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As filed with the Securities and Exchange Commission on December 22, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________
FORM SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(AMENDMENT NO. 4)
---------------
Genesis Financial Group, Inc.
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(Name of small business issuer in its charter)
Virginia 5777 54-1671737
- ------------------------------ ------------------- ------------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Classification Code Identification No.)
organization) Number)
4206 Williamson Road, Roanoke, Virginia 24012 (540) 265-1368
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
4206 Williamson Road, Roanoke, Virginia 24012 (540) 265-1368
- ------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Richard R. Sayers, P.O. Box 404, Roanoke, Virginia 24003-0404 (540) 343-9800
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(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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CALCULATION OF REGISTRATION FEE
----------------- ------------- ---------------- ---------------- ----------
Title of each Dollar Proposed maximum Proposed maximum Amount
class of securi- Amount to be offering price aggregate offer- of regis-
ties to be registered per unit ing price tration
---------- -------- ---------
registered fee
---------- ---
----------------- ------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Promissory Notes $7,500,000.00 $10,000.00 $7,500,000.00 $2,587.00
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The registrant hereby amends this registration statement on such date or dates
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.
Disclosure alternative used (check one): Alternative 1___; Alternative 2 X
-----
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement becomes+
+effective. This prospectus shall not constitute an offer to sell or the +
+solicitation of an offer to buy nor shall there be any sale of these +
+securities in any state in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such state. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
THIS PROSPECTUS IS DATED DECEMBER 22, 1997
PROSPECTUS
GENESIS FINANCIAL GROUP, INC.
A VIRGINIA CORPORATION (THE "COMPANY")
4206 WILLIAMSON ROAD, ROANOKE, VIRGINIA 24012
$7,500,000.00 CORPORATE PROMISSORY NOTES
PROMISSORY NOTES ("NOTES") IN THE AGGREGATE AMOUNT OF $7,500,000.00
IN INCREMENTS OF $2,500.00 WITH AN INITIAL MINIMUM INVESTMENT OF $10,000.00
-------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------
OFFEREES WILL BE INITIALLY RESTRICTED TO A MINIMUM PURCHASE REQUIREMENT OF ONE
NOTE FOR $10,000.00. THEREAFTER, PURCHASES SHALL BE IN INCREMENTS OF $2,500.00.
THE NOTES MATURE IN 3 1/2 YEARS AFTER THE ISSUANCE THEREOF AND MAY BE PREPAID
WITHOUT PENALTY. THERE IS NO MINIMUM OFFERING AMOUNT AND THIS OFFER WILL
TERMINATE 2 YEARS FROM THE DATE HEREOF UNLESS ALL NOTES ARE SOLD PRIOR THERETO.
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PRICE TO PUBLIC AGENT'S COMMISSIONS/1/ PROCEEDS TO
ISSUER/2/
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER NOTE/3/ $ 10,000.00 $ 500.00 $ 9,500.00
- --------------------------------------------------------------------------------
$7,500,000.00 $7,500,000.00 $375,000.00 $7,125,000.00
PROMISSORY NOTES/4/
- --------------------------------------------------------------------------------
TOTAL $7,500,000.00 $375,000.00 $7,125,000.00
================================================================================
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
This Prospectus is dated December 22, 1997
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- -----------------------
/1/ This estimates assumes a 5% commission and the sale of all securities
offered hereby by the Company's agents. The Company does not intend to pay
more than a 5% commission fee to its selling agents. There are no formal
arrangements or agreements with any broker or dealer for the placement of
the Notes. The Company reserves the right to enter into such arrangements
during the offering period. Principals of the Company will not receive any
commissions or other remuneration for selling the Company's securities.
/2/ Before deducting estimated Offering expenses of $56,587.00.
/3/ Notes, will be sold on a best efforts basis; however, there is no minimum
amount of Notes that must be sold to close this Offering.
/4/ The minimum investment for a Note is $10,000.00. Purchases in excess of
$10,000.00 shall be made in increments of $2,500.00. (See "DESCRIPTION OF
THE SECURITIES.")
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-1 under the Securities Act with respect to the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Notes
offered hereby, reference is hereby made to the Registration Statement,
including the exhibits and schedules thereto. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document filed with
the Commission are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
As a result of the offering of the Notes described herein, the Company will
become subject to the periodic reporting and other informational requirements of
the Exchange Act. As long as the Company is subject to such periodic reporting
and information requirements, it will file with the Commission all reports,
proxy statements and other information required thereby. The Registration
Statement and the exhibits and schedules thereto, as well as such reports and
other information filed by the Company with the Commission, may be inspected at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
office located at 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may be obtained by mail from the Public Reference Branch
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or from the
regional office at prescribed rates. The Commission's Web site address is
"http://www.sec.gov".
2
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The Company intends to distribute to its investors an annual report shortly
after the end of each fiscal year.
Until January 16, 1998 all dealers, if any, effecting transactions in the
Notes, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The Company currently has a minimal operating history. It intends to engage
primarily in purchasing and servicing installment sales contracts ("Contracts")
originated by Mr. Car Man, Inc., ("MCMI") a Virginia corporation and an
Affiliate of the Company, in the sale of used automobiles, vans, light trucks
and other vehicles. (See "PROSPECTUS SUMMARY" and "DESCRIPTION OF THE
BUSINESS.")
Unless otherwise defined herein, please refer to the "Glossary" section of
this Prospectus for the meaning of capitalized terms used throughout the text.
This Offering Involves Certain Material Risk Factors
----------------------------------------------------
In addition to the general risks in investing in a relatively new
enterprise, potential investors should consider other major risks, including:
(i) competition in the used car business;
(ii) the inability of investors to liquidate their investments;
(iii) the inability of customers to fulfill their contractual obligations
under the Contracts;
(iv) recession or other economic downturn in the economy adversely
impacting MCMI's potential customer base;
(v) increase in charge-offs and delinquencies with respect to the
Contracts which could materially and adversely affect the Company's
profitability;
(vi) the loss of one or both of the Company's two principal executives;
and
(vii) the failure or liquidation of MCMI.
There is no trading market for the Notes and there are no assurances,
should transfer of such Notes be authorized, that a market will develop, or if
any such market does develop, that it will continue. (See "RISK FACTORS.")
[Balance of this page intentionally left blank.]
3
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TABLE OF CONTENTS
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<S> <C>
AVAILABLE INFORMATION..................................................... 2
PROSPECTUS SUMMARY........................................................ 7
The Company and Affiliates.......................................... 7
Securities Offered.................................................. 8
Risk Factors........................................................ 8
RISK FACTORS.............................................................. 9
I. Risks of Credit Business.......................................... 9
General Risks................................................. 9
Financing Risks............................................... 9
Operational Risks............................................. 10
II. Operating Risks................................................... 10
Short Operating History....................................... 10
Limited Capital and Need for Additional Financing............. 11
Key Personnel................................................. 11
Default Risks................................................. 11
Failure of MCMI............................................... 11
Repossession and Casualty Risks............................... 12
Lack of Financial Statements.................................. 12
Dependence on Certain Principals.............................. 12
Determination of Offering Price............................... 12
Tax Risks..................................................... 12
Lack of Liquidity............................................. 12
Debt Service Obligations...................................... 13
Company's Competition and Affiliation......................... 13
MCMI's Competition............................................ 13
Management's Conflict of Interest and Lack of Agreement to
Sell Contracts............................................ 13
Termination of Common Ownership............................... 14
Prepayment and Unsecured Status of Notes...................... 14
Minimum Sale Requirements..................................... 15
MCMI's Obligation to Replace Contracts........................ 15
III. Investment Risks.................................................. 15
No Public Market............................................. 15
Limitations on Liability of Officers and Directors........... 15
No Independent Counsel to Investors.......................... 15
Subscription of Securities and Shelf Registration............ 16
Change in Economic Conditions................................ 16
USE OF PROCEEDS........................................................... 16
SUMMARY OF FINANCIALS..................................................... 18
INVESTMENT HIGHLIGHTS..................................................... 20
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4
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<S> <C>
DETERMINATION OF OFFERING PRICE........................................... 20
CAPITALIZATION............................................................ 20
DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES................................................ 21
DESCRIPTION OF THE SECURITIES............................................. 22
Notes............................................................... 22
Indenture Provisions................................................ 22
Solicitations and Commissions....................................... 23
DESCRIPTION OF THE BUSINESS............................................... 23
Genesis Financial Group, Inc........................................ 23
Mr. Car Man, Inc.................................................... 25
COMPETITION............................................................... 27
EMPLOYEES................................................................. 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 28
Genesis Financial Group, Inc,...................................... 28
Operating History.............................................. 28
Liquidity and Capital Resources................................ 28
Purchase of Contracts from MCMI................................ 29
Source of Revenues............................................. 29
Factors Affecting Operations................................... 29
Projections.................................................... 29
PROPERTIES................................................................ 30
LEGAL PROCEEDINGS......................................................... 30
MANAGEMENT................................................................ 30
Directors........................................................... 30
Officers............................................................ 31
Biographies of Directors and Officers............................... 31
Executive Compensation.............................................. 31
PRINCIPAL STOCKHOLDERS.................................................... 32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 32
LEGAL MATTERS............................................................. 33
EXPERTS................................................................... 33
GLOSSARY.................................................................. 34
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5
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<S> <C>
INDEX TO FINANCIAL STATEMENTS............................................. 41
APPENDIX A: Promissory Note.............................................. A-1
APPENDIX B: Subscription Letter.......................................... B-1
APPENDIX C: Indenture.................................................... C-1
APPENDIX D: Articles of Incorporation And Bylaws Of Genesis Financial
Group Inc. .................................................. D-1
APPENDIX E: Articles Of Incorporation And Bylaws Of Mr. Car Man, Inc. ... E-1
</TABLE>
6
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PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the information and financial statements included
elsewhere in this Prospectus.
The Company and Affiliates
--------------------------
The headquarters of the Company is located at 4206 Williamson Road,
Roanoke, Virginia 24012. The telephone number is (540) 265-1368. The Company has
a minimal operating history to date.
The Company will engage primarily in purchasing and servicing installment
sales contracts ("Contracts") originated by Mr. Car Man, Inc. ("MCMI"), a
Virginia corporation and an Affiliate of the Company, from the sale of used
automobiles, vans, light trucks and other vehicles (collectively referred to as
"Automobiles"). The principals and 100% shareholders of the Company are Jeffrey
W. Akers and Franklin W. Blankemeyer, Jr., both of Roanoke, Virginia. Messrs.
Akers and Blankemeyer also are the principals and 100% shareholders in MCMI.
Although the Company and MCMI were formed simultaneously on June 15, 1993, the
principals concentrated exclusively on developing and expanding MCMI's used
Automobile business during the past three years. Having established MCMI's
market niche in the Roanoke Valley, the principals are ready to implement the
second phase of their business plan to establish a funding vehicle for MCMI's
business operations. The Company was formed for this purpose and will provide
centralized funding, receivables management, and collection services for the two
business locations which MCMI currently owns and operates and for its future
operations in the used Automobile industry. MCMI's customer base primarily
consists of individuals having limited access to traditional sources of consumer
credit (the "Non-Prime Consumer"). The Company assists MCMI with the sale of
used vehicles by providing an indirect source of funding for such buyers.
Contracts which meet the Company's underwriting standards are purchased from
MCMI after the Company has reviewed and approved the Automobile purchaser's
credit application. In order to achieve an acceptable rate of return on its
funding and adjust for credit risks, Contracts are purchased from MCMI at a
discount to the remaining principal balance. (See "DESCRIPTION OF THE
BUSINESS".)
MCMI will offer its Contracts for sale exclusively to the Company.
Depending upon its capital resources, the Company intends to purchase some or
all of the Contracts offered by MCMI from time to time. (See "RISK FACTORS".)
MCMI has been engaged in purchasing, servicing, selling, and financing used
Automobiles since August 2, 1993. MCMI and the Company have targeted the Non-
Prime Consumer as its primary customer base. In the past, this segment of the
used car market has been very poorly serviced since the consumer had few
dealerships from which to choose. MCMI's goal is to establish a new marketing
niche in the used car industry in the Roanoke Valley, located in Southwest
Virginia, and beyond through a very heavy emphasis on customer service, proper
marketing, and sound business management. MCMI currently has two locations
serving the Roanoke Valley area, and future expansion is planned targeting
additional market areas outside the Roanoke Valley.
7
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The Offering will be conducted over a two (2) year period, and the proceeds
will be used to fund the purchase of Contracts generated by MCMI and the
Company's other business operations. Because of the nature of MCMI's business,
the entire Offering will continue over an extended period of time to allow MCMI
the time it will need to generate a sufficient number of Contracts for sale to
the Company in order to consummate this Offering. The Company anticipates that
the Offering will be consummated in two years. (See "INVESTMENT HIGHLIGHTS.")
The Company's strategy is to grow its portfolio of contract receivables by
assisting MCMI in growing its business. The Company and MCMI believe that the
nature of their business present significant opportunities for growth for the
following reasons: (1) the automobile finance market, with approximately $325
billion in outstanding automobile installment credit as of March 31, 1995, is
the second largest consumer credit market in the United States; (2) the Non-
Prime Consumer portion of the automobile finance market is estimated to be
between $30.0 and $50.0 billion; (3) the used automobile market has grown over
the past five years at four times the rate of the new automobile market; and (4)
there is not a dominant used car dealer which focuses on the Non-Prime Consumer
in the Roanoke Valley or in the other major cities and towns surrounding
Roanoke.
MCMI successfully concluded a private placement of its Contracts under Rule
504 of Regulation D promulgated under the Securities Act of 1933. Through the
private placement of such Contracts, MCMI raised capital in excess of
$950,000.00. Because of the success of MCMI's business and its private offering,
the principals of the Company and MCMI look to expand their business and
customer base through additional capital infusion. (See "DESCRIPTION OF THE
BUSINESS"; "USE OF PROCEEDS"; "DESCRIPTION OF THE SECURITIES"; and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
Securities Offered
------------------
The securities described by this Prospectus are comprised of corporate
promissory notes ("Notes") to be issued by the Company. The Notes will bear
interest at 18% per annum and will be amortized over a period of three and one-
half years. Investors will be subject to an initial minimum investment of
$10,000.00. Thereafter, the Notes must be purchased in increments of $2,500.00.
