) as adjusted for known changes is
sufficient to properly service that higher level of debt;
(g) issue options or warrants to purchase shares to the Directors or
Affiliates except on the same terms as such options or warrants are sold to
the general public. Gen-Net may issue options or warrants to persons not so
connected with Gen-Net but not at exercise prices less than the fair market
value of such securities on the date of grant and for consideration (which
may include services) that in the judgement of the Independent Directors,
has a market value less than the value of such option on the date of grant.
Options or warrants issuable to the Directors or any Affiliate shall not
exceed an amount equal to ten percent (10%) of the outstanding shares of
Gen-Net on the date of grant of any options or warrants;
(h) issue shares on a deferred payment basis or other similar arrangement;
(i) invest in any mortgage loans that are subordinate to any liens or
other indebtedness on a property;
(j) invest in equity securities unless a majority of the Directors
(including a majority of the Independent Directors) not interested in the
transaction approves the transaction as being fair, competitive and
commercially reasonable;
(k) sell any of its properties to any Director or Affiliates or to
Genesis;
(l) engage in any short sales of securities or trading, as distinguished
from investment activities;
(m) engage in underwriting or the agency distribution of securities
issued by others;
(n) acquire securities in any company holding an investment or engaging
in activities in which Gen-Net is prohibited to invest or engage;
(o) invest in the securities of other issuers for the purpose of
exercising control;
(p) invest in the securities of or interests in persons or other entities
engaged in real estate activities;
(q) engage in the purchase and sale of investments, other than the
properties which satisfy Gen-Net's investment objectives or for the purpose
of investing on a short-term basis reserves and funds available for the
purchase of properties;
(r) acquire shares through repurchase except as may be necessary to
maintain qualification as a REIT.
(s) engage in a contract, joint venture or other transaction or series of
transactions with any Director, officer, or Affiliate, or with Genesis,
unless a majority of the Directors including a majority of the Independent
Directors determines that the contract, joint venture, or other transaction
is fair, competitive and commercially reasonable and on terms and conditions
no less favorable to Gen-Net than those available from unaffiliated third
parties under the same circumstances.
The foregoing policies shall not be changed except in the case of a proposal
to do so being made by a shareholder or the Directors and the votes of a
majority of the shareholders (not including shares held by officers, Directors,
or an Affiliate) voting at any regular or special shareholders' meeting.
PROPERTY UNDERWRITING
As of the date of this prospectus, Gen-Net has not acquired any properties
nor has it identified any properties that it intends to acquire. The Directors
are evaluating various properties for acquisition and will engage in
discussions with sellers from time to time regarding the purchase of
properties. Depending on the proceeds obtained from this offering, the
Directors intend to diversify the type and location of commercial properties
acquired. Gen-Net is not limited as to the amount or percentage of its assets
that may be invested in any specific property. Although Gen-Net presently
intends to purchase from two to twenty properties with the net
24
proceeds of this offering, the Directors may purchase only a single property
if, in their judgment, such purchase would be in Gen-Net's best interest.
In determining whether a property is a suitable acquisition for Gen-Net, the
Directors will consider the following factors, among others:
(a) the safety of the investment;
(b) the location, condition, use and design of the property and its
suitability for a long-term Net Lease;
(c) the terms of the proposed lease (including, specifically, provisions
relating to rent increases or percentage rent and provisions relating to
passing on operating expenses to tenants);
(d) the creditworthiness of the lessee (which must be a publicly traded
company or a municipal/state/federal government agency and have a net worth
of at least $100 million based on the lessee's most recent audited financial
statement or other similar evidence establishing net worth) and the cash
flow expected to be generated by the property;
(e) the prospects for long-term appreciation of the property;
(f) the prospects for long-range liquidity of the investment in the
property; and
(g) the stability and potential growth of the community.
. Underwriting Lessees. Gen-Net will undertake a thorough analysis in
selecting lessees. This analysis includes a review of publicly available
information concerning the lessee, a credit analysis of financial
statements and operating history, evaluation of unit level performance
including closure and business failure statistics, analysis of market
penetration and name recognition.
. Underwriting Lessee Credit. The lessees will be all companies with a
minimum net worth of $100 million companies or government agencies.
Gen-Net subjects each proposed lessee to a thorough underwriting process
designated to identify the most creditworthy lessees and minimize the risk
from defaults and business failures. Gen-Net will target only lessees with
the competitive position and financial strength to meet their obligations
throughout the lease term. The Directors will evaluate the party's
creditworthiness in terms of its most recent financial statements, its
general credit history, any trends exhibited by its credit rating,
appropriate references, if available, the type of business in which it
engages, the size and scope of its business, the length of its operating
history, the background and experience of its management and similar types
of factors. In keeping with their philosophy as to the safety of the
investment, the Directors are willing to receive a somewhat lower rent in
exchange for having a higher credit standard in the tenant.
. Underwriting Site Selection. Prior to acquiring a property, Gen-Net will
engage in an extensive site review. Gen-Net will typically undertake a
long-term viability and market value analysis, including an inspection of
the property and surrounding area by an acquisition specialist, and
assessment of a market area demographics, consumers demand, traffic
patterns, surrounding land use, accessibility, visibility, competition and
parking.
. Maintenance of Relationships with Lessees. Once a business concept has
been approved, Gen-Net will seek to develop a strong ongoing working
relationship with its lessees.
. Active Management of Lessee Credit. In addition to monitoring lessee
compliance with lease obligations, Gen-Net will regularly review the
financial condition of its lessees and business, economic and market
trends to identify and anticipate problems with lessee performance, which
could adversely affect the lessee's ability to meet lease obligations.
Another set of important factors in assessing properties for acquisition and
the terms of prospective leases are the property's prospects for long-term
appreciation and the prospects for long-range liquidity of the investment. If
the Directors are successful in their efforts relating to safety of the
investment and
25
creditworthiness of the lessee, then to a degree the properties' prospects for
long-term appreciation and liquidity will be enhanced. Other considerations of
the Directors affecting appreciation of the properties and liquidity of the
investment include: inclusion of lease clauses providing for increased rents
based on a tenant's increased revenues, lease clauses providing for periodic
inflation adjustments to the base rent, minimizing deferred maintenance by
prompt attention to repair and replacement needs at the properties and by
including common area maintenance clauses in the leases, and locating
properties in areas where the financial institutions are less inclined to make
speculative real estate loans (to potential competitors) than was the case in
the past. These considerations, as well as others that may be appreciated by
the Directors once they study the facts and circumstances surrounding a
particular acquisition prospect, will principally affect the appreciation and
liquidity aspects referred to above.
Prospective investors should recognize that the Directors may in good faith
select properties that do not satisfy one or more of these standards. There is
no assurance that even if a property satisfies, by the Directors' standards,
every one of the above factors, that such a property will perform profitably.
Ordinarily, the consideration paid for the property will be based upon the
fair market value of the property, as determined by a majority of the
Directors. In all cases where a majority of the Independent Directors so
determine, fair market value shall be determined by an independent appraiser
selected by the Independent Directors.
Any transaction with a Director, officer or Affiliate or with Genesis that
involves the acquisition of a property from such person must be approved by a
majority of the Independent Directors as being fair, competitive and
commercially reasonable and no less favorable to Gen-Net than transactions
involving similar properties with similar circumstances. Additionally, the
total price for the property being acquired will not be in excess of the
appraised value of the property as stated in an Appraisal by a qualified
independent real estate appraiser selected by the Independent Directors. If the
price is in excess of the cost of the property to the seller, the Independent
Directors must determine that substantial justification exists for the excess
and the excess is not unreasonable. NO OTHER RESTRICTIONS APPLY WITH RESPECT TO
GEN-NET'S ACQUISITION OF PROPERTIES FROM A DIRECTOR, OFFICER OR AFFILIATE.
Gen-Net shall not sell or lease property to an employee, officer, Director or
Affiliate.
At such time as the Directors believe a reasonable probability exists that a
property will be acquired, this prospectus will be supplemented to disclose the
pending acquisition. Based upon the experience and acquisition methods of the
Directors, this will normally occur on the signing of a legally binding
purchase agreement, but may occur before or after such signing, depending on
the particular circumstances surrounding each potential acquisition. A
supplement to this prospectus will describe in detail the proposed terms of
purchase, the property to be acquired, the financial results of the prior
operation, if any, of the property and other information considered appropriate
for an understanding of the transaction. Upon termination of this offering, no
further supplements to this prospectus will be distributed, but shareholders
will receive reports containing substantially equivalent information about
acquisitions.
THE INITIAL DISCLOSURE OF ANY PROPOSED ACQUISITION CANNOT BE RELIED UPON AS
AN ASSURANCE THAT GEN-NET WILL ULTIMATELY CONSUMMATE THE PROPOSED ACQUISITION
OR THAT THE INFORMATION PROVIDED CONCERNING THE PROPOSED ACQUISITION WILL NOT
CHANGE BETWEEN THE DATE OF THE SUPPLEMENT TO THIS PROSPECTUS AND THE ACTUAL
PURCHASE.
26
MANAGEMENT
Fiduciary Responsibility of the Directors
The Directors are accountable to Gen-Net as fiduciaries and consequently
must exercise good faith in handling its affairs. As a fiduciary, a corporate
director can be held to a higher standard with respect to his activities
affecting corporate matters than the standard of reasonable care. The higher
standard would apply primarily to a Director's handling of Gen-Net's funds.
The Bylaws provide that the Directors will not be liable to Gen-Net or the
shareholders for acts or omissions in the exercise of their judgment relative
to Gen-Net if their actions were not the result of negligence or intentional
misconduct. Furthermore, Gen-Net will indemnify the Directors for any claim or
liability arising out of their activities on behalf of Gen-Net unless such
claim or liability was the result of negligence or intentional misconduct.
Therefore, the shareholders have a more limited right of action than would
otherwise be the case absent such provisions in the Bylaws. The foregoing
limitations on liability do not, however, affect the availability of
non-monetary relief nor do they apply to violations of federal securities laws.
In the opinion of the SEC, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy and therefore unenforceable. In
the event that a claim for indemnification for liabilities arising under the
Securities Act of 1933 (other than the payment by Gen-Net of expenses incurred
or paid by the Directors in the successful defense of any such action, suit or
proceeding) is asserted by the Directors in connection with the shares Gen-Net
will submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy and will be governed by the
final adjudication of such issue.
The Directors' Duties Generally
In general, decisions made by the Directors respecting Gen-Net's operations
must be made by a majority of those Directors not otherwise interested in the
transaction. A majority of the Directors must consist of Independent Directors.
An Independent Director may not, directly or indirectly (including through a
member of his or her immediate family), own any interest in, be employed by,
have general present business or a professional relationship with or serve as
an officer or director of an Affiliate. An Independent Director may not perform
material services for Gen-Net, except as a Director.
Gen-Net presently has three (3) Directors, two (2) of whom are Independent
Directors. The Bylaws provide for a minimum of three and a maximum of seven
Directors, with the actual number being set from time to time by the Directors.
Although Gen-Net believes it unlikely, it is possible that the Independent
Directors (if there is an even number) would deadlock on a particular matter
because one or more Directors cannot vote due to an interest they have in a
particular proposed transaction involving Gen-Net. The Bylaws provide that in
that event, Gen-Net is prohibited from entering into or continuing in a
transaction that benefits or would benefit the interested Director(s).
A Director holds office until the next annual meeting of shareholders or
until his successor is duly elected and qualified. Directors may be re-elected
by shareholders. A Director may resign at any time and may be removed with or
without cause by the shareholders upon the affirmative vote of at least a
majority of all the outstanding votes entitled to be cast at a meeting called
for the purpose of such proposed removal. The notice of any such meeting must
indicate that the purpose, or one of the purposes of such a meeting is to
determine if a Director is to be removed. A vacancy created by a change in the
authorized number of Directors or the death, resignation, removal, adjudicated
incompetence, or other incapacity of a Director may be filled by the remaining
affiliated Directors, in the case of an affiliated Director, or in the case of
an Independent Director, by the remaining Independent Directors. If there are
no remaining affiliated or Independent Directors to fill an affiliated
27
or Independent Director vacancy, as the case may be, then the remaining
Directors as a group may fill the vacancy. Should there be no independent or
affiliated Directors in office, successor Directors must be elected by the
shareholders.
The Directors are not required to devote all of their time to Gen-Net's
affairs. The Directors will meet as necessary. Each Director's principal
occupation and principal source of income is unrelated to the Company.
The Directors are empowered to fix the compensation of the officers and may
pay themselves such compensation for special services as they deem reasonable.
Gen-Net will pay each Director and the Treasurer an annual fee of $25,000.00.
Gen-Net will reimburse each Independent Director for his out-of-pocket costs in
attending Director meetings.
The Bylaws provide that the Directors and officers may engage in separate
business activities like those conducted by Gen-Net and that they are not
required to present to Gen-Net any investment opportunities which become
available to them, regardless of whether the opportunities are within Gen-Net's
investment objectives. See "RISK FACTORS" and "CONFLICTS OF INTEREST."
In exercising their discretion in managing Gen-Net's affairs, the Directors
must follow Gen-Net's investment objectives and the borrowing policies set
forth in this prospectus and Gen-Net's bylaws. The Directors may establish,
from time to time, further written policies on investments and borrowings and
will monitor Gen-Net's administrative procedures, investment operations and
performance to assure that these policies are effected and are in the best
interest of the shareholders. Until modified by the Directors, Gen-Net will
continue to follow the policies on investments and borrowing set forth in this
prospectus and the bylaws. The investment objectives may not be changed by the
Directors without the approval of a majority vote of the shareholders.
The Directors shall also review the fees and expenses of Gen-Net no less
often than annually and with sufficient frequency to determine that the
expenses incurred are in the best interest of the shareholders. Any
transactions between Gen-Net and any Affiliate must be approved by a majority
of the Directors not otherwise interested in the transaction (including a
majority of the Independent Directors). Gen-Net's bylaws prohibit the sale of
properties to any Directors or Affiliates. The Directors are also responsible
for reviewing the performance of the officers and determining that the
compensation paid to the officers is reasonable in relation to the nature and
quality of services performed by them and under the provisions of their
employment contract(s). In reviewing these matters, the Directors consider
factors such as the size of the fees paid to the officers in relation to the
size, composition and performance of Gen-Net's investments, the success of the
officers in generating appropriate investment opportunities, rates charged
other REITs and other investors by advisors performing similar services,
additional revenues realized by the officers and any Affiliate through their
relationship with Gen-Net, whether paid by Gen-Net or others with whom Gen-Net
does business, the quality and extent of service and advice furnished by the
officers, the performance of the investment portfolio, and the quality of the
investment portfolio relative to the investments generated by the officers for
their own accounts.
The Directors have established an Audit Committee consisting of the two
Independent Directors. The Audit Committee will make recommendations concerning
the engagement of the independent public accountants, review the results of the
audit engagement with the independent public accountants, evaluates the quality
of audit services, negotiates auditing fees and consults with the independent
public accountants regarding the adequacy of Gen-Net's internal accounting
controls.
The Directors may establish an Executive Committee consisting of two
Directors, including one Independent Director. The Executive Committee would
likely exercise all powers of the Directors except for those which require
actions by all of the Directors or the Independent Directors under the Articles
of Incorporation or Bylaws or under applicable law.
The Bylaws do not specify qualifications for officers with whom Gen-Net may
contract for services. Determination of whether an individual is qualified is
the responsibility of the Directors, who, in general, must exercise prudent
business judgment in the selection of an officer and in supervising
relationships with the
28
officers. In selecting an officer, the Directors will consider a number of
factors, including his or her experience and management abilities, his
performance history in investing or advising in the investment in real estate
acquisition, operation and disposition, and the identity and location of other
employers.
Gen-Net's Directors and Executive Officers
The Directors and executive officers of Gen-Net are:
Name Age Position with the Company
---- --- -------------------------
Jerry D. Bringard.... 66 Chair of the Board of Directors (2001 Present);
President; Secretary
Thomas D. Peschio.... 61 Director (2001Present)
Richard H. Schwachter 57 Director (2001Present)
Bruce Baum........... 61 Treasurer (2001Present)
Jerry D. Bringard. Chair of the Board of Directors; President;
Secretary. Mr. Bringard retired in June, 1998 as Vice President-General
Counsel of Ford Motor Credit Company, Dearborn, Michigan and as a member of its
Executive Committee, having been employed by Ford Credit for 38 years. Mr.
Bringard's duties at Ford Motor Credit Company involved complex commercial real
estate transactions. He is presently Chairman of the Board of Directors of
William Tyndale College. He serves as Chairman of the Law Committee of the
American Financial Services Association; is Chairman-Emeritus of the Conference
on Consumer Finance Law; and as an adviser to, and past President of, the
Hillsdale College Parents' Executive Board. Mr. Bringard holds a BA degree from
Denison University, an MBA degree from the University of Detroit and a JD
degree (with distinction) from Wayne State University.
Thomas D. Peschio. Independent Director. From 1997 to the present Mr.
Peschio has been a stockholder, a member of the Board of Directors and
Executive Vice President of the Lund Company in Omaha, Nebraska, the largest
wholly independent firm in Nebraska offering complete commercial real estate
services. From 1993 to 1997, Mr. Peschio served as a corporate officer focusing
on investment real estate for what is now known as Grubb & Ellis, Pacific
Realty Group. From 1978 to 1997, he owned and operated his own full service
investment real estate firm, Peschio & Company. Mr. Peschio has focused his
professional efforts on direct investment in real estate, debt and equity
financing and securitization, corporate real estate development and property
management. Mr. Peschio received a BS degree from St. Louis University and a
MBA from Washington University in St. Louis. Mr. Peschio holds professional
designations from the American Society of Real Estate Counselor, Consultant in
Real Estate (CRE), from the Real Estate Investment Association, Specialist,
Real Estate Investment (SRI); and, from the former Real Estate Securities and
Syndication Institute, Specialist in Real Estate Securities (SRS).
Richard H. Schwachter. Independent Director. Mr. Schwachter has been
engaged in the private practice of law since 1969. He has been a sole
practitioner since 1982. From 1969 to 1982 he was with the firm of Goulder &
Schwachter. His practice has focused on real estate law and private placement
of securities transactions. He has held the Series 7 and 63 securities
registered representatives' licenses securities registered representatives'
since 1993. From 1996 to 2000 he was an officer and director of Indianapolis
Securities, Inc., a broker-dealer and is currently an officer and director of
Diagnostic Centers, Inc., which offers diagnostic services to the medical
community in three states. Mr. Schwachter received his BS degree (cum laude)
from the University of Wisconsin, in 1966 and his JD degree from Case Western
Reserve Law School in 1969. He is a member of the Bar of the State of Ohio.
Bruce Baum. Treasurer. Since July 1999, Bruce Baum has been employed as the
President of Capital Matrix, LLC, which serves as a financial and construction
consultant to investment groups regarding the purchase and redevelopment of
income producing commercial real estate. From 1985 to 1999, Mr. Baum was
employed as the President of Bruce M. Baum & Associates, which engaged in
business similar to Capital Matrix, LLC. Throughout his career, Mr. Baum has
been active in mortgage banking and mortgage brokerage
29
and has originated and placed in excess of three billion dollars
($3,000,000,000) of financing on all types of income producing real estate
properties. He has personally developed and constructed high-rise luxury
apartments in New York City and North Carolina; strip shopping centers in New
York, New Jersey, Connecticut and North Carolina; a high-rise office building
in Boston; a high-rise senior citizen dwelling facility in Maine and a
high-rise condominium in New York City. He has functioned as a partner in
numerous properties including a high-rise office building in Louisiana, a
high-rise apartment complex in Maryland and Florida, a high-rise hotel in
Florida and a shopping center in Michigan. He has served as visiting lecturer
at New York University's School of Continuing Education in the area of mortgage
financing. He obtained his BS from Brooklyn College and has engaged in graduate
study in engineering at Columbia University.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
-----------------------------
Annual Compensation Awards Payouts
------------------------- --------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Award(s) Options' Payouts Compensation
Principal Position Year $ $ $ $ SARs $ ($) ($)
------------------ ---- ------ ----- ------------ ---------- ---------- ------- ------------
Jerry D. Bringard......... 2001 0.00 0.00 0.00 0.00 0.00 0.00 0.00
President and Secretary
Bruce Baum................ 2001 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Treasurer
Daily Management Responsibility
Managing Gen-Net's day-to-day activities, including the performance of
Genesis and others contracted to provide services, are the primary
responsibility of Mr. Bringard, the President. He will be assisted in managing
Gen-Net's financial affairs by Mr. Baum, the Treasurer. Together, they are
responsible for overseeing and monitoring Genesis with respect to the selection
of property acquisition prospects, the analysis in relation to Gen-Net and
Directors' objectives, and requirements and the negotiation of their
acquisition and disposition. The Directors must authorize and approve
investments and typically the Directors' decision will be based largely on the
information provided by Genesis and the recommendation of Messrs. Bringard and
Baum.
