SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ------------- to------------------
COMMISSION FILE NUMBER: 333-72404
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GEN-NET LEASE INCOME TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-6777356
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization No.)
24081 West River Road
PO Box 417
Grosse Ile, Michigan 48138
(Address of principal executive offices)
(734) 362-0175
(Registrant's telephone number, including area code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
---------------
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED
NONE NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED
NONE NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of March 15, 2003, the aggregate market value of the shares of common stock
held by non-affiliates of the registrant was approximately $6,878,845 (based on
the price for which each share was sold). As of March 15, 2003, there were
708,231 shares of common stock of the registrant outstanding.
EXPLANATORY NOTE
In connection with a proposed underwritten public offering, Gen-Net
Lease Income Trust, Inc. (the "Company") replaced its independent accountants,
Zwick & Steinberger, P.L.L.C. ("Z&S"), and engaged the services of Ernst & Young
LLP ("EY") as its new independent accountants. The Audit Committee of the
Company's Board of Directors (the "Board") recommended, and the Board approved,
the dismissal of Z&S and the appointment of EY. Z&S will continue providing
other services to the Company.
As part of its engagement, EY reaudited the Company's financial
statements as of and for the fiscal years ended December 31, 2002 and December
31, 2001. As a result of this reaudit, the Company reclassified certain amounts
in its consolidated balance sheet, with no effect on the Company's consolidated
financial position. The reclassifications primarily related to the followings
areas:
REAL ESTATE AT COST: The Company reclassified the original purchase price of its
only 2002 property acquisition based upon the provisions of Statement of
Financial Accounting Standards No. 141 "Business Combinations." The
reclassifications included an allocation of purchase price to an in-place lease
at the acquired property ("Tenant origination costs" and "Lease intangible").
CASH AND CASH EQUIVALENTS AND REAL ESTATE DEPOSITS: Certain real estate deposit
amounts were reclassified back into cash and cash equivalents, as the transfer
of the cash for the deposits did not occur until January 2003.
MORTGAGE NOTE PAYABLE: The break out of current and long-term portions of
mortgage note payable has been removed as the Company intends on a going forward
basis to present a non-classified balance sheet.
ADVANCES FROM AFFILIATE: Amounts previously reflected as notes payable-related
party have been reclassified as advances from affiliate. These amounts are
non-interest bearing and along with amounts previously included in accounts
payable are more accurately reflected as advances from affiliate.
OTHER ASSETS AND ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Certain other assets and
accounts payable and accrued expenses have been combined as the Company intends
to utilize this presentation on a going forward basis.
No changes were made to the Consolidated Statements of Operations and
Consolidated Statements of Changes in Shareholders' Equity. The Consolidated
Statements of Cash Flows have been modified to reflect the reclassifications
made to the Consolidated Balance Sheets described above.
During the two most recent fiscal years of the Company ended December
31, 2002 and December 31, 2001, respectively, and the subsequent interim periods
through September 4, 2003, there were no disagreements between the Company and
Z&S on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to Z&S's satisfaction, would have caused Z&S to make reference to the subject
matter of the disagreement in connection with its reports; and there were no
reportable events described under Item 304(a)(1)(v) of Regulation S-K.
The audit reports of Z&S on the consolidated financial statements of
the Company as of and for the fiscal years ended December 31, 2002 and December
31, 2001 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting.
principles.
During the years ended December 31, 2002 and December 31, 2001 and
through the date of EY's engagement by the Company, the Company did not consult
with EY with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our consolidated
financial statements, or any other matter or reportable events as set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Company has provided a copy of the above disclosures to Z&S and has
requested that Z&S furnish the Company with a letter addressed to the SEC
stating its agreement with the above statements. A copy of this letter has been
filed as an exhibit to this amendment.
Items 6, 7, 8 and 15 of this Annual Report on Form 10-K are amended and
restated as follows. Except as so amended, all other items of this Annual Report
remain unchanged.
Item 6. SELECTED FINANCIAL DATA
Gen-Net Lease Income Trust, Inc.
(a Michigan corporation)
For the year ended December 31, 2002
(not covered by the Independent Auditors' Report)
Total assets $ 6,879,595
Mortgages payable $ 3,202,333
Total revenue $ 4,885
Net (loss) $ (5,085)
Loss per common share $ (.24)
Distributions declared $ -
Distributions per common share $ -
Funds from operations $ (5,085)
Funds available for distribution $ -
Cash flows provided by operating activities $ 153,208
Cash flows used in investing activities $ 4,523,548
Cash flows provided by financial activities $ 6,683,703
Weighted average number of common shares outstanding 21,182
(a) The above selected financial data should be read in conjunction with the
audited consolidated financial statements and related notes appearing
elsewhere in this annual report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto and the "Selected
Financial Data" appearing elsewhere in this report. Such financial statements
and information have been prepared to reflect the Company's financial position
as of December 31, 2002, together with the results of its operations and its
cash flows. As of December 31, 2001, the Company did not own any properties and
was establishing a corporate infrastructure to support planned operations.