If the Offering is oversubscribed, the Company, at its discretion, may reduce an
Investor's subscription to accommodate other subscriptions. The bulk of the net
proceeds of the Offering will be used to purchase Contracts from MCMI on an
ongoing basis. MCMI will use the funds to replenish its inventory of Automobiles
and for working capital. (See "USE OF PROCEEDS"; "DESCRIPTION OF THE
SECURITIES"; and the form Note in Appendix "A".)
Risk Factors
------------
An investment in the Notes offered hereby will involve certain substantial
risks. These risks include a lack of financial flexibility and liquidity,
absence of a significant operating history for the Company, potential federal
and state regulations of financing institutions, competition, the nature of
MCMI's business, the higher risk customer base, and the lack of an existing
market for
8
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the Notes. (See "RISK FACTORS.")
RISK FACTORS
An investment in the Company involves significant risks and is suitable
only for persons of substantial means who have no need for liquidity in their
investments. The following is not intended as a comprehensive discussion of all
risks that might be encountered by an Investor in the Company. Investors are
urged to consult with independent advisors and tax counsel for the possible
personal and tax consequences of an investment in the Company.
In addition to the other factors and information set forth in this
Prospectus, Investors should carefully consider and evaluate the following
specific risk factors:
I. Risks of Credit Business
------------------------
A. General Risks. The operation of a credit business primarily engaged in
-------------
purchasing and servicing installment sales contracts ("Contracts") for used
Automobiles originated by an affiliated company involves certain risks,
including those described in this Prospectus. By way of example and not
limitation, an investment in the Company is subject to the risk of adverse
changes in general or local economic conditions, such as: (i) inability to
compete with other consumer funding sources in a competitive market; (ii)
inability to raise and/or maintain sufficient capital reserves to finance the
purchase of new Contracts originated by MCMI; (iii) inability of MCMI's
customers to service their debt; (iv) inability of MCMI's customers to maintain
gainful employment; and (v) inability of MCMI to maintain high patronage levels.
In addition, certain expenditures associated with investments in the
Company (principally debt payments, lease obligations and maintenance costs) are
not normally decreased by events adversely affecting the Company's income. In
the event debt payments are not met, the Company may lose its leasehold interest
in some or all of its current business locations and may sustain as a result of
a foreclosure a loss of an asset collateralizing a secured debt. To the extent
the Company purchases real property in the future and defaults on any debt
secured by such real property, it could suffer a loss of its equity investment
in such real estate as a result of a foreclosure.
The success of the Company also depends upon the management skills of the
principal executive officers. The principal executive officers have prior
experience in collateral financing and have operated MCMI since its inception.
(See "MANAGEMENT" for a more thorough description of the background of the
principal executive officers.)
B. Financing Risks. The Company will incur substantial indebtedness
---------------
through the issuance of the Notes offered hereunder. Such indebtedness is
required to be paid within 3.5 years of the issue dates. The Company has the
right to prepay the Notes at any time without penalty. Although the Company
9
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anticipates that the indebtedness will be spread out over a period of years,
there can be no guarantee that the Company will be able to service all of its
indebtedness as it arises which could result in the loss of some or all of the
Company's assets which in turn may force the Company into bankruptcy and/or
liquidation. Without incurring such debt, the Company may be unable to
adequately finance the purchase of the Contracts from MCMI. Without such
financing, MCMI may be unable to obtain, through operating cash flow and/or from
other sources, the funds it needs to meet operating expenses and/or to replenish
its inventory of Automobiles. (See "USE OF PROCEEDS.")
As previously described, the Company will purchase at a discount ranging
from 25% to 50% from MCMI, from time to time, some or all of the Contracts
generated through MCMI's business operations to help fund MCMI's capital needs
for operating expenses and new inventory. The Company intends to use the bulk of
the proceeds from the sale of the Notes for such purposes. (See "USE OF
PROCEEDS" and "DESCRIPTION OF THE BUSINESS.") The Company will be responsible
for collecting payments and securing the Contracts it purchases from MCMI.
Although the Company anticipates that customer payments under the Contracts will
be sufficient to service its obligations to its Investors arising under the
Notes, there can be no assurance that a customer will not default under his or
her Contract. (See "Description Of The Business.") In such event, the Company
may not have sufficient capital to satisfy all of its payment obligations under
the Notes. Even if the Company has sufficient capital reserves to satisfy its
obligations, such additional debt obligations would further burden the Company's
cash flow and reserves and could adversely impact its financial viability. (See
"DESCRIPTION OF THE SECURITIES" and "DESCRIPTION OF THE BUSINESS.")
C. Operational Risks. If the expenses of operating the Company's business
-----------------
exceed the Company's income, the Company may have to obtain additional sources
of financing or dispose of some of its assets under disadvantageous terms. In
addition, in the event the operation of the Company's business does not generate
sufficient operating income to pay all of its operating expenses, taxes and debt
service requirements, MCMI may not be able to sustain its business operations
for lack of financing for new inventory. There can be no assurance that the
Company will not incur operating deficits. (See "USE OF PROCEEDS" and
"DESCRIPTION OF THE BUSINESS.")
Should the Company's revenues be insufficient to service its debt and pay
taxes and other operating expenses, the Company will be required to utilize
working capital and/or seek additional funds or financing. There can be no
assurance that additional funds will be available to the Company if needed, or,
if available, will be on terms acceptable or advantageous to the Company.
II. Operating Risks
---------------
A. Short Operating History. Even though the Company was organized on June
-----------------------
15, 1993, the Company has a minimal operating history. However, MCMI has been
operating since August 2, 1993, and has successfully conducted a private
placement of its Contracts under Rule 504 of Regulation D, promulgated by the
Securities Act, through which it raised in excess of $950,000.00. The Company
10
<PAGE>
anticipates that MCMI's business will continue to grow and that MCMI will
continue to generate Contracts that will be purchased by the Company. Although
the Company believes its commercial paper financing and MCMI's used car business
will be profitable, there can be no assurance that the Company will generate
sufficient revenues to service all of its debt and other obligations to make the
Company profitable.
B. Limited Capital and Need for Additional Financing. Although the
-------------------------------------------------
Company believes it will have sufficient capital from the Offering to commence
and continue its business operations on a profitable basis, there can be no
assurance that the Company's activities will be successful or will generate
adequate cash flow to meet its capital and operational needs as they arise.
Therefore, additional capital may have to be raised internally and/or externally
from time to time to finance the Company's continuing and expanding business and
its capital requirements. Such additional financing may not be available at all
or at the time needed or may be available only on adverse terms. If the Company
is unable to raise sufficient capital by whatever means, the Company's ability
to maintain and/or expand its business operations and MCMI's ability to obtain
funding for new inventory may be severely hindered.
C. Key Personnel. The Company and MCMI are dependent upon the continued
-------------
services of Franklin W. Blankemeyer, Jr., and Jeffrey W. Akers. The loss of the
services of Mr. Blankemeyer or Mr. Akers could have a significant adverse effect
on the Company and/or MCMI.
D. Default Risks. As customary with any consumer credit business, there
-------------
is substantial risk involved with customers defaulting on their obligations
under the Contracts. Since the Company will primarily operate to fund the
operations of MCMI and since MCMI will target "higher risk" consumers for the
purchase of its inventory, the risks of default are enhanced. There can be no
guarantee that the Company or MCMI will be able to absorb such losses through
repossessions and continued operations. Currently, MCMI experiences a 25%
repossession rate based upon the total number of Contracts generated which is
within the non-prime industry's national average. MCMI and the Company utilize
the same credit review policies. However, there is a time lag between the time
the two entities conduct their review. Accordingly, a customer has to pass the
credit review requirements twice before the Contract is purchased by the
Company, once when the Contract is generated by MCMI and again when the Contract
is offered for sale to the Company. The Company has the discretion to reject a
Contract if the customer is in default or if other unacceptable credit risks
arise during the interim period. By requiring each customer to satisfy the
credit review policies of both MCMI and Company on two separate occasions, the
company anticipates that the credit review policies together with the cash flow
generated from the auction or resale of repossessed cars will help curtail
potential losses from customer defaults. (See "INVESTMENT HIGHLIGHTS.")
Regarding the projected economic impact of the 25% repossession rate on the
Company, Investors should note that the historical salvage return on cars
repossessed by MCMI is a very optimistic number in comparison to the number
generated for the Company in this Prospectus. This is due to the way MCMI has
11
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historically resold repossessed automobiles. Currently, and continuing until the
Offering is approved, repossessed Automobiles will be resold on MCMI's lot. This
can be accomplished since MCMI is very small. This allows MCMI to receive a much
higher resale value and, concomitantly, a much lower bad debt figure. However,
after commencement of this Offering and after the Company and MCMI start to
grow, repossessed Automobiles will not be sold in this manner. For the purpose
of being conservative in its numbers, the Company has assumed that it will sell
the repossessed Automobiles at auction, thereby generating the bad debt number
shown in the financials.
The Company has indicated in this Prospectus that, even given the 25%
repossession rate, the projected revenues from operations will be sufficient to
meet its debt obligations, including obligations arising under the Notes. The
projections contained in this Prospectus are the Company's best efforts in
estimating what it reasonably expects to achieve. The projections were derived
from weeks of mathematical calculations of MCMI's monthly cash flows from all
sources and categorized into specific groups to arrive at the number needed for
the requirements of the projections.
E. Failure of MCMI. Currently, the Company is solely dependent upon MCMI
---------------
to generate the Contracts that it intends to purchase. Conversely, MCMI will be
primarily dependent upon the Company to provide the funding needed for its
operating expenses and new inventory. There can be no assurance MCMI will
continue to be successful in the used car business. In the event MCMI
experiences a protracted downturn in its used car business or goes out of
business, the Company's primary source of Contracts would be materially and
adversely impacted. Presently, the Company has no plans for financing other used
car dealerships or any other related business. There can be no guarantee that
the Company will be able to sustain any such loss in MCMI's level of business
and/or its affiliation, and/or develop new business relationships to satisfy its
operating expenses and other obligations, including its obligations to Investors
under the Notes, or to continue its operations on a profitable basis.
F. Repossession and Casualty Risks. Repossession of an Automobile sold on
-------------------------------
an installment basis is an inherent risk of the used car business. However, the
Company and MCMI have established credit guidelines which are stringently
enforced to help alleviate this risk. Company will vigorously enforce its
repossession rights and resell the repossessed Automobile in accordance with
applicable law. On average, twenty-five percent (25%) of all Contracts purchased
by Company each year will end in default resulting in repossession of the
underlying Automobile. An additional five percent (5%) of Automobiles sold each
year are damaged beyond repair. Based upon these assumptions, the Company
anticipates that the 25% repossession rate and 5% damage rate will total
approximately ten percent (10%) of the Company's accounts receivable on an
annual basis. (See "INVESTMENT HIGHLIGHTS.") However, in most cases involving a
casualty, the Company's investment is protected by casualty insurance. (See
"DESCRIPTION OF THE BUSINESS.")
G. Lack of Financial Statements. Although the Company has had a minimal
----------------------------
operating history since incorporating in 1993, a comparative balance sheet has
12
<PAGE>
been prepared as of December 31, 1993, 1994, 1995 (audited) and 1996 (audited).
(See the "FINANCIAL STATEMENTS.")
H. Dependence on Certain Principals. Franklin W. Blankemeyer, Jr. and
--------------------------------
Jeffrey W. Akers intend to devote their full time to promote, market and develop
the business of the Company and MCMI. There can be no guarantee that all
principals will remain with the Company and/or MCMI, and the departure of one or
more could adversely affect the future success of the Company and/or MCMI.
I. Determination of Offering Price. The offering price of the Notes is
-------------------------------
solely predicated upon the face value of the Notes. (See "DESCRIPTION OF THE
SECURITIES"; and "DETERMINATION OF OFFERING PRICE.")
J. Tax Risks. All prospective Investors should retain their own tax
---------
counsel or advisor to discuss the possible tax effects ensuing from an
investment in the Company.
K. Lack of Liquidity. The Company will service the debt obligations
-----------------
evidenced by its Notes through normal business operations in conjunction with
MCMI. The Company anticipates that the payments made by customers under the
Contracts will be sufficient to satisfy these obligations. Proceeds from this
Offering will be used primarily to fund the Company's working capital needs
including the purchase of additional Contracts and to provide a source of
funding for MCMI's business operations. (See "USE OF PROCEEDS" and "DESCRIPTION
OF THE BUSINESS.") In the event the Company's operating revenues are
insufficient to meet its obligations, additional cash requirements must be
funded through additional borrowings or credit extensions which may be
unavailable. Since the Company will not have substantial assets, other than the
Contracts, that can be pledged as collateral for financing purposes, obtaining
additional secured financing may not be possible. This lack of financial
flexibility and liquidity could adversely impact an investment in the Company.
L. Debt Service Obligations. Pursuant to the Offering, the Company will
------------------------
be obligated on a significant level of indebtedness. In servicing this
indebtedness, the Company may be vulnerable to various risks, including, without
limitation, the impairment of the Company's ability to obtain additional
financing for working capital, capital improvements or other purposes and a
possible downturn in the economy. (See "PROSPECTUS SUMMARY"; "DESCRIPTION OF THE
SECURITIES"; and "DESCRIPTION OF THE BUSINESS.")