Services of Genesis
The services to be performed by Genesis under its written contract with
Gen-Net fall into the following categories: property acquisition services,
property management services, administrative services and property disposition
services. In assisting Gen-Net with property acquisitions, Genesis will, among
other things, help locate prospective properties for purchase which meet
Gen-Net's acquisition criteria as described in this prospectus, assist in
negotiations with the seller of the property, engage legal counsel, oversee
preparation of transaction documents, and monitor the closing of the purchase
to ensure compliance with the agreed upon terms. Property management services
to be provided by Genesis include negotiating leads, providing monthly property
reports, collecting rents, verifying tenant lease compliance and provide
property inspections. Administrative support services for Gen-Net include
transfer agent support, computer, secretarial and similar office functions and
activities. Finally, to facilitate disposition of Gen-Net's properties, Genesis
will assist in locating purchasers, help negotiate sale terms, engage legal
counsel, oversee preparation of sale documents and monitor the close of the
sale to ensure compliance with the agreed upon terms. In no event are the
services provided by Genesis intended to vest in Genesis the responsibility for
directing or performing the day-to-day business affairs of Gen-Net. Gen-Net and
Genesis specifically intend that Genesis shall not be an Advisor to Gen-Net.
Genesis' principal executive officers are D. James Barton, President and
Gregg S. Barton, Vice President and Chief Acquisitions Officer. D. James
Barton's principal occupation since 1969 has been as an attorney in private law
practice. Gregg S. Barton's principal occupation is with Genesis. The Bartons
have been employed by Genesis since 1994. Since its formation, Genesis has not
operated at a profit for accounting purposes, although it has obtained
sufficient cash flow to maintain its operations.
Genesis' contract with Gen-Net is for a term of twelve (12) months. It will
be renewed automatically for additional twelve (12) month periods unless
terminated by either party upon sixty (60) days notice to the other party.
30
The following table details the type, and to the extent practicable,
estimates of the amounts of all material compensation that Genesis will or may
receive under its agreement with Gen-Net. As described in the table below,
Genesis' compensation is limited to certain percentages but not to any
particular dollar amount.
OFFERING STAGE
Type of Compensation Method of Compensation Estimated Amount
-------------------- ---------------------- ----------------
Selling Commissions Genesis will receive no None
(Shares) compensation based on
shares sold in this
offering. Shares will be
offered through Investors
Capital Corporation and
Selected Dealers who will
be paid commission. SEE
PLAN OF DISTRIBUTION.
Other organizational and Genesis may advance and Actual amounts will be
offering expenses be reimbursed by Gen-Net based on actual funds
for organizational and advanced. Gen-Net
offering expenses estimates that not less
incurred in connection than $80,000 will be
with this offering, reimbursed if the minimum
including legal and number of shares is sold
accounting fees, filing and not less than
fees, printing costs and $500,000 if the maximum
selling expenses. number of shares is sold.
ACQUISITION STAGE
Type of Compensation Method of Compensation Estimated Amount
-------------------- ---------------------- ----------------
Acquisition Fees Genesis (or other third Actual amount will depend
party acting on behalf of on the purchase price of
Gen-Net) may receive a the property acquired and
fee of up to 3% of the cannot be determined at
property purchase price. this time.
Acquisition Expenses Genesis (or other third Actual amount will depend
party acting on behalf of on the amount of expenses
Gen-Net) will be associated with the
reimbursed for property transaction and
Acquisition Expenses, as cannot be determined at
incurred. Total of this time.
Acquisition Fees and
Acquisition Expenses will
not exceed 6% of the
property purchase price.
OPERATIONAL STAGE
Type of Compensation Method of Compensation Estimated Amount
-------------------- ---------------------- ----------------
Property Management Fees Genesis (or other third Actual amount will depend
party acting on behalf of upon the gross income of
Gen-Net) will receive a the property and cannot
management fee equal to be determined at this
3% of the gross rental time.
revenues of the property.
Administration Fees Genesis will receive a Actual amount will depend
fee equal to 3% of the upon the gross rental
gross rental income from income of the properties
the properties as and cannot be determined
compensation for at this time.
administrative support
provided to Gen-Net.
31
Administrative Expenses Genesis will be Actual amount will depend
reimbursed for its on results of operations
out-of-pocket expenses and cannot be determined
incurred in providing at this time.
administrative support to
Gen-Net.
LIQUIDATION STAGE
Type of Compensation Method of Compensation Estimated Amount
-------------------- ---------------------- ----------------
Disposition Fees Genesis (or other third Actual amounts will
party acting on behalf of depend on the property
Gen-Net) will receive a sale price and cannot be
disposition fee of up to determined at this time.
5% of the property sale
price. In no event will
the amount paid to
Genesis, when added to
the sums paid to
unaffiliated parties upon
the disposition of a
property, exceed the
lesser of a competitive
real estate commission or
6% of the property sale
price.
Disposition Expenses Genesis (or other third Actual amounts will
party acting on behalf of depend on the amount of
Gen-Net) will be expenses associated with
reimbursed for expenses the property transaction
named in the disposition and cannot be determined
of properties. at this time.
PRIOR PERFORMANCE OF GEN-NET AND GENESIS
Though formed in 1998, Gen-Net has been a dormant entity and has no
historical experience. The remainder of this section summarizes the historical
experience of real estate programs previously sponsored by Genesis and its
Affiliates. INVESTORS IN GEN-NET SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE
RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTING IN THOSE PRIOR
PROGRAMS.
Genesis and its Affiliates have sponsored a total of 18 real estate programs
dating to 1994, all of which were non-public. As of December 31, 2001, a total
of approximately $23 million has been raised from over 685 investors through
all-programs. The properties acquired in the prior programs are located
throughout the United States.
Nearly $20 million has been expended through December 31, 2001 on the
purchase of a total of 35 properties which include 34 office properties and 1
corporate distribution center. There is a total of $1 million in open deposits
on properties. All of the properties were existing structures when acquired.
Only two of the properties have been sold. Table III of Appendix B of this
prospectus contains more information on the operating results of the prior
programs.
32
The following table sets forth summary information as of December 31, 2001,
regarding property acquisitions from 1999 to present. The general investment
objectives of each program are acquiring Net Leased properties with the
potential for long-term appreciation and providing periodic cash distributions
to investors, which are similar to those of Gen-Net. Whether the objectives of
acquiring property that will conserve the investors' capital and provide an
inflation hedge have been met can only be determined after the programs'
properties have been sold, which has not yet occurred.
No. of
Properties Type of
Name of Program Purchased Property Location Method of Financing
--------------- ---------- -------- ---------- -------------------------
Fixed Income Series 1(1).................... 0 Office TX Properties under Contract
Fixed Income Series 2....................... 2 Office IL, MA Cash/Mortgage
Fixed Income Series 3....................... 6 Office CA, OH, TX Cash/Mortgage
Fixed Income Series 4....................... 6 Office TX Cash/Mortgage
Fixed Income Series 5....................... 2 Office TX Cash/Mortgage
Corporate/Government Series 1............... 4 Office TX Cash/Mortgage
Corporate/Government Series 2............... 2 Office TX, VA Cash/Mortgage
Federal Government & US Post Office Series 1 2 Office IL, TX Cash/Mortgage
Fixed Income Series 9....................... 2 Office HI, TX Cash/Mortgage
Fixed Income Series 10...................... 2 Office MO, NJ Cash/Mortgage
Fixed Income Series 11...................... 1 Office AZ Cash/Mortgage
Fixed Income Series 12...................... 2 Office TX, NM Cash/Mortgage
Fixed Income Series 14...................... 2 Office IL, TX Cash/Mortgage
Fixed Income Series 15...................... 0 Office WI Properties under Contract
Fixed Income Series 16...................... 0 Office PA Properties under Contract
Genesis 10% Bonds........................... 0 N/A N/A N/A
Genesis Series Bonds........................ 0 N/A N/A N/A
- --------
(1) Two properties were purchased by this program and sold in 1999. Of the
$1,500,547 raised, $1,127,703 was liquidated to investors. The remaining
balance remains held by the program for future investment.
Investors are encouraged to examine the prior performance tables attached as
Exhibit B to this prospectus for more detailed information concerning Genesis'
prior experience. Additionally, Table VI contains a more detailed description
of property acquisitions made by the prior programs and is contained in Part II
of the registration statement filed with the SEC. A copy of Table VI is
available from Gen-Net without fee, upon request.
ERISA CONSIDERATIONS
The following is a summary of certain non-tax considerations associated with
an investment in Gen-Net by a qualified employee benefit plan, KEOGH Plan, or
IRA ("Benefit Plans" or "Plan"). This summary is based on the provisions of
ERISA and the Internal Revenue Code, as amended, ("Code"), through the date of
this prospectus and relevant regulations and opinions issued by the IRS and the
United States Department of Labor. It is possible that future legislative or
administrative changes or court decisions may significantly modify the
statements set forth herein. It is also possible that said changes may apply to
transactions entered into prior to the date of their enactment.
In general, employee benefit plans subject to ERISA must have all of their
assets held in trust and that a trustee or duly authorized investment manager
have exclusive authority and discretion to manage and control their assets. In
addition, the Code provides similar rules for employee benefit plans which are
not subject to ERISA, including individual retirement accounts and KEOGH Plans
that cover only self-employed persons. This requirement is satisfied with
respect to the investment if the indicia of ownership of the Shares are held in
trust on behalf of the plan. Counsel is of the opinion that Gen-Net's method of
identifying owners of the Shares will satisfy the ERISA "holding in trust"
requirement.
33
Fiduciaries. In general, a person will be a Benefit Plan fiduciary under
ERISA if among other things, that person has discretionary authority or control
with respect to plan assets or provides investment advice for a fee with
respect to such assets. Accordingly, whether or not a person is a Benefit plan
fiduciary will depend on the facts and circumstances underlying that person's
relationship with the Plan and each person should consult his own advisor or
that of the Benefit Plan regarding questions of fiduciary status.
Benefit Plan fiduciaries are required under ERISA to determine whether an
investment in the shares will satisfy the prudent man adequate consideration
and other fiduciary standards set forth in ERlSA. A fiduciary's decision to
cause a plan to invest in the shares should include, among other things, an
analysis of whether (i) the investment is in accordance with the governing
instruments of the plan and its needs and objectives; (ii) the investment
satisfies the diversification requirement of ERISA Section 404(a) (1) (C);
(iii) the purchase is prudent considering the nature of the investment,
Gen-Net's compensation structure, the lack of a ready market for the shares and
the other risks discussed in this prospectus; and (iv) the investment is made
solely in the interest of the plan participants. The Department of Labor has
ruled that for diversification purposes, plan fiduciaries are entitled to look
to the underlying assets of Gen-Net. The other ERISA requirements must be
satisfied on an individual facts and circumstances basis.
Prohibited Transactions. A fiduciary of a Benefit Plan is prohibited from
engaging in self-dealing, acting for a person who has an interest adverse to
that of the plan (other than in the case of IRAs and some KEOGH Plans), or
receiving any consideration for its own account from a party dealing with the
plan in a transaction regarding the plan's assets. Benefit Plan fiduciaries may
incur substantial taxes and penalties in the event they enter into transactions
involving Benefit Plan assets which constitute a prohibited transaction under
ERlSA. A prohibited transaction under ERISA should not be confused with a
Prohibited Transaction under the REIT provisions discussed under the "INCOME
TAX ASPECTS" section of this prospectus.
In general, a prohibited transaction for ERISA purposes is a transaction
involving the assets of the Benefit Plan and any "party in interest" or
"disqualified person" with respect to that Benefit Plan. ERISA prohibits these
transactions regardless of how beneficial they may be to the Benefit Plan.
Prohibited transactions include the sale, exchange, or leasing of property and
the lending of money or the extension of credit between a Benefit Plan and a
party in interest or disqualified person.
A prohibited transaction could occur if Gen-Net, any Selected Dealer, or
their respective Affiliates, is a fiduciary (within the meaning of ERISA) with
respect to the purchase of shares by a Benefit Plan. This will be true even if
Gen-Net assets underlying the shares do not constitute plan assets as discussed
below. Thus, unless an administrative or statutory exemption applies, shares
should not be purchased by any Benefit Plan for which either Gen-Net, a
Selected Dealer, or their respective Affiliates, is a fiduciary with respect to
such share purchase.
In the case of a prohibited transaction, the Code imposes an excise tax
equal to 5% of the amount involved and authorizes the IRS to impose an
additional 100% excise tax if the prohibited transaction is not corrected.
These taxes would be imposed on any disqualified person who participates in the
prohibited transaction. In addition, the fiduciaries of Benefit Plan
shareholders subject to ERISA who permitted a prohibited transaction to occur
or otherwise breach their fiduciary responsibilities would be required to
restore to the plan any profits realized by them as a result of the transaction
or breach, and to make good to the plan any losses it incurred as a result of
the transaction or breach. Where an IRA invests in Gen-Net, the occurrence of a
prohibited transaction involving the individual who established the IRA, or his
or her beneficiary, would cause the IRA to lose its tax-exempt status under the
Code.
Annual Valuation. ERISA requires that assets of a plan be valued to reflect
market value as of the close of each plan year. ERISA requires a fiduciary of a
Benefit Plan to determine annually the fair market value of each asset of the
plan as of the end of the plan's fiscal year and to file an annual report
reflecting that value. Where no fair market value of a particular asset is
available, the fiduciary is required to make a good faith determination of
34
the asset's "fair market value" assuming an orderly liquidation at the time the
determination is made. A trustee or custodian of an IRA must, in addition,
provide the IRA participants with a statement of the value of the IRA each
year. There presently exists no regular secondary market for the shares and it
is not anticipated that one will develop in the immediate future. The Directors
will report a fair market value for the shares to plan fiduciaries on an annual
basis. SEE "REPORTS TO SHAREHOLDERS" for more details.
Unrelated Business Income. A Benefit Plan investing in shares will not be
subject to tax on distributions from Gen-Netsolong as Gen-Net qualifies as a
REIT. The IRS has ruled that dividends and other distributions from a REIT are
not taxable to Section 501(a) organizations as "Unrelated Business Taxable
Income." This result stands even if the REIT utilizes debt financing to
purchase its real property assets. A private foundation, however, may be
subject to the excise taxes imposed by Sections 4940 and 4943 of the Code
(relating to investment income and excess business holdings). Additionally, the
laws and regulations applicable to Section 501(a) organizations set forth other
requirements respecting investments by such organizations. These additional
requirements may not be addressed in this prospectus and prospective
shareholders which are Section 501(a) organizations must consult their own tax
advisors in this regard.
Plan Assets. In the event a Benefit Plan purchases shares and Gen-Net's
assets represented by those shares, rather than the shares themselves, were
considered the plan's assets under ERISA, the prudent man standards and other
provisions of Title I of ERISA applicable to investments made by Gen-Net and
certain transactions into which Gen-Net might seek to enter could constitute an
improper delegation of a fiduciary responsibility to Gen-Net and expose the
fiduciary of the plan to co-fiduciary liability under ERISA for any breach by
Gen-Net of its ERISA fiduciary duties. In such event, investment by an IRA in
the shares might result in an impermissible commingling of plan assets with
other property.
Accordingly, fiduciaries who hold or acquire shares on behalf of plans or
IRAs subject to ERISA, must evaluate the risk that unintended ERISA or Code
prohibited transaction questions and fiduciary duty delegation questions may
arise if the underlying assets of the plan are treated under ERISA as "plan
assets" of such Plans or IRAs.
The term "plan assets" is not defined under ERISA. The Department of Labor
issued final regulations regarding the meaning of "plan assets." Under these
regulations, the assets of entities in which Benefit Plans invest would
constitute plan assets unless the entity satisfies at least one of the stated
exceptions.
One of the stated exceptions provides that the underlying assets of entities
such as Gen-Net will not be treated as the assets of a Benefit Plan if the
interest the Benefit Plan acquires is a "publicly-offered security." A
publicly-offered security must be (i) freely transferable, (ii) part of a class
of shares that is owned by 100 or more persons who are independent of the
issuer and one another, and (iii) sold as part of a public offering registered
under the Securities Act of 1933 and be part of a class of shares registered
under the Securities Act of 1934 within a specified time period.
INCOME TAX CONSIDERATIONS
General
The following discussion, which has been prepared by the law firm of Lieben,
Whitted, Houghton, Slowiaczek & Cavanagh, P.C., L.L.O., counsel to Gen-Net,
summarizes the material provisions of the federal income tax treatment
applicable to Gen-Net and to the shareholders in connection with their
ownership of shares of Gen-Net. The discussion relates only to the federal
income tax treatment of Gen-Net and its shareholders and is generally directed
to the federal income tax treatment of an individual who is a United States
resident and subject to regular federal income tax. It will not otherwise
discuss the possible application of the federal income tax law to individual
shareholders. SINCE THE DISCUSSION MAY NOT ADDRESS IN DEPTH ALL OF
35
THE MATERIAL INCOME TAX CONSIDERATIONS FOR EACH SHAREHOLDER'S PERSONAL TAX
SITUATION, IT DOES NOT DISCUSS STATE AND LOCAL INCOME TAX CONSIDERATIONS AND IS
NOT TO BE INTERPRETED AS TAX ADVICE TO PROSPECTIVE SHAREHOLDERS, PROSPECTIVE
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THEIR PERSONAL TAX
SITUATION.
Gen-Net intends to conduct its operations in a manner that will permit it to
qualify and elect to be treated as a REIT for federal income tax purposes for
no later than its first taxable year in which it receives the proceeds from
this offering and for each taxable year thereafter. Gen-Net has not requested a
ruling from the IRS as to its qualification as a REIT. Gen-Net, however, has
obtained an opinion from its counsel that, for federal income tax purposes,
based on current law or interpretations thereof, (i) Gen-Net will qualify as a
REIT provided it is operated in the manner described in this prospectus and in
accordance with the representations set forth in this prospectus and satisfies
the share ownership tests described below, and (ii) based on IRS Revenue Ruling
66-109, 1966-1 C.B. 151, distributions will not constitute unrelated business
taxable income ("UBTI") to a Shareholder that is a tax-exempt entity (such as a
pension plan, IRA or charitable organization) that is required to account for
UBTI even if Gen-Net owns debt financed property as that term is defined In the
Code, provided that (i) such shareholder does not incur any "acquisition
indebtedness" with respect to its shares and (ii) Gen-Net is not a pension-held
REIT as defined by the Code. See "INCOME TAX CONSIDERATIONS--TAXATION
OF TAX-EXEMPT ENTITIES."
Counsel has rendered no opinion on the other issues discussed under "Income
Tax Considerations" because of the prospective or hypothetical nature of the
facts and circumstances associated with such an opinion as, for example, the
tax treatment of distributions to specific shareholders or the tax treatment of
certain real estate transactions. counsel's opinion represents only its best
legal judgment and has no binding effect on the IRS or the courts. There is,
therefore, no assurance that the conclusions expressed below would be sustained
by a court if contested, or that future legislative or administrative changes
or court decisions may not significantly modify the statements and opinions
expressed herein. Any such future changes could be retroactive with respect to
any transactions effected prior to the time they are made.
In preparing and filing its income tax returns, Gen-Net will make decisions
on several tax matters, including the expending or capitalizing of particular
expenditures, the allocation of property acquisition costs between land,
improvements and personal property and similar items. In making these
determinations, Gen-Net will seek advice of its independent accountants,
however, in general, such decisions will not be reviewed by counsel. There is
no assurance that some of these determinations will not be challenged by the
IRS.
The Code provides tax treatment for organizations that principally invest in
real estate or real estates assets (including mortgages secured by real
property) which meet certain conditions imposed by Code Sections 856-860 and
elect to be taxed as a REIT. In general, a REIT will not be taxed at the
corporate level on its net income which is currently distributed to its
shareholders. Thus, taxation as a REIT will substantially eliminate the "double
taxation" (tax at both the corporate and shareholder levels) typically
associated with corporations. If Gen-Net fails to continue to qualify as a REIT
in any year, it would likely be taxed as a domestic corporation and would not
receive a deduction for dividends paid to the shareholders. In such event, the
shareholders would be taxed in the same manner as shareholders of ordinary
domestic corporations and Gen-Net may be subject to significant tax
liabilities, which would reduce the amount of cash available for dividends to
the shareholders.
Requirements for Qualification and Taxation as a REIT
In the opinion of Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C.,
L.L.O., counsel to Gen-Net, assuming that Gen-Net operates in accordance with
the method of operation described in this prospectus, including the
representations of the Directors that they intend to continue to comply with
the requirements of Code Sections 856-860, as amended, Gen-Net will qualify for
taxation as a REIT. However, counsel can give no opinion that Gen-Net will
actually satisfy the REIT requirements in the future since that will depend
substantially on future events. Further, Gen-Net has not, and does not intend
to, request a ruling from the IRS as to its tax status.
36
To qualify as a REIT, Gen-Net must, among others, meet each of the
requirements discussed below.
Ownership of Shares. Gen-Net's shares must be held by a minimum of 100
persons for at least 335 days in each of its 12-month taxable years. At all
times during the last half of each of its taxable years, no more than 50% in
value of the shares may be owned, directly or indirectly, actually or
constructively, by five or fewer individuals. To aid in meeting these
requirements, Gen-Net is given the power in its Bylaws to prohibit a transfer
of shares which would produce a violation of these requirements. In determining
share ownership, the attribution rules provided in the Code will, in general,
apply. In applying the attribution rules to determine indirect ownership of
shares, attribution to an individual of Shares owned by or for the individual's
partner is ignored.
Nature of Assets: Diversification. Gen-Net must meet two tests designed to
insure that its investments are primarily in real estate assets (including
mortgages secured by real estate), cash, or government shares and that its
other assets are diversified. In general, at the end of each fiscal quarter, at
least 75% of the value of Gen-Net's total assets must be real estate assets,
cash and cash items (including receivables), and government shares. Gen-Net
generally may not own shares of any one non-governmental issuer which, in the
aggregate, exceed more than 5% of the value of Gen-Net's total assets. Also,
Gen-Net may not own more than 10% of the outstanding voting shares of any one
issuer. For the purposes of so evaluating Gen-Net's assets, any investments in
a partnership or joint venture will be deemed to be a proportionate investment
in the assets of such partnership or joint venture. Stock or debt instruments
purchased with the new equity capital are treated as real estate assets for the
purposes of the 75% assets test. See the discussion under "New Equity Capital"
below.