Historical results and trends should not be taken as indicative of
future operations. Management's statements contained in this report that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ materially from
those included in the forward-looking statements. The Company intends such
forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with
those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," project," prospects," or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company on
a consolidated basis include, but are not limited to: changes in economic
conditions generally and the real estate market specifically,
legislative/regulatory changes (including changes to laws governing the taxation
of REITs), availability of capital, interest rates, competition, supply and
demand for operating properties in the Company's current and proposed market
areas and generally accepted accounting principles, policies and guidelines
applicable to REITs. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors
that could materially affect the Company's financial results, is included herein
and in the Company's other filings with the Securities and Exchange Commission.
The comparability of the financial information discussed below is
impacted by the acquisition during 2002 of the Federal Express Distribution
Center in Harahan, Louisiana, discussed elsewhere in this report.
RESULTS OF OPERATIONS
Rental income, mortgage interest, depreciation and substantially all of
the general and administration expenses incurred during 2002 are all a result of
the operations from the single property interest acquired at the end of the
fourth quarter of 2002 (Federal Express Distribution Center). The property
seller was not affiliated with the Company or the Sponsor.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had $2,314,319 of cash to meet its
immediate short-term liquidity requirements. Future short-term liquidity
requirements are anticipated to be met through the net cash flow from operations
and existing working capital.
At December 31, 2002, the Company had two established lines of credit
with Citizens First Savings Bank of Port Huron, Michigan, in the amounts of
$300,000 and $150,000 respectively. Both lines of credit carry variable interest
rates subject to change from time to time based upon changes in the Wall Street
Journal Prime Rate. Both lines carried an initial interest rate of 4.75%. Both
lines were subject to interest only payments, with principal and accrued unpaid
interest due on May 6, 2003 and April 31, 2003 (subsequently extended to October
31, 2003), respectively. The lines were unsecured by the Company, though both
were secured by the personal guarantees of D. James Barton and Gregg Barton,
both affiliates of the Sponsor. At December 31, 2002, the balances due on these
lines of credit were $189,000 and $148,867, respectively. The Company
subsequently paid the balance on the $300,000 credit line.
At December 31, 2002, the Sponsor had advanced on behalf of the Company
$135,238 to unrelated third parties for deposits on possible future property
acquisitions. There are no terms for the repayment of this amount by the
Company.
The Company anticipates that adequate cash will be available to fund
its operating and administrative expenses, continuing debt service obligations
and the payment of dividends in accordance with REIT requirements in the
foreseeable future.
Cash provided by operating activities amounted to $153,208 for the year
ended December 31, 2002. The primary reason for the increase related to the
additional accounts payable and accrued expenses contributed by the single
acquired property.
Cash used in investing activities amounted to $4,523,548 for the year
ended December 31, 2002. The increase is a result of the real estate
acquisition.
At December 31, 2002, the Company does not have any material planned
capital expenditures resulting from any known demand based on existing trends
for the single property owned as of that date. However, management may conclude
that expenditures to improve the property purchased after December 31, 2002 are
necessary and/or desirable. Further, the Company will continue its property
acquisition strategy in 2003.
Cash provided by financing activities amounted to $6,683,703 for the
year ended December 31, 2002. The primary reasons for the increase relates to
net proceeds from the sale of common stock of
$3,022,153, advances from the Sponsor of $121,350, borrowings under our line of
credit of $337,867 and a mortgage loan of $3,202,333.
There are offering expenses which have been paid or incurred by the
Sponsor which the Sponsor has presented as expenses owed by the Company.
Although the Company has accrued these expenses, the Company's Board of
Directors has not approved the reimbursement or payment of these expenses and
will not do so if such expenses, together with other organizational and offering
expenses of the Company which have been paid by the Company, were to exceed 11%
of the gross offering proceeds. In the event that the expenses paid or incurred
by the Sponsor which the Sponsor is requesting be reimbursed or paid by the
Company be within the 11% limit for all organizational and offering expenses,
the Board may nevertheless disallow all or a portion of such expenses.
The annual interest rate on the single mortgage payable outstanding at
December 31, 2002 was approximately 5.7%. See Note 4 of the Notes to
Consolidated Financial Statements (Item 8 of this annual report) for a
description of the mortgage payable.
In order to quality as a REIT for federal income tax purposes in 2003
and thereafter, the Company is required to make distributions to its
shareholders of at least 90% of REIT taxable income. The Company expects to use
its cash flow from operating activities for distributions to shareholders and
for payment of other expenditures. The Company intends to invest amounts
accumulated for distribution in short-term investments.