M. Company's Competition and Affiliation. Currently, the Company intends
-------------------------------------
to purchase Contracts generated solely by its Affiliate, MCMI. Since the Company
and MCMI share the same principals and management, MCMI will not offer its
Contracts to any other funding source or company. Accordingly, the Company does
not anticipate any competition as long as MCMI remains viable and an Affiliate
of the Company. However, there is no contractual agreement between MCMI and the
Company for the offer and sale of Contracts. There can be no guarantee that MCMI
will continue its successful operations and/or remain in business or that the
principals and management of the Company and MCMI will remain the same. In
addition, since there is no contractual arrangement between MCMI and the
Company,
13
<PAGE>
there can be no guarantee that MCMI will not sell its Contracts to third parties
and/or participate in additional private or public placements of its Contracts
in the future. In such event, the Company would have to contract with one or
more alternative sources for such Contracts to continue its business operations.
There can be no assurance that such alternative sources can be found, or that
the Company will be successful in obtaining a sufficient source of new Contracts
to continue operating. (See "DESCRIPTION OF THE BUSINESS.")
N. MCMI's Competition. In general, the used car business is highly
------------------
competitive. There are numerous competitors in the industry who are more
established and who have substantially greater financial resources than the
Company and MCMI. In addition, there are numerous competitors having greater
name recognition, better capitalization, equivalent or lower pricing guidelines,
more experienced organization, and a larger employee base. Also, the Company and
MCMI must contend with those competitors having better facilities and/or
equipment. Although Management believes MCMI has a significant advantage in the
Roanoke Valley at the present time due to the absence of any other dominant used
car dealer targeting the Non-Prime Consumer, the high degree of competition in
the used car business in general will remain a primary factor affecting both
MCMI's and the Company's profitability. The used car business will also continue
to be highly susceptible to changes in the economy and the buying habits of the
general public. (See "INVESTMENT HIGHLIGHTS"; "DESCRIPTION OF THE BUSINESS"; and
"COMPETITION.") In such event, the Company would have to contract with one or
more alternative sources for such Contracts to continue its business operations.
There can be no assurance that such alternative sources can be found, or that
the Company will be successful in obtaining a sufficient source of new Contracts
to continue operating. (See "DESCRIPTION OF THE BUSINESS.")
O. Management's Conflict of Interest and Lack of Agreement to Sell
---------------------------------------------------------------
Contracts. Since the Company and MCMI are owned and managed by the same
- ---------
principals, the determination of the discount and purchase price for a Contract
purchased by the Company from MCMI is not arrived at in an arms-length
transaction. On average, the face value of a Contract is discounted between 25%
and 50% when sold to the Company. Currently, the Company is solely dependent
upon MCMI to generate the Contracts. Because of the commonality of ownership,
there is no separate agreement between the Company and MCMI obligating MCMI to
offer the Contracts to the Company at the discounted value, or any other price,
or obligating the Company to purchase same. The affiliation of the two
companies allows the principals to internalize all business operations. Such
an arrangement bestows a significant benefit on the principals in that they are
able to offer to its customers through their wholly owned entities both the
Automobile and the financing. In addition, the affiliation of the principals
and the companies maximize other cost efficiencies by allowing the principals to
streamline managerial and administrative functions and financial accounting
procedures. The principals will have sole discretion in determining which
Contracts will be bought and sold as well as the discounted purchase price.
However, since the two companies will rely exclusively on the other for their
respective business operations, the principals do not believe a written
agreement is necessary at this time. Further, since the principals control all
decisions in this regard, the principals do not anticipate any adverse impact
to Investors
14
<PAGE>
since the Company will purchase the Contracts at a discount and will use the
receivables on the Contracts to satisfy the principal and interest payments due
under the Notes. Accordingly, neither the discounted purchase price nor the
affiliation of the companies will have any adverse effect on the obligations
arising under the Notes or the underlying Contracts since such obligations will
remain constant. Although the principals do not plan on selling their interest
in either company, there can be no guarantee that they will continue to jointly
own both. In the event of an ownership change in one or both companies, the
existing business relationship may be curtailed or severed entirely. In such
event, the Company may not be able to develop new sources for such Contracts, or
purchase Contracts on as favorable terms, and/or be able to continue business
operations on a profitable basis. Under such circumstances, the Company may be
forced: (i) to use some or all of its cash flow and/or reserves to satisfy its
debt obligations under the Notes which obligations would have an adverse impact
on the Company's financial resources and viability as a going concern; or (ii)
to cease business operations altogether. (See "DESCRIPTION OF THE SECURITIES";
"DESCRIPTION OF THE BUSINESS"; "DETERMINATION OF THE OFFERING PRICE" and
"MANAGEMENT".)
P. Termination of Common Ownership. Because of the commonality of
-------------------------------
ownership of the Company and MCMI, there is no written contract or agreement
between the companies obligating MCMI to sell or offer to sell all of its
Contracts to the Company, or obligating the Company to buy same, for the reasons
specified in Paragraph O above. Although MCMI is currently obligated to replace
defaulted Contracts under its previous offering under Rule 504 of Regulation D,
MCMI will only use the Contracts generated from the resale of the repossessed
Automobile for such purposes. In the event MCMI cannot generate a new Contract
through a resale of the repossessed Automobiles, the investor will be paid in
full. The risks to Investors upon termination of the common ownership of the
companies and for the lack of a contractual obligation on the part of MCMI to
sell the Contracts solely to the Company are the same as set forth in Paragraph
O above. (See "DESCRIPTION OF THE BUSINESS" and "MANAGEMENT.")
Q. Prepayment and Unsecured Status of Notes. The Notes issued pursuant
----------------------------------------
to this Offering are unsecured and subject to being prepaid, in whole or in
part, at any time without penalty. The Notes will not be subordinated to any
other debt of the Company. (See "DESCRIPTION OF THE SECURITIES" and the form
Indenture appended hereto as Appendix "C".)
R. Minimum Sale Requirements. The Company will have to sell a minimum of
-------------------------
6 Notes at an average of $10,000.00 each to satisfy the closing costs incurred
in conjunction with this Offering which costs are set forth in items (a) through
(c) and (e) in the section captioned "Use Of Proceeds" and before it will have
excess funds available to fund its working capital account. In addition, the
Company estimates it will need to sale $3.0 million in Notes over the twelve
month period following the Effective Date to continue its business operations.
There can be no guarantee that the Company will be successful in raising these
funds within the allocated time or that it will be able to continue operations
on a profitable basis irrespective of the amount of funds raised during the
Offering.
15
<PAGE>
S. MCMI's Obligation to Replace Contracts. Pursuant to MCMI's prior
--------------------------------------
Regulation D offering under Rule 504, MCMI is obligated to replace a defaulted
Contract with a new one. Notwithstanding MCMI's obligation, MCMI does not
operate under any time restraints for replacing its defaulted Contracts allowing
the principals to prioritize the Company's needs. In addition, the Contracts
which are targeted by MCMI as replacements for its defaulted Contracts are new
Contracts generated from the resale of the same Automobile which was repossessed
by MCMI when the customer defaulted under the original Contract. Contracts
generated from the sale of new inventory will not be used as replacement
Contracts by MCMI but instead will be offered to the Company. If a repossessed
Automobile is not resold by MCMI to generate a replacement Contract, the
investor will be paid in full. Accordingly, the principals do not anticipate
the occurrence of any competing circumstances or conflicts of interest arising
with respect to the Contracts since MCMI will only use Contracts generated from
the resale of repossessed Automobiles for replacement purposes. All Contracts
generated by MCMI from the sale of new inventory will be offered to the Company.
Although Management anticipates little or no adverse effects on the supply of
Contracts based upon the historical and projected operations of the two
companies and the rate of default experienced by MCMI, there can be no assurance
that the Company will be able to purchase a sufficient number of Contracts on a
timely basis and/or continue operations on a profitable basis.
III. Investment Risks
----------------
A. No Public Market. No public market exists for the Notes, and it is
----------------
unlikely that a ready market will exist at any time in the future. Accordingly,
if an Investor wishes to transfer or sell his Note, he may be unable to
liquidate his investment promptly at a reasonable price due to market conditions
and/or the general illiquidity of such an interest. The Company also reserves
the right to prepay one or more of the Notes at any time without penalty.
B. Limitations on Liability of Officers and Directors. The bylaws of the
--------------------------------------------------
Company provide that the officers and directors of the Company shall be
indemnified to the extent allowed by law. Therefore, an Investor may have a more
limited right of action against the officers and/or directors than he would have
if there were no such limitations.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED WITH RESPECT TO AN OFFICER'S OR DIRECTOR'S ACTION, THE
SECURITIES AND EXCHANGE COMMISSION HAS TAKEN THE POSITION THAT SUCH
INDEMNIFICATION PROVISION IS AGAINST PUBLIC POLICY AND, THEREFORE, IS
UNENFORCEABLE. (SEE "DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES.")
C. No Independent Counsel to Investors. No independent counsel has been
-----------------------------------
retained to represent the interests of the Investors. This Prospectus was
drafted, in part, by counsel retained by or whose fees are paid, directly or
indirectly by the Company. These documents have not been reviewed by any
independent attorney on behalf of the Investors. Each Investor should,
therefore, consult with his own counsel and accountants as to the terms and
provisions of
16
<PAGE>
this Prospectus and all other documents relating thereto.
D. Subscription of Securities and Shelf Registration. The Company intends
-------------------------------------------------
to offer the Notes over a period of two (2) years. Accordingly, the Company
cannot predict with any degree of certainty how successful the offering will be
or if the Notes will be fully subscribed. The Company anticipates that it will
need to sell $3.0 million in Notes over the next twelve months following the
Effective date of this Prospectus to continue its business operations and that
it will take approximately two (2) years to fully subscribe the Notes. Although
the Company anticipates that the sale of the Notes offered hereunder will
provide sufficient revenues to satisfy Company's financial needs for at least
six months following the completion of the Offering, there can be no guarantee
that the Company will be successful even if the Notes are fully subscribed
and/or will be able to pursue additional financing as and when needed. (See
"USE OF PROCEEDS.")
E. Change in Economic Conditions. Since the Offering will be conducted
-----------------------------
over a two year period, the Company will be more susceptible to local and
national economic changes. There can be no guarantee that certain conditions or
events will not occur during this period which will have a major impact on the
Company's and/or MCMI's business operations. Such events may include a loss of
a major employer in the market area of MCMI, especially if the job loss
adversely impacts the Non-Prime Consumer, and a change in interest rates.
Although an increase in such rates would probably not impact the Non-Prime
Consumer since he is accustomed to paying higher interest rates because of his
credit history, it could have a deleterious effect on the marketability of the
Notes to Investors by reducing their return on borrowed funds used to purchase
the Notes or by rendering their investment return less competitive in light of
current market rates.
USE OF PROCEEDS
Currently, the Company has a minimal capitalization. A portion of the
proceeds of this Offering will be used to pay certain costs and expenses
associated with this Offering. The following table sets forth the proposed use
of proceeds from the sale of the Notes. The table assumes that $7,500,000.00 in
Notes are subscribed. (See "PROSPECTUS SUMMARY"; and "DESCRIPTION OF THE
SECURITIES.") The following figures represent the Company's best estimate as to
the needs of the Company. Accordingly, such estimates are subject to change as
circumstances dictate and should not be relied upon as a definitive account of
the ultimate use of the funds. All proceeds of the Offering will be held by the
Company for the benefit of the Investors.
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds from Offering: $7,500,000.00/1/
- ---------------------- -------------
LESS:
- ----
(a) Registration Fee: 2,587.00/2/
(b) State Securities Filing Fees: 6,500.00/3/
(c) Non-Refundable Legal Fees,
Printing and Copying Costs; and
Miscellaneous Closing Costs
Attributable to the offering: 40,000.00/4/
(d) Compensation of Selling Agents: 375,000.00/5/
(e) Accounting Fees: 7,500.00/6/
(f) Reserve Fund for the purchase of
additional Contracts: 6,361,572.00/7/
(g) Working Capital Fund for servicing
all debt obligations and operat-
ing expenses and for capital
improvements: 706,841.00/8/
Total Application of Proceeds: $7,500,000.00/9/
----------------------------- -------------
</TABLE>
Notes to Use of Proceeds:
- ------------------------
1. Based on an offering of Notes in the amount of $7,500,000.00 being fully
subscribed. The Company may also sell less than $7,500,000.00. The
Company anticipates this Offering will continue for a period of two (2)
years. However, all fees and costs listed herein are to be paid whether
this Offering is successful. (See "DESCRIPTION OF THE SECURITIES.")
2. Based on 1/29 of 1% of the $7,500,000.00 aggregate offering price of the
Notes. Total registration fee will be approximately $2,587.00. Such fee
is payable before the Effective Date of this Prospectus.
3. Represents the estimated cost of registering the Notes in the applicable
states. This figure is subject to change depending upon the amount of
securities offered per state; the registration fee of each applicable
state; and the final number of states in which the securities are
registered. Such fee is payable on or before the Effective Date of this
Prospectus.
4. Represents the estimated costs to be incurred in connection with the
Offering including: (i) legal fees; (ii) recording, printing, and travel
18
<PAGE>
expenses, and any other organizational or closing costs and fees; and (iii)
reimbursement of certain out-of-pocket expenses for filing and other fees
incurred in complying with federal and state securities laws. All such
fees and costs are non-refundable and shall be paid on or before the
Effective Date of this Prospectus. A substantial portion of these expenses
have been prepaid. Any excess funds remaining after the payment of the
foregoing expenses will be added to the working capital account.
5. Represents the aggregate amount of compensation to be paid to selling
agents of the Company based on a 5% commission scale. Assumes the Notes
are fully subscribed solely upon the efforts of the Company's agents. The
Company reserves the right to sell some or all of the Notes through its own
efforts without compensation. Any funds not used for commissions will be
added to the working capital account.
6. Represents the estimated cost of accounting fees to be incurred with
respect to the Offering. A substantial portion of these expenses have been
prepaid. The balance of such fees will be paid on or before the Effective
Date of this Prospectus.
7. Represents the major portion of the balance of the offering proceeds which
will be used to establish a reserve fund for the purchase of additional
Contracts generated by MCMI.