Sources Of Income. To qualify as a REIT, Gen-Net must meet the three
separate income tests described below. These tests are designed to ensure that
Gen-Net's income is derived principally from passive real estate investments.
In evaluating Gen-Net's income, if Gen-Net invests in a partnership or joint
venture, it will be treated as receiving its proportionate share of the income
earned by such partnership or joint venture and, in Gen-Net's hands, any such
income will retain the character that it would have in the hands of the
partnership or joint venture.
The 75% Source of Income Test. Under this requirement, at least 75% of
Gen-Net's income must be derived from the following sources:
. Interest on monetary obligations secured by real property, including any
income derived from a shared appreciation provision which is treated as
gain recognized on the sale of the secured property. A "shared
appreciation provision" is any interest that is in connection with an
obligation that is held by the REIT and secured by an interest in real
property, which provision entitles the REIT to receive a specified portion
of any gain realized on the sale or exchange of such property (or any gain
that would be realized if the property were sold on a specified date). For
the purpose of meeting the income requirements, the REIT will be treated
as holding the secured property for the period during which it held the
shared appreciation provision (or, if shorter, the period during which
secured property was held by the person holding such property). Gen-Net
does not intend to make substantial investments in such mortgages.
. Rents from real property, except for (a) rent based on the income or
profits derived from the property, (b) rent paid by a person or
corporation in which Gen-Net owns a 10% or greater interest, and (c)
amounts received with respect to real or personal property if Gen-Net
furnishes services to tenants, or manages or operates the property, other
than through an "independent contractor" from whom Gen-Net does not derive
any income. Gen-Net anticipates that most of its income will derive from
such rents.
. Gain from the sale or other disposition of real property (including
interests in mortgages) which is not property described in Code Section
1221(1). Section 1221(1) property ("dealer property") is stock in trade,
inventory, and property held primarily for sale to customers in the
ordinary course of a trade or business. In general, income from the sale
of dealer property does not qualify under this source of income test
because it is active income. Gen-Net does not expect to have significant
amounts of such gain.
. Dividends or other distributions on shares in other REITs (except a
Qualified REIT Subsidiary), as well as gain from the sale of such shares.
Gen-Net does not expect to invest in any other REIT.
37
. Abatements and refunds of real property taxes.
. Commitment fees received in consideration for the REIT's agreement to make
secured loans or purchase or lease real property.
For the purposes of the above, an "independent contractor" is any person who
does not own, directly or indirectly, 35% of the REITs shares, and, in general,
which is not 35% or more owned, directly or indirectly, by any person or
persons owning 35% or more the REIT's shares. Attribution rules apply for such
determination so that the shares of two or more persons may be aggregated in
making the determination. The independent contractor must be adequately
compensated for any services performed for the REIT. Compensation determined by
reference to an unadjusted percentage of gross rents will generally be
considered to be adequate where the percentage is reasonable, taking into
account the going rate of compensation for managing similar property in the
same locality, the services rendered and other relevant factors. An independent
contractor may not be an employee of the REIT (i.e., the manner in which the
contractor carries out its duties as independent contractor must not be subject
to the control of the REIT).
To the extent that services (other than those customarily furnished or
rendered in connection with the rental of real property) are rendered to the
tenants of the property they must, in general, be provided by an independent
contractor and the cost of the services must be borne by the independent
contractor or a separate charge on the tenants must be made for such services.
The amount of the separate charge must be received and retained by the
independent contractor and the independent contractor must be adequately
compensated for its services. However, REITs may perform for themselves those
services that would not result in the receipt of UBTI if performed by certain
tax exempted entitles, without using an independent contractor. Gen-Net does
not presently contemplate that it will perform for itself such services.
The 95% Source of Income Test. Under this requirement, Gen-Net must derive
at least 95% of its gross income from the sources listed under the 75% source
of income test and from dividends, interest or gains from the sale or
disposition of shares, which is not dealer property.
For the purposes of determining whether Gen-Net complies with the 75% and
95% source of income tests detailed above, "gross income" does not include
gross income from Prohibited Transactions. See GLOSSARY discussion of
prohibited transactions below.
The Code provides certain relief from this requirement when a REIT has
certain types of income that are not accompanied by the receipt of cash.
However, the REIT must pay tax on the amounts not distributed (Code Sections
857(a) and (e)).
Should Gen-Net fail to satisfy either of the 75% or the 95% source of income
tests for any taxable year, it will be subject to a 100% excise tax on the
greater of the amount by which it fails either test. However, Gen-Net may still
be deemed to have satisfied the tests if (i) its failure to comply was due to
reasonable cause and not to willful neglect, (ii) it reports the name and
amount of each item of its income included in the tests on a schedule attached
to its tax return; and (iii) any incorrect information is not due to fraud with
intent to evade tax. The Regulations indicate such failure will be due to
reasonable cause and not a willful neglect if Gen-Net exercises ordinary
business care and prudence in attempting to satisfy the tests.
The 30% Source of Income Test. Under this requirement, Gen-Net must derive
less than 30% of its gross income from the sale or other disposition of (i)
real property held less than four years, other than foreclosure property or
property involuntarily or compulsorily converted within the meaning of Code
Section 1033, (ii) shares held less than one year, and (iii) property sold in a
Prohibited Transaction.
Prohibited Transactions. A "Prohibited Transaction" is one involving a sale
of dealer property, other than foreclosure property and certain property not
held by Gen-Net for at least four years. The Code provides a safe harbor
whereby the sale of a property is not a Prohibited Transaction if: (i) Gen-Net
held the property for not less
38
than four years; (ii) Gen-Net made no more than seven property sales (other
than foreclosure property) during such taxable year, or the adjusted basis of
all such sales is not more than 10% of the adjusted basis of all of Gen-Net's
assets as of the beginning of such year; (iii) the aggregate expenditures made
by Gen-Net (or any partner or joint venturer) during the four-year period
preceding the date of the sale which are includable In the basis of the
property do not exceed 20% of the net selling price of such property: and (iv)
in the case of land or improvements not acquired through foreclosure or lease
termination, Gen-Net held the property for at least four years for the
production of rental income. Losses from Prohibited Transactions may not be
taken into account in determining the amount of net income from Prohibited
Transactions. However, any net loss from Prohibited Transactions may be taken
into account in computing REIT taxable income.
In the event the IRS was successful in characterizing Gen-Net as a dealer in
connection with any sale of a property, Gen-Net could be subject to the 100%
excise tax. In addition, capital gain treatment and any otherwise applicable
capital gain tax rate with respect to the sale of the property could be
available. Under such circumstances, Gen-Net could be unable to satisfy the 75%
and 95% source of income tests. Likewise, there is no assurance that
improvements made by Gen-Net to any property will not exceed 20% of the net
selling price of such properties or that Gen-Net will not make more than seven
sales of properties in any one year.
Gen-Net does not intend to hold any property primarily for sale to customers
in the ordinary course of its trade or business and thereby have dealer
property. However, the determination of whether Gen-Net are dealer property
depends on the facts and circumstances relating to the particular property at
the time of sale. Also, Gen-Net purposes for holding property may change during
the course of its investments. Accordingly, there can be no assurance that
Gen-Net will avoid dealer status with respect to its properties.
New Equity Capital. A REIT receiving new equity capital and investing it in
stock or bonds may treat interest, dividends or gains from the sale of such
investments as income for the purpose of the 75% source of income test. "New
equity capital" is any amount received by a REIT in exchange for its stock
(other than pursuant to a dividend reinvestment plan) or in a public offering
of debt obligations of the REIT with maturities of at least five years.
However, this provision is applicable only to income received for the one-year
period beginning on the date that the REIT received such capital. In addition,
during that period, stock or bonds bought with "new equity capital" will be
treated as real estate assets for the purposes of the 75% test explained
previously.
Additional Requirements. In addition to the foregoing, Gen-Net must:
(1) Except for the application of Code Section 856-860 related to REITs,
be taxable as a "domestic corporation"; use June 30 as its annual accounting
period for federal income tax purposes; and
(2) Conduct its affairs, with certain limitations, and manage and dispose
of its properties under the continuing exclusive authority and management of
its Directors.
Distribution Requirements
Distributions During the Taxable Year. In addition to satisfying the
requirements discussed above, in order to qualify for taxation as a REIT
Gen-Net must distribute to the shareholders in each taxable year an amount at
least equal to the sum of:
. 90% of its REIT Taxable Income before the deduction for dividends paid and
excluding any net capital gain; and
. 90% of the net income from foreclosure property minus the tax imposed on
that income; minus
. Excess non-cash income.
In some situations, Gen-Net may produce taxable income in excess of the cash
available for distribution. As a result, from time to time Gen-Net might have
to attempt to borrow, use cash reserves or sell properties to meet the 90%
distribution test.
39
Distributions After the Taxable Year. Under certain circumstances, Gen-Net
can rectify its failure to meet the 90% distribution test by paying dividends
after the close of the taxable year.
Dividends Paid In the Following Year. For purposes of the 90% distribution
test, Gen-Net is permitted to treat as distributed in a particular taxable
year, certain dividends that it pays to the shareholders in the following
taxable year. To qualify for this treatment, the dividends must be declared
before the date on which Gen-Net's tax return filings are due (including
extension periods), and the dividend must be paid within twelve months of the
end of the taxable year and no later than the next regular dividend payment
after the declaration.
Deficiency Dividends. Although Gen-Net may meet the 90% distribution test
based upon the figures reflected in its tax returns, the IRS might successfully
dispute those figures. If an adjustment is made that causes the dividends paid
by Gen-Net to be insufficient to have met the 90% distribution test, it may pay
a deficiency dividend, that will be permitted as a deduction in the taxable
year to which the adjustment is made, so that Gen-Net will retroactively be
deemed in compliance with the 90% distribution test. To qualify as a deficiency
dividend, Gen-Net must make this dividend within a specified period. No
deficiency dividend deduction is allowed if the deficiency is due and there
exists fraud with intent to evade tax or willful failure to file a timely tax
return.
Termination or Revocation of REIT Status
Gen-Net's election to be treated as a REIT will be terminated automatically
if it fails to meet one of the various requirements described above. Gen-Net
may voluntarily revoke its election within the first 90 days of any taxable
year after the first taxable year for which such election is effective in the
manner prescribed in the Regulations. If a termination or revocation occurs,
Gen-Net will not be eligible to elect REIT status for any taxable year prior to
the fifth taxable year that begins after the taxable year for which the
termination or revocation is first effective. However, this five year
ineligibility rule will not apply in the case of terminations (as opposed to
revocations) if: (i) Gen-Net does not willfully fail to timely file an income
tax return for the taxable year of the termination, (ii) any incorrect
information in such return is not due to fraud with intent to evade tax, and
(iii) Gen-Net's failure to qualify as a REIT is due to reasonable cause and not
due to willful neglect.
Taxation of the Company
If Qualified REIT. The following discussion generally describes the various
tax rules applicable to Gen-Net for years in which it qualifies as a REIT:
Loss Carry Forward. Gen-Net generally cannot carry its net operating or net
capital losses back to prior years,but it may carry forward net operating loss
for 15 years and net capital loss for 5 years.
Income Taxable If Not Distributed. Gen-Net is taxed on its REIT Taxable
Income which is not timely distributed to the shareholders and on its
undistributed capital gain as if it were an ordinary domestic corporation. This
income is essentially Gen-Net's undistributed net income and, in certain
circumstances, dividends paid after the end of each taxable year may also be
deducted in determining the income subject to tax. However, to discourage a
REIT from delaying distributions until the year after the income earned, the
Code imposes a non-deductible excise tax on undistributed income of 4% of the
amount by which the required distribution exceeds the amount distributed in the
taxableyear.The required distribution is the sum of 85% of the REIT's ordinary
income, plus 95% of its capital gain net income, plus the excess, if any, of
the "grossed up required distribution" for the preceding calendar year over the
distributed amount for such year. The "grossed up required distribution" for
the proceeding calendar year is the sum of the REIT' Taxable Income for that
year (without regard to deductions for REIT distributions) and amounts from
earlier years that are not treated as having been distributed.
If Gen-Net has undistributed net capital gain for a taxable year, it must
pay tax on such amounts. Currently, corporate long-term capital gains are taxed
as ordinary income, but will be subject to a maximum rate of 35%. The
alternative tax rate for corporate net capital gains does not apply.
40
Income Taxable Whether or Not Distributed. The following forms of income
are subject to taxation at the company level, whether or not they are
distributed to the shareholders:
. Violation of the 75% or 90% Source of Income Tests. If Gen-Net fails to
meet either the 75% or 90% source of income tests described above, but
still qualifies for taxation as a REIT under the reasonable cause
exception to those tests, a 100% tax is imposed on an amount equal to the
result obtained by multiplying (i) the greater of (A) the amount by which
it failed to meet the 75% test or (B) the amount by which it failed to
meet the 90% test, by (ii) a fraction, the numerator of which is Gen-Net's
taxable income (with certain adjustments) and the denominator of which is
its gross income (with certain adjustments).
. Net Income From Foreclosure Property. Gen-Net's net income from
foreclosure property would be taxed at the highest corporate rate, which
is presently 35%.
. Income From Prohibited Transactions. Gen-Net's net income from Prohibited
Transactions will be taxed at a rate of 100% whether or not such income is
distributed to the shareholders.
. Minimum Tax on Items of Tax Preference. Gen-Net may be subject to the
corporate alternative minimum tax ("AMT"), which is similar to the
individual AMT. The corporate AMT rate is 25% with a $40,000 exemption
amount (phased out at the rate of $.25 on each dollar for AMT income in
excess of $150,000). For the corporate AMT, items of tax preference
include accelerated depreciation (to the extent different from alternative
depreciation, using 150% declining balance method for personal property)
for all property (other than transitional property) placed in service
after 1986. After 1989, pretax book income is replaced for this purpose by
earnings and profits, with certain adjustments. As a result of the Revenue
Reconciliation Act of 1993, for properties placed in service after 1993,
the separate depreciation calculation for figuring the adjustment to
adjusted corporate earnings is eliminated. Rules similar to those under
the individual AMT apply to incentive credits, the foreign tax credit, net
operating losses and the credit for minimum tax liability attributable to
timing preferences. As a transition rule, investment tax credits generally
are permitted to offset 25% of AMT liability.
In Kind Distributions. The Bylaws do not permit Gen-Net to make any in-kind
distributions to the shareholders.
Qualified REIT Subsidiaries. A REIT owning a Qualified REIT Subsidiary, may
treat all of the assets, liabilities and items of income, deduction, and credit
of the subsidiary as though they were those of the REIT.
If Not Qualified REIT. For any taxable year in which Gen-Net fails to
qualify as a REIT, it will be taxed at the maximum corporate rate (currently
35%) on its taxable income, whether or not the income is distributed to the
shareholders.
Tax Deferred Exchanges
Section 1031 of the Code, and the Regulations thereunder, provide that no
gain or loss will be recognized when property held for productive use in a
trade or business, or for investment, is exchanged solely for property of "like
kind" that is also to be held either for productive use in a trade or business
or for investment. If cash is received or if "unlike" property is received or
given in the exchange, at least a part of the gain or loss may be recognized.
If cash is paid in connection with the exchange gain or loss is not recognized.
Non-recognition of gain or loss in a tax-free exchange results merely in
postponing recognition because the basis of the property which is acquired is,
in general, the same as the basis of the property (including money)
transferred. A loss resulting from a like-kind exchange will likewise be
deferred. For the purposes of Section 1031, "like-kind property" means, in
general, that the properties exchanged must be of the same character or nature,
but not necessarily of the same grade or quality.
41
Generally, if property received in a like-kind exchange between related
persons is disposed of before a date that is two years after the date of the
last transfer in exchange, any gain or loss that was not recognized on the
original exchange must be recognized as of the date that the property is
disposed of. Other than with respect to a transfer pursuant to a written
binding contract in effect on that date, and at all times thereafter before the
transfer, the non-recognition rule does not apply if one of the exchange
properties consists of real property located outside of the United States.
The non-recognition of gain or loss rules applicable to like-kind exchanges
will not apply to deferred like-kind exchanges unless the exchange is completed
within 180 days of the date the taxpayer transfers the property and the
property to be received in exchange is identified by the taxpayer within 45
days of such transfer. The date of transfer is the date on which the taxpayer
transferred the property relinquished in the exchange (but not later than the
due date, including extensions, for the taxpayer's return for the tax year in
which the transfer of the relinquished property occurred).
Taxation of Domestic Shareholders
For any taxable year in which Gen-Net fails to qualify as a REIT,
distributions to the shareholders would be taxed as ordinary dividends to the
extent of Gen-Net's current and accumulated earnings and profits. Such
dividends would be eligible for the dividend exclusion for individuals or the
80% dividends received deduction for corporations.
Taxation of Distributions. For any taxable year in which Gen-Net qualifies
as a REIT, the amounts it distributes to the shareholders will be taxed as
follows:
Distributions from Accumulated Earnings and Profits. Distributions from
Gen-Net will be taxable to shareholders who are not tax-exempt entities as
ordinary income to the extent of the earnings and profits of Gen-Net. Any
dividend declared by Gen-Net in October, November, or December of any year
payable to shareholders of record on a specified date in such a month, shall
be deemed to have been received by each shareholder on December 31 of such
year and to have been paid by Gen-Net on December 31 of such year, provided
such dividend actually is paid by January 31, of the following year.
Consequently, any such dividend will be taxable to a shareholder in such
shareholder's taxable year Including December 31. (It is possible that any
portion of a dividend made to a shareholder after December 31 not from
current or accumulated earnings and profits would be treated as a
distribution by Gen-Net in the year it is actually made. Accordingly, if
Gen-Net has sufficient earnings and profits in the year in which such
dividend actually is paid, no portion of such dividend would be a return of
capital distribution). Dividends paid to such shareholders will not
constitute passive activity income (such income, therefor, will not be
subject to reduction by losses from passive activities of a shareholder who
is subject to the passive activity loss rules). Such distributions, however,
will be considered investment income, which may be offset by investment
deductions.
Capital Gain Distributions. Dividends that are designated as capital
gain dividends by Gen-Net will be taxed as long-term capital gain taxable to
shareholders to the extent that they do not exceed Gen-Net's actual net
capital gain for the taxable year. A Shareholder that is a corporation may
be required to treat up to 20% of any such capital gains dividend as
ordinary income. Such distributions, whether characterized as ordinary
income or as capital gains, are not eligible for the 70% dividends received
deduction for corporations. Shareholders are not permitted to deduct any net
losses of Gen-Net. For tax years beginning after 1992, the maximum federal
income tax rate applicable to net capital gains (the excess of net long-term
capital gains over net short-term capital losses) recognized by an
individual is 28% as compared to a maximum rate of 39.6% for ordinary income.
Return of Capital. To the extent any distributions made by Gen-Net to
the shareholders exceed the current and accumulated earnings and profits of
Gen-Net, such distributions will constitute a non-taxable return of capital
to the shareholder to the extent of the shareholder's adjusted tax basis in
his shares. A shareholder's adjusted tax basis in his shares will be reduced
(but not below zero) by the amount of such excess. The proportion of the
distributions that exceed such adjusted tax basis will be taxable to the
shareholder as gain from the sale or exchange of his shares.
42
Notification. Gen-Net is not required to notify the shareholders of the
portions of the distributions made during each taxable year that constitute
long-term capital gain. Gen-Net will promptly, as required, notify
shareholders of the amount of any items of tax preference and the portion of
distributions made during each taxable year that constitute return of
invested capital.
Back-up Withholding. Gen-Net will be required to withhold tax from
dividends paid to a shareholder under certain circumstances as specified in
the "back-up" withholding provisions. These provisions only apply to a
Shareholder who (i) fails to furnish his taxpayer identification number
("TIN") to Gen-Net as required; (ii) who has, according to the IRS,
furnished an incorrect TIN; (iii) who has, according to the IRS,
under-reported interest, dividends or patronage dividend income in the past;
or (iv) who has failed to satisfy the payee's certification requirements of
Code Section 3406. With respect to such a shareholder, Gen-Net will impose
back-up withholding on dividends paid by the fund at the required rate of
28%. Foreign investors are subject to different withholding rules.
Alternative Minimum Tax. Individual and other non-corporate shareholders
may, as a result of their investment in Gen-Net, be subject to the Alternative
Minimum Tax ("AMT"), but only to the extent it exceeds their regular tax
liability. Effective in 1993, a two-tiered, graduated rate schedule for AMT is
applicable. The lower tier consists of a 26% rate, applicable to the first
$175,000 of a taxpayer's alternative minimum taxable income ("AMTI") in excess
of the exemption amount. The upper tier consists of a 28% rate, applicable to
AMTI that is greater than $175,000 above the exemption amount. For married
individuals filing separately, the 28% rate applies to AMTI that is greater
than $87,500 above the exemption amount. The exemption amounts are $45,000 for
married individuals filing joint returns, $33,750 for unmarried individuals,
and $22,500 for married individuals filing separately, estates and trusts.