The Company paid no dividend distributions during 2002. Future
distributions will be determined by the Company's Board of Directors and are
dependent on a number of factors, including the amount of funds available for
distributions, the Company's financial condition, any decision by the Board of
Directors to reinvest funds rather than to distribute the funds, the Company's
capital expenditures, the annual distribution required to establish and maintain
REIT status under the Code and other factors the Board of Directors may deem
relevant.
The Company's management monitors the various qualification tests the
Company must meet to establish and maintain its status as a REIT. Large
ownership of the Company's stock is tested upon purchase to determine that no
more than 50% in value of the outstanding stock is owned directly, or
indirectly, by five or fewer persons or entities at a time. The Company's
management also determines, on a quarterly basis, that the gross income, asset
and distribution tests imposed by the REIT requirements are met. On an ongoing
basis, as due diligence is performed by the Sponsor on potential real estate
purchases or temporary investment of uninvested capital, management determines
that the income from the new asset will qualify for REIT purposes.
The Company intends to acquire additional properties and may seek to
fund these acquisitions through proceeds received from a combination of equity
offerings, debt financings or asset dispositions.
SUBSEQUENT EVENTS
On January 3, 2003, the Company purchased a second property located in
Bakersfield, California. Information on that property transaction is as follows:
Description. The property consists of a 2.09 acre, rectangular shaped parcel.
The improvements consist of a two-story 20,000 square foot office building
together with 15 secure parking spaces. The building was constructed in
November, 2000. The property is presently occupied by the USDEA, pursuant to a
long-term Net Lease with the U. S. General Services Administration (the "USDEA
Lease"). The building serves as the USDEA's regional headquarters and the Drug
Enforcement Agency Clandestine Laboratory and Enforcement for the Southern
Central Valley. The Board of Directors determined that the USDEA, an agency of
the United States government, meets all of the Company's established criteria
with respect to prospective tenants.
Lease. The USDEA Lease is for a term of 10 years commencing November 27, 2000,
and will expire on November 25, 2010, unless terminated pursuant to an early
termination clause on November 27, 2008. The annual rent is $310,660. Included
as rent is an amount calculated by the lessor to cover the building's operating
costs, and base year real estate taxes. The tenant pays any increase over the
base year real estate taxes through a direct dollar-for-dollar reimbursement
payment to the lessor. The lease also provides for an annual adjustment in the
portion of rent attributable to operating costs based on the percent of change
in the Cost of Living Index, which is measured by the U.S. Department of Labor
revised Consumer Price Index ("CPI"). In evaluating the USDEA Lease prior to
acquiring the property, the Company determined that the portion of the rent
attributable to operating costs, coupled with the CPI escalator, was sufficient
to protect the Company from absorbing the building's operating costs in the same
way that a triple-net lease would operate. Although the Company bears the
responsibility for the portion of any change that exceeds the percent of change
in the CPI, the Company believes the risk of such an occurrence is low in light
of the substantial estimates initially used to determine the portion of rent
attributable to such costs. Based upon the foregoing, the Company has determined
that the USDEA Lease functions as a Net Lease.
Terms of Acquisition. The transaction closed on January 3, 2003. The aggregate
purchase price of the property was $2,350,000, or $117 per square foot. The
purchase was subject to a 75% loan to value line of credit withdrawal from
Citizens First Savings Bank of Port Huron, Michigan. The terms of the line of
credit include a $1,645,000 principal balance, interest at 4.3% per annum, and
interest-only payments for the 6 month term. The lender required the Company to
use a bankruptcy-remote entity to hold title to the property. Accordingly, DEA
Bakersfield, LLC, of which the Company is the sole member serves this purpose.
The Sponsor received an acquisition fee of $23,500 or 1% of the purchase price,
of which $10,000 was paid by the Sponsor to D. James Barton's law firm, D. James
Barton, PLLC, for legal services rendered in connection with the transaction. D.
James Barton is an affiliate of the Sponsor.
On January 31, 2003, the Company paid an aggregate dividend
distribution of $11,019, to shareholders of record as of January 2, 2003.
On March 14, 2003, the Company terminated Investors Capital Corporation
as Managing Underwriter of the offering, in accordance with the parties'
Underwriting Agreement. Investors Capital will continue to sell shares on behalf
of the Company as a non-exclusive selected dealer, as described in the
supplemented prospectus.
As of March 15, 2003, subscriptions for a total of 687,884.528 shares
were received from total gross offering proceeds of $6,878,845.28, which does
not include 20,346 shares purchased by the Sponsor for $203,460 prior to the
commencement of the offering.
On behalf of the Company, the Sponsor is currently exploring the
purchase of additional properties from unaffiliated third parties.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result
of its long-term debt used to maintain liquidity and fund capital expenditures
and expansion of the Company's real estate investment portfolio and operations.