8. Represents the remaining portion of the balance of the offering proceeds
which will be used as working capital to: (i) service the Company's debt
obligations under its Notes; (ii) satisfy the Company's operating expenses;
and (iii) fund its reserve account for capital improvements and similar
needs.
9. Pursuant to the costs set forth in items (a) through (c) and (e) above, the
Company will have to sell a minimum of six (6) Notes at $10,000.00 each to
satisfy these obligations and before it will have excess funds available to
fund its working capital account. Since there is no existing or formal
agreement with a broker or dealer and since there is no fee or commission
obligation in effect, the costs do not include item (d) above regarding
commission fees. The Company intends to utilize its working capital
account to purchase additional Contracts from MCMI and to satisfy its
normal operating expenses, including, without limitation, taxes, rent,
utilities, salaries and general overhead expenses. The Company estimates
it will need to sell $3.0 million in Notes over the next twelve (12) months
following the Effective Date to continue its business operations. Because
of the nature of MCMI's business, Contracts will be generated over a period
of time. Accordingly, such Contracts can not be purchased from MCMI until
they are generated. The Company's business is predicated upon the
continuous flow of Contracts from MCMI. See the section captioned "RISK
FACTORS" for a more detailed explanation of the risks involved with an
investment in the Company. It should be noted that the Company intends to
sell a substantial portion of its Notes over a period of time to correlate
with the generation of Contracts by MCMI. (See "DESCRIPTION OF
19
<PAGE>
THE BUSINESS.")
SUMMARY OF FINANCIALS
The selected financial data presented below for the periods ended December
31, 1993, 1994 have been derived from the unaudited financial statements of the
Company. The financial data for the year ended December 31, 1996 and 1995 have
been derived from the audited financial statements of the Company and the notes
thereto. The unaudited financial statements reflect all adjustments of a normal
recurring nature which management considers necessary for a fair presentation of
the financial position and the results of operations for these periods. The data
set forth below should be read in conjunction with the section captioned
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the "FINANCIAL STATEMENTS," the notes thereto and other
financial and statistical information appearing elsewhere in this Prospectus.
[Balance of this page intentionally left blank.]
20
<PAGE>
Periods Ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 October 31,
STATEMENT OF 1997
INCOME DATA Unaudited Unaudited Audited Audited Unaudited
- -----------
<S> <C> <C> <C> <C> <C>
Net Sales -- -- -- -- --
Cost of Sales -- -- -- -- --
--------- --------- ------- ------- ----------
Gross Profit -- -- -- -- --
Operating Expenses 10,773 86 86 2,512 65
--------- --------- ------- ------- ----------
Loss (10,773) ( 86) ( 86) (2,512) 65
========= ========= ======= ======= ==========
BALANCE SHEET
DATA
- -------------
Working Capital 50 -- -- -- --
Total Assets 451 315 229 143 78
Long-Term Debt
and Capital Leases 9,224 9,174 9,174 11,600 11,600
Stockholders Equity (8,773) (8,859) (8,945) (11,457) (11,535)
</TABLE>
<PAGE>
INVESTMENT HIGHLIGHTS
The Company has projected revenues to be approximately $2 million by year
two. Net income for that year is projected at $413,611. The complete set of
projections is included in the section captioned "Financial Statements." The
growth of the Company will be financed by the placement of Notes payable up to
$7.5 million by the end of year two. These Notes payable are anticipated to be
subscribed over years one and two in the amounts of $3,000,000 and $4,500,000,
respectively. These notes bear interest at 18% for forty-two months from date
of issue.
The proceeds of these Notes will be used to acquire Contracts from its
Affiliate, MCMI, of $3,000,000 and $4,500,000 in years one and two,
respectively. These purchase levels are based on Management's projections that
MCMI will continue to expand its revenues by its historical levels of
approximately 50% per year since 1994.
During the first full year of operations, Management plans to establish a
separate office and expand its staff to handle the increased volume. To support
the growth of the Company, Management must also work to expand the operations of
MCMI. The proceeds from the sale of the Notes will be used to purchase
Contracts from MCMI on an ongoing basis. To generate the volume of sales
necessary, MCMI will manage an aggressive marketing campaign to attract the
buyers to its lots. Management is planning to open one new car lot in each of
years one and two which will require an additional investment of approximately
$100,000 per lot for inventory, and $25,000 per lot for furniture and fixtures.
MCMI intends to fund its growth and expansion plans through cash flow generated
during normal business operations; revenues received from the sale of its
Contracts to the Company; and/or funds obtained from traditional funding
sources, such as financial institutions.
The projections include a provision for bad debts expense calculated based
on percentage of projected accounts receivable weighted according to age of the
Contract. The percentage and weighing formulas used incorporates certain
assumptions based on Management's experience drawn from MCMI's operations. The
assumptions include estimates of: (i) 25% projected default rate of all
Contracts over the life of the Contracts; and (ii) 5% casualty rate of all
Contracts over the life of the Contracts. The projections also include the
estimates of bad debt recovery expected to be derived from the sale of
repossessions at auction and insurance proceeds to offset losses resulting from
collision damage.
As the Company expands, other expenses will increase accordingly. The
projections included in the section captioned "Financial Statements" reflect
Management's estimate of other operating expenses for years on and two. The
expenses include projections of personnel needs, expansion of operations to its
own location from its existing office sharing arrangements with MCMI, and
related operating expenses. The assumptions disclosed in this discussion are
those Management believes are significant to the projections.
22
<PAGE>
DETERMINATION OF OFFERING PRICE
The offering price for the Notes is predicated upon the face value of the
respective Notes. (See "DESCRIPTION OF THE SECURITIES.")
CAPITALIZATION
The following table sets forth the capitalization of the Company at May 31,
1997, on an actual basis.
<TABLE>
<CAPTION>
May 31, 1997
Actual/(1)/
-------------
<S> <C>
Short-term debt -0-
Long-term debt 11,600
Stockholders' equity:
Common Stock, no par 2,000
value (100 shares
authorized; 20
shares outstanding
Retained Earnings (13,493)
Total Stockholders' (11,493)
Equity
</TABLE>
- -----------------------
(1) Please see the "Financial Statements" set forth in this Prospectus.
DISCLOSURE OF COMMISSION'S POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 13.1-697 and 13.1-702 of the Code of Virginia, as amended, permit
any Virginia Corporation to indemnify its directors and officers against
liability incurred in a proceeding if he conducted himself in good faith and
believed (a) in the case of conduct in his official capacity with the
Corporation that his conduct was in its best interests and (b) in all other
cases that his conduct was at least not opposed to its best interests. In the
case of a criminal proceeding, a Corporation may indemnify a director made party
to such proceeding if he had no reasonable cause to believe his conduct was
unlawful. A Corporation may not indemnify a director under those Sections in
connection with a proceeding by or in the right of the Corporation in which the
director was adjudged liable to the Corporation or in connection with any other
proceeding charging improper personal benefit to the director, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under those Sections in connection with a proceeding by or in the
right of the Corporation is limited to reasonable expenses incurred in
connection with the
23
<PAGE>
proceeding. Unless limited by its Articles of Incorporation, the Corporation is
required to provide mandatory indemnification to an officer or director who
entirely prevails in the defense of any proceeding to which he was a party
because he is or was an officer or director of the Corporation against
reasonable expenses incurred by him in connection with the proceeding. Also,
unless limited by the Corporation's Articles of Incorporation, an officer or
director of the Corporation who is a party to a proceeding may apply for
indemnification to the court conducting the proceeding or seek indemnification
in another court of competent jurisdiction. The court may order indemnification
if it determines the officer or director is entitled to mandatory
indemnification as described above, in which case the court shall also order the
Corporation to pay the officers, or directors' reasonable expenses incurred in
obtaining court-ordered indemnification, or, with respect to a proceeding by or
in the right of the Corporation, the officer or director is found by the court
to be fairly and reasonably entitled to indemnification in view of all the
relevant circumstances even though he was adjudged liable, but any
indemnifications shall be limited to reasonable expenses incurred. The
Corporation is given the power to make further indemnity to any officers or
directors that may be authorized by the Articles of Incorporation or any Bylaw
made by the stockholders or any resolution adopted, before or after the event,
by the stockholders, except an indemnity against gross negligence or willful
misconduct.
The Articles of Incorporation of Genesis Financial Group, Inc. provides
that the directors and officers of the Company may be indemnified in the manner,
against the matters, and to the full extent provided by the Code of Virginia.
The Company may purchase directors and officers insurance for such purposes.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities And Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. (See "RISK FACTORS - Limitations On Liability Of
Officers And Directors.")
DESCRIPTION OF THE SECURITIES
A. Notes. The Company intends to offer to Investors over a two (2) year
-----
period $7,500,000.00 in promissory notes ("Notes") at a fixed rate of interest
of 18% per annum amortized over a three and one-half (3 1/2) year period under
the rules and regulations of the Commission pursuant to an SB-1 offering. The
Notes will be payable on a monthly basis with the first installment of principal
and interest due and payable on the first day of the second calendar month
following the date of the Note if the Note is issued on any day other than the
first day of a month. If the Note is issued on the first day of a month, the
first installment of principal and interest will be due on the first day of the
following month. Except for the first monthly installment which may have
additional accrued interest depending upon the issue date of the Note, principal
and interest shall be payable in forty-one (41) equal monthly installments. The
remaining principal balance of each Note together with all accrued interest
shall
24
<PAGE>
be due and payable on the forty-second (42nd) installment. The Notes will
be unsecured and may be prepaid, in whole or in part, at any time without
penalty.
B. Indenture Provisions. The Notes are subject to the terms and
--------------------
provisions of the Indenture agreement appended hereto in Appendix "C". Pursuant
to the terms of the Indenture, a Trustee will be appointed whose
responsibilities will include protecting and enforcing the rights of the
Investors. The Indenture requires the Notes to be issued in proper form and
duly authenticated as the Company's authorized debt instrument. (See Section
2.02 of Indenture. All future section references will be to the Indenture.)
The Company is obligated to notify the Trustee in the event of a default by the
Company in making a scheduled payment and is required to segregate all funds
held for servicing its indebtedness under the Notes in a separate trust fund
(Section 2.04). In addition, the Company must notify the Trustee prior to
making any pre-payment on the Notes, whether in partial or full satisfaction
thereof (Section 3.01). If less than all the Notes outstanding are to be
prepaid, the Trustee and the Registrar (Section 2.03) will select the method of
prepayment and the Notes to be prepaid which must be fair and appropriate
(Section 3.02). Once the Notes to be prepaid are selected and the method of
prepayment determined, the funds are to be deposited and disbursed in accordance
with the terms of the Indenture (Section 3.03 through 3.06).
Restrictions on the Company's ability to incur additional debt secured by
its Restricted Property are incorporated to protect the Investors' investment by
limiting other potential claims to the Company's assets in the event of a
default or bankruptcy (Section 4.03). However, the Company may incur or assume
certain debt including purchase money indebtedness, existing debt on acquired
property, construction debt and debt that does not exceed 5% of Consolidated Net
Tangible Assets which is defined to mean the consolidated net worth of the
Company as determined under generally acceptable accounting principles (Sections
4.01 and 4.03). Restricted Property is defined to include Principal Property,
any debt of a Restricted Subsidiary and any shares of stock of a Restricted
Subsidiary, not owned or hereafter required by the Company or a Restricted
Subsidiary (Section 4.01). The Company currently has no Restricted Subsidiary
which is also defined in Section 4.01. Principal Property means any property
owned by the Company except such property deemed immaterial by the Board of
Directors to the total business conducted by the Company (Section 4.01). The
Company is also precluded from paying dividends or other distributions on
account of its capital stock, except stock distributions (Section 4.04), and is
required to maintain its corporate existence (Section 4.05) and Principal
Properties (Section 4.06). Copies of all SEC reports and other filings must be
submitted to the Trustee (Section 4.08) as well as an annual compliance
certificate affirming the Company's compliance with its covenants under the
Indenture (Section 4.10).
Events of default that would give Investors the right to accelerate all of
the indebtedness under the Notes are provided for in Section 6.01 and include
failure to pay an installment timely, breach of any covenant or condition in the
Indenture or Note and bankruptcy. The Company has the right to cure most
defaults before Investors can exercise their acceleration rights. Except for an
installment default, either the Trustee or Investors holding at least 25% of the
25
<PAGE>
principal amount of the outstanding indebtedness must notify the Company of a
default before the cure period commences and before a default can be enforced
(Section 6.01). Once any applicable cure period expires, either the Trustee or
Investors holding 25% of the debt can declare a default and accelerate the
indebtedness under the Notes. (Section 6.02). The Trustee must be allowed to
pursue any remedy available in the event of a default (Section 6.03). Only if
the Trustee fails to act after proper notice from Investors can the Investors
pursue any such remedy (Section 6.06). The Trustee has the right to be
indemnified for his actions prior to commencing any legal proceeding to enforce
the terms of the Notes and/or Indenture (Section 6.06(3)). Prior to making any
distributions to Investors, the Trustee has the right to offset from any funds
collected from the Company his compensation for services, if any, and all
expenses incurred in pursuing legal action. (Sections 6.10 and 7.07). The
Trustee's duties are more particularly described in Section 7.01.
The initial Trustee is Nancy C. Mattox. Ms. Mattox is the mother of
Jeffrey W. Akers, one of the Company's principals and is a noteholder of MCMI.
Management believes Ms. Mattox has the expertise and ability to fulfill all of
her duties as Trustee under the Indenture irrespective of the conflict of
interest inherent in her relationship with Mr. Akers. Ms. Mattox has over 30
years of administrative and management experience working with Norfolk Southern
Corporation in Roanoke, Virginia. The Company does not foresee any conflict of
interest in her being a noteholder of MCMI and the Trustee under the Indenture
since the Indenture, and her obligations thereunder, run to the Notes sold by
the Company not MCMI, and since the bulk of the revenues MCMI receives will come
from the sale of Contracts to the Company. In addition, the outstanding
indebtedness of MCMI to Ms. Mattox is only $8,500.00. (See "Certain
Relationships And Related Transactions"). It is unlikely that Ms. Mattox would
have sufficient financial resources available to satisfy any liability arising
from or in connection with any act or failure to act in her capacity as Trustee.