AMTI is calculated by adding the taxpayer's items of tax preference to his
adjusted gross income (computed without regard to any deduction for net
operating loss carryovers) and subtracting certain itemized deductions (to the
extent they do not create a net operating loss, which can be carried to another
year for purposes of the regular tax), the taxpayer's AMT on net operating loss
carryovers and the applicable exemption amount. Under the Code, REITs are
subject to AMT to the extent items of tax preference and other items are
treated differently for regular tax and AMT purposes. Code section 59(d)
authorizes the IRS to issue regulations concerning the apportionment of
differently treated items between a REIT and its shareholders. These
regulations, when issued, could result in Shareholders being allocated such
differently treated item for inclusion in their own tax returns.
Statement of Share Ownership. Each year Gen-Net must demand from the record
holders of designated percentages of its shares written statements disclosing
the actual owners of the shares. Gen-Net must also maintain permanent records
showing the information it has received from the shareholders on this subject,
and a list of those persons failing or refusing to comply with its request for
that information.
Taxation of Tax-Exempt Entities. In general, a shareholder that is a
tax-exempt entity not subject to tax on its investment income will not be
subject to tax on distributions from Gen-Net. In Revenue Ruling 66-106, 1966-1
C.B. 151, the IRS ruled that amounts distributed as dividends by a REIT do not
constitute UBTI when received by a qualified Plan. Based on that ruling,
counsel has opined that regardless of whether Gen-Net incurs indebtedness in
connection with the acquisition of properties, distributions paid to a
shareholder that is a tax-exempt entity will not be treated as UBTI, provided
that (i) the tax-exempt entity has not financed the acquisition of its shares
with "acquisition indebtedness" within the meaning of the Code and the shares
otherwise are not used in an unrelated trade or business of the tax-exempt
entity and (ii) the Company is not a pension-held REIT. This opinion applies to
a shareholder that is an organization that qualifies under Code Section
401(a),an IRA or any other tax-exempt organization that would compute UBTI, if
any, in accordance with Code Section 512(a)(1). However, pursuant to changes
that were part of the 1993 Tax Act, if the Company is a pension-held REIT and a
tax-exempt shareholder owns more than 10 percent of Gen-Net, such shareholder
will be required to recognize as UBTI that percentage of the dividends that it
receives from Gen-Net as is equal to the percentage of Gen-Net's gross income
that would be UBTI to Gen-Net if it were a tax-exempt entity required to
recognize UBTI. A REIT
43
is a pension-held REIT if at least one qualified trust holds more than 25
percent of the value of the REIT's shares or one or more qualified trusts, each
of whom own more than 10 percent of the REITs shares, hold more than 50 percent
of the value of the REIT's shares.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt
from federal income taxation under Code Sections 501 (c)(7), (c)(9), (c)(17)
and (c)(20), respectively, income from an investment in Gen-Net will constitute
UBTI unless the organization is able to deduct amounts set aside or placed in
reserve for certain purposes so as to offset the UBTI generated by its
investment. Such prospective shareholders should consult their own tax advisors
concerning these "set aside" and reserve requirements.
Taxation of Foreign Shareholders
Non-resident alien individuals, foreign corporations, foreign partnerships
and other foreign shareholders are subject to United States federal income tax
under rules which are complex and the application of which will vary depending
on their particular circumstances. Accordingly, no attempt is made to summarize
these rules and prospective foreign shareholders should consult their own tax
advisors concerning those provisions of the Code which deal with the taxation
of foreign taxpayers.
United States Report Requirements
Subject to regulations, the IRS may impose annual reporting requirements of
certain United States and foreign persons directly holding United States Real
Property Interests ("USRPIs"). The required reports are in addition to any
necessary income tax returns. Furthermore, because shares in a domestically
controlled REIT do not constitute USRPIs, such reporting requirements will not
apply to a foreign shareholder in Gen-Net (assuming that Gen-Net will be
domestically controlled) if such shareholder does not otherwise own USRPIs.
However, Gen-Net is required to file an information return with the IRS setting
forth the name, address and taxpayer identification number of the payee of
dividends, whether the payee is a nominee or is the actual beneficial owner of
the shares.
State and Local Taxes
Treatment of Gen-Net and the shareholders under state and local tax laws may
differ substantially from the federal income tax treatment described above.
CONSEQUENTLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR WITH
REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN GEN-NET.
DESCRIPTION OF ORGANIZATIONAL DOCUMENTS AND SHARES
The following description of Gen-Net's organizational documents and shares
does not purport to be complete but contains a summary of portions of the
Restated Articles of Incorporation and Bylaws, and is qualified in its entirety
by reference to those documents.
Description of Shares
Gen-Net is authorized to issue up to 2,500,000 shares pursuant to this
offering. The shares have a $10.00 par value. There are currently 10,000 shares
issued and outstanding all owned by Genesis.
Each share is entitled to participate equally in dividends when and if
declared by the Directors and in the distribution of assets upon liquidation.
Each share is entitled to one vote and will be fully paid and non-assessable by
Gen-Net when the share is issued and paid for. The shares are not subject to
redemption by
44
Gen-Net, except in limited circumstances in order to preserve Gen-Net's REIT
status. The shares have no preemptive rights which are intended to ensure that
a shareholder maintains the same ownership interest (on a percentage basis)
before and after the issuance of additional shares. The shares do not have
cumulative voting under Michigan law for the election of Directors. Gen-Net
currently does not intend to issue any shares other than the shares offered in
this offering, although it may do so from time to time in either public or
private distributions.
Gen-Net has the authority, at the discretion of the Directors, to authorize
the listing, issuance and sale of shares on a national security exchange or on
NASDAQ. Gen-Net has the authority to issue shares of any class or shares
convertible into shares of any class or classes, to classify or to reclassify
any unissued stock by setting or changing the preferences conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of the redemption of such stock, all as
determined by the Directors, except Gen-Net is not authorized to issue
preferred shares and may do so only upon amendment of its Articles of
Incorporation.
Gen-Net will not issue share certificates unless it receives a written
request for a certificate. Shareholders who elect not to receive share
certificates will own such shares in "uncertificated" or "book entry" form and
will be treated in a like manner as those who request and receive a
certificate. Owning shares in uncertificated or book entry form will (a)
eliminate the physical handling and safekeeping responsibilities inherent in
owning transferable certificates, and (b) eliminate the need to return a duly
executed share certificate to the transfer agent to effect the transfer.
Transfers can be effected simply by mailing a duly executed stock power to the
transfer agent.
Transfer Agent
Gen-Net shall serve as Transfer Agent.
Meetings and Special Voting Requirements
The next annual meeting of shareholders will be held on the first Monday of
June, 2003 at 10:00 a.m., and each year thereafter, no fewer than 30 days after
delivery of the annual report. Special meetings of shareholders may be called
only upon the request of a majority of the Directors, a majority of the
Independent Directors, the President, or upon the written request of
shareholders entitled to cast at least 10% of all of the votes entitled to be
cast at such meeting. In general, the presence in person or by proxy of a
majority of the outstanding shares shall constitute a quorum at any
shareholders' meeting. The organizational documents may generally be amended by
a majority vote of the shareholders. However, an amendment of any provision
requiring a greater than majority vote must be approved by such greater vote
and a vote of the shareholders holding at least 66 2/3% of the outstanding
shares of any class of shares is required to approve any amendment which would
change any rights of that class by reducing the amount payable thereon upon
liquidation, or by diminishing or eliminating any voting rights of that class.
For the purposes of the foregoing, the authorization by the Directors and/or
shareholders of a new class or series of preferred stock would not constitute
such an amendment.
Other matters on which the shareholders are entitled to vote include: (i)
the election and removal of Directors; (ii) increase or decrease in the number
of authorized Directors; (iii) approval or renewal of advisory contracts; (iv)
a voluntary change in Gen-Net's status as a REIT; and/or (v) the dissolution of
Gen-Net.
With respect to shares owned by Directors, or any Affiliates, neither the
Directors or any Affiliates may vote or comment on matters submitted to the
shareholders regarding the removal of any Director, or any Affiliate, or any
transaction between Gen-Net and any of them. In determining the applicable
percentage in interest of shares necessary to approve a matter in which a
Director and any Affiliate may not vote or consult, any shares owned by any of
them shall not be included.
A majority of the Directors (including a majority of the Independent
Directors) may, in their discretion from time to time, amend certain portions
of the Bylaws. However certain Bylaw provisions, including those relating to
investment policies and objectives, and investment restrictions, may not be
amended without a majority vote of the shareholders.
45
Any action pertaining to a transaction involving Gen-Net in which any
Director or officer or any Affiliate has an interest shall specifically be
approved with respect to any isolated transactions or generally be approved
with respect to any series of similar transactions, by a majority of the
Directors, including a majority of the Independent Directors who are not
parties to and have no financial interest in the transaction and who are not
Affiliates of any interested party, even if such Directors constitute less than
a quorum. Any deadlock in voting by the Independent Directors shall result in
disapproval of the inside transaction with respect to which the voting was
conducted.
Limitations on Holdings and Transfer
For Gen-Net to qualify as a "REIT" under the Code, not more than 50% of its
outstanding shares may be owned by five or fewer individuals during the last
half of each year and outstanding shares must be owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year except with respect to the first
taxable year for which an election be treated as an REIT is made. The Bylaws
restrict the accumulation or transfer of shares, if any accumulation or
transfer could result in any person beneficially owning in accordance with the
Code, in excess of 9.8% of the then outstanding shares, determinable on an
audited basis and on a fully-diluted basis, or could result in Gen-Net having
fewer than 100 shareholders. Such restrictions authorize the Board of Directors
to refuse to give effect to such transfer and include suspension of voting and
distribution rights as to shares accumulated in excess of the 9.8% ownership
limit. Although the intent of these restrictions is to preclude transfers which
would violate the ownership limit or reduce the number of shareholders below
100, there can be no assurance that such restrictions will achieve their intent.
A transferee who acquires shares in a restricted transfer is required to
indemnify, defend, and hold Gen-Net and all other shareholders harmless from
and against all damages, losses, costs and expenses, including, without
limitation, reasonable attorneys' fees incurred or suffered by Gen-Net or such
shareholders by virtue of Gen-Net's loss of its qualification as a REIT if such
loss is a result of the transferee's acquisition. See "INCOME TAX
CONSIDERATIONS."
REPORTS TO SHAREHOLDERS
Gen-Net will provide periodic reports to the shareholders regarding its
operations over the course of the year. Financial information contained in all
reports to shareholders will be prepared on an accrual basis of accounting in
accordance with generally accepted accounting principles. Tax information will
be mailed to shareholders within 30 days following the close of each fiscal
year. Gen-Net's annual report, which will include financial statements audited
and reported upon by independent public accountants, will be furnished within
120 days following the close of each fiscal year. The annual financial
statements will contain or be accompanied by a complete statement of any
transactions with any Affiliates, and of compensation and fees paid or payable
by Gen-Net to the management and its Affiliates. The information required by
Form 10-Q will be made available to shareholders within 45 days of the close of
the first 3 fiscal quarters of each year.
Shareholders have the right under applicable federal and Michigan law to
obtain certain information about Gen-Net and, at their expense, may obtain a
list of names and addresses of the shareholders. Shareholders or their
designated representatives shall have access to all records of Gen-Net at all
reasonable times, and may inspect and duplicate any of them. In the event that
the SEC promulgates rules and/or in the event that applicable state or North
American Securities Administrators Association ("NASAA") Guidelines are amended
so that, taking such changes into account, Gen-Net's reporting requirements are
reduced, Gen-Net may cease preparing and filing certain of the reports if the
Directors determine such action to be in the best interests of Gen-Net and, if
such cessation is in compliance with the rules and regulations of the SEC, and
applicable state and NASAA Guidelines, one or more of which may then be amended.
Gen-Net will provide the shareholders that are qualified retirement plans
with an annual statement of value in order to permit them to comply with ERISA
annual reporting requirements. The statement will report the value of shares
based upon the amount Shareholders would receive if properties were sold at
their Appraised Values as
46
of the close of Gen-Net's fiscal year and if such proceeds, together with the
other funds, were distributed in liquidation. For the first three annual
reports following the termination of this offering, all properties will be
deemed to be valued at cost and the value of each share will be deemed to be
$10.00. Thereafter, Gen-Net will obtain an Appraisal update based on
capitalization of income for each property unless Gen-Net previously obtained
an Appraisal for such property dated within nine months prior to the end of the
relevant fiscal year. After the first three annual reports, the Directors may
elect to deliver such reports to all shareholders.
PLAN OF DISTRIBUTION
Gen-Net is offering a total of 2,500,000 shares of its common stock and has
registered such shares with the SEC. The offering price of $10.00 per share was
determined arbitrarily by Gen-Net. It does not bear any relationship to
objective factors such as Gen-Net's financial condition.
Each investor purchasing shares will be required to complete and execute an
Order Form (also referred to sometimes as a "Subscription Agreement") which
includes certain representations (Exhibit B). At the time the prospective
investor submits his Subscription Agreement, he must tender a check in the
amount of $10.00 for each share being purchased. Checks should be made payable
to "Gen-Net Special Escrow Account." Shares will only be sold to an investor
who represents in writing that, at the time he executes the Subscription
Agreement, he meets the applicable suitability requirements. See "INVESTOR
SUITABILITY." Investor funds will be held in an interest bearing escrow account
with Citizens First Savings Bank, Port Huron, Michigan, (1-800-922-5308 (ext.
706)) until the minimum of 300,000 shares (or $3,000,000) have been sold.
Gen-Net has complete discretion to reject any Subscription Agreement
executed by any investor within thirty days of its submission. It is
anticipated that subscriptions would be rejected for an investor's failure to
meet the suitability requirements, an over-subscription of the offering, or for
other reasons determined to be in the best interest of Gen-Net. If any
investor's subscription is rejected, the investor's funds submitted with the
subscription will be promptly returned to the investor. Gen-Net may not
complete a sale to an investor until at least 5 business days after the date
the investor receives a final prospectus. Gen-Net or its designee shall send
each investor a confirmation of his purchase.
The shares are being offered by Investors Capital Corporation, a member of
the NASD who has entered into a written underwriting agreement with Gen-Net.
The underwriting agreement is a "best efforts" arrangement which means
generally that Investors Capital is required to use only its best efforts to
sell the shares and has no firm commitment or obligation to purchase any of the
shares. Investors Capital will receive a managing underwriter fee of 1.25% of
the gross proceeds from the sale of shares and .25% for due diligence expenses.
Investors Capital will also receive a selling commission of 5.5% of the gross
proceeds from the sale of the shares, which it may reallow to Selected Dealers
who sell shares. Total selling compensation is limited to 7.25%. Investors
Capital and the Selected Dealers are not obligated to sell any shares and there
is no assurance that any shares will be sold.
The following table sets forth the type, and to the extent practicable,
estimates of the amounts of all material compensation that Investors Capital
and the Selected Dealers may receive in connection with this offering.
Person Receiving Form and Method of
Compensation Compensation Estimated Amount
------------ ------------------------- -------------------------
Investors Capital 1.5% of sales price as Aggregate estimated
Corporation managing underwriter's compensation will be
fee, plus .25% for due $217,500 if the minimum
diligence; 5.5% of amount of shares are
sales price as selling sold and $1,812,500 if
commission the maximum amount of
shares are sold.
Selected Dealers Investors Capital may Aggregate estimated
reallow its selling compensation will be
commission of 5.5% to $165,000 if the minimum
Selected Dealers who amount of shares are
sell shares. sold and $1,375,000 if
the maximum amount of
shares are sold.
On or after acceptance of his subscription agreement, an investor will have
no right to withdraw any funds submitted during the offering period. Shares
will be evidenced on Gen-Net's books and records, which will include a list of
shareholders' names, addresses and number of shares owned.
47
Investors Capital will be indemnified by Gen-Net against certain
liabilities, including liabilities under the Securities Act of 1933 unless such
liability arises from information in this prospectus relating to Investors
Capital and supplied by Investors Capital. Causes of action resulting from
violations of federal or state securities laws shall be governed by such laws.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GEN-NET'S FINANCIAL CONDITION
As of the date of this Prospectus, Gen-Net has not yet had any operations
nor has entered into any commitments or obligations to acquire properties.
Gen-Net intends to utilize the proceeds of this offering as described under
"ESTIMATED USE OF PROCEEDS," consistent with those principles set forth in
"INVESTMENT OBJECTIVES AND PROCEEDS."
In the event that the proceeds of this offering are less than the maximum
amount contemplated Gen-Net may be unable to diversify its investments. Since
the leases will be "Net Leases," Gen-Net will establish a working capital
reserve of 1% of the gross proceeds of the offering. In the event such reserves
are insufficient to satisfy unanticipated costs, Gen-Net may be required to
borrow funds to meet such costs.
As of the date of this prospectus, Gen-Net has no external sources of
financing. However, the Directors are not aware of any material trends,
favorable or unfavorable, in either capital resources or the outlook for
long-term cash generation, nor do they expect any material changes in the
availability and relative cost of such capital resources, other than as
referred to herein. It is for these reasons that the Directors believe that
should Gen-Net be required to obtain financing, other than from affiliated
sources, such external financing should be available.
A copy of Gen-Net's audited financial statements for the years ended
December 31, 2000 and 2001, is attached to this prospectus as Exhibit C. The
loan payable described in Note 3 to the financial statements is a loan by
Genesis to Gen-Net. The loan has a 5 year term and bears interest at an annual
rate of 5%. Interest accrues on the unpaid balance of the loan. A single
payment at the end of the term is required. However, Gen-Net may, at its
option, make partial payments, or payment in full, at any time without penalty.
The proceeds of this loan are being used by Gen-Net to pay organizational and
operating expenses--See Estimated Use of Proceeds. If approved by the
Directors, the loan may be repaid with proceeds from this offering.
SALES MATERIALS
Sales material prepared by Gen-Net may be used in connection with this
offering. Such material may be used only when accompanied or preceded by the
delivery of this prospectus. The offering is made only by means of this
prospectus and shall be identified with Gen-Net's name and logo on the cover
page. Sales material does not purport to be complete and should not be
considered part of this prospectus or as forming the basis of the offering of
the shares.
EXPERTS
Gen-Net's financial statements as of December 31, 2000 and 2001, included in
this prospectus have been audited by Zwick & Steinberger, P.L.L.C., independent
certified public accountants, as indicated in their report herein, and have
been included in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The statements concerning federal taxes under the headings "INCOME TAX
CONSIDERATIONS" AND "RISK FACTORS" have been reviewed by Lieben, Whitted,
Houghton, Slowiaczek & Cavanagh, P.C., L.L.O., Counsel for Gen-Net, and have
been included herein, to the extent they constitute matters of law. In reliance
upon the authority of said firm as experts, counsel believes that such material
constitutes a full and fair disclosure of the material tax risks associated
with an investment in the shares.
LEGAL MATTERS
The legality and validity of the shares being offered hereby has been passed
upon for Gen-Net by its Michigan counsel, David A. Sims, P.C.
48
Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C., L.L.O. has rendered
its opinion regarding the material income tax issues associated with the
ownership of shares.
None of Gen-Net, its officers or Directors, are parties to any pending legal
proceedings that are material to Gen-Net.
FURTHER INFORMATION
This prospectus does not contain all of the information set forth in
Gen-Net's registration statement and the Exhibits relating thereto which
Gen-Net has filed with the SEC, and to which reference is hereby made. Copies
of the Exhibits are on file at the offices of the SEC in Washington, D.C. and
may be obtained upon payment of the fee prescribed by the SEC, or may be
examined without charge at the offices of the SEC.
All summaries contained herein of documents which are filed as Exhibits to
the Registration Statement are qualified in their entirety by this reference to
those Exhibits. Gen-Net has not knowingly made any untrue statement of a
material fact or admitted to any fact required to be stated in the Registration
Statement, including this Prospectus, or necessary to make the statement
therein not misleading.
GLOSSARY
"Acquisition Expenses" means those expenses, including but not limited to
legal fees and expenses, travel and communications expenses, costs of
appraisals, nonrefundable option payments on property not acquired,
environmental, accounting fees and expenses, title insurance, and miscellaneous
expenses related to selection and acquisition of Properties, whether or not
acquired. Acquisition Expenses shall not include Acquisition Fees.
"Acquisition Fees" means the total of all fees and commissions paid by any
party to any party in connection with making or investing in mortgage loans or
the purchase, development or construction of property by Gen-Net. Included in
the computation of such fees or commissions shall be any real estate
commission, selection fee, development fee, construction fee, nonrecurring
management fee, loan fees or points or any fee of a similar nature however
designated. Excluded shall be development fees and construction fees paid to
persons not affiliated with the Sponsor in connection with the actual
development and construction of a project.
"Advisor" means the person or entity responsible for directing or performing
the day-to-day business affairs of Gen-Net, including a person or entity to
which an Advisor subcontracts substantially all such functions.
"Affiliate" of another person means (a) any person directly or indirectly
owning, controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person; (b) any person ten percent
or more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held, with power to vote, by such other person; (c) any
person directly or indirectly controlling, controlled by, or under common
control with such other person; (d) any executive officer, director, trustee or
general partner of such other person; (e) any legal entity for which such
person acts as the executive officer, director, trustee or general partner.
"Appraisal" means the valuation of real property (which value may take into
consideration the existing state of the property or a state to be created) by
an independent, qualified appraiser who is a member in good standing of the
American Institute of Real Estate Appraisers (MAI) or is a disinterested person
who, in the judgment of the Directors, is qualified to make such a
determination. Each Appraisal shall be maintained in Gen-Net's records for at
least five years and shall be available for inspection and duplication by any
shareholder. The independent qualified appraiser shall be selected by a
majority of the Directors (including a majority of the Independent Directors).