The Company's interest rate risk management objectives are to limit the impact
of interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. To achieve its objectives the Company borrows primarily at
fixed rates or variable rates with the lowest margins available and in some
cases, with the ability to convert variable rates to fixed rates.
The Company's sole mortgage note payable at December 31, 2002, has a
fixed interest rate of 5.70%, through the date of maturity, January 11, 2013.
The Company also has two lines of credit outstanding at December 31, 2002 with
variable interest rates (at prime rate - rate of 4.25% at December 31, 2002)
that mature in 2003 (one in January 2003 and the other in October 2003).
The Company's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes.
2003 2004 2005 2006 2007 THEREAFTER
- ------------------------------------------------------------------------------------------------------------------
Fixed rate debt $ 38,449 $ 53,511 $ 56,642 $ 59,956 $ 63,465 $ 2,930,310
Average interest rate 5.7% 5.7% 5.7% 5.7% 5.7%
Variable rate debt $ 337,867 - - - - -
Average interest rate 4.25% - - - - -
The fair estimated value of the Company's debt approximates its December 31,
2002 carrying amount.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
Board of Directors
Gen-Net Lease Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Gen-Net Lease
Income Trust, Inc., as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the management of Gen-Net Lease Income Trust, Inc. 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 consolidated financial position of Gen-Net Lease
Income Trust, Inc. at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Chicago, Illinois ERNST & YOUNG LLP
September 5, 2003
Gen-Net Lease Income Trust, Inc.
Consolidated Balance Sheets
DECEMBER 31
2002 2001
------------------------
ASSETS
Real estate at cost:
Land $ 759,251 $ -
Buildings and improvements 3,149,042 -
Tenant origination costs 177,439 -
Lease intangibles 302,578 -
------------------------
4,388,310 -
Accumulated depreciation (4,220) -
------------------------
4,384,090 -
Cash and cash equivalents 2,314,319 956
Deferred costs - 180,145
Real estate deposits 135,238 -
Other assets 45,948 -
------------------------
Total assets $ 6,879,595 $ 181,101
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 180,395 $ 5,374
Lines of credit 337,867 -
Mortgage note payable 3,202,333 -
Advances from affiliate 196,462 75,112
------------------------
Total liabilities 3,917,057 80,486
Shareholders' equity:
Common stock ($10 par value; 10,000,000 shares
authorized, 371,923 and 10,000 shares issued and
outstanding at December 31, 2002 and 2001,
respectively) 2,967,008 100,000
Retained earnings (deficit) (4,470) 615
------------------------
Total shareholders' equity 2,962,538 100,615
------------------------
Total liabilities and shareholders' equity $ 6,879,595 $ 181,101
========================
See accompanying notes.
Gen-Net Lease Income Trust, Inc.
Consolidated Statements of Operations
YEAR ENDED
DECEMBER 31
2002 2001
-----------------------
REVENUE
Rental income $ 4,885 $ -
-----------------------
Total revenue 4,885 -
EXPENSES
Depreciation and amortization 4,220 -
General and administrative 8,836 -
-----------------------
Total expenses 13,056 -
-----------------------
Operating loss (8,171) -
Other income 3,183 1,340
Interest expense (822) -
-----------------------
Income (loss) before income taxes (5,810) 1,340
Income taxes (expense) benefit 725 (725)
-----------------------
Net income (loss) $ (5,085) $ 615
=======================
Net income (loss) per share (basic and
diluted) $ (0.24) $ 0.06
=======================
Weighted average number of shares
outstanding 21,182 10,000
=======================
See accompanying notes.
Gen-Net Lease Income Trust, Inc.
Consolidated Statements of
Changes in Shareholders' Equity
Years ended December 31, 2002 and 2001
COMMON STOCK RETAINED
------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
----------------------------------------------------
Initial issuance of common stock 10,000 $ 100,000 $ - $ 100,000
Net income - - 615 615
----------------------------------------------------
Balance at December 31, 2001 10,000 100,000 615 100,615
Issuance of common stock 361,923 2,867,008 - 2,867,008
Net loss - - (5,085) (5,085)
----------------------------------------------------
Balance at December 31, 2002 371,923 $ 2,967,008 $ (4,470) $ 2,962,538
====================================================
See accompanying notes.
Gen-Net Lease Income Trust, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED
DECEMBER 31
2002 2001
---------------------------
OPERATING ACTIVITIES
Net income (loss) $ (5,085) $ 615
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,220 -
Changes in assets and liabilities:
Increase in other assets (20,948) -
Increase in accounts payable and accrued
expenses 175,021 5,374
---------------------------
Net cash provided by operating activities 153,208 5,989
Expenditures for real estate (4,388,310) -
Deposit on future real estate purchases (135,238) -
---------------------------
Cash used in investing activities (4,523,548) -
FINANCING ACTIVITIES
Net borrowing under lines of credit 337,867 -
Proceeds from mortgage notes payable 3,202,333 -
Advances from affiliate 121,350 75,112
Net proceeds from sale of common stock 3,022,153 100,000
Deferred offering costs - (180,145)
---------------------------
Net cash provided by (used in) financing
activities 6,683,703 (5,033)
---------------------------
Net increase in cash 2,313,363 956
Cash, beginning of period 956 -
---------------------------
Cash, end of period $ 2,314,319 $ 956
===========================
See accompanying notes.