However, Investors holding a majority in principal amount of the Notes may
remove a Trustee at any time and may appoint a new Trustee with the Company's
consent (Section 7.08). Currently, no compensation of any kind will be paid to
Ms. Mattox for acting in such capacity. Further, the Company does not intend to
pay Ms. Mattox any compensation for her services. Ms. Mattox will be reimbursed
for any reasonable out of pocket expenses incurred in the performance of her
duties.
C. Solicitations and Commissions. Solicitations and sales of the Notes
-----------------------------
will be made by the principals and/or agents of the Company. The Company
anticipates paying commissions associated with this Offering on agents' sales
only. The principals of the Company will not receive any commissions or other
remuneration on the sale of Notes. Total estimated commissions would be
$375,000.00 assuming a 5% commission, a fully subscribed offering, and agent
solicitation only. Currently, the Company has no written or verbal agreement or
understanding with any brokerage firm or sales agent. The Company may retain
such services during this Offering and will use its best efforts in negotiating
a 5% commission rate. In the absence of such brokers-dealers, the two principals
of the Company, Jeffrey W. Akers and Franklin W. Blankemeyer, Jr., will conduct
such activities on behalf of the Company in reliance upon Rule 3 a 4-1
promulgated under the Exchange Act. The Company will issue a Note directly to
26
<PAGE>
an Investor upon receipt of a validly executed Subscription Letter, a copy of
which form is appended hereto in Appendix "B", collected funds in the face
amount of the Note, and any other document required by the Company for an
investment hereunder. A form Note is appended hereto in Appendix "A".
DESCRIPTION OF THE BUSINESS
A. Genesis Financial Group, Inc.
-----------------------------
The Company was incorporated on June 15, 1993, under the laws of the
Commonwealth of Virginia as an S Corporation under the Internal Revenue Code
("Code"). Effective January 1, 1997, the Company terminated its S Corporation
status and is now a C Corporation under the Code. The Company was formed
specifically to provide a ready funding source for Mr. Car Man, Inc. ("MCMI"), a
used car dealership and an Affiliate of the Company. The Company is 100% owned
by Jeffrey W. Akers and Franklin W. Blankemeyer, Jr. The principals in the
Company are the same as in MCMI. The Company has a minimal operating history to
date but anticipates capitalizing on a significant business opportunity by
actively participating as the financial arm of MCMI's business. As previously
discussed, the Company will purchase at a discount some or all of the Contracts
generated by MCMI from time to time upon the sale of its Automobiles. The
purchase price of a Contract purchased by the Company will usually be the face
value of the Contracts discounted between 25% and 50%.
MCMI's targeted market will primarily consist of those individuals who are
unable to obtain financing through traditional sources because of poor credit or
other salient risks, including, without limitation, divorce, medical
emergencies, and job loss ("Non-Prime Consumers"). Such customers are generally
deemed to be in a "high risk" classification by most conventional lenders giving
them little opportunity to reestablish their credit status and to redeem
themselves in the consumer market place. The Company will follow strict
guidelines before approving any such financing, including, without limitation,
reviewing credit reports and verifying employment and residence status. In
addition, the Company must be reasonably assured that the customer has the
ability to pay without adversely impacting the customer's standard of living.
The Company retains the right to review and revise its credit terms as and when
it deems necessary or appropriate under the circumstances. In addition, the
customer will have to meet these credit standards on two separate occasions
since both MCMI and the Company utilize the same credit review policies, and
since there is a time lag between the time a Contract is generated by MCMI and
offered for sale to the Company. Although strict adherence to these guidelines
will not prevent non-performance of every Contract, the Company reasonably
believes that having each customer go through the credit review process on two
separate occasions will reduce the exposure of the Company to customer defaults.
(See "RISK FACTORS"; "INVESTMENT HIGHLIGHTS"; and the "FINANCIAL STATEMENTS" in
this Prospectus.)
MCMI will assign and transfer to the Company all Contracts purchased by the
Company and the motor vehicle titles to the Automobiles covered by such
Contracts. The Company intends to use the bulk of the funds received from the
27
<PAGE>
sale of the Notes to Investors to purchase additional Contracts. MCMI will use
the funds it receives from the sale of its Contracts to Company to finance its
business operations including, without limitation, the replenishment of its
inventory. The Company anticipates a steady stream of Contracts since the
targeted customer base for MCMI will be comprised of individuals who are unable
to obtain financing through traditional or other sources. (See "USE OF PROCEEDS"
and "INVESTMENT HIGHLIGHTS.")
The Company will service all Contracts. Accordingly, the Company will
collect all payments due from the underlying customers, and fulfill any and all
obligations originally imposed upon and enforce all rights originally granted to
MCMI thereunder, including, without limitation, the commencement of collection
and/or repossession actions in the event a customer defaults. A majority of
repossessed cars will be auctioned or resold by the Company.
Although the Company will provide a funding source for MCMI's business
operations, it is not subject to any lending or consumer credit licensing
requirements under the laws of the Commonwealth of Virginia since it is an
Affiliate of MCMI and purchases the consumer Notes at a discount.
Pursuant to the closing costs set forth in items (a) through (c) and (e) in
the section captioned "Use Of Proceeds," the Company will have to sell a minimum
of 6 Notes at an average of $10,000.00 each to satisfy these obligations at
closing and before the Company will have excess funds to fund its working
capital account. The Company estimates that it will need to sell $3.0 million
in Notes over the twelve month period following the Effective Date to commence
its business operations. (See "RISK FACTORS - Minimum Sale Requirements.")
Upon the consummation of the Offering, Management believes the Company will
have sufficient revenues to meet its future operating needs for at least the
next six months. Accordingly, after the Offering is closed the Company may have
to seek additional capital or financing from time to time in the future.
The Company intends to purchase as many Contracts from MCMI as funds allow.
However, there is no written contractual agreement obligating MCMI to sell its
Contracts to Company. Management believes this is unnecessary since both
companies are owned by the same principals and since MCMI will be dependent upon
the Company to finance its business operations. No Contract will be originated
by MCMI or purchased by Company unless the underlying customer satisfies the
companies' credit requirements discussed herein. MCMI will retain certain
Contracts to satisfy its obligations to replace defaulted Contracts under its
previous private placement under Rule 504 of Regulation D of the Securities Act.
The Contracts which MCMI will retain as replacements for defaulted Contracts
sold to its investors will be those Contracts generated from the resale of the
same Automobile repossessed by MCMI when the customer defaulted under the
original Contract for that Automobile. If MCMI is unable, for whatever reason,
to resell the repossessed Automobile, the investor affected by such default is
paid in full. Contracts generated from the sale of new inventory will not be
used as replacement Contracts by MCMI but instead will be offered to the Company
for its purchase. Management does not anticipate the occurrence of any competing
28
<PAGE>
circumstances or conflicts of interest arising with respect to the Contracts
since MCMI will only use Contracts generated from the resale of repossessed
Automobiles for replacement purposes. Although there can be no guarantee that
MCMI will not participate in additional private or public placements of its
Contracts in the future since MCMI has no contractual obligation to sell its
Contracts to the Company, as long as both entities share common ownership and
management, Management intends to use the Company as MCMI's sole resource for
the placement of Contracts. (See "RISK FACTORS.") The Company does not use any
type or form of selection process in determining which Contracts it will
purchase once they arise; subject, however, to the availability of cash or other
resources for such purposes.
The Company intends to use the bulk of the proceeds received from the sale
of its Notes to fund the purchase of additional Contracts from MCMI. The
Company will generate revenues from the purchase of the Contracts as follows.
With interest on a Note at 18%, the Company retains the spread on each monthly
payment equal to the difference between the principal and interest installments
made by the customer under the Contract and the principal and interest
installments paid by the Company under the Note.
The Company will undertake to repossess an Automobile in the event a
customer defaults. All such repossessed Automobiles will be sold at auction or,
to the extent allowed by law, resold by the Company. The opportunity to resell
such Automobiles is also dependant upon the condition of the vehicle upon
repossession. There can be no guarantee that all repossessed Automobiles will be
in the same or similar condition as of the time of original sale.
Regarding the projected economic impact of the 25% repossession rate on the
Company, Investors should note that currently, and continuing until the Offering
is approved, repossessed Automobiles will be resold on MCMI's lot. This can be
accomplished since MCMI is currently a very small operation. This allows MCMI
to receive a much higher resale value and, concomitantly, a much lower bad debt
figure. However, after commencement of this Offering and after the Company and
MCMI start to grow, repossessed Automobiles will not be sold in this manner.
For the purpose of being conservative in its numbers, the Company has assumed
that it will sell the repossessed Automobiles at auction which is a less
efficient method for generating a resale return, thereby generating the bad debt
number shown in the financials.
The Company has indicated in this Prospectus that, even given the 25%
repossession rate, the projected revenues from operations will be sufficient to
meet its debt obligations, including obligations arising under the Notes. The
projections contained in this Prospectus are the Company's best efforts in
estimating what it reasonably expects to achieve. The projections were derived
from weeks of mathematical calculations of MCMI's monthly cash flows from all
sources and categorized into specific groups to arrive at the number needed for
the requirements of the projections.
B. Mr. Car Man, Inc.
-----------------
29
<PAGE>
Mr. Car Man, Inc. ("MCMI") is a Virginia corporation duly organized on June
15, 1993, as an S Corporation under the Code. MCMI began business on August 2,
1993, at which time it sold its first used vehicle. Franklin W. Blankemeyer,
Jr., and Jeffrey W. Akers own all the issued and outstanding stock of MCMI and
each play an integral part in the business operations of both companies. MCMI
presently has two locations in the City of Roanoke, Virginia.
MCMI has established its reputation through fresh marketing ideas, a strong
emphasis on customer service and a sound financial base. MCMI strives to focus
on its customers and their needs. In addition, MCMI believes it has implemented
the best service program for its customers. Currently, MCMI offers all
customers a service agreement based on dealer's cost. Such a program covers the
actual cost of all parts needed with labor under warranty currently charged at
$22.50 per hour. This service agreement continues as long as the Contract is
outstanding.
Prior to this Offering, MCMI successfully concluded a limited private
placement offering under Rule 504 of Regulation D of the Securities Act of 1933.
Through this offering, MCMI raised funds in excess of $950,000.00. MCMI targets
the higher risk, Non-Prime Consumer, since there is a tremendous market for this
type consumer. MCMI anticipates that the majority of the Contracts it generates
will be sold at a discount to the Company through which it will obtain the
financing it needs to replenish its inventory and meet its other operating
capital needs. MCMI will retain some Contracts from time to time to fulfill its
obligations to its previous investors under the 504 offering with respect to
defaulted Contracts. There is no written agreement between MCMI and the Company
obligating MCMI to sell its Contracts exclusively to the Company. However,
because of the commonality of ownership of the two companies, the success of the
companies' business operations will depend upon such an arrangement.
Accordingly, Management has no intention to deviate from this course of action.
A key element of MCMI's business plan is solidifying its source for capital
funding to maintain and satisfy its increasing demand for inventory. As MCMI
expands with additional lots, the demand for additional inventory will also
increase. Coupled with the historical growth in sales volume, MCMI's need for
capital will become of paramount importance. The principals foresaw this need
which precipitated the formation of the Company and the Offering. With the
affiliated status of both entities, MCMI will have an exclusive source in the
Company for marketing its Contracts. Having a ready buyer for its Contracts
will allow MCMI to replenish its inventory on an ongoing basis and continue
business operations. Through the Offering, the Company will have the funds to
purchase the Contracts as they are generated by MCMI. (See "DESCRIPTION OF THE
BUSINESS.")
Management believes MCMI has established a strong reputation in its market
area for providing good service and dependable Automobiles. In targeting the
Non-Prime Consumer, Management expects MCMI to increase its market share because
of the lack of dealers and finance companies competing for this consumer class.
(See "COMPETITION.")
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<PAGE>
Management anticipates achieving its principal goal of enhanced sales
volume through a number of initiatives. First, MCMI plans on implementing an
aggressive marketing campaign targeting the Non-Prime Market. Second,
Management intends to expand its business and market exposure by opening one new
car lot each year for the next two years. Additional inventory and sales staff
will be added to meet the increasing demand for Automobiles and to handle the
increase in customer traffic. Third, through MCMI's affiliation with the
Company, MCMI has an exclusive buyer for its Contracts, thereby converting its
accounts receivable into immediate cash. By maintaining a steady stream of cash
flow, MCMI will be able to replenish its inventory and meet its operating needs
of an ongoing basis which, in turn, reduces or eliminates MCMI's reliance on
future borrowings. Fourth, with a successful Offering by the Company, the
Company will have the capital it needs to fund the purchase of MCMI's Contracts
as they become available. This alleviates MCMI's dependence on outside sources
of financing to satisfy its capital requirements and to continue business
operations.
To remain competitive in the used car industry, MCMI must maintain
sufficient operating capital to replenish its inventory. This cannot be
accomplished if it finances the majority of its sales without the assistance of
a finance company. The Company provides a ready market for MCMI's "car paper"
(i.e., the Contracts), which generates the cash flow MCMI needs to satisfy its
ongoing capital requirements. With a successful Offering, the Company
anticipates it will have the capital reserves necessary to purchase MCMI's
Contracts on a continual basis. Management's long term goal is to establish: (i)
a market for MCMI's Contracts with large financial institutions, pension funds
and/or insurance companies; and/or (ii) sufficient lines of credit, thereby
reducing the need for individual investors.
Management will develop a new showroom concept which will be stimulating to
the eye as well as the ear. On display will be video monitors replaying segments
of movies and comedy stand-up routines, all of which poke fun or in some way
humorously relate to the car industry. Intermixed between these segments will be
portions of songs and other musical themes about cars, all being played through
a computerized sound system. Management will emphasize the car theme in
packaging this media by incorporating parts of cars into the display. For
example, a video monitor could be installed inside the headlight and grill
section of a '55 Chevy and hung from the ceiling. The car buying process then
truly becomes a captivating and entertaining experience. Psychological research
proves that humor lowers anxiety. By lowering a potential customer's anxiety
level, his level of trust rises which increases the chances of selling more
cars.