"Appraised Value" means the value of a particular property as stated in the
Appraisal.
"Average Invested Assets" means for any period the average of the aggregate
book value of the assets of Gen-Net invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves computed by taking the average
of such values at the end of each month during such period.
49
"Beneficial Ownership, Beneficially Own or Beneficial Owner of Shares" means
the ownership of such shares for purposes of part II, Subchapter M of the Code,
including the attribution of ownership provisions of Section 542 and 544 of the
Code, or if, under Rule 13d-3 of the Exchange Act, such person would be deemed
to have beneficial ownership of such shares.
"Benefit Plan" or "Plan" means an IRA, KEOGH or employee benefit plan
subject to Title I of ERISA or Section 4975 of the Code.
"Distributable REIT Taxable Income" means an amount equal to or greater than
(i) the sum of 90% of: (a) the REIT Taxable Income for the taxable year
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain), and (b) the excess of the net income from foreclosure
property over the tax imposed on such income less (ii) any excess non-cash
income.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Exchange Act" means The Securities Exchange Act of 1934, as amended.
"Independent Directors" means the Director(s) of Gen-Net who are not
associated and have not been associated within the last two years, directly or
indirectly, with the Sponsor.
(a) A Director shall be deemed to be associated with the Sponsor if he or
she:
i. owns an interest in the Sponsor, or any of their Affiliates; or
ii. is employed by the Sponsor, or any of their Affiliates; or
iii. is an officer or director of the Sponsor, or any of their
Affiliates; or
iv. performs services, other than as a Director, for Gen-Net; or
v. is a Director for more than three companies organized by the Sponsor;
or
vi. has any material business or professional relationship with the
Sponsor, or any Affiliates.
(b) For purposes of determining whether or not the business or professional
relationship is material, the gross revenue derived by the prospective
Independent Director from the Sponsor and Affiliates shall be deemed material
per se if it exceeds 5% of the prospective Independent Directors':
i. annual gross revenue, derived from all sources, during either of the
last two years;
or
ii. net worth, on a fair market value basis.
(c) An indirect relationship shall include circumstances in which a
Director's spouse, parents, children, siblings, mothers, or fathers-in-law,
sons or daughters-in-law or brothers-in-law or sisters-in-law are or have been
associated with the Sponsor, any of their Affiliates, or Gen-Net.
"Net Assets" means the total assets (other than intangible) at cost before
deducting depreciation or other non-cash reserves less total liabilities,
calculated at least quarterly on a basis consistently applied.
"Organization and Offering Expenses" means those expenses payable by Gen-Net
in connection with the formation, qualification and registration of Gen-Net and
in marketing and distributing shares, including, but not limited to, (i) the
preparing, printing, filing and delivery of the Registration Statement and the
prospectus (including any amendments thereof or supplements thereto) and the
preparing and printing of contractual agreements between Gen-Net and Investors
Capital Corporation (including copies thereof), (ii) the preparing and printing
of the Articles of Incorporation and Bylaws, solicitation material and related
documents and the filing and/or recording of such documents necessary to comply
with the laws of the State of Michigan for the formation
50
of a company and thereafter for the continued good standing of a company, (iii)
the qualification or registration of the Shares under state securities or "Blue
Sky" laws, (iv) any escrow arrangements, including any compensation to an
escrow agent, (v) the filing fees payable to the SEC and to the NASD, (vi)
reimbursement for the reasonable and identifiable out-of-pocket expenses of the
Investors Capital Corporation, including the cost of their counsel, (vii) the
fees of counsel and independent public accounts, (viii) all advertising
expenses incurred in connection with the offering, including the cost of all
sales literature and the costs related to investor and broker-dealer sales and
information meetings and marketing incentive programs, and (ix) selling
commissions, marketing fees, incentive fees, investment banking fees and
wholesaling fees and expenses incurred in connection with the sale of the
shares.
"Permitted Temporary Investments" means United States government shares,
certificates of deposit or other time or demand deposits of commercial banks,
savings banks, savings and loan associations or similar institutions which have
a net worth of at least $100,000,000 or in which such certificates or deposits
are fully insured by any federal or state government agency, United States
dollar deposits in foreign branches of banks which have a net worth of at least
$100,000,000, bank repurchase agreements covering shares of the United States
government or governmental agencies, commercial paper, bankers acceptances,
public money market funds or other similar short-term highly liquid investments.
"Prohibited Transaction" under the REIT Provisions means sale of assets held
by Gen-Net primarily for sale to customers in the ordinary course of business
other than (i) foreclosure property and (ii) certain dispositions of real
estate assets not held for at least four years as required by Section
857(b))(6)(C) of the Code.
"Qualified REIT Subsidiary" means a subsidiary of a REIT which is 100% owned
by the REIT during the subsidiary's existence.
"Regulations" means the federal income tax regulations which are the
official United States Treasury Department Interpretations of the Code.
"REIT" or "Real Estate Investment Trust" means a real estate investment
trust as defined under Sections 856-860 of the Code.
"REIT Provisions of the Code" or "REIT Provisions" means Parts II and III of
Subchapter M of Chapter 1 of the Code or successor statutes, and regulations
and rulings promulgated thereunder.
"REIT Taxable Income" means the taxable income of a REIT, adjusted as
follows: (i) the deduction for dividends received allowable to trusts under
Sections 241 through 247, 249 and 250 of the Code is not allowed; (ii) the
deduction for dividends paid under Section 561 of the Code is allowed, but is
computed without regard to that portion of such deduction attributable to net
income from foreclosure property; (iii) taxable income is computed without
regard to Section 443(b) of the Code relating to the computation of tax upon
the change of an annual accounting period; (vi) net income from foreclosure
property that is not qualified REIT income without regard to the foreclosure
Property provisions of the Code is excluded; (v) the tax imposed for failing
the 75% income test and/or the 95% income test is deducted; and (vi) income
derived from Prohibited Transactions is excluded.
"Roll-up" means a transaction involving the acquisition, merger, conversion,
or consolidation either directly or indirectly of Gen-Net and the issuance of
securities of a Roll-up Entity. Such term does not include:
(a) a transaction involving securities of Gen-Net that have been for at
least 12 months listed on a national securities exchange or traded through
the National Association of Securities Dealers Automated Quotation National
Market System; or
(b) a transaction involving the conversion to corporate, trust or
association form of only Gen-Net if, as a consequence of the transaction
there will be no significant adverse change in any of the following:
i. Shareholders voting rights;
ii. The term of existence of Gen-Net;
51
iii. Sponsor compensation;
iv. Gen-Net's investment objectives.
"Roll-up Entity" means a partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed roll-up transaction.
"Sponsor" means Genesis Financial Group, Inc. and its Affiliates, including
the Bartons. Not included is any person whose only relationship with Gen-Net is
as that of an independent property manager of Gen-Net assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. A person may also be deemed a Sponsor by:
(a) taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of Gen-Net, either alone or in
conjunction with one or more other persons;
(b) receiving a material participation in Gen-Net in connection with the
founding or organizing of the business, in consideration of services or
property, or both services and property;
(c) having a substantial number of relationships and contacts with
Gen-Net;
(d) possessing significant rights to control Gen-Net's properties;
(e) receiving fees for providing services to Gen-Net which are paid on a
basis that is not customary in the industry; or
(f) providing goods or services to Gen-Net on a basis which was not
negotiated at arms length.
"Total Operating Expenses" means the aggregate expenses of every character
paid or incurred by Gen-Net as determined under generally accepted accounting
principles, but excluding:
(a) the expense of raising capital such as Organization and Offering
Expenses, legal, audit, accounting, underwriting, brokerage, listing
registration and other fees, printing and other such expenses, and tax
incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of the shares;
(b) interest payments;
(c) taxes;
(d) non-cash expenditures such as depreciation, amortization, and bad
debt reserves;
(e) incentive fees;
(f) Acquisition Fees and Acquisition Expenses, real estate commissions on
resale of property and other expenses connected with the acquisition,
disposition, and ownership of real estate interests, mortgage loans and on
other property, (such as the costs of foreclosure, insurance premiums, legal
services, maintenance, repair, and improvement of real property).
"UBTI" means unrelated business taxable income as defined in Section 512 of
the Code.
"Unimproved Real Property" means the real property of Gen-Net which has the
following three characteristics:
(a) an equity interest in real property which was not acquired for the
purpose of producing rental or other operating income;
(b) has no development or construction in process on such land; and
(c) no development or construction on such land is planned in good faith
to commence on such land within one year.
52
EXHIBIT A
ORDER FORM
The undersigned desires to become a Shareholder of Gen-Net Lease
Income Trust, Inc. ("Gen-Net") and to purchase the number of shares appearing
at the beginning of this Order Form in accordance with the terms and conditions
of the prospectus and supplements, if any, thereto. In connection therewith,
the undersigned hereby represents, warrants and agrees as follows:
1. SUBSCRIPTION The undersigned agrees to purchase the number of
shares set forth above his signature at the end of this
subscription, and hereby tenders the amount required to
purchase such shares ($10.00 per Share).
2. REPRESENTATIONS (Each investor must (a) The undersigned is subscribing for shares solely for
initial each representation on the line his own account or for the account indicated herein
provided after each such representation.) and not for the benefit of the account of any other
person or entity. ______ (initial)
(b) The undersigned is aware that this subscription may
be rejected in whole or in part by Gen-Net in its
sole discretion. ______ (initial)
(c) The undersigned has received a copy of the
prospectus. ______ (initial)
(d) The undersigned meets the minimum income and
net worth standards established by Gen-Net, or
higher standards established by the undersigned's
jurisdiction of residence (see SUITABILITY
section of prospectus) which are generally as
follows: (1) gross income of $________ and a net
worth of $________ (excluding home, furnishings
and automobiles), or (2) a net worth of $
(excluding home, furnishings and automobiles).
______ initial
(e) The undersigned acknowledges that the shares are
not liquid. ______ (initial)
NOTHING HEREIN SHALL BE DEEMED A WAVIER OF ANY RIGHTS OF ACTION WHICH THE
UNDERSIGNED MAY HAVE UNDER ANY FEDERAL OR STATE SECURITIES LAW.
53
REGISTRATION REQUIREMENTS FOR GEN-NET LEASE INCOME TRUST, INC.
The following requirements have been established for the various forms of
registration. Accordingly, complete subscription agreements and such supporting
material as may be necessary, must be provided.
TYPE OF OWNERSHIP:
1. INDIVIDUAL--One signature required.
2. JOINT TENANTS WITH RIGHT OF SURVIVORSHIP--Both parties must sign.
3. TENANTS IN COMMON--Both parties must sign.
4. COMMUNITY PROPERTY--Only one investor signature required.
5. CUSTODIAN--The custodian signs the Subscription Agreement.
6. TRUST--The trustee signs the Subscription Agreement. Provide a copy of
the trust agreement, the name of the trustee and the name of the beneficiary.
7. PARTNERSHIP--Identify the entity as to whether it is a general or
limited partnership. The general partners must be identified and their
signatures obtained on the order. In the case of an investment by a general
partnership, all partners must sign (unless a "managing partner" has been
designated for the partnership, in which case he may sign on behalf of the
partnership if a certified copy of the document granting him authority to
invest on behalf of the partnership is submitted).
8. CORPORATION--The Subscription Agreement must be accompanied by (i) a
certified copy of the resolution of the Board of Directors designating the
officer(s) of the corporation authorized to sign on behalf of the
corporation and (ii) a certified copy of the board's resolution authorizing
the investment.
9. IRA--Requires signature of authorized signer (e.g., an officer) of the
bank, trust company or other fiduciary. The address of the trustee must be
provided in order for them to receive checks and other pertinent information
regarding the investment.
10. KEOGH (HR 10)--Same rules as those applicable to IRAs.
11. UNIFORM GIFT TO MINORS ACT (UGMA--The required signature is that of
the custodian, not of the parent (unless the parent has been designated as
the custodian). Only one child is permitted in each investment under the
Uniform Gift to Minors Act. In addition, designate the state under which
UGMA is being made and the child's Social Security number.
GEN-NET LEASE INCOME TRUST, INC.
24081 West River Road, First Floor
Grosse Ile, MI 48138
ORDER FORM
54
GEN-NET LEASE INCOME TRUST, INC.
Make Checks Payable To: "GEN-NET SPECIAL ESCROW ACCOUNT"
IMPORTANT: Please fill out application completely. Type or use ballpoint pen.
Press hard.
1. INVESTMENT _________________________ NEW PURCHASER _________________________
NUMBER OF SHARES DATE OF PREVIOUS PURCHASE
OR
$__ AMOUNT OF INVESTMENT ADDITION TO PREVIOUS PREV. AM ACCT. #
($10.00 TIMES NUMBER OF PURCHASE
SHARES)
2. OWNERSHIP Check One: A. Individual F. Trust K. Uniform Gift to Minors
B. Joint Tenants with G. Partnership Act of the State of
Rights of Survivorship H. Corporation L. Other (explain)
C. Tenants in Common I. IRA _________________________
D. Community Property J. Keogh (HR 10) _________________________
E. Custodian _________________________
3. REGISTERED OWNER: Name of Name _____________________________________
Investor. (Use name of trust and address of Soc. Sec. No. ____________________________
the trustee or custodian or administrator Name _____________________________________
where applicable.) Please type or print here Soc. Sec. No. ____________________________
the exact name (registration) investor desires Address __________________________________
on account. City ______ State ______ Zip _______ Phone
4. DIVIDEND PAYMENT ADDRESS: Name _____________________________________
Where is the dividend to be sent? (Insert c/o _____________________________________
"same" if it is to be sent to address of the Address __________________________________
registered owner. Insert name, address and City State Zip Phone _____________________
account number if check is to be sent to a Account Number ___________________________
financial institution.)
55
5. CORRESPONDENCE: All reports and financial statements will be sent to the
registered owner at the address above. All
correspondence, reports, and financial statements are
normally sent to the registered owner at the address
shown above. On IRA and Uniform Gift to Minors Act
accounts, please complete this block to insure that the
investor will receive this information at his or her
mailing address. Also, if additional correspondence,
reports and financial statements are required by another
person, please complete.
Name ___________________________________________________
Address ________________________________________________
City ______ State ______ Zip ______ Phone
6. SIGNATURES: Executed this ___ day of __________, 200
at _____________________________________________________
X ________________ X ________________
Signature Signature
(Investor, (Investor, Trustee
Trustee, Custodian,
Custodian, Administrator)
Administrator)
BY EXECUTING THIS AGREEMENT THE
INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE SECURITIES ACT OF 1933 OR THE
SECURITIES EXCHANGE ACT OF 1934.
56
7. BROKER/DEALER REGISTERED We recognize our obligation under Sections 3(b) and
REPRESENTATIVE 4(d), Appendix F of the NASD Manual, Rules of Fair
Practice (i) to determine the suitability of investors and
maintain documentation on which the determination was
based, and (ii) to inform investors of the liquidity and
marketability of the Shares.
Broker/Dealer NASD Firm Name _____________________________
Home/Main Office Address _________________________________
City ______ State ______ Zip ______ Phone
Broker/Dealer Authorized Signature X _____________________
Registered Representative Name ___________________________
Branch Office Address & Dealer Code Number _______________
City ______ State ______ Zip ______ Phone
Registered Representative Signature X ____________________
8. COPY DISTRIBUTION: YELLOW--To _______________________________________________
9. MAIL TO: Mailing Instructions: Please remove yellow copy and
mail along with check to:
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
10. (OFFICE USE ONLY) Accepted: Date ________ (must be at least 5 days after
the date investor receives a final Prospectus)
Date Received ________ By ______ Date
Checked By
Investor Check Date ________ Investor Check Amount
$
Investor Check #
Entered by ___________ Date Entered
Confirmation of Purchase Section _________________________
57
EXHIBIT B
PRIOR PERFORMANCE TABLES
The following Prior Performance Tables (the "Tables") provide information
relating to all prior real estate investment programs sponsored by Genesis
("Prior Programs").
As a prospective investor, you should read these Tables carefully together
with the summary information concerning the Prior Programs as set forth in
"PRIOR PERFORMANCE OF GEN-NET AND GENESIS."
AS AN INVESTOR IN GEN-NET, YOU WILL NOT OWN ANY INTEREST IN THE PRIOR
PROGRAMS AND SHOULD NOT ASSUME THAT YOU WILL EXPERIENCE RETURNS, IF ANY,
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE PRIOR PROGRAMS.
As described in the prospectus, Genesis is responsible for assisting
management with Gen-Net's day-to-day business affairs and assets, serves as a
consultant in connection with policy decisions to be made by the Directors,
manages Gen-Net's properties, and renders other services as the Directors and
management deem necessary. The financial results of the Prior Programs thus
provide an indication of Genesis' performance of its obligations during the
periods covered. However, general economic conditions affecting the real estate
industry and other factors contribute significantly to financial results.
The following tables are included herein:
Table I--Experience in Raising and Investing Funds (on a Percentage
Basis). Table I generally shows Genesis' experience in raising investing
funds as measured by the Prior Programs. All of the Prior Programs were
non-public programs with objectives similar to those of Gen-Net.
Table II--Compensation to Sponsor. Table II shows the aggregate payments
Genesis received as the sponsor of the Prior Programs. All of the Prior
Programs were non-public programs with objectives similar to those of
Gen-Net.
Table III--Annual Operating Results of Prior Programs. Table III shows
the annual operating results of each of the Prior Programs since their
respective inceptions. All of the Prior Programs were non-public programs
with objectives similar to those of Gen-Net.
Table IV--(Results of Completed Programs) has been omitted since none of
the Prior Programs are completed to date.
Table V--Sales or Disposals of Property. Table V shows the properties
sold by the Prior Programs, all of which were non-public programs with
investment objectives similar to those of Gen-Net.
Additional information relating to the acquisition of properties by the
Prior Programs is contained in Table VI, which is included in the registration
statement which Gen-Net filed with the SEC.
58
Table I
Experience in Raising and Investing Funds
(Unaudited Statement)
UITFX1 UITGI1 Bond G9 UITFX2 Bond G1 UITFX3
---------- ---------- ---------- ---------- ---------- ----------
Dollar amount offered................................. $1,650,000 $2,115,000 $2,500,000 $1,795,000 $1,000,000 $4,412,836
Dollar amount raised (100%)........................... $1,500,547 $ 121,000 $2,500,000 $1,786,936 $ 742,000 $4,218,159
Less offering expenses:
Selling commissions and discounts retained by non
affiliates........................................ 6% 6% 5% 5% 5% 5%
Organizational expenses............................ 1% 1% 1% 1% 1% 1%
Other(a)........................................... 35% 0% 71% 4% 94% 23%
Reserves.............................................. 0% 0% 0% 0% 0% 0%
---------- ---------- ---------- ---------- ---------- ----------
Percent available for investment...................... 58% 93% 23% 90% 0% 71%
Acquisition costs:
Prepaid items and fees related to purchase of
property.......................................... 0% 0% 0% 0% 0% 0%
Cash down payment.................................. 0% 93% 23% 66% 0% 63%
Acquisition fees................................... 0% 0% 0% 0% 0% 0%
Other(b)........................................... 58% 0% 0% 24% 0% 8%
---------- ---------- ---------- ---------- ---------- ----------
Total Acquisition costs............................ 58% 93% 23% 90% 0% 71%
Percent leverage (Mortgage financing divided by
total acquisition cost)........................... 0% 0% 0% 60% 0% 57%
Date offering began................................ 1/97 5/97 8/97 10/97 6/98 3/99
Length of offering (Months)........................ 12 12 12 12 12 12
Months to invest 90% of amount available for
investment (Measured from beginning of
offering)......................................... 2 1 6 1 -- 2
- --------
a) General Operational Expenses-Dilution
b) Cash available to purchase properties.
59
Table I
Experience in Raising and Investing Funds
(Unaudited Statement)
Bond G3
& G5 UITFX4 UITFX5 UITCG1
---------- ---------- ---------- ----------
Dollar amount offered................................................. $2,000,000 $5,000,000 $4,000,000 $2,500,000
Dollar amount raised (100%)........................................... $ 910,200 $1,571,769 $1,346,209 $1,432,573
Less offering expenses:
Selling commissions and discount...................................
Retained by non-affiliates......................................... 5% 5% 5% 5%
Organizational expenses............................................ 2% 2% 2% 2%
Other (a).......................................................... 93% 4% 1% 1%
Reserves.............................................................. 0% 1% 1% 1%
---------- ---------- ---------- ----------
Percent available for investment...................................... 0% 88% 91% 88%
Acquisition costs:
Prepaid items and fees related to purchase of property............. 0% 0% 0% 0%
Cash down payment.................................................. 0% 88% 91% 88%
Acquisition fees................................................... 0% 0% 0% 0%
Other (explain).................................................... 0% 0% 0% 0%
---------- ---------- ---------- ----------
Total Acquisition costs 0% 88% 91% 88%
Percent leverage (Mortgage financing divided by total acquisition
cost)............................................................. 0% 54% 80% 70%
Date offering began................................................ 8/99 7/99 9/99 10/99
Length of offering (months)........................................... 12 12 12 12
Months to invest 90% of amount available for investment (Measured
from beginning of offering).......................................... -- 2 2 2
UITCG2
----------
Dollar amount offered................................................. $2,000,000
Dollar amount raised (100%)........................................... $1,273,405
Less offering expenses:
Selling commissions and discount...................................