Gen-Net Lease Income Trust, Inc.
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND OPERATIONS
Gen-Net Lease Income Trust, Inc. (the "Company") was incorporated in Michigan on
September 28, 1998 and had no operations prior to 2001. The Company intends to
make an election to operate as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for federal income tax purposes,
beginning in 2003. The Company began formal operations with its first property
acquisition in December 2002 and acquired four additional properties through
September 5, 2003, located throughout the United States (see Notes 7 and 9).
The Company acquires properties through various operating limited liability
companies (one for each property), which are wholly-owned by the Company. The
Company currently operates in only one segment.
Genesis Financial Group, Inc. ("Genesis"), a shareholder of the Company,
provides property management, administrative and other services to the Company
(see Note 6). The Company had no full-time employees during 2002 or 2001.
Pursuant to a registration statement on Form S-11 declared effective on October
10, 2002 (the "Registration Statement"), the Company sold shares of its common
stock (the "Offering") at $10 per share. On August 13, 2003, the Company's Board
of Directors terminated the Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include all accounts of the
Company, and the entities in which has the Company has control or from which the
Company receives all economic benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain amounts in these consolidated financial statements have been
reclassified from a previously issued version of these consolidated financial
statements, with no effect on the Company's consolidated financial position or
results of operations.
REAL ESTATE
The Company allocates the purchase price of properties to net tangible and
identified intangible assets acquired based on their fair values in accordance
with the provisions Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations" ("SFAS 141). In making estimates of fair values for
purposes of allocating purchase price, the Company utilizes a number of sources,
including independent appraisals that may be obtained in connection with the
acquisition or financing of the respective property and other market data. The
Company also considers information obtained about each property as a result of
its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The Company allocates a portion of the purchase price to above-market and
below-market in-place lease values for acquired properties based on the present
value (using an interest rate which reflects the risks associated with the
leases acquired) of the difference between (i) the contractual amounts to be
paid pursuant to the in-place leases and (ii) management's estimate of fair
market lease rates for the corresponding in-place leases, measured over the
remaining non-cancelable term of the lease. In the case of below market leases,
the Company considers the remaining contractual lease period and renewal
periods, taking into consideration the likelihood of the tenant exercising its
renewal options. The capitalized above-market lease values (presented as lease
intangibles in consolidated balance sheet) are amortized as a reduction of
rental income over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values (presented as deferred income) are
amortized as an addition to rental income over the remaining contractual lease
period, including any renewal periods included in the valuation analysis. Should
a tenant terminate its lease, the unamortized portion of the lease intangibles
would be charged to expense.
The Company allocates a portion of the purchase price to the value of leases
acquired based on the difference between (i) the property valued with existing
in-place leases adjusted to market rental rates and (ii) the property valued as
if vacant. The Company utilizes independent appraisals or its estimates to
determine the respective in-place lease values. The Company's estimates of value
are made using methods similar to those used by independent appraisers. Factors
management considers in its analysis include an estimate of carrying costs
during the expected lease-up periods considering current market conditions, and
costs to execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and other operating expenses and estimates
of lost rentals at market rates during the expected lease-up periods. The
Company also estimates costs to execute similar leases including tenant
improvements, leasing commissions, legal and other related expenses.
The Company also considers an allocation of purchase price to in-place lease
that have a related customer relationship intangible values. Characteristics
management considers in allocating these values include the nature and extent of
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant's credit quality and expectations of
lease renewals, among other factors. The Company currently has the U.S.
Government as its major tenant, but has not yet developed a relationship that it
would consider to have any current intangible value.
The value of in-place leases (presented as tenant origination costs in
consolidated balance sheet) is amortized to expense over the remaining initial
term of the respective leases. The value of customer relationship intangibles is
amortized to expense over the remaining initial term, including any renewal
periods included in the valuation analysis for the respective leases, but in no
event does the amortization period for intangible assets exceed the remaining
depreciable life of the building. Should a tenant terminate its lease, the
unamortized portion of the tenant origination costs and customer relationship
intangibles would be charged to expense.