MCMI currently offers to its customers a five (5) day money back guarantee
and a bumper to bumper dealer cost warranty. If a customer does not like the
Automobile for any reason, MCMI will give the customer his down payment back
less mileage. With the warranty, which lasts for the full length of the financed
contract term, MCMI only charges the customer what MCMI paid for the part (no
markup). Labor under warranty is currently priced at $22.50 per hour. These
features are unmatched in MCMI's market area, and Management believes few if any
independent car companies offer these services in other regions of the United
States.
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<PAGE>
MCMI has implemented strict credit guidelines for its potential customers.
MCMI does not utilize loan-to-value ratios in determining credit worthiness.
Instead, it scrutinizes a customer's job retention, residence history, debt
service requirements, income potential and other similar factors. Because MCMI
targets the Non-Prime Consumer, standard loan-to-value ratios are not
emphasized.
COMPETITION
Since the Company intends to purchase all of its Contracts from its
Affiliate, MCMI, the Company has no direct competition for such Contracts.
However, if MCMI experiences a downturn in its business, becomes insolvent, or
goes out of business, or if the common ownership of the Company and MCMI should
change for whatever reason, the Company may be forced to pursue other
dealerships and/or consumer related businesses to continue its business
operations. In such event the Company could encounter significant competition
in its market area which competition could have an adverse impact on its
financial viability and business operations. (See "RISK FACTORS - Company's
Competition and Affiliation.")
Management estimates that MCMI has 5 major direct competitors in the Non-
Prime Market in its existing market area in Southwest Virginia which includes
Roanoke City, Salem City, Roanoke County, Botetourt County, Montgomery County
and the Town of Vinton. In addition, there are numerous new and used car
dealers in the market area in general. Because of the difficulties in
ascertaining the sales volume of its competitors, Management is not able to
determine its percentage share of the used car market at this time.
The Non-Prime Market is very fragmented and highly competitive. Despite
significant opportunities, many financial entities, such as banks, savings and
loans, credit unions, captive finance companies, and leasing companies, do not
consistently provide financing to this market. These organizations, which have
consistently serviced the automobile finance business, have migrated toward
higher credit quality consumers. The entities which do provide consistent
financing for Non-Prime Consumers can be broken into two primary categories:
(i) publicly traded specialty automobile finance companies; and (ii) dealers who
provide financing programs directly to the consumer. The remainder is comprised
of smaller finance organizations that solicit business when their capital
resources permit.
Due to the fact that specialty finance companies must compete with one
another for each car dealer's business, the Company believes it has a
significant advantage because MCMI will sell its Contracts exclusively to the
Company. The dealer who finances his own vehicles and does not sell off his
contracts finds himself at a disadvantage due to the substantial amount of
capital that the car/finance business requires. These dealers typically do not
have large resources of capital and typically sell their vehicles AS/IS without
offering any kind of extended service warranty.
Because of its affiliation with the Company, MCMI anticipates having
sufficient capital to implement fresh marketing ideas, provide for a clean
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<PAGE>
atmosphere and retain friendly sales associates which, in turn, will separate it
from its competitors. MCMI's dedication to the customer, its exclusive bumper to
bumper warranty (which is a dealer cost warranty and lasts for the entire term
of the Contract) and its five day money back guarantee will help MCMI, and
therefore the Company, to prosper in this large and growing segment of the
industry. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "DESCRIPTION OF THE BUSINESS.")
EMPLOYEES
Currently, the Company and MCMI have eight (8) employees in addition to the
two (2) principals who are full-time employees. There are no employment
agreements or other similar arrangements with the employees. None of the
employees are currently covered by collective bargaining agreements. Management
for both corporations believes that its employee relations are satisfactory.
(See "MANAGEMENT.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
I. Genesis Financial Group, Inc.
-----------------------------
A. Operating History. The Company has a minimal operating history to
-----------------
date. Although the Company and MCMI were incorporated at the same time, the
principals of the Company realized that they had to concentrate exclusively on
building MCMI's business in the initial years to generate the customer base and
sales volume needed to support the financing arm of their used car business. The
principals have successfully completed this part of their business plan and now
seek to expand their business to incorporate the credit side of the used car
industry. By providing customers with well-maintained used cars and favorable
credit terms not readily available elsewhere, Management believes the Company
and MCMI will become firmly entrenched in its market area. Through the Offering,
the Company should become sufficiently capitalized to maintain its market niche.
B. Liquidity and Capital Resources. Although the Company currently has
-------------------------------
no lines of credit and the availability of credit in the foreseeable future is
uncertain, Management believes that the Company will be able to meet its future
obligations after the Offering through internally generated funds, primarily the
collection of payments due and owing under the Contracts, and/or externally
generated funds. However, there is no assurance that such collections will be
sufficient to: (i) cover all future obligations of the Company; (ii) purchase
Contracts as they arise; and/or (iii) meet the operating needs of MCMI. Under
such circumstances, the Company may have to seek additional sources of financing
and/or credit which it may not be able to obtain or which may be available only
33
<PAGE>
on unfavorable terms.
The Company will generate revenues from the purchase of Contracts in the
following manner. If the Company sells a Note for $5,000.00 and uses the
proceeds to purchase a Contract having a principal indebtedness of $8,000.00
(the discounted purchase price) and an interest rate of 20%, the Company will
retain the spread on each monthly payment equal to the difference between the
principal and interest installments made by the customer under the Contract and
the principal and interest installments paid by the Company under the Note.
C. Purchase of Contracts from MCMI. The Company was formed to be the
-------------------------------
financing arm for the principals' used car business conducted by MCMI. Although
the two companies are owned by the same principals and will rely significantly
on the successful operations of each other, the companies will operate as
separate and distinct entities. MCMI has been successfully operating on its own
since its inception. The Company intends to utilize the funds raised from the
sale of the Notes to purchase additional Contracts from MCMI as they become
available. The Company will purchase such Contracts at a discount of the
original face value. (See "DESCRIPTION OF THE SECURITIES.")
D. Source of Revenues. As aforementioned, the Company anticipates
------------------
generating the revenues it will need to satisfy its operational needs, including
the payment of normal operating costs, such as utilities, rent, payroll, bad
debt, repossession costs, debt services, etc., from the sale of its Notes and
through the excess funds generated from customer payments under the Contracts.
(See "DESCRIPTION OF THE BUSINESS" and "DESCRIPTION OF THE SECURITIES.")
Investment and similar income will also be available for such purposes. The
Company intends to sell the Notes as Contracts arise from MCMI's business
operations. Accordingly, as a general rule, the Company will not incur the debt
under the Notes until such time as Contracts become available.
E. Factors Affecting Operations. Currently, the Company will rely
----------------------------
exclusively on MCMI to generate the Contracts. If MCMI's volume of business
should become stagnant or decrease, or if it should become insolvent, the
Company would have to find other sources for such Contracts to continue its
business operations. See the section captioned "RISK FACTORS" for a more
detailed discussion of the various risks involved regarding the affiliation of
MCMI and the Company and the proposed business operations of both entities. In
addition, a significant change in the local economy, such as a loss of a major
employer, could also adversely impact the Company's business operations if the
jobs lost have an inordinate impact on the Non-Prime Consumer workforce. In
addition, an increase in interest rates could also impact the Company's
viability; however, the Company would not anticipate a significant impact on
MCMI's business since the bulk of the Contracts represent the Non-Prime Consumer
who, because of his status, is accustomed to paying higher interest rates. Such
changes could affect the marketability of the Notes to Investors by reducing
their return on borrowed funds used to purchase the Notes or by rendering their
investment return less competitive in light of current market rates. (See "RISK
FACTORS.")
F. Projections. Management is optimistic about the business
-----------
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opportunities available to the Company and MCMI in the Non-Prime Market. Based
upon the growth of MCMI since its inception, Management believes the Company
will experience continuous growth as the number of Contracts generated by MCMI
increases. The Company's growth and profitability are inextricably interrelated
with MCMI's. See the sections captioned "INVESTMENT HIGHLIGHTS" and
"DESCRIPTION OF THE BUSINESS" for a more detailed description of the business
operations of the Company and MCMI.
PROPERTIES
The following table describes the principal office and business locations
of the Company and MCMI and the monthly rental as of December 31, 1996:
<TABLE>
<CAPTION>
Location Description Rent/Month
- -------- ----------- ----------
<S> <C> <C>
3733 Williamson Road Service and Collections Lot/1/ $1,326
Roanoke, Virginia
4206 Williamson Road Sales Lot and Executive and $1,650
Roanoke, Virginia Administrative Offices for MCMI and the Company/2/
</TABLE>
Management projects to open an additional car lot per year for each of the next
three years. Rental projections are based on lease rates that are comparable to
existing lease agreements.
- ---------------
/1/ Leased (term expires July 31, 1998; no renewal option)
/2/ Leased (term expires August 31, 1997; unlimited one year renewal options)
LEGAL PROCEEDINGS
Currently, neither Company nor MCMI is a party to any legal proceeding.
Although there have been no such proceedings to date, there is no guarantee that
such proceedings will not arise in the future in the ordinary course of
business, especially with respect to collection efforts necessitated by customer
defaults.
35
<PAGE>
MANAGEMENT
A. Directors
---------
The table below sets forth the name, age, and position of the Company's and
MCMI's Directors:
<TABLE>
<CAPTION>
Directors
- ---------
Name Age Position/Status
---- --- ---------------
<S> <C> <C>
Franklin W. Blankemeyer, Jr. 33 Director; 50% Shareholder
Jeffrey W. Akers 33 Director; 50% Shareholder
</TABLE>
Messrs. Blankemeyer and Akers are the sole shareholders and directors of MCMI
and the Company and are serving terms that will expire at the date of the annual
shareholders' meeting in 1997.
B. Officers
--------
The table below sets forth the name, age and position of the Company's and
MCMI's executive officers:
<TABLE>
<CAPTION>
Name Age Position/Status
---- --- ---------------
<S> <C> <C>
Franklin W. Blankemeyer, Jr. 33 President and Secretary
Jeffrey W. Akers 33 Vice-President and Treasurer
</TABLE>
C. Biographies of Directors and Officers
-------------------------------------
Franklin W. Blankemeyer, Jr. Mr. Franklin W. Blankemeyer, Jr., co-founder and
----------------------------
Director of the Company and MCMI, has served as the President and Secretary for
both companies since June 1993. Prior to founding the Company, Mr. Blankemeyer
was employed by Valleydale Foods, Inc. and Valleydale Packers, Inc.
(collectively "Valleydale") and served as plant manager of Valleydale's Salem,
Virginia, sales/production facility directing the efforts of 225 employees.
Valleydale had annual sales of $40,000,000. Mr. Blankemeyer was with both
companies for a total of 8 years. Mr. Blankemeyer also served as program
director for Southwestern Virginia's International Trade Association during his
employment at Valleydale Packers, Inc. Mr. Blankemeyer graduated from Hampden-
Sydney College in 1986, cum laude, with a B.S. in Economics.
Jeffrey W. Akers. Mr. Jeffrey W. Akers graduated from Virginia Tech in 1987
----------------
with a B. S. in Civil Engineering. He worked at Richard L. Williams Consulting
Engineers as a Project Structural Engineer for three years designing small to
medium sized commercial buildings before turning to the field of finance and
investments. After two years serving as a Financial Consultant and a training
manager for IDS Financial Services (now American Express Financial Advisors)
36
<PAGE>
where he qualified for the Mercury Award, presented to the top 20% performers,
he founded the Company and MCMI with Franklin Blankemeyer. Mr. Akers is
currently a Director and the Vice-President and Treasurer of both companies.
D. Executive Compensation
----------------------
Compensation of Directors. Neither the Company's nor MCMI's Board of
-------------------------
Directors receive any compensation or remuneration of any kind.
The following table sets forth the aggregate annual compensation of the
executive officers of MCMI and the Company for the last fiscal year:
<TABLE>
<CAPTION>
Principal Salary/Other Annual
Name of Officer Position Year Distributions/1/ Compensation
- --------------- -------- ---- ---------------- ------------
<S> <C> <C> <C> <C>
Franklin W. President/ 1996 56,472.00 NONE
Blankemeyer, Jr. Secretary
Jeffrey W. Akers Vice- 1996 56,472.00 NONE
President/
Treasurer
</TABLE>
(1) The two principal officers received stockholder distributions in the
amount of $56,472.00 each during 1996. No bonuses were paid during
this time. The Company anticipates implementing a monthly salary in
the amount of $2,000.00 for the two principals commencing in 1997, in
addition to stockholder distributions.
(2) Neither officer received any other compensation or benefit of any kind
during 1996.
Cash Incentive Compensation. At the present time there is no management
---------------------------
incentive plan or any other type of remuneration or compensation plan
benefitting solely the executive officers of MCMI or the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the common stock of the Company as of the Effective Date, (i) by
each director and officer, (ii) by each person known by the Company to be the
beneficial owner of ten percent or more of the outstanding shares of common
stock of the Company, and (iii) by all directors and officers as a group.
37
<PAGE>
<TABLE>
Name and Address Number of Shares Percent of
- ---------------- Beneficially ----------
------------ Class
Owned -----
-----
<S> <C> <C>
Franklin W. 10 50%
Blankemeyer, Jr.
P.O. Box 21264
Roanoke, Virginia
24018
Jeffrey W. Akers 10 50%
505 24th Street, S.W.
Roanoke, Virginia
24014
Directors and Officers 20 100%
as a Group (2 persons)
Franklin W.
Blankemeyer, Jr.
P.O. Box 21264
Roanoke, Virginia
24018
Jeffrey W. Akers
505 24th Street, S.W.