Retained by non-affiliates......................................... 5%
Organizational expenses............................................ 2%
Other (a).......................................................... 1%
Reserves.............................................................. 3%
----------
Percent available for investment...................................... 89%
Acquisition costs:
Prepaid items and fees related to purchase of property............. 0%
Cash down payment.................................................. 89%
Acquisition fees................................................... 0%
Other (explain).................................................... 0%
----------
Total Acquisition costs 89%
Percent leverage (Mortgage financing divided by total acquisition
cost)............................................................. 55%
Date offering began................................................ 1/00
Length of offering (months)........................................... 12
Months to invest 90% of amount available for investment (Measured
from beginning of offering).......................................... 2
- --------
a) General Operational Expenses-Dilution
60
Table I
Experience in Raising and Investing Funds
(Unaudited Statements)
UITFGPO UITFX9 UITFX10 UITFX11 UITFX12 UITFX14 UITFX15
---------- ---------- ---------- ---------- ---------- ---------- ---------
Dollar amount offered................. $1,500,000 $3,400,000 $2,200,000 $1,800,000 $1,750,000 $3,000,000 2,000,000
Dollar amount raised (100%)........... $1,466,000 $1,476,392 $1,299,700 $1,800,000 $1,646,404 $1,092,601 1,384,492
Less offering expenses:
Selling commissions and discounts
retained by non-affiliates........ 5% 5% 5% 5% 5% 5% 5%
Organizational expenses............ 2% 2% 2% 2% 2% 2% 2%
Other(a)........................... 4% 4% 4% 4% 4% 4% 3%
Reserves.............................. 0% 0% 0% 0% 0% 0% 0%
---------- ---------- ---------- ---------- ---------- ---------- ---------
Percent available for investment...... 88% 88% 88% 88% 88% 88% 90%
Acquisition costs:
Prepaid items and fees related to
purchase of property.............. 0% 0% 0% 0% 0% 0% 0%
Cash down payment.................. 88% 88% 88% 88% 88% 88% 0%
Acquisition fees................... 0% 0% 0% 0% 0% 0% 0%
Other(b)........................... 0% 0% 0% 0% 0% 0% 90%
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total Acquisition costs............... 88% 88% 88% 88% 88% 88% 90%
Percent leverage (Mortgage
financing divided by total
acquisition cost)................. 40% 56% 66% 52% 0% 0% 0%
Date offering began................ 3/00 7/00 10/00 1/01 3/01 8/01 9/01
Length of offering (months)........... 12 12 12 12 12 12 12
Months to invest 90% of amount
available for investment (Measured
from beginning of offering).......... 2 2 2 3 -- -- --
UITFX16
---------
Dollar amount offered................. 1,600,000
Dollar amount raised (100%)........... 1,500,518
Less offering expenses:
Selling commissions and discounts
retained by non-affiliates........ 5%
Organizational expenses............ 2%
Other(a)........................... 5%
Reserves.............................. 0%
---------
Percent available for investment...... 88%
Acquisition costs:
Prepaid items and fees related to
purchase of property.............. 0%
Cash down payment.................. 0%
Acquisition fees................... 0%
Other(b)........................... 88%
---------
Total Acquisition costs............... 88%
Percent leverage (Mortgage
financing divided by total
acquisition cost)................. 0%
Date offering began................ 10/01
Length of offering (months)........... 12
Months to invest 90% of amount
available for investment (Measured
from beginning of offering).......... --
- --------
a) General Operational Expenses-Dilution
b) Cash available to purchase properties
61
Table II
Compensation to Sponsor
(Unaudited statement)
GFG Bond
GFG Bond G9 GFG G1 G3/G5
----------- -------- --------
Date offering commenced......................................... 8/97 6/98 8/99
Dollar amount raised (100%)..................................... $2,602,710 $742,000 $910,200
Amount paid to sponsor from proceeds of offering:
Offering Expenses............................................ $ 156,163 $ 44,520 $ 69,714
Underwriting fees............................................ $ 0 $ 0 $ 0
Acquisition fees:............................................ $ 0 $ 0 $ 0
Real estate commissions.................................... $ 0 $ 0 $ 0
Advisory fees.............................................. $ 0 $ 0 $ 0
Other (identify and quantify).............................. $ 0 $ 0 $ 0
Other........................................................ $ 0 $ 0 $ 0
Dollar amount of cash generated from operations Before deducting
payments to sponsor........................................... $ 140,750 $200,400 $245,820
Amount paid to sponsor from operations:
Property management fee...................................... $ 4,221 $ 1,965 $ 0
Partnership management fees:
Reimbursements............................................... $ 0 $ 0 $ 0
Leasing commissions.......................................... $ 0 $ 0 $ 0
Other (identify and quantify)................................ $ 0 $ 0 $ 0
Dollar amount of property sales and refinancing before deducting
Payments to sponsor:
Cash......................................................... $ 0 $ 0 $ 0
Notes........................................................ $ 0 $ 0 $ 0
Amount paid to sponsor from property sales and refinancing:
Real estate commissions...................................... $ 19,224 $ 0 $ 0
Incentive fees............................................... $ 0 $ 0 $ 0
Other (identify and quantify)................................... $ 0 $ 0 $ 0
62
Table II
Compensation to Sponsor
(Unaudited statement)
UIT Fixed UIT Fixed UIT Fixed
Income I Income II Income III
----------- ---------- ----------
Date offering commenced......................................... 1/97 10/97 3/99
Dollar amount raised (100%)..................................... $1,650,000 $1,786,936 $4,218,159
Amount paid to sponsor from proceeds of offering:
Offering Expenses............................................ $ 132,000 $ 107,216 $ 244,690
Underwriting fees............................................ $ 0 $ 0 $ 0
Acquisition fees............................................. $ 0 $ 0 $ 0
Real estate commissions.................................... $ 0 $ 0 $ 0
Advisory fees.............................................. $ 0 $ 0 $ 0
Other (identify and quantify).............................. $ 0 $ 0 $ 0
Other........................................................ $ 0 $ 0 $ 0
Dollar amount of cash generated from operations Before deducting
payments to sponsor........................................... $ 347,179 $ 470,269 $ 696,160
Amount paid to sponsor from operations:
Property management fee...................................... $ 0 $ 8,177 $ 25,641
Partnership management fees:
Reimbursements............................................... $ 0 $ 0 $ 0
Leasing commissions.......................................... $ 0 $ 0 $ 0
Other (identify and quantify)................................ $ 0 $ 0 $ 0
Dollar amount of property sales and refinancing before deducting
Payments to sponsor:
Cash......................................................... $ 0 $ 0 $ 0
Notes........................................................ $ 0 $ 0
Amount paid to sponsor from property sales and refinancing:
Real estate commissions...................................... $ 44,416 $ 0 $ 0
Incentive fees............................................... $ 0 $ 0 $ 0
Other (identify and quantify)................................... $ 0 $ 0 $ 0
63
Table II
Compensation to Sponsor
(Unaudited statement)
UIT Fixed Income IV UIT Fixed Income V UIT Fixed Income CGI
------------------- ------------------ --------------------
Date offering commenced........................ 7/99 9/99 10/99
Dollar amount raised (100%).................... $1,571,769 $1,346,209 $1,432,573
Amount paid to sponsor from proceeds of
offering:
Offering Expenses............................. $ 119,369 $ 111,819 $ 115,656
Underwriting fees............................. $ 0 $ 0 $ 0
Acquisition fees.............................. $ 0 $ 0 $ 0
Real estate commissions................. $ 0 $ 0 $ 0
Advisory fees........................... $ 0 $ 0 $ 0
Other (identify and quantify)........... $ 0 $ 0 $ 0
Other......................................... $ 0 $ 0 $ 0
Dollar amount of cash generated from operations
Before deducting payments to sponsor......... $ 346,381 $ 464,207 $ 229,509
Amount paid to sponsor from operations:
Property management fee....................... $ 27,386 $ 36,469 $ 7,835
Partnership management fees:
Reimbursements................................ $ 0 $ 0 $ 0
Leasing commissions........................... $ 0 $ 0 $ 0
Other (identify and quantify)................. $ 0 $ 0 $ 0
Dollar amount of property sales and refinancing
before deducting Payments to sponsor:
Cash.......................................... $ 0 $ 0 $ 0
Notes......................................... $ 0 $ 0
Amount paid to sponsor from property sales and
refinancing:
Real estate commissions....................... $ 0 $ 0 $ 0
Incentive fees................................ $ 0 $ 0 $ 0
Other (identify and quantify).................. $ 0 $ 0 $ 0
64
Table II
Compensation to Sponsor
(Unaudited statement)
UIT Fixed Income CGII UIT Fixed Income VIII UIT Fixed Income IX
--------------------- --------------------- -------------------
Date offering commenced................... 1/00 3/00 7/00
Dollar amount raised (100%)............... $1,273,405 $1,466,000 $1,476,312
Amount paid to sponsor from proceeds of
offering:
Offering Expenses........................ $ 112,682 $ 123,300 $ 123,656
Underwriting fees........................ $ 0 $ 0 $ 0
Acquisition fees......................... $ 0 $ 0 $ 0
Real estate commissions............ $ 0 $ 0 $ 0
Advisory fees...................... $ 0 $ 0 $ 0
Other (identify and quantify)...... $ 0 $ 0 $ 0
Other.................................... $ 0 $ 0 $ 0
Dollar amount of cash generated from
operations Before deducting payments to
sponsor................................. $ 135,833 $ 180,161 $ 81,709
Amount paid to sponsor from operations:
Property management fee.................. $ 1,587 $ 4,894 $ 1,608
Partnership management fees:
Reimbursements........................... $ 0 $ 0 $ 0
Leasing commissions...................... $ 0 $ 0 $ 0
Other (identify and quantify)............ $ 0 $ 0 $ 0
Dollar amount of property sales and
refinancing before deducting Payments to
sponsor:
Cash..................................... $ 0 $ 0 $ 0
Notes.................................... $ 0 $ 0 $ 0
Amount paid to sponsor from property sales
and refinancing:
Real estate commissions.................. $ 0 $ 0 $ 0
Incentive fees........................... $ 0 $ 0 $ 0
Other (identify and quantify)............. $ 0 $ 0 $ 0
65
Table II
Compensation to Sponsor
(Unaudited statement)
UIT Fixed Income X UIT Fixed Income XI UIT Fixed Income XII
------------------ ------------------- --------------------
Date offering commenced.......................... 10/00 1/01 3/01
Dollar amount raised (100%)...................... $1,299,700 $1,800,000 $1,646,404
Amount paid to sponsor from proceeds of offering:
Offering Expenses............................... $ 156,653 $ 131,810 $ 131,712
Underwriting fees............................... $ 0 $ 0 $ 0
Acquisition fees................................ $ 0 $ 0 $ 0
Real estate commissions................... $ 0 $ 0 $ 0
Advisory fees............................. $ 0 $ 0 $ 0
Other (identify and quantify)............. $ 0 $ 0 $ 0
Other........................................... $ 0 $ 0 $ 0
Dollar amount of cash generated from operations
Before deducting payments to sponsor........... $ 56,863 $ 15,663 $ 1,557
Amount paid to sponsor from operations:
Property management fee......................... $ 0 $ 0 $ 0
Partnership management fees:
Reimbursements.................................. $ 0 $ 0 $ 0
Leasing commissions............................. $ 0 $ 0 $ 0
Other (identify and quantify)................... $ 0 $ 0 $ 0
Dollar amount of property sales and refinancing
before deducting Payments to sponsor:
Cash............................................ $ 0 $ 0 $ 0
Notes........................................... $ 0 $ 0 $ 0
Amount paid to sponsor from property sales and
refinancing:
Real estate commissions......................... $ 0 $ 0 $ 0
Incentive fees.................................. $ 0 $ 0 $ 0
Other (identify and quantify).................... $ 0 $ 0 $ 0
66
Table II
Compensation to Sponsor
(Unaudited statement)
UIT Fixed Income XIV UIT Fixed Income XV UIT Fixed Income XVI
-------------------- ------------------- --------------------
Date offering commenced................... 6/01 9/01 10/01
Dollar amount raised (100%)............... $1,092,601 $1,384,492 $1,500,518
Amount paid to sponsor from proceeds of
offering:
Offering Expenses........................ $ 87,408 $ 71,200 $ 62,500
Underwriting fees........................ $ 0 $ 0 $ 0
Acquisition fees......................... $ 0 $ 0 $ 0
Real estate commissions............ $ 0 $ 0 $ 0
Advisory fees...................... $ 0 $ 0 $ 0
Other (identify and quantify)...... $ 0 $ 0 $ 0
Other.................................... $ 0 $ 0 $ 0
Dollar amount of cash generated from
operations Before deducting payments to
sponsor................................. $ 0 $ 0 $ 0
Amount paid to sponsor from operations:
Property management fee.................. $ 0 $ 0 $ 0
Partnership management fees:
Reimbursements........................... $ 0 $ 0 $ 0
Leasing commissions...................... $ 0 $ 0 $ 0
Other (identify and quantify)............ $ 0 $ 0 $ 0
Dollar amount of property sales and
refinancing before deducting Payments to
sponsor:
Cash..................................... $ 0 $ 0 $ 0
Notes.................................... $ 0 $ 0 $ 0
Amount paid to sponsor from property sales
and refinancing:
Real estate commissions.................. $ 0 $ 0 $ 0
Incentive fees........................... $ 0 $ 0 $ 0
Other (identify and quantify)............. $ 0 $ 0 $ 0
67
Table III
GFG Bond G1
Unaudited Statement
1998 1999 2000 2001
------- ------- ------- --------
Gross revenues.......................................................... $85,380 $85,380 $85,380 $ 0
Profit on sale of properties............................................ $ 0 $ 0 $ 0 $ 0
Less....................................................................
Operating expenses................................................... $ 750 $ 1,215 $ 0 $ 0
Interest expense..................................................... $24,232 $66,605 $71,433 $ 55,272
Depreciation expense................................................. $ 0 $ 0 $ 0 $ 0
Net income-GAAP basis................................................... $60,398 $17,560 $13,947 $(55,272)
Taxable Income..........................................................
From operations...................................................... $ 0 $ 0 $ 0 $ 0
From gain on sale.................................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations.......................................... $85,380 $85,380 $85,380 $ 0
Cash generated from sales............................................... $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing...................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing................ $ 0 $ 0 $ 0 $ 0
Less: Cash distributions to investors...................................
From operating cash flow............................................. $ 0 $ 0 $ 0 $ 0
From sales and refinancing........................................... $ 0 $ 0 $ 0 $ 0
From other(1)........................................................ $ 0 $ 0 $ 0 $ 55,272
Cash generated (deficiency) after cash distributions................... $ 0 $ 0 $ 0 $ 0
Less: Special items
(not including sales and refinancing)
(identify and qualify)................................................. $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special
items................................................................ $ 0 $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested............................ $ 0 $ 0 $ 0 $ 0
Federal income tax results:
From operations.................................................. $ 0 $ 0 $ 0 $ 0
From recapture................................................... $ 0 $ 0 $ 0 $ 0
Capital gain (loss).............................................. $ 0 $ 0 $ 0 $ 0
Cash distributions to investors......................................... $ 0 $ 0 $ 0 $ 0
Source (on GAAP basis)...........................................
Investment income............................................... $ 0 $ 0 $ 0
Return of capital............................................... $ 0 $ 0 $ 0 $ 0
Source (on cash basis)...........................................
Sales...........................................................
Refinancing..................................................... $ 0 $ 0 $ 0 $ 0
Operations...................................................... $ 0 $ 0 $ 0 $ 0
Other........................................................... $ 0 $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the table (Original
total acquisition costs of properties retained divided by total
acquisition costs of all properties in program)....................... 0% 0% 0% 0%
- --------
(1) Represents unrestricted cash received from Genesis Financial Group, Inc.,
to service corporate general obligation bonds.
68
Table III
GFG Bond G3--G5
Unaudited Statement
1999 2000 2001
------- -------- --------
Gross revenues.............................................................. $66,480 $ 49,500 $ 8,250
Profit on sale of properties................................................ $ 0 $ 0 $ 0
Less
Operating expenses....................................................... $ 0 $ 0 $ 0
Interest expense......................................................... $49,553 $ 91,888 $ 72,561
Depreciation expense..................................................... $ 0 $ 0 $ 0
Net income-GAAP basis....................................................... $16,927 $(42,388) $(64,311)
Taxable Income
From operations.......................................................... $ 0 $ 0 $ 0
From gain on sale........................................................ $ 0 $ 0 $ 0
Cash generated from operations.............................................. $66,480 $ 49,500 $ 8,250
Cash generated from sales................................................... $ 0 $ 0 $ 0
Cash generated from refinancing............................................ $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing...................... $ 0 $ 0 $ 0
Less:
Cash distributions to investors.......................................... $49,553 $ 49,500 $ 8,250
From operating cash flow................................................. $ 0 $ 0 $ 0
From sales and refinancing............................................... $ 0 $ 0 $ 0
From other(1)............................................................ $ 0 $ 42,388 $ 64,311
Cash generated (deficiency) after cash distributions....................... $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and
qualify)................................................................. $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items...... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested................................ $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss)..................................................... $ 0 $ 0 $ 0
From operations...................................................... $ 0 $ 0 $ 0
From recapture....................................................... $ 0 $ 0 $ 0
Capital gain (loss).................................................. $ 0 $ 0 $ 0
Cash distributions to investors
Source (on GAAP basis)
Investment income................................................. $ 0 $ 0 $ 0
Return of capital................................................. $ 0 $ 0 $ 0
Source (on cash basis)
Sales.............................................................
Refinancing....................................................... $ 0 $ 0 $ 0
Operations........................................................ $ 0 $ 0 $ 0
Other............................................................. $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at
the end of the last year reported in the table (Original total acquisition
costs of properties retained divided by total acquisition costs of all
properties in program).................................................... 0% 0% 0%
- --------
(1) Represents unrestricted cash received from Genesis Financial Group, Inc.,
to service corporate general obligation bonds.
69
Table III
GFG Bond G9
Unaudited Statement
1997 1998 1999
- - -------- --------- ----------
Gross revenues.............................................................. $114,134 $ 102,190 $ 21,791
Profit on sale of properties................................................ $ 0 $ 0 $
Less
Operating expenses....................................................... $ 880 $ 2,126 $ 1,215
Interest expense......................................................... $ 67,439 $ 234,354 $ 94,135
Depreciation expense..................................................... $ 0 $ 0 $ 0
Net income-GAAP basis....................................................... $ 45,815 $(134,290) $ (73,559)
Taxable Income
From operations.......................................................... $ 0 $ 0 $ 0
From gain on sale........................................................ $ 0 $ 0 $ 0
Cash generated from operations.............................................. $114,134 $ 102,190 $ 21,791
Cash generated from sales................................................... $ 0 $ 0 $ 640,810
Cash generated from refinancing............................................. $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing....................... $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow................................................... $ 67,439 $ 102,190 $ 21,791
From sales and refinancing................................................. $ 0 $ 0 $ 640,810
From other(1).............................................................. $ 0 $ 134,298 $ 73,559
Cash generated (deficiency) after cash distributions........................ $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and
qualify).................................................................. $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items...... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested................................ $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss)..................................................... $ 0 $ 0 $ 0
From operations...................................................... $ 0 $ 0 $ 0
From recapture....................................................... $ 0 $ 0 $ 0
Capital gain (loss).................................................. $ 0 $ 0 $ 0
Cash distributions to investors............................................. $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income................................................. $ 0 $ 0 $ 0
Return of capital................................................. $ 0 $ 0 $2,450,360
Source (on cash basis)
Sales.............................................................
Refinancing....................................................... $ 0 $ 0 $ 0
Operations........................................................ $ 0 $ 0 $ 0
Other............................................................. $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at
the end of the last year reported in the table (Original total acquisition
costs of properties retained divided by total acquisition costs of all
properties in program).................................................... 23% 23% 0%
- --------
(1) Represents unrestricted cash received from Genesis Financial Group, Inc.,
to service corporate general obligation bonds.
70
Table III
GFG UIT-Fixed Income Corporate-Government Series I
Unaudited Statement
1999 2000 2001
------- -------- --------
Gross revenues.............................................................. $ 2,161 $ 85,616 $103,050
Profit on sale of properties................................................ $ 0 $ 0 $ 0
Less
Operating expenses....................................................... $ 2,933 $ 6,530 $ 6,031
Interest expense......................................................... $ 4,134 $111,978 $114,153
Depreciation expense..................................................... $ 0 $ 0 $ 0
Net income-GAAP basis....................................................... $(4,906) $(32,892) $(17,134)
Taxable Income
From operations.......................................................... $ 0 $ 0 $ 0
From gain on sale........................................................ $ 0 $ 0 $ 0
Cash generated from operations.............................................. $ 2,161 $ 85,616 $103,050
Cash generated from sales................................................... $ 0 $ 0 $ 0
Cash generated from refinancing............................................. $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing....................... $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1).............................................. $ 4,906 $ 32,892 $ 17,134
From sales and refinancing............................................... $ 0 $ 0 $ 0
From other............................................................... $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions........................ $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and
qualify).................................................................. $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items...... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested................................ $ 0 $ 0 $ 0
Federal income tax results:
From operations............................................................. $ 0 $ 0 $ 0
From recapture.............................................................. $ 0 $ 0 $ 0
Capital gain (loss)......................................................... $ 0 $ 0 $ 0
Cash distributions to investors............................................. $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income................................................. $ 0 $ 0 $ 0
Return of capital................................................. $ 0 $ 0 $ 0
Source (on cash basis)
Sales.............................................................