Amounts allocated to tangible land, building, tenant improvements, equipment and
fixtures are based on independent appraisals or our own analysis of comparable
properties in the existing portfolio.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the related assets, which are as follows:
Building and improvements 39 years
Tenants origination costs Remaining term of the related lease
Lease intangibles Remaining term of the related lease
(included as a reduction of rental
revenue)
Tenant improvements Term of related leases
Furniture and equipment 3-7 years
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real estate is carried at depreciated cost. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred. Significant
renovations and improvements, which improve and/or extend the useful life of the
asset are capitalized and depreciated over their estimated useful life. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 144"), the Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets during the expected hold period are less than the
carrying amounts of those assets. Impairment losses are measured as the
difference between carrying value and fair value of assets. For assets held for
sale, impairment is measured as the difference between carrying value and fair
value, less cost to dispose. Fair value is based on estimated cash flows
discounted at a risk-adjusted rate of interest.
CASH AND CASH EQUIVALENTS
Certificates of deposit and short-term investments with remaining maturities of
three months or less when acquired are considered cash equivalents.
Other income primarily consists of interest income earned on cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts is maintained for estimated losses resulting
from the inability of certain tenants to meet the contractual obligations under
their lease agreements.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk are primarily cash investments and accounts receivable from tenants.
Cash is generally invested in investment-grade short-term instruments and the
amount of credit exposure to any one commercial issuer is limited. The Company
has cash in financial institutions, which is insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000 per institution. At December 31,
2002, the Company had cash in the amount of $60,000 in excess of FDIC insured
limits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE DEPOSITS
The Company makes deposits on proposed property purchases. At December 31, 2002
the deposits were $135,238, of which $85,438, were not refundable. The deposits
were made on properties acquired in 2003 (see Note 9).
DEFERRED COSTS
Costs incurred in connection with financings, refinancings or debt modifications
are capitalized as deferred financing costs and are amortized on the
straight-line method over the lives of the related loans. Leasing commissions
and other leasing costs directly attributable to tenant leases are capitalized
as deferred leasing costs and are amortized on the straight-line method over the
terms of the related lease agreements. Costs incurred prior to the completion of
the Offering that directly related to the Offering were deferred and then netted
against proceeds received from the Offering.
COMMON STOCK
In completing sales of common stock, the Company may have a delay in receiving
the cash proceeds. In these cases, the Company will record a receivable related
to these sales as the cash proceeds will be collected within a short period. At
December 31, 2002, the Company had a $25,000 receivable related to a stock sale
(included in other assets in the consolidated balance sheet) that was collected
in early January 2003.
RENTAL REVENUE
Rental revenue is recorded on the straight-line method over the terms of the
related lease agreements for new leases and the remaining terms of existing
leases for acquired properties. Differences between rental revenue earned and
amounts due per the respective lease agreements are credited or charged, as
applicable, to deferred rent receivable. Rental payments received prior to their
recognition as income are classified as rent received in advance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the interest rates associated with its lines-of credit
and mortgage note payable approximate the market interest rates for these types
of debt instruments and as such, the carrying amount of the lines-of-credit and
mortgage note payable approximate their fair value.
The carrying amount of cash and cash equivalents, deposits, other assets, and
accounts payable and accrued expenses, approximate fair value because of the
relatively short maturity of these instruments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
For 2002 and 2001, the Company accounted for income taxes payable in accordance
with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires
that deferred tax assets and liabilities be recognized using enacted tax rates
for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized. During 2002, the
Company recorded a deferred income tax benefit and a deferred tax asset of $725
related to a carryback of 2002 net operating losses to offset 2001 taxable
income (included in other assets in the consolidated balance sheet at December
31, 2002). During 2001, the Company recorded a current income tax provision and
a current income tax liability of $725 (included in accounts payable and accrued
expenses at December 31, 2001 in the consolidated balance sheet). No other
provisions for income tax were required for 2002 or 2001.
The Company paid income taxes of $725 for the year ended December 31, 2002
related to 2001 income taxes. The Company made no other income tax payments in
any other period presented.
EARNINGS PER SHARE
The Company reports earnings per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic loss per share
attributable for all periods presented in computed by dividing the loss to
common stockholders by the weighted average number of common shares and
potential common stock outstanding during the period. The Company had no common
stock equivalents outstanding in 2002 and 2001.
3. DEFERRED COSTS
Deferred costs consist of the following:
DECEMBER 31
2002 2001
----------------------------
Offering costs $ - $180,145
------------- --------
180,145
Accumulated amortization - -
------------- --------
$ - $180,145
============= ========
4. LINES-OF-CREDIT AND MORTGAGE NOTE PAYABLE
Lines-of-credit and mortgage note payable consisted of the following:
DECEMBER 31
2002
-----------
LINES OF CREDIT
Unsecured line-of-credit with a financial, institution
(maximum borrowing $150,000), interest at prime
rate (4.25% at December 31, 2002), principal and
interest due October 31, 2003 $148,867
Unsecured line-of-credit with a financial, institution,
interest at prime rate (4.25% at December 31,
2002), principal and interest were repaid and the
line retired in January 2003 189,000
--------
Total lines of credit $337,867
========
4. LINES-OF-CREDIT AND MORTGAGE NOTE PAYABLE (CONTINUED)
DECEMBER 31
2002
-----------
MORTGAGE NOTE PAYABLE
Mortgage note payable to a financial institution,
collateralized by a property, interest at fixed rates
of 5.7% per annum, with principal and interest payable
monthly through 2013. $3,202,333
==========
During the year ended December 31, 2002, the Company incurred interest expense
of $822.