Roanoke, Virginia
24014
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as specified herein, there are no transactions involving the Company or
MCMI in which any director, officer, or shareholder or their spouses or other
relatives, have had or will have a direct or indirect material interest. Mr.
Blankemeyer's father and Mr. Akers' mother are current noteholders of MCMI which
notes and terms are more particularly described below:
<TABLE>
<CAPTION>
Payee Original Date of Interest Monthly Terms Balance
Amount Note Rate Payment 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Mr. Franklin W. 49,500 variable 7% int. Demand 49,500
Blankemeyer, Sr. accrues
60,961 3/4/94 7% int. Demand 60,961
accrues
15,000 4/5/95 15% int. 24 mos. 9,677
accrues
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Mr. Franklin W. 12,681 variable 0% N/A Demand 12,681
Blankemeyer, Sr.
Ms. Nancy Mattox 20,000 11/3/93 7% $396 60 mos. 8,500
</TABLE>
In addition, Mr. Akers' father is employed by MCMI on a full time basis. Mr.
Frank Akers' salary is based entirely on commission and averages $35,000.00 per
year.
Currently, Jeffrey W. Akers is indebted to MCMI in the amount of $4,850.00
representing a cash advance. The debt is evidenced by an unsecured, non-
interest` bearing demand note.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Magee, Foster, Goldstein & Sayers, P.C.
EXPERTS
The audited financial statements of Genesis Financial Group, Inc., as of
December 31, 1996 and 1995, and for the periods then ended included in this
Prospectus have been so included in reliance on the report and authority of Hope
Player And Associates, P.C., an expert in auditing and accounting.
[Balance of this page intentionally left blank.]
GLOSSARY
The following are definitions of certain capitalized terms used in this
Prospectus:
Affiliate - an affiliate of, or person affiliated with, a specified person
shall mean a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control with the
persons
39
<PAGE>
specified.
Automobiles - the used cars, vans, light trucks and other vehicles sold by
MCMI from time to time.
Code - the Internal Revenue Code of 1986, as amended.
Commission - the Securities And Exchange Commission.
Company - Genesis Financial Group, Inc., a Virginia corporation.
Contracts - the Installment Sales Contracts originated by MCMI during the
normal course of its business operations of selling Automobiles to the general
public, specifically the Non-Prime Consumer.
Effective Date - the date upon which the registration statement, of which this
Prospectus is a part, registering the Notes and filed with the SEC on behalf of
the Company is declared effective by the staff of the Commission.
Exchange Act - The Securities Exchange Act of 1934, as amended.
Investor(s) - a purchaser of a Note offered by the Company pursuant to the
Offering.
Management - Messrs. Franklin W. Blankemeyer, Jr., and Jeffrey W. Akers.
MCMI - Mr. Car Man, Inc., a Virginia corporation.
Non-Prime Consumer - an Automobile buyer with limited access to traditional
sources of consumer credit.
Non-Prime Market - the automobile finance market for Non-Prime Consumers.
Notes - the $7.5 million of corporate promissory notes offered by the Company
to Investors pursuant to the Offering.
Offering - the offer for sale to Investors by the Company of up to
$7,500,000.00 in Notes for the purpose of raising, in the aggregate,
$7,500,000.00 in capital which Offering is registered with the Commission on
form SB-1.
Prospectus - the offering document delivered to Investors interested in
purchasing the Notes.
Securities Act - The Securities Act of 1933, as amended.
40
<PAGE>
FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Comparative Financial Statements for
Genesis Financial Group, Inc.
Comparative Balance Sheets for Genesis Financial Group, Inc. as of
December 31, 1993, 1994, 1995, 1996 and October 31, 1997 F-1
Comparative Income Statements for Genesis Financial Group, Inc.
for periods ended December 31, 1993, 1994, 1995, 1996 and
October 31, 1997 F-2
Audited Financial Statements of Genesis Financial Group, Inc.
December 31, 1995 and 1996 F-3
Report of Independent Auditors F-4
Balance Sheets as of December 31, 1995 and 1996 F-5
Statements of Income and Retained Earnings
for years ended December 31, 1995 and 1996 F-6
Statements of Cash Flows for years ended December 31, 1995 and 1996 F-7
Notes to Financial Statements F-8
Projected Financial Statements
Projected Balance Sheets for Genesis Financial Group, Inc. as of
Years One and Two F-9
Projected Income Statements for Genesis Financial Group, Inc.
for the Periods Ended Years One and Two F-10
Summary of Significant Projected Assumptions
for Genesis Financial Group, Inc. Years One and Two F-11
</TABLE>
41
<PAGE>
GENESIS FINANCIAL GROUP, INC.
COMPARATIVE BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
October 31,
1993 1994 1995 1996 1997
UNAUDITED UNAUDITED AUDITED AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Assets
------
Current assets
Cash $ 50 - - - -
-------- --------- ---------- ---------- ---------
Total current assets 50 - - - -
Organization costs, net 401 315 229 143 78
-------- --------- ---------- ---------- ---------
Total assets 451 315 229 143 78
======== ========= ========== ========== =========
Liabilities and Stockholders' Equity
------------------------------------
Loans from stockholders 9,224 9,174 9,174 11,600 11,600
Stockholders' equity
Common stock, no par value,
20 shares issued and 100
shares authorized 2,000 2,000 2,000 2,000 2,000
Retained earnings (10,773) (10,859) (10,945) (13,457) (13,522)
-------- -------- --------- --------- --------
(8,773) (8,859) (8,945) (11,457) (11,522)
-------- -------- --------- --------- --------
Total liabilities and
stockholders' equity $ 451 315 229 143 78
======== ======== ========= ========= ========
</TABLE>
F-1
<PAGE>
GENESIS FINANCIAL GROUP, INC.
COMPARATIVE INCOME STATEMENTS
PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
October 31,
1993 1994 1995 1996 1997
UNAUDITED UNAUDITED AUDITED AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Revenues, net $ - - - - -
Expenses
Advertising 566 - - 2,000 -
Education 8,066 - - - -
Supplies 470 - - - -
Telephone 731 - - 376 -
Miscellaneous 789 - - 50 -
Meals 122 - - - -
Amortization 29 86 86 86 65
------- --- --- ------ ---
Total expenses 10,773 86 86 2,512 65
------- --- --- ------ ---
Net loss $(10,773) (86) (86) (2,512) (65)
======= === === ====== ===
</TABLE>
F-2
<PAGE>
GENESIS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(With Independent Auditors' Report)
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Genesis Financial Group, Inc.
We have audited the accompanying balance sheet of Genesis Financial Group, Inc.
as of December 31, 1995 and 1996, and the related statements of income and
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genesis Financial Group, Inc.
as of December 31, 1995 and 1996, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
HOPE PLAYER AND ASSOCIATES, P.C.
Roanoke, Virginia
March 6, 1997
F-4
<PAGE>
GENESIS FINANCIAL GROUP, INC.
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Assets
------
Current assets
Cash $ - -
------- -------
Total current assets - -
Organization costs, net 229 143
------- -------
Total assets 229 143
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Loans from stockholders 9,174 11,600
Stockholders' equity
Common stock, no par value, 20 shares
issued and 100 shares authorized 2,000 2,000
Retained earnings (10,945) (13,437)
------- -------
(8,945) (11,457)
------- -------
Total liabilities and
stockholders' equity $ 229 143
======= =======
</TABLE>
The notes to financial statements are an integral part of these statements.
F-5
<PAGE>
GENESIS FINANCIAL GROUP, INC.
Statements of Income and Retained Earnings
Years Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Revenues, net $ - -
Expenses
Advertising - 2,000
Education - -
Supplies - -
Telephone - 376
Miscellaneous - 50
Meals - -
Amortization 86 86
-------- --------
Total expenses 86 2,512
-------- --------
Net loss (86) (2,512)
Retained earnings, beginning (10,859) (10,945)
-------- --------
Retained earnings, ending $(10,945) (13,457)
======== ========
</TABLE>
The notes to financial statements are an integral part of these statements.
F-6
<PAGE>
GENESIS FINANCIAL GROUP, INC.
Statements of Cash Flows
Years Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (86) (2,512)
Adjustment to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 86 86
---- -----
Net cash provided (used) by operating activities - (2,426)
Cash provide by financing activities
Increase in loans from stockholders - 2,426
---- -----
Cash at beginning of year - -
---- -----
Cash at end of year $ - -
==== =====
</TABLE>
The notes to financial statements are an integral part of these statements.
F-7
<PAGE>
GENESIS FINANCIAL GROUP, INC.
Notes to Financial Statements
December 31, 1995 and 1996
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Genesis Financial Group, Inc. (Genesis) was formed to provide
centralized funding, receivables, management, and collection services
for installment sales contracts originated by Mr. Car Man, Inc. (MCMI),
an affiliated company, from the sale of used automobiles, van, light
trucks and other vehicles. MCMI sells used automobiles to individuals in
the Roanoke, Virginia area who have limited access to traditional
sources of consumer credit. As of the date of these financial
statements, Genesis has a limited operating history.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
unrestricted highly liquefied investments with an initial maturity of
three months or less to be cash equivalents.
Income Taxes
------------
The Company had originally elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code. Under those provisions,
Genesis does not pay federal corporate income taxes on its taxable
income. Instead the stockholders are liable for individual federal
income taxes on their respective shares of the Company's profits.
Effective January 1, 1997, the Company terminated its S Corporation
status and is now a C Corporation.
Note 2. RELATED PARTY TRANSACTIONS
Notes payable to stockholders as of December 31, 1995 and 1996
represents amounts advanced by stockholders to fund initial working
capital requirements. The loans are due on demand and bear no interest.
F-8
<PAGE>
GENESIS FINANCIAL GROUP, INC.
PROJECTED BALANCE SHEETS
YEARS ONE AND TWO
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, YEAR YEAR
1997 ONE TWO
----------- ---- ----
<S> <C> <C> <C>
Assets
------
Current assets
Cash $ - 76,602 375,512
Accounts receivable - 2,773,941 6,359,626
Reserve for bad debts - (134,936) (404,801)
---------- ---------- ----------
Total current assets - 2,715,607 6,330,337
Fixed assets, net - - 20,000
Organization costs, net 78 - -
---------- ---------- ----------
Total assets 78 2,715,607 6,350,337
========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Long-term debt 11,600 2,644,109 5,865,236
Stockholders' Equity
Common stock no par value, 20 shares
issued and 100 shares authorized 2,000 2,000 2,000
Retained earnings (deficit) (13,522) 69,490 483,101
---------- ---------- ----------
(11,522) 71,490 485,101
---------- ---------- ----------
Total liabilities and Stockholders'
Equity $ 78 2,715,607 6,350,337
========== ========== ==========
</TABLE>
(See Summary of Significant Assumptions)
F-9
<PAGE>
GENESIS FINANCIAL GROUP, INC.
PROJECTED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, YEAR YEAR
1997 ONE TWO
<S> <C> <C> <C>
Revenues, net $ - 682,821 2,071,437
Interest expense - 176,468 681,181
------ ------- ---------
Gross profit - 506,353 1,390,256
Expenses
Bad debt - 134,936 269,864
Other expenses 65 255,856 453,707
------ ------- ---------
Total expenses 65 390,792 723,571
------ ------- ---------
Income (loss) before taxes (65) 115,560 666,685
Income taxes - 32,548 253,074
------ ------- ---------
Net income (loss) $ (65) 83,012 413,611
====== ======= =========
</TABLE>
(See Summary of Significant Assumptions)
F-10
<PAGE>
GENESIS FINANCIAL GROUP, INC.
SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS
YEARS ONE AND TWO
The financial projection is based on subscribing an offering of $7.5 million
in promissory notes by the end of year two, and presents to the best of
management's knowledge and belief, a summary of the Company's expected results
of operations and changes in financial position for the projection period, if
such funds are obtained. Accordingly, the projection reflects its judgement, as
of November 3, 1997, the date of this projection, of the expected conditions and
its expected course of action if the financing were obtained. The presentation
is designed to provide information to potential lenders and investors
concerning results if the funds were obtained and should not be considered to
be a presentation of expected future results. Accordingly, this presentation may
not be useful for other purposes. The assumptions disclosed herein are those
management believes are significant to the projections. Even if funds are
obtained, there will usually be differences between projected and actual
results, because events and circumstances frequently do not occur as expected
and those differences may be material.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Genesis Financial Group, Inc. (Genesis) was formed to provide centralized
funding, receivables, management, and collection services for installment sales
contracts originated by Mr. Car Man, Inc. (MCMI), an affiliated company, from
the sale of used automobiles, vans, light trucks and other vehicles. MCMI sells
used automobiles to individuals in the Roanoke, Virginia area who have limited
access to traditional sources of consumer credit. As of the date of these
financial statements, Genesis has a limited operating history.
Income Taxes
- ------------
The Company had originally elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code. Under those provisions, Genesis does
not pay federal corporate income taxes on its taxable income. Instead the
stockholders are liable for individual federal income taxes on their respective
shares of the Company's profits. Effective January 1,1997, the Company
terminated its S Corporation status and is now a C Corporation.
F-11
<PAGE>
GENESIS FINANCIAL GROUP, INC.
SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS
YEARS ONE AND TWO
(Continued)
SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS
Note A. REVENUES
The Company expects to purchase installment sales contracts
from its affiliated company, Mr. Car Man, Inc. (MCMI) in
amounts of $3,000,000 and $4,500,000, in years one and two,
respectively. Interest income will be recorded as revenue as
earned, and other revenues will be recognized as received. The
Company has projected these levels of purchases relying on the
ability of MCMI to maintain sales growth at historic levels.
These projected volumes will generate the sales contracts to be
available for purchase. Interest income will be recorded as
revenue as earned, and other revenues will be recognized as
collected.
Note B. FIXED ASSETS
In year two, management plans to establish a separate office
for the Company operations. Depreciation expense is calculated
based on the assets estimated useful life of five years.