Refinancing....................................................... $ 0 $ 0 $ 0
Operations........................................................ $ 0 $ 0 $ 0
Other............................................................. $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at
the end of the last year reported in the table (Original total acquisition
costs of properties retained divided by total acquisition costs of all
properties in program).................................................... 88% 88% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
71
Table III
GFG UIT-Corporate-Government Series II
Unaudited Statement
2000 2001
-------- --------
Gross revenues............................................................................ $ 82,056 $102,370
Profit on sale of properties.............................................................. $ 0 $ 0
Less
Operating expenses..................................................................... $ 2,852 $ 2,610
Interest expense....................................................................... $ 94,273 $104,271
Depreciation expense................................................................... $ 0 $ 0
Net income-GAAP basis..................................................................... $(15,069) $ (4,511)
Taxable Income
From operations........................................................................ $ 0 $ 0
From gain on sale...................................................................... $ 0 $ 0
Cash generated from operations............................................................ $ 82,056 $102,370
Cash generated from sales................................................................. $ 0 $ 0
Cash generated from refinancing........................................................... $ 0 $ 0
Cash generated from operations, sales and refinancing..................................... $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)............................................................ $ 15,069 $ 4,511
From sales and refinancing............................................................. $ 0 $ 0
From other............................................................................. $ $
Cash generated (deficiency) after cash distributions...................................... $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify).......... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items.................... $ 0 $ 0
Tax and distribution data per $1000 invested.............................................. $ 0 $ 0
Federal income tax results:
Ordinary income (loss)................................................................... $ 0 $ 0
From operations.................................................................... $ 0 $ 0
From recapture..................................................................... $ 0 $ 0
Capital gain (loss)................................................................ $ 0 $ 0
Cash distributions to investors........................................................... $ 0 $ 0
Source (on GAAP basis)
Investment income............................................................... $ 0 $ 0
Return of capital............................................................... $ 0 $ 0
Source (on cash basis)
Sales
Refinancing..................................................................... $ 0 $ 0
Operations...................................................................... $ 0 $ 0
Other........................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the end of the
last year reported in the table (Original total acquisition costs of properties retained
divided by total acquisition costs of all properties in program)........................ 88% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
72
Table III
GFG UIT--Federal Government/Post Office Series I
Unaudited Statement
2000 2001
-------- --------
Gross revenues....................................................................... $ 84,227 $120,380
Profit on sale of properties......................................................... $ 0 $ 0
Less
Operating expenses............................................................ $ 6,099 $ 4,969
Interest expense.............................................................. $ 88,266 $130,658
Depreciation expense.......................................................... $ 0 $ 0
Net income-GAAP basis................................................................ $(10,138) $(15,247)
Taxable Income
From operations............................................................... $ 0 $ 0
From gain on sale............................................................. $ 0 $ 0
Cash generated from operations....................................................... $ 84,227 $120,380
Cash generated from sales............................................................ $ 0 $ 0
Cash generated from refinancing................................................... $ 0 $ 0
Cash generated from operations, sales and refinancing............................. $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)....................................................... $ 10,138 $ 15,247
From sales and refinancing........................................................ $ 0 $ 0
From other........................................................................ $ 0 $ 0
Cash generated (deficiency) after cash distributions................................. $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify)..... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items............... $ 0 $ 0
Tax and distribution data per $1000 invested......................................... $ 0 $ 0
Federal income tax results:
Ordinary income (loss)............................................................ $ 0 $ 0
From operations............................................................... $ 0 $ 0
From recapture................................................................ $ 0 $ 0
Capital gain (loss)........................................................... $ 0 $ 0
Cash distributions to investors...................................................... $ 0 $ 0
Source (on GAAP basis)
Investment income............................................................. $ 0 $ 0
Return of capital............................................................. $ 0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................... $ 0 $ 0
Operations.................................................................... $ 0 $ 0
Other......................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the end of
the last year reported in the table (Original total acquisition costs of properties
retained divided by total acquisition costs of all properties in program).......... 88% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
73
Table III
GFG UIT-Fixed Income Series I
Unaudited Statement
1998 1999 2000 2001
-------- ---------- ------- --------
Gross revenues................................................. $159,240 $ 49,500 $49,500 $ 0
Profit on sale of properties................................... $ 0 $ 124,883 $ 0 $ 0
Less
Operating expenses...................................... $ 0 $ 0 $ 0 $ 0
Interest expense........................................ $153,901 $ 101,480 $54,061 $ 48,286
Depreciation expense.................................... $ 0 $ 0 $ 0 $ 0
Net income-GAAP basis.......................................... $ 5,339 $ 72,903 $(4,561) $(48,286)
Taxable Income
From operations......................................... $ 0 $ 0 $ 0 $ 0
From gain on sale....................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations................................. $159,240 $ 49,500 $49,500 $ 0
Cash generated from sales...................................... $ 0 $1,233,882 $ 0 $ 0
Cash generated from refinancing............................. $ 0 $ 0 $ 0 $ 0
Cash generated from operations, sales and
refinancing................................................. $ 0 $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)................................. $ 0 $ 0 $ 4,561 $ 48,286
From sales and refinancing.................................. $ 0 $1,120,703 $ 0 $ 0
From other.................................................. $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions........... $ 0 $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing)
(identify and qualify)....................................... $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and
special items................................................ $ 0 $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested................... $ 0 $ 0 $ 0 $ 0
Federal income tax results: $ 0 $ 0 $ 0
Ordinary income (loss)...................................... $ 0 $ 0 $ 0 $ 0
From operations......................................... $ 0 $ 0 $ 0 $ 0
From recapture.......................................... $ 0 $ 0 $ 0 $ 0
Capital gain (loss)..................................... $ 0 $ 0 $ 0 $ 0
Cash distributions to investors................................ $ 0 $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income....................................... $ 0 $ 0 $ 0 $ 0
Return of capital....................................... $ 0 1,120,703 $ 0 $ 0
Source (on cash basis)
Sales
Refinancing............................................. $ 0 $ 0 $ 0 $ 0
Operations.............................................. $ 0 $ 0 $ 0 $ 0
Other................................................... $ 0 $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in
program properties at the end of the last year reported in
the table (Original total acquisition costs of properties
retained divided by total acquisition costs of all properties
in program).................................................. 93% 93% 0% 0%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
74
Table III
GFG UIT-Fixed Income Series II
Unaudited Statement
1998 1999 2000 2001
-------- -------- -------- --------
Gross revenues..................................................... $ 41,167 $ 98,756 $111,984 $112,882
Profit on sale of properties....................................... $ 0 $ 0 $ 0 $ 0
Less
Operating expenses.......................................... $ 0 $ 2,644 $ 4,767 $ 3,193
Interest expense............................................ $ 93,975 $145,140 $103,819 $ 72,017
Depreciation expense........................................ $ 0 $ 0 $ 0 $ 0
Net income-GAAP basis.............................................. $(52,808) $(49,028) $ 3,398 $ 37,672
Taxable Income
From operations............................................. $ 0 $ 0 $ 0 $ 0
From gain on sale........................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations..................................... $ 41,167 $ 98,756 $111,984 $112,882
Cash generated from sales.......................................... $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing................................. $ 0 $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing........... $ 0 $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)..................................... $ 52,808 $ 49,028 $ 0 $ 0
From sales and refinancing...................................... $ 0 $ 0 $ 0 $ 0
From other...................................................... $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions............... $ 0 $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)..................................................... $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special
items............................................................ $ 0 $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested....................... $ 0 $ 0 $ 0 $ 0
Federal income tax results:........................................ $ 0 $ 0
From operations............................................. $ 0 $ 0 $ 0 $ 0
From recapture.............................................. $ 0 $ 0 $ 0 $ 0
Capital gain (loss)......................................... $ 0 $ 0 $ 0 $ 0
Cash distributions to investors.................................... $ 0 $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income........................................ $ 0 $ 0 $ 0 $ 0
Return of capital........................................ $ 0 $ 0 $ 0 $ 0
Source (on cash basis)
Sales
Refinancing.............................................. $ 0 $ 0 $ 0 $ 0
Operations............................................... $ 0 $ 0 $ 0 $ 0
Other.................................................... $ 0 $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the table
(Original total acquisition costs of properties retained divided
by total acquisition costs of all properties in program)......... 90% 90% 90% 66%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
75
Table III
GFG UIT-Fixed Income Series III
Unaudited Statement
1999 2000 2001
--------- --------- ---------
Gross revenues............................................................. $ 66,503 $ 214,773 $ 231,681
Profit on sale of properties............................................... $ 0 0 0
Less
Operating expenses...................................................... $ 8,648 $ 12,116 $ 10,268
Interest expense........................................................ $ 231,617 $ 362,751 $ 329,318
Depreciation expense.................................................... $ 0 $ 0 $ 0
Net income-GAAP basis...................................................... $(173,762) $(160,094) $(107,905)
Taxable Income
From operations......................................................... $ 0 $ 0 $ 0
From gain on sale....................................................... $ 0 $ 0 $ 0
Cash generated from operations............................................. $ 66,503 $ 214,773 $ 231,681
Cash generated from sales.................................................. $ 0 $ 0 $ 0
Cash generated from refinancing......................................... $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing................... $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)............................................. $ 173,762 $ 160,094 $ 107,905
From sales and refinancing.............................................. $ 0 $ 0 $ 0
From other.............................................................. $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions....................... $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and
qualify)................................................................. $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items..... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested............................... $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss)................................................... $ 0 $ 0 $ 0
From operations..................................................... $ 0 $ 0 $ 0
From recapture...................................................... $ 0 $ 0 $ 0
Capital gain (loss)................................................. $ 0 $ 0 $ 0
Cash distributions to investors............................................ $ 0 $ 0 $ 0
Source (on GAAP basis)................................................ $ 0 $ 0 $ 0
Investment income................................................... $ 0 $ 0 $ 0
Return of capital................................................... $ 0 $ 0 $ 0
Source (on cash basis)
Sales...............................................................
Refinancing......................................................... $ 0 $ 0 $ 0
Operations.......................................................... $ 0 $ 0 $ 0
Other............................................................... $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at
the end of the last year reported in the table(Original total acquisition
costs of properties retained divided by total acquisition costs of all
properties in program)................................................... 63% 63% 63%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party intitutional trustee for the benefit of the
unitholder investors.
76
Table III
GFG UIT--Fixed Income Series IV
Unaudited Statement
1999 2000 2001
- - -------- -------- --------
Gross revenues................................................................... $ 28,941 $124,184 $142,188
Profit on sale of properties..................................................... $ 0 $ 0 $ 0
Less
Operating expenses............................................................ $ 5,400 $ 1,894 $ 11,355
Interest expense.............................................................. $ 41,409 $144,286 $130,703
Depreciation expense.......................................................... $ 0 $ 0 $ 0
Net income-GAAP basis............................................................ $(17,868) $(21,996) $ 130
Taxable Income
From operations............................................................... $ 0 $ 0 $ 0
From gain on sale............................................................. $ 0 $ 0 $ 0
Cash generated from operations................................................... $ 28,941 $124,184 $142,188
Cash generated from sales........................................................ $ 0 $ 0 $ 0
Cash generated from refinancing............................................... $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing......................... $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)................................................... $ 17,868 $ 21,996 $ 0
From sales and refinancing.................................................... $ 0 $ 0 $ 0
From other.................................................................... $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions............................. $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify). $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested..................................... $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss)......................................................... $ 0 $ 0 $ 0
From operations........................................................... $ 0 $ 0 $ 0
From recapture............................................................ $ 0 $ 0 $ 0
Capital gain (loss)....................................................... $ 0 $ 0 $ 0
Cash distributions to investors.................................................. $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income......................................................... $ 0 $ 0 $ 0
Return of capital......................................................... $ 0 $ 0 $ 0
Source (on cash basis) $ 0 $ 0 $ 0
Sales $ 0 $ 0 $ 0
Refinancing............................................................... $ 0 $ 0 $ 0
Operations................................................................ $ 0 $ 0 $ 0
Other..................................................................... $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 88% 88% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
77
Table III
GFG UIT--Fixed Income Series V
Unaudited Statement
1999 2000 2001
------- -------- --------
Gross revenues................................................................... $14,501 $101,880 $107,009
Profit on sale of properties..................................................... $ 0 $ 0 $ 0
Less
Operating expenses............................................................ $ 3,452 $ 10,223 $ 11,405
Interest expense.............................................................. $17,622 $113,585 $105,775
Depreciation expense.......................................................... $ 0 $ 0 $ 0
Net income-GAAP basis............................................................ $(6,573) $(21,928) $(10,171)
Taxable Income
From operations............................................................... $ 0 $ 0 $ 0
From gain on sale............................................................. $ 0 $ 0 $ 0
Cash generated from operations................................................... $14,501 $101,880 $107,009
Cash generated from sales........................................................ $ 0 $ 0 $ 0
Cash generated from refinancing............................................... $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing......................... $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)................................................... $ 6,573 $ 21,928 $ 10,171
From sales and refinancing.................................................... $ 0 $ 0 $ 0
From other.................................................................... $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions............................. $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and
qualify)...................................................................... $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested..................................... $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss)......................................................... $ 0 $ 0 $ 0
From operations........................................................... $ 0 $ 0 $ 0
From recapture............................................................ $ 0 $ 0 $ 0
Capital gain (loss)....................................................... $ 0 $ 0 $ 0
Cash distributions to investors.................................................. $ 0 $ 0 $ 0
Source (on GAAP basis)
Investment income......................................................... $ 0 $ 0 $ 0
Return of capital......................................................... $ 0 $ 0 $ 0
Source (on cash basis)
Sales
Refinancing............................................................... $ 0 $ 0 $ 0
Operations................................................................ $ 0 $ 0 $ 0
Other..................................................................... $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 91% 91% 91%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
78
Table III
GFG UIT--Fixed Income Series X
Unaudited Statement
2000 2001
-------- --------
Gross revenues............................................................................ $ 2,725 $ 94,437
Profit on sale of properties.............................................................. $ 0 $ 0
Less
Operating expenses..................................................................... $ 2,388 $ 7,281
Interest expense....................................................................... $ 10,658 $106,476
Depreciation expense................................................................... $ 0 $ 0
Net income-GAAP basis..................................................................... $(10,321) $(19,320)
Taxable Income
From operations........................................................................ $ 0 $ 0
From gain on sale...................................................................... $ 0 $ 0
Cash generated from operations............................................................ $ 2,725 $ 94,437
Cash generated from sales................................................................. $ 0 $ 0
Cash generated from refinancing........................................................ $ 0 $ 0
Cash generated from operations, sales and refinancing.................................. $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)............................................................ $ 10,321 $ 19,320
From sales and refinancing............................................................. $ 0 $ 0
From other............................................................................. $ 0 $ 0
Cash generated (deficiency) after cash distributions...................................... $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify).......... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items.................... $ 0 $ 0
Tax and distribution data per $1000 invested.............................................. $ 0 $ 0
Federal income tax results:
From operations...................................................................... $ 0 $ 0
From recapture....................................................................... $ 0 $ 0
Capital gain (loss).................................................................. $ 0 $ 0
Cash distributions to investors........................................................... $ 0 $ 0
Source (on GAAP basis)
Investment income.................................................................. $ 0 $ 0
Return of capital.................................................................. $ 0 $ 0
Source (on cash basis)
Sales
Refinancing........................................................................ $ 0 $ 0
Operations......................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the end of the
last year reported in the table (Original total acquisition costs of properties retained
divided by total acquisition costs of all properties in program)........................ 0% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
79
Table III
GFG UIT--Fixed Income Series XI
Unaudited Statement
2000 2001
---- --------
Gross revenues................................................................... $0 $ 74,888
Profit on sale of properties..................................................... $0 $ 0
Less
Operating expenses............................................................ $0 $ 4,515
Interest expense.............................................................. $0 $116,667
Depreciation expense.......................................................... $0 $ 0
Net income-GAAP basis............................................................ $0 $(46,294)
Taxable Income
From operations............................................................... $0 $ 0
From gain on sale............................................................. $0 $ 0
Cash generated from operations................................................... $0 $ 74,888
Cash generated from sales........................................................ $0 $ 0
Cash generated from refinancing................................................. $0 $ 0
Cash generated from operations, sales and refinancing........................... $0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)..................................................... $0 $ 46,294
From sales and refinancing...................................................... $0 $ 0
From other...................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions............................. $0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)..................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $0 $ 0
Tax and distribution data per $1000 invested..................................... $0 $ 0
Federal income tax results:
Ordinary income (loss)........................................................... $0 $ 0
From operations............................................................... $0 $ 0
From recapture................................................................ $0 $ 0
Capital gain (loss)........................................................... $0 $ 0
Cash distributions to investors.................................................. $0 $ 0
Source (on GAAP basis)
Investment income........................................................... $0 $ 0
Return of capital........................................................... $0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................. $0 $ 0
Operations.................................................................. $0 $ 0
Other....................................................................... $0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 0% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
80
Table III
GFG UIT--Fixed Income Series XII
Unaudited Statement
2000 2001
---- --------
Gross revenues................................................................... $0 $ 47,955
Profit on sale of properties..................................................... $0 $ 0
Less
Operating expenses............................................................ $0 $ 4,563
Interest expense.............................................................. $0 $ 85,904
Depreciation expense.......................................................... $0 $ 0
Net income-GAAP basis............................................................ $0 $(42,512)
Taxable Income
From operations............................................................... $0 $ 0
From gain on sale............................................................. $0 $ 0
Cash generated from operations................................................... $0 $ 47,955
Cash generated from sales........................................................ $0 $ 0
Cash generated from refinancing................................................. $0 $ 0
Cash generated from operations, sales and refinancing........................... $0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)..................................................... $0 $ 42,512
From sales and refinancing...................................................... $0 $ 0
From other...................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions............................. $0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)..................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $0 $ 0
Tax and distribution data per $1000 invested..................................... $0 $ 0
Federal income tax results:
Ordinary income (loss)........................................................... $0 $ 0
From operations............................................................... $0 $ 0
From recapture................................................................ $0 $ 0
Capital gain (loss)........................................................... $0 $ 0
Cash distributions to investors.................................................. $0 $ 0
Source (on GAAP basis)
Investment income........................................................... $0 $ 0
Return of capital........................................................... $0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................. $0 $ 0
Operations.................................................................. $0 $ 0
Other....................................................................... $0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 0% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
81
Table III
GFG UIT--Fixed Income Series XIV
Unaudited Statement
2000 2001
---- --------
Gross revenues................................................................... $0 $ 22,854
Profit on sale of properties..................................................... $0 $ 0
Less
Operating expenses............................................................ $0 $ 286
Interest expense.............................................................. $0 $ 47,881
Depreciation expense.......................................................... $0 $ 0
Net income-GAAP basis............................................................ $0 $(25,313)
Taxable Income
From operations............................................................... $0 $ 0
From gain on sale............................................................. $0 $ 0
Cash generated from operations................................................... $0 $ 22,854
Cash generated from sales........................................................ $0 $ 0
Cash generated from refinancing................................................. $0 $ 0
Cash generated from operations, sales and refinancing........................... $0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)..................................................... $0 $ 25,313
From sales and refinancing...................................................... $0 $ 0
From other...................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions............................. $0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)..................................................................... $0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $0 $ 0
Tax and distribution data per $1000 invested..................................... $0 $ 0
Federal income tax results:
Ordinary income (loss)........................................................... $0 $ 0
From operations............................................................... $0 $ 0
From recapture................................................................ $0 $ 0
Capital gain (loss)........................................................... $0 $ 0
Cash distributions to investors.................................................. $0 $ 0
Source (on GAAP basis)
Investment income........................................................... $0 $ 0
Return of capital........................................................... $0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................. $0 $ 0
Operations.................................................................. $0 $ 0
Other....................................................................... $0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 0% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
82
Table III
GFG UIT--Growth and Income Series I
Unaudited Statement
1998 1999 2000 2001
------ ------ -------- ------
Gross revenues......................................................... $8,470 $8,470 $ 8,470 $ 0
Profit on sale of properties........................................... $ 0 $ 0 $ 0 $ 0
Less
Operating expenses.................................................. $ 0 $ 0 $ 0 $ 0
Interest expense.................................................... $8,470 $8,470 $ 8,470 $ 0
Depreciation expense................................................ $ 0 $ 0 $ 0 $ 0
Net income-GAAP basis.................................................. $ 0 $ 0 $ 0 $ 0
Taxable Income
From operations..................................................... $ 0 $ 0 $ 0 $ 0
From gain on sale................................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations......................................... $8,470 $8,470 $ 8,470 $ 0
Cash generated from sales.............................................. $ 0 $ 0 $150,000 $ 0
Cash generated from refinancing....................................... $ 0 $ 0 $ 0 $ 0
Cash generated from operations, sales and refinancing............... $ 0 $ 0 $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow.............................................. $ 0 $ 0 $ 0 $ 0
From sales and refinancing.......................................... $ 0 $ 0 $150,000 $ 0
From other.......................................................... $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions................... $ 0 $ 0 $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)........................................................... $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items. $ 0 $ 0 $ 0 $ 0
Tax and distribution data per $1000 invested........................... $ 0 $ 0 $ 0 $ 0
Federal income tax results:
Ordinary income (loss).............................................. $ 0 $ 0 $ 0 $ 0
From operations................................................. $ 0 $ 0 $ 0 $ 0
From recapture.................................................. $ 0 $ 0 $ 0 $ 0
Capital gain (loss)............................................. $ 0 $ 0 $ 0 $ 0
Cash distributions to investors........................................ $ 0 $ 0
Source (on GAAP basis).............................................. $ 0 $ 0 $ 0 $ 0
Investment income............................................... $ 0 $ 0 $ 0 $ 0
Return of capital............................................... $ 0 $ 0 $150,000 $ 0
Source(on cash basis)
Sales
Refinancing....................................................... $ 0 $ 0 $ 0 $ 0
Operations........................................................ $ 0 $ 0 $ 0 $ 0
Other........................................................... $ 0 $ 0 $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties
at the end of the last year reported in the table (Original total
acquisition costs of properties retained divided by total acquisition
costs of all properties in program).................................. 93% 93% 93% 0%
83
Table III
GFG UIT--Fixed Income Series IX
Unaudited Statement
2000 2001
-------- --------
Gross revenues................................................................... $ 27,000 $123,759
Profit on sale of properties..................................................... $ 0 $ 0
Less
Operating expenses............................................................ $ 2,984 $ 5,318
Interest expense.............................................................. $ 39,305 $121,200
Depreciation expense.......................................................... $ 0 $ 0
Net income-GAAP basis............................................................ $(15,289) $ (2,759)
Taxable Income
From operations............................................................... $ 0 $ 0
From gain on sale............................................................. $ 0 $ 0
Cash generated from operations................................................... $ 27,000 $123,759
Cash generated from sales........................................................ $ 0 $ 0
Cash generated from refinancing................................................. $ 0 $ 0
Cash generated from operations, sales and refinancing........................... $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)..................................................... $ 15,289 $ 2,759
From sales and refinancing...................................................... $ 0 $ 0
From other...................................................................... $ 0 $ 0
Cash generated (deficiency) after cash distributions............................. $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify
and qualify)..................................................................... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items........... $ 0 $ 0
Tax and distribution data per $1000 invested..................................... $ 0 $ 0
Federal income tax results:
Ordinary income (loss)........................................................... $ 0 $ 0
From operations............................................................... $ 0 $ 0
From recapture................................................................ $ 0 $ 0
Capital gain (loss)........................................................... $ 0 $ 0
Cash distributions to investors.................................................. $ 0 $ 0
Source (on GAAP basis)
Investment income........................................................... $ 0 $ 0
Return of capital........................................................... $ 0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................. $ 0 $ 0
Operations.................................................................. $ 0 $ 0
Other....................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the table (Original total acquisition costs of
properties retained divided by total acquisition costs of all properties in
program)....................................................................... 88% 88%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
84
Table III
GFG UIT-Fixed Income Series XV
Unaudited Statement
2000 2001
------ --------
Gross revenues............................................................................ $ 0 $ 14,077
Profit on sale of properties.............................................................. $ 0 $ 0
Less
Operating expenses................................................................. $ 0 $ 2,250
Interest expenses.................................................................. $ 0 $ 29,625
Depreciation expense............................................................... $ 0 $ 0
Net income-GAAP basis..................................................................... $ 0 $(17,798)
Taxable Income
From operations.................................................................... $ 0 $ 0
From gain on sale.................................................................. $ 0 $ 0
Cash generated from operations............................................................ $ 0 $ 14,077
Cash generated from sales................................................................. $ 0 $ 0
Cash generated from refinancing........................................................ $ 0 $ 0
Cash generated from operations, sales and refinancing.................................. $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)............................................................ $ 0 $ 17,798
From sales and refinancing............................................................. $ 0 $ 0
From other............................................................................. $ 0 $ 0
Cash generated (deficiency) after cash distributions...................................... $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify).......... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items.................... $ 0 $ 0
Tax and distribution data per $1000 invested.............................................. $ 0 $ 0
Federal income tax results:
Ordinary income (loss).................................................................... $ 0 $ 0
From operations.................................................................... $ 0 $ 0
From recapture..................................................................... $ 0 $ 0
Capital gain (loss)................................................................ $ 0 $ 0
Cash distributions to investors........................................................... $ 0 $ 0
Source (on GAAP basis)
Investment income............................................................... $ 0 $ 0
Return of capital............................................................... $ 0 $ 0
Source (on cash basis)
Sales...........................................................................