4. LINES-OF-CREDIT AND MORTGAGE NOTE PAYABLE
The following represents future minimum principal payments due on the Company's
lines-of-credit and mortgage note payable, outstanding at December 31, 2002:
DECEMBER 31
2002
-------------
Year ending December 31
2003 $ 376,316
2004 53,511
2005 56,642
2006 59,956
2007 63,465
Thereafter 2,930,310
-----------
$ 3,540,200
===========
5. FUTURE MINIMUM LEASE PAYMENTS
The Company has lease agreements with one tenant with a lease term through 2016.
The leases generally provide for increases in base rent based upon inflation and
for tenants to pay their share of real estate taxes over specified base amounts.
All rental revenue for the year ended December 31, 2002 was received from one
tenant.
The total future minimum rents to be received by us under such noncancelable
operating leases in effect at December 31, 2002, exclusive of reimbursements,
are as follows:
DECEMBER 31
2002
-------------
Year ending December 31
2003 $ 363,432
2004 363,432
2005 363,432
2006 363,432
2007 363,432
Thereafter 2,937,742
------------
$ 4,754,902
============
6. RELATED PARTY TRANSACTIONS
Pursuant to a service agreement, Genesis provides various services to the
Company as follows (See Note 9):
FEE COMPENSATION
- --------------------------------------------------------------------------------
Acquisition Fees For acquisition of properties - up to 3% of
property purchase price (actual rates incurred were
1%), plus out-of-pocket costs up to 6% of property
purchase price, including the Acquisition Fees
Property Management Fees For day-to-day property management - 3% of gross
rental revenue
Administrative Fees For day-to-day administrative support to the Company
- 3% of gross rental revenue
The following is a summary of the fees incurred and payable for the year ended
December 31, 2002:
DECEMBER 31, 2002
PAYABLE INCURRED
-------- --------
Acquisition fees (A) $ 42,600 $ 42,600
Property management fees (B) - -
Administrative fees (B) - -
(A) Amounts included in real estate, at cost in the Consolidated Balance
Sheets (no fees were incurred for the year ended December 31, 2001).
(B) No fees were incurred for the years ended December 31, 2002 and 2001.
Advances from Genesis total $196,462 and $75,112 at December 31, 2002 and 2001,
respectively. The amounts are non-interest bearing and payable upon demand.
The Company has made an advance to an owner of Genesis with a balance of $10,000
at December 31, 2002(included in other assets in the consolidated balance
sheets) that is unsecured, non-interest-bearing and payable on demand.
Before the commencement of the Offering, Genesis purchased 20,346 shares (10,346
shares in 2002 and 10,000 shares in 2001) of Company common stock at the price
of $10 per share.
In connection with the Offering, Genesis agreed to fund any costs of the
Offering in excess of 11% of the gross proceeds from the Offering. Through
December 31, 2002, the Offering costs have not exceeded 11%.
7. PROPERTY ACQUISITION
The Company acquired the following property in 2002. The results of this
property's operations are included in the Company's consolidated statement of
operations from the date of acquisition.
ACQUISITION MONTH
PROPERTY LOCATION COST ACQUIRED
- -----------------------------------------------------------------------------------------------------
2002 acquisition (A):
Federal Express Corporation Distribution
Center (Harahan, Property) Harahan, LA $ 4,388,310 December
============
(A) In accordance with SFAS 141, the Company allocated the purchase price
for these properties to net tangible and identified intangible assets
acquired based on their fair values (including land, buildings, tenant
improvements, acquired above and below market leases and the
origination cost of acquired in-place leases) and acquired liabilities,
and allocated the purchase price based on these assessments, including
land at appraised value and buildings at replacement costs. The Company
assessed fair value based on estimated cash flow projections that
utilize discount and capitalization rates deemed appropriate by
management and available market information. As part of the allocation
of purchase prices, the Company recorded tenant origination costs of
$177,439 at December 31, 2002, and intangible lease costs (representing
the value of acquired in-place "above Market" leases) of $302,578 at
December 31, 2002. The value of tenant origination costs and intangible
lease costs are amortized over the remaining term of the respective
leases.
8. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited Pro Forma Condensed Consolidated Statements of
Operations are presented as if, at January 1, 2002, the Company acquired the
property described in Note 7 - Property Acquisition and the shares outstanding
at December 31, 2002 were also outstanding at January 1, 2002. In management's
opinion, all adjustments necessary to reflect the effects of the above
transactions have been made.
The unaudited Pro Forma Condensed Consolidated Statement of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming the above mentioned transaction had occurred at the dates indicated
above, nor do they purport to represent our future results of operations.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
YEAR ENDED
DECEMBER 31
2002
-----------
Total revenue $ 340,317
=========
Net income $ 28,226
=========
Income per diluted common share $ 0.08
=========
9. SUBSEQUENT EVENTS
The Company acquired the following properties in 2003.
ACQUISITION MONTH MORTGAGE
PROPERTY LOCATION COST ACQUIRED DEBT
- -----------------------------------------------------------------------------------------------------------------
2003 acquisitions:
USDEA Building (Bakersfield
Property) (A) Bakersfield, CA $ 2,393,816 January $ 1,645,000
Social Security Administration Offices
(Charleston Property) Charleston, WV 18,443,635 April 16,787,510
General Services Administration Office
(Clarksburg Property) Clarksburg, WV 10,989,117 April 8,325,000
Social Security Administration Office
(Kingsport Property) Kingsport, TN 2,992,130 April 2,308,422
------------ ------------
$ 34,818,698 $ 29,065,932
============ ============
(A) Genesis provided the mortgage debt for the Bakersfield Property acquisition.
On June 2, 2003, Genesis and the Company amended the above mentioned service
agreement. Pursuant to the amendment, Genesis will provide property acquisition
services, property disposition services, administration services and property
management services. For acquisition services, Genesis will receive
compensation for services and expenses not to exceed 1% of the purchase price of
the property being acquired. For property disposition services, Genesis will
receive a real estate commission upon the sale of properties it sales on behalf
of the Company not to 3% of sale price of the property. For administration
services, Genesis will receive its actual out-of-pocket expenses for providing
the services. For property management services, Genesis will receive a monthly
fee of 3% of the gross rental revenues of the properties for which such services
were provided.
Through September 5, 2003, the Company declared and paid dividends of $0.375 per
common share for the shares outstanding at the date of declaration.
Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed:
(1) The consolidated financial statements of the Company
are set forth in Item 8.
(2) Financial Statement Schedules: None required.
(3) Exhibits. The following exhibits are filed as part of
this document:
1. Form of Underwriting Agreement between the Company and Investors
Capital Corporation (included in Exhibit 1 to Pre-Effective Amendment
No. 2 to Registration Statement on Form S-11 (File No. 333-72404) and
incorporated herein by this reference).
3.1 Restated Articles of Incorporation of the Company (included as Exhibit
3 to Pre-Effective Amendment No. 1 to Registration Statement on Form
S-11 (File No. 333-72404) and incorporated herein by this reference).
3.2 Form of Amended and Restated Bylaws of the Company (included as Exhibit
3.1 to Pre-Effective Amendment No. 7 to Registration Statement on Form
S-11 (File No. 333-72404) and incorporated herein by this reference).
4. Specimen Stock Certificate (included as Exhibit 4 to Post-Effective
Amendment No. 1 to Registration Statement Form S-11 (File No.
333-72404) are incorporated herein by this reference).
10.1 Escrow Agreement (included as Exhibit 10.1 to Pre-Effective Amendment
No. 2 to Registration Statement on Form S-11 (File No. 333-72404) and
incorporated herein by this reference).
10.2 Form of Amended and Restated Omnibus Services Agreement between the
Company and Genesis Financial Group, Inc. (included as Exhibit 10.2 to
Registration Statement on Form S-11 (File No. 333-72404) and
incorporated herein by this reference.
10.3 Form of Selected Dealer Agreement (included as Exhibit 1.2 to
Post-Effective Amendment No. 2 to Registration Statement on Form S-11
(File No. 333-72404) and incorporated herein by this reference).
16.1 Letter of Zwick & Steinberger, P.L.L.C., dated October 3, 2003,
regarding change in independent accountants.
31.1 Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of
the period covered by this annual report.
(c) See exhibit index included above.
(d) None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 1 to be signed on
its behalf by the undersigned, thereunto duly authorized.
GEN-NET LEASE INCOME TRUST, INC.
By: /s/ THOMAS D. PESCHIO
--------------------------------
Thomas D. Peschio, President,
Chief Executive Officer and
Treasurer
October 6, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ THOMAS D. PESCHIO
-----------------------------------
Thomas D. Peschio, Director,
President, Chief Executive Officer
and Treasurer
October 6, 2003
/s/ RICHARD H. SCHWACHTER
-----------------------------------
Richard H. Schwachter, Director
October 6, 2003
/s/ JERRY D. BRINGARD
-----------------------------------
Jerry D. Bringard, Director
October 6, 2003