Refinancing..................................................................... $ 0 $ 0
Operations...................................................................... $ 0 $ 0
Other........................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the end of the
last year reported in the table (Original total acquisition costs of properties retained
divided by total acquisition costs of all properties in program)........................ $ 0% 0%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
85
Table III
GFG UIT-Fixed Income Series XVI
Unaudited Statement
2000 2001
------ ----------
Gross revenues....................................................................... $ 0 $ 3,487
Profit on sale of properties......................................................... $ 0 $ 0
Less
Operating expenses............................................................ $ 0 $ 0
Interest expense.............................................................. $ 0 $ 9,768
Depreciation expense.......................................................... $ 0 $ 0
Net income-GAAP basis................................................................ $ 0 $ (6,281)
Taxable Income
From operations............................................................... $ 0 $ 0
From gain on sale............................................................. $ 0 $ 0
Cash generated from operations....................................................... $ 0 $ 3,487
Cash generated from sales............................................................ $ 0 $ 0
Cash generated from refinancing................................................... $ 0 $ 0
Cash generated from operations, sales and refinancing............................. $ 0 $ 0
Less: Cash distributions to investors
From operating cash flow(1)....................................................... $ 0 $ 6,281
From sales and refinancing........................................................ $ 0 $ 0
From other........................................................................ $ 0 $ 0
Cash generated (deficiency) after cash distributions................................. $ 0 $ 0
Less: Special items (not including sales and refinancing) (identify and qualify)..... $ 0 $ 0
Cash generated (deficiency) after cash distributions and special items............... $ 0 $ 0
Tax and distribution data per $1000 invested......................................... $ 0 $ 0
Federal income tax results:
Ordinary income (loss)............................................................... $ 0 $ 0
From operations................................................................... $ 0 $ 0
From recapture.................................................................... $ 0 $ 0
Capital gain (loss)............................................................... $ 0 $ 0
Cash distributions to investors...................................................... $ 0 $ 0
Source (on GAAP basis)
Investment income............................................................. $ 0 $ 0
Return of capital............................................................. $ 0 $ 0
Source (on cash basis)
Sales
Refinancing................................................................... $ 0 $ 0
Operations.................................................................... $ 0 $ 0
Other......................................................................... $ 0 $ 0
Amount (in percentage terms) remaining invested in program properties at the end of
the last year reported in the table (Original total acquisition costs of properties
retained divided by total acquisition costs of all properties in program).......... 0% 0%
- --------
(1) Represents net rental revenue received by the property owner and
transmitted to a third party institutional trustee for the benefit of the
unitholder investors.
86
Table V
Sales or Disposals of Property
Excess
(Deficiency)
of Property
Cost of Operating
Properties, Cash
Including Receipts
Date Date Closing and Over Cash
Property(1) Acquired of Sale Selling Price, Net of Closing Costs and GAAP adjustments Soft Costs Expenditures
----------- -------- ------- ------------------------------------------------------------------ ------------ ------------
Purchase total
money Adjustments acquisition
Cash Mortgage mortgage resulting cost capital
Received balance taken from original improvement
net of at time of back by application mortgage closing and
closing costs sale program of GAAP total financing soft costs total
Fraser-Rallys...... 4/25/95 2/28/01 $330,633 $ 0 $50,000 $0 $ 427,000 $ 0 $96,367 $ 427,000
Greenfield-Rite Aid 2/13/97 5/18/99 $790,070 $745,387 $ 0 $0 $1,525,387 $850,000 $94,613 $1,620,000
Property(1)
----------- -
Fraser-Rallys......
Greenfield-Rite Aid
(1) Properties owned by Genesis Financial Group, Inc. for the benefit of the
Fixed Income Series I unitholders.
87
EXHIBIT C
GEN-NET LEASE INCOME TRUST, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 2001
88
GEN-NET LEASE INCOME TRUST, INC.
YEARS ENDED DECEMBER 31, 2000 AND 2001
CONTENTS
Independent accountants' audit report........... 91
Financial statements:
Balance sheet................................ 92
Statement of income.......................... 93
Statement of changes in shareholder's equity. 94
Statement of cash flows...................... 95
Notes to financial statements................ 96
89
INDEPENDENT AUDITOR'S REPORT
Shareholder
Gen-Net Lease Income Trust, Inc.
Grosse Ile, Michigan
We have audited the accompanying balance sheet of Gen-Net Lease Income
Trust, Inc. as of December 31, 2000 and 2001, and the related statement of
income, changes shareholders' equity and cash flows for each of the three years
in the period ended December 31, 2001. These financial statements are the
responsibility of Gen-Net Income Trust, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial positions of Gen-Net Lease Income
Trust, Inc. as of December 31, 2000 and 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
ZWICK & STEINBERGER, P.L.L.C.
Southfield, Michigan
January 10, 2002
90
GEN-NET LEASE INCOME TRUST, INC.
BALANCE SHEET
(See Accountants' Audit Report)
December 31,
-------------- April 30,
2000 2001 2002
----- -------- -----------
(unaudited)
ASSETS
------
Cash and cash equivalents.............................................. $ -- $ 956 $ 10,041
Investments:
Public offering expenses (note 2)................................... -- 180,145 233,597
----- -------- --------
Total assets................................................. $ -- $181,101 $243,638
===== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Liabilities:
Accrued public offering expenses.................................... $ -- $ 4,649 $ 9,444
Line of credit...................................................... $ -- -- $ 28,660
Accrued income taxes................................................ $ -- $ 725 $ 44
Accounts payable.................................................... -- -- $ 525
Notes payable, related party (Note 3)............................... $ -- $ 75,112 $104,312
----- -------- --------
Total liabilities............................................ $ -- $ 80,486 $142,985
===== ======== ========
Shareholder's equity
Common stock, ($10 par; 10,000,000 shares authorized, 10,000 issued
and outstanding).................................................. -- 100,000 100,000
Retained earnings................................................... -- 615 653
----- -------- --------
Total shareholder's equity...................................... -- 100,615 100,653
----- -------- --------
$ -- $181,101 $243,638
===== ======== ========
The accompanying notes are an integral part of the financial statements.
91
GEN-NET LEASE INCOME TRUST, INC.
STATEMENT OF INCOME
(See Accountant's Audit Report)
Year ended For the four months
December 31, Ended April 30,
---------------- -------------------
(unaudited)
1999 2000 2001 2001 2002
Dividend income..... $ -- $ -- $1,340 $ -- $ 82
Income taxes........ $ -- $ -- 725 $ -- $ 44
---- ---- ------ ---- -----
Net income.......... $ -- $ -- $ 615 $ -- $ 38
==== ==== ====== ==== =====
Net income per share $ -- $ -- $ .06 $ -- $ .00
==== ==== ====== ==== =====
The accompanying notes are an integral part of the financial statements.
92
GEN-NET LEASE INCOME TRUST, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(See Accountants' Audit Report)
Common stock
--------------- Retained
Shares Amount Earnings Total
------ -------- -------- --------
Balance, January 1, 1999.......... -- $ -- $ -- $ --
Net income........................ -- -- -- --
Balance December 31, 1999......... -- -- -- --
Net income........................ -- -- -- --
Balance, December 31, 2000........ -- -- -- --
Net income........................ -- -- 615 615
Stock issued for cash............. 10,000 100,000 -- 100,000
------ -------- ---- --------
Balance, December 31, 2001........ 10,000 $100,000 $615 $100,615
====== ======== ==== ========
Net Income........................ -- -- 38 38
Balance April 30, 2002 (unaudited) 10,000 $100,000 $653 $100,653
The accompanying notes are an integral part of the financial statements.
93
GEN-NET LEASE INCOME TRUST, INC.
STATEMENT OF CASH FLOWS
(See Accountants' Audit Report)
For the four
Year ended Months ended
December 31, April 30,
----------------------- ---------------
(unaudited)
1999 2000 2001 2001 2002
------ ------ --------- ------ --------
Cash flows from operating activities:
Net income........................................... -- -- $ 615 $ -- $ 38
------ ------ --------- ------ --------
Adjustments to reconcile net income to net
cash used in operating activities:
Changes in assets and liabilities:
Increase in accrued expense................... -- -- 4,649 -- 4,795
Increase (decrease) in accrued
income tax.................................. -- -- 725 -- (681)
Increase in accounts payable.................. -- -- -- -- 525
Increase in public offering expense........... -- -- (180,145) -- (53,452)
------ ------ --------- ------ --------
Total adjustments......................... -- -- (174,771) -- (48,813)
------ ------ --------- ------ --------
Net cash used in operating
activities............................... -- -- (174,156) -- (48,775)
------ ------ --------- ------ --------
Cash flows provided by financing activities:
Proceeds from related party borrowings............... -- -- 75,112 -- 29,200
Proceeds from line of credit......................... -- -- -- -- 28,660
Proceeds from sale of common stock................... -- -- 100,000 -- --
------ ------ --------- ------ --------
Net cash provided by financing
activities.............................. -- -- 175,112 -- 57,860
------ ------ --------- ------ --------
Net increase in cash.................................... -- -- 956 -- 9,085
Cash, beginning......................................... -- -- 0 -- 956
------ ------ --------- ------ --------
Cash, ending............................................ $ -- $ -- $ 956 $ -- $ 10,041
====== ====== ========= ====== ========
The accompanying notes are an integral part of the financial statements.
94
GEN-NET LEASE INCOME TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
(See Independent Accountants' Audit Report)
1. Nature of Business and Operations:
The Company was incorporated as Genesis Net Lease Realty, Inc. (a Michigan
corporation) on September 28, 1998. The Company changed its name on August 30,
2001 to Gen-Net Lease Income Trust, Inc. The Company intends to operate as a
Real Estate Investment Trust which will invest in single purpose properties to
be leased in a net lease to material businesses or governmental agencies,
supported by long-term real estate leases. Net leases generally impose on the
leasee responsibility for all or a substantial portion of operating costs and
expenses of the property including repairs and maintenance, taxes, assessments,
utilities, and insurance. The Company's leases generally provide for a minimum
rent plus specified fixed periodic rent increases. The Company will commence
operations after receiving approval from the proper regulatory authorities.
The Company had no operations during 1998, 1999 and 2000, and no assets or
liabilities during that period of time.
2. Public offering expense:
Public offering expenses will be treated as a reduction of proceeds upon
successful completion of the offering. In the event the offering is not
completed, these expenses will be written off.
3. Loan payable:
The loan payable related party, are for amounts due to the shareholder for
public offering expenses advanced on behalf of the Company.
4. Income taxes:
The Company intends to become a Real Estate Investment Trust as defined
under Internal Revenue Code Section 856 through 860. The trust and its' unit
holders will be subject to taxation under Internal Revenue Code Section 857,
whereby, the taxable income of the trust will be taxable to the shareholders of
the trust if at least 90% of its real estate investment trust taxable income is
distributed to shareholders and meets certain other requirements. As of
December 31, 2001, the Company was not a Real Estate Investment Trust.
5. Subsequent events:
The Company filed an initial public offering during 2001 and such
registration is currently in progress.
95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution
SEC Registration Fee.................... $ 6,250
NASD Filing Fee......................... $ 3,000
Blue Sky Qualification Fees and Expenses $ 20,000
--------
Fees of Transfer Agent.................. $ 0
Printing and Engraving.................. $ 85,000
--------
Accounting Fees and Expenses............ $ 25,000
--------
Legal Fees and Expenses................. $ 60,000
--------
Total(1)............................. $199,250
--------
- --------
(1) The amounts set forth above, except for SEC and NASD fees, are in each case
estimated. All expenses itemized above will be paid by Registrant.
Item 32. Sales to Special Parties.
None.
Item 33. Recent Sales of Unregistered Securities.
None.
Item 34. Indemnification of Directors and Officers.
Section 5.12 of the Bylaws of the Company provides for indemnification
of the officers, directors, or their affiliates by the Company against any
claim or loss imposed on them relative to the Company and provided the course
of conduct causing the loss was determined, in good faith, to be in the best
interests of the Company and that the Directors, or their affiliates were not
guilty of misconduct or negligence. Section 5.12 also provides that no Director
or affiliate shall be indemnified for any liability imposed by judgment arising
out of a violation of state or federal securities laws. The Section conforms
with Michigan law.
Section 9(a) of the Underwriting Agreement provides that the Company
shall indemnify the Underwriter, its officers and Directors and each person, if
any, who controls the Underwriter for liabilities arising out of (i) any untrue
statement or alleged untrue statement of a material fact contained in the
prospectus or any amendment or supplement to the prospectus or (ii) the
omission or alleged omission to state in the prospectus or any amendment or
supplement thereto, a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
Section 9(b) of the Underwriting Agreement provides that the
Underwriter agrees to indemnify the Company, its officers and directors, and
each person, if any, who controls the Company for liabilities arising out of
(i) any untrue statement or alleged untrue statement of a material fact
contained in the prospectus or any amendment or supplement thereto, or (ii) the
omission or alleged omission to state in the prospectus or any amendment or
supplement thereto, any material fact required to be stated therein or
necessary to make the
II-1
statements therein, in light of the circumstances under which they were made,
not misleading; in each case, to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by the Underwriter specifically for use in the preparation of
the prospectus or any such amendment or supplement thereto, or (iii) any
omission or alleged omission to state in the prospectus or any amendment or
supplement thereto, a material fact required to be stated therein or necessary
to make the statements therein not misleading if the person asserting the loss
purchased securities from the Underwriter and a copy of the prospectus (as
amended or supplemented) was not sent or given by or on behalf of the
Underwriter to such person if required by law to have been delivered at or
prior to the written confirmation of the sale to such person and if the
prospectus (as amended or supplemented) would have cured the defect giving rise
to the liability.
Item 35. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements
(1) Gen-Net Lease Income Trust, Inc. Financial Statements and Independent
Auditors' Report, for years ended December 31, 2000 and 2001 (filed with
Prospectus)
(b) Exhibits
Title Method of Filing
----- ----------------
1 Form of Underwriting Agreement between Filed with Amendment No. 2.
Registrant and Investors Capital Corporation
3 Restated Articles of Incorporation Filed with Amendment No. 1.
3.1 Form of Amended and Restated Bylaws Filed herewith.
4 Specimen of Stock Certificate Filed with Amendment No. 3.
5 Opinion of David A. Sims, P.C. as to legality of Filed with Amendment No. 1.
securities being registered, including consent
8 Form of Opinion of Lieben, Whitted, Houghton, Filed with Amendment No. 1.
Slowiaczek & Cavanagh, P.C., L.L.O. as to tax
matters, including consent
10.1 Escrow Agreement Filed with Amendment No. 2.
10.2 Form of Omnibus Services Agreement with Filed with Amendment No. 3.
Genesis Financial Group, Inc.
23 Consent of Zwick & Steinberger, P.L.L.C., Filed herewith.
Independent Certified Public Accountants
23.1 Consent of Lieben, Whitted, Houghton, Included in Exhibit 8.
Slowiaczek & Cavanagh, P.C., L.L.O.
24 Power of Attorney with respect to signing future Filed as part of signature page of initial
amendments to this Registration Statement Registration Statement.
99 Prior Performance Table VI Filed with Amendment No. 1.
II-2
Item 37. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment of
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified in
the prospectus at such time as there arises a reasonable probability that
such property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the
existing Limited Partners. Each sticker supplement should disclose all
compensation and fees received by the General Partner(s) and its affiliates
in connection with any such acquisition. The post-effective amendment shall
include audited financial statements meeting the requirements of Rule 3-14
of Regulation S-X only for properties acquired during the distribution
period.
The registrant also undertakes to file, after the end of the distribution
period, a current report on Form 8-K containing the financial statements and
any additional information required by Rule 3-14 of Regulation S-X, to reflect
each commitment (i.e., the signing of a binding purchase agreement) made after
the end of the distribution period involving the use of 10 percent or more (on
a cumulative basis) of the net proceeds of the offering, and to provide the
information contained in such report to the Limited Partners at least once each
quarter after the distribution period of the offering has ended.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
amended registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the Township of Grosse Ile, State of Michigan, on
the 6th day of September, 2002.
GEN-NET LEASE INCOME TRUST, INC.
/s/ JERRY D. BRINGARD
By: -----------------------------
Jerry D. Bringard
Chair of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ JERRY D. BRINGARD Chair of the Board of September 6, 2002
- ----------------------------- Directors, President,
Jerry D. Bringard Secretary and Director
(Principal Executive Officer)
BRUCE BAUM* Treasurer (Principal September 6, 2002
- ----------------------------- Financial Officer) (Principal
Bruce Baum Accounting Officer)
THOMAS D. PESCHIO* Independent Director September 6, 2002
- -----------------------------
Thomas D. Peschio
RICHARD H. SCHWACHTER* Independent Director September 6, 2002
- -----------------------------
Richard H. Schwachter
/s/ JERRY D. BRINGARD
*By: -------------------------
Jerry D. Bringard,
Attorney-in-Fact
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EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
3.1 Form of Amended and Restated Bylaws
23 Consent of Zwick & Steinberger, P.L.L.C., Independent Certified Public Accountants