Note C. NOTES PAYABLE
The notes payable are anticipated to be subscribed over years
one and two, in the amounts of $3,000,000 and $4,500,000,
respectively. These projections include interest expense
calculations based on an 18% interest rate, assuming an equal
amount of new notes on a monthly basis, with the first payment
to be made in the first month following the issuance of the
notes.
Note D. BAD DEBT EXPENSE
The projection of bad debt expense is based on a weighted
percentage of projected aged receivable balances. These
calculations consider the assumptions that there is a (i) 25%
default rate on all contracts purchased from MCMI, (ii) as well
as 5% casualty rate. It should be noted that in a majority of
cases, casualty claims will be fully covered by insurance. To
minimize losses from default, management intends to sell
repossessions at auction to generate funds.
F-12
<PAGE>
GENESIS FINANCIAL GROUP, INC.
SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS
YEARS ONE AND TWO
(Continued)
SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS (CONTINUED)
Note E. OTHER EXPENSES
The Company will become fully operational in year one upon receipt of
initial funds under the offerings of $7.5 million in notes. Other
operating expenses are summarized as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ONE TWO
--- ---
<S> <C> <C>
Personnel 60,000 120,000
Occupancy - 12,000
Legal and professional 10,000 15,000
Collection costs 12,770 39,400
Commissions 150,000 225,000
Other operating 23,086 42,307
------- -------
255,856 453,707
======= =======
</TABLE>
Note F. INCOME TAX
State and federal income taxes are calculated at current tax rates,
and are assumed to be paid during the year for each of the years
presented.
F-13
<PAGE>
APPENDIX "A"
Promissory Note
---------------
A-1
<PAGE>
PROMISSORY NOTE
---------------
$_____________ Roanoke, Virginia Date: __________, 199__
FOR VALUE RECEIVED, Genesis Financial Group, Inc., a Virginia corporation,
promises to pay, without offset, to the order of ______________________
("Payee") the principal sum of ____________ Dollars ($___________________)
together with interest on the unpaid balance from time to time remaining at the
annual rate of eighteen percent (18%). Principal and interest shall be due and
payable in equal monthly installments, commencing ____________, 199__ and on the
first day of each month thereafter until _______________, _____, when the entire
aggregate principal amount and accrued but unpaid interest shall be due and
payable. Notwithstanding the foregoing, the initial installment of principal and
interest may be different to reflect the additional interest that may accrue
before the initial payment is due.
Interest shall accrue on a 30/360 day basis. Each payment shall be applied
first to interest then accrued, and the balance shall be credited to principal.
Principal and interest are payable at such place as the holder hereof may
designate in writing.
If any payment herein provided for is not made within ten (10) days of the
date when due, then before having recourse with respect to such nonpayment, the
holder hereof shall give notice to the maker hereof of such nonpayment, and if
the delinquent payment specified in such notice is not made within thirty (30)
days of the effective date of such notice then the entire, unpaid principal sum
evidenced by this note and all accrued, but unpaid interest shall at the option
of the holder become immediately due and payable. No failure of the holder to
exercise the right of accelerating the maturity of this indebtedness and no
indulgence or forbearance granted from time to time shall be construed as a
waiver of such right of acceleration or estop the holder from exercising such
right at any time.
Any notice required or desired to be given hereunder shall be in writing
and shall be delivered by hand, or by U. S. certified mail and shall be properly
addressed with sufficient postage delivery charge prepaid as follows:
If to maker: Genesis Financial Group, Inc.
c/o Jeffrey W. Akers
4206 Williamson Road
Roanoke, Virginia 24012
If to holder: ________________________________
________________________________
________________________________
<PAGE>
Any such notice shall be effective when actually received by the party to whom
addressed. Either party may change its effective address by notice to that
effect to the other party.
Notwithstanding any other provision of this note to the contrary, the holder
hereof or his assignee or transferee or any other person from time to time
entitled to receive payment hereunder, as the case may be, shall look solely to
the assets of the maker of this note, both real and personal, in satisfaction of
each and every obligation hereunder; in no event shall the officers or directors
of maker have personal liability with respect to this obligation or any other
obligation of maker.
The maker and endorsers, guarantors and others from time to time obligated
hereunder hereby severally waive and renounce the benefit of homestead and all
other exemption rights as against this indebtedness or any renewal or extension
hereof; and further waive demand, protest, notice of protest, presentment for
payment, notice of dishonor and all defenses on the ground of extension of time
for payment hereof.
The maker hereof reserves the right to prepay the indebtedness evidenced
hereby, in whole or in part, at any time or from time to time without penalty.
Notwithstanding anything herein to the contrary, this Note shall be subject
to the terms and conditions set forth in that certain Indenture issued to the
Payee hereof to which Indenture reference is hereby made for a more detailed
explanation of the additional obligations and responsibilities of the maker
hereof and the additional rights of the holder.
This note shall be governed and construed in all respects and enforced
according to the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the undersigned has caused this note to be executed as
of the day and year first above set forth.
Genesis Financial Group, Inc.,
a Virginia Corporation
By: _______________________________
Its: ______________________________
<PAGE>
APPENDIX "B"
Subscription Letter
-------------------
B-1
<PAGE>
SUBSCRIPTION LETTER
-------------------
<TABLE>
<S> <C> <C>
Genesis Financial Group Total Offering: $7,500,000
4206 Williamson Road
Roanoke, Virginia 24012 Type of Investment 3 1/2 Year
Offered: Promissory
Notes
Initial Minimum
Investment: $10,000.00
Total Investment: $____________
Commencement Date
of Offering: July ___, 1997
</TABLE>
Gentlemen:
This letter is furnished to Genesis Financial Group, a Virginia
corporation, ("Corporation"), in connection with the investment by the
undersigned on this date in the amount shown above for the acquisition of one or
more unsecured corporate promissory notes amortized over a three and one-half (3
1/2) year period at 18% per annum. In conjunction herewith, the undersigned
hereby delivers his check, payable to the Corporation, in the amount equal to
the total investment shown above.
The undersigned hereby understands that the Notes have been registered
under the Securities Act of 1933 ("1933 Act") and that the Corporation reserves
the right, in its sole discretion, to reject any subscription at any time. The
Corporation intends to sell to investors up to $7,500,000.00 in Notes. If not
sooner terminated by the Corporation, this offering will terminate on the second
anniversary date of the Effective Date of the Registration Statement. The
undersigned understands there is no minimum offering amount required to be
received before the Corporation may fully utilize the undersigned's funds. In
conjunction with the offering, the undersigned agrees to execute the Power of
Attorney form delivered with this Letter.
Nature, Type And Return On Investment
- -------------------------------------
The undersigned understands that the Corporation is in the business of
purchasing at a discount some or all of the Retail Installment Sales Contracts
("Contracts") generated by its affiliate, Mr. Car Man, Inc. ("MCMI"), from time
to time as they arise during the course of its normal business operations of
selling used vehicles.
B-2
<PAGE>
The initial minimum investment is one Note for $10,000.00. Thereafter, the
undersigned may purchase additional Notes in increments of $2,500.00. Interest
shall accrue at the rate of 18% per annum, and the Notes shall be amortized on a
3 1/2 year basis. Principal and interest shall be payable on a monthly basis as
provided for in the Notes.
The undersigned acknowledges and understands that the Notes are unsecured
and that the success of the Corporation's business depends upon the creation by
MCMI of new sale transactions on a continual basis. The Corporation reserves the
right at any time and from time to time to prepay, in whole or in part, any Note
without penalty.
Indenture
- ---------
The Notes offered by the Corporation will be issued pursuant to and subject
to the terms of that certain Indenture agreement executed by the Corporation in
conjunction with this offering. The Indenture is required under the Trust
Indenture Act of 1939 and imposes additional obligations on the Corporation in
issuing the Notes and servicing its debt obligations thereunder. A copy of the
Indenture will be provided to each investor to which document reference is
hereby made.
Receipt And Review Of Information
- ---------------------------------
The undersigned acknowledges receipt of the Corporation's Prospectus filed
with the Securities And Exchange Commission, a copy of the form Note, a copy of
the Indenture, and a Subscriber Information Schedule ("Schedule"). In addition,
the undersigned hereby acknowledges that he, or his investment advisor, has had
the opportunity to ask questions of the Corporation's and MCMI's officers and
receive and review all information and documentation requested pertaining to the
officers, the Corporation and MCMI. The undersigned represents that he and/or
his investment advisor: (i) is familiar with the financial condition of the
Corporation and MCMI and the proposed business activities of the Corporation and
MCMI; (ii) has discussed with the officers the current and proposed activities
of the Corporation and MCMI including, without limitation, the selling
operations of MCMI; and (iii) has conducted, to his sole satisfaction, all
investigations and inquiries pertaining to the Corporation, MCMI and the
officers thereof that he deemed necessary and expedient in making his investment
decision. Accordingly, the undersigned believes that the Notes are securities of
the kind he wishes to purchase and hold for investment and that the nature and
amount of his investment are consistent with his investment program.
B-3
<PAGE>
Acknowledgement Of Certain Facts
- --------------------------------
The undersigned hereby expressly acknowledges that he is aware of the
following facts;
(i) In addition to the risks summarized herein, there are other
substantial risks involved in investing in the Corporation and, therefore, the
risks set forth hereunder are not intended to be complete or relied upon by the
undersigned as a basis for making an investment in the Corporation;
(ii) Neither the Securities And Exchange Commission nor any state agency
has passed upon the adequacy of this offering or upon the accuracy of any
information or documentation provided to him or made any finding or
determination as to the fairness of an investment in the Corporation. Any
representation to the contrary is a criminal offense;
(iii) He should only invest in the Corporation based upon his particular
circumstances and should confer with and rely on his own investment and tax
advisors as to the substantial risks inherent in an investment in the
Corporation. He acknowledges that he has carefully read and completed, where
necessary, in its entirety the Prospectus, Schedule, Indenture and this Letter
and that neither the Corporation, its officers, nor any other party has made any
representation or warranty with respect to the Corporation, MCMI, the officers
thereof or the business conducted thereby except as otherwise specifically set
forth herein and in the Prospectus;
(iv) The Corporation and MCMI have provided him with an opportunity to
meet and confer with the officers thereof regarding all aspects of the
transactions contemplated by the Corporation including the creation and purchase
of the Contracts and will afford him the opportunity to obtain any additional
information, to the extent that the Corporation and MCMI possesses such
information or can acquire it without unreasonable effort or expense; and
(v) This offering will continue for a period of two years.
Representations Of Investors And Risks
- --------------------------------------
The undersigned understands that an investment in the Corporation involves
a high degree of risk. To induce the Corporation to issue and sell the Notes to
the undersigned, the undersigned hereby warrants, represents and covenants to
the Corporation as follows:
(i) The undersigned can bear the economic risk of an investment in the
Corporation and the acquisition of the subscribed for Notes for an indefinite
period of time;
B-4
<PAGE>
(ii) The undersigned has sufficient available financial resources to
provide adequately for his current needs, including possible personal
contingencies, and can bear the economic risk of a complete loss of his
investment hereunder without materially affecting his financial condition;
(iii) The undersigned has been furnished with all materials, documents and
information relating to the Corporation, MCMI and their activities, the offering
of the Notes and anything set forth in this Letter and the Prospectus which he
has requested and the undersigned has been afforded the opportunity to obtain
any additional information necessary to verify the accuracy of any
representations or information set forth in said documents;
(iv) The Corporation, MCMI and their officers have answered all inquiries
that the undersigned has put to them concerning the Corporation, MCMI and their
activities and any other matters relating to the Corporation, MCMI and the
offering;
(v) The undersigned has not been furnished any offering literature other
than this Letter, the Prospectus, the Indenture and the form Note and in making
his investment decision has relied only on the information contained therein and
his own investigations into the suitability of the investment, the projected
rate of return and the proposed business to be conducted by the Corporation and
MCMI. The undersigned is familiar with the methods and procedures of the
proposed business operations contemplated by the Corporation and MCMI. The
undersigned has carefully reviewed and understands this Letter, the Prospectus,
the Indenture and the form Note and the risks of, and other considerations
relating to, an investment in the Corporation. Furthermore, the undersigned has
not relied upon any information concerning this offering, written or oral, other
than contained in this Letter, the Prospectus, the Indenture, the form Note and
the information obtained through his own investigations. The undersigned
acknowledges that the officers have answered all questions presented by the
undersigned and/or his investment advisor and provided all information requested
pertaining to the past operating history and financial condition of the
Corporation and MCMI;
(vi) The undersigned has been represented by such legal counsel, tax
advisors, accountants and others selected by the undersigned as he has found
necessary to consult concerning this transaction and to review and evaluate the
tax, economic and other ramifications of an investment in the Corporation. No
representation, warranty or advice of any kind is made by the Corporation, the
officers or any other person with respect to any consequences relating to the
business of the Corporation or an investment in the Corporation, except to the
extent otherwise set forth in the Prospectus. (Please note that the provisions
of the
B-5
<PAGE>
federal securities laws, in the view of the Commission, are not subject to
disclaimer or waiver);
(vii) The undersigned, if a corporation, partnership, trust or other form
of business entity, is authorized and otherwise duly qualified to purchase and
hold the Notes, and such entity has the principal place of business as set forth
in the signature page hereof and such entity has not been formed for the
specific purpose of acquiring the Notes;
(viii) The undersigned understands that the Notes have been registered
under the 1933 Act;
(ix) All the information which the undersigned has furnished to the
Corporation with respect to his financial position and business experience is
correct and complete as of the date of this Letter and, if there should be any
material change in such information prior to the consummation of this offering,
the undersigned will immediately furnish such revised or corrected information
to the Corporation;
(x) The undersigned hereby acknowledges that no state regulatory
authority has passed upon the adequacy or merits of this offering and has
expressed no opinion as to the quality of the Notes offered hereunder; and
(xi) The undersigned hereby acknowledges that all financial and related
projections pertaining to the Corporation are merely predictions which are
dependent upon various assumptions including, but not limited to, the cost of
maintaining inventory, the cost of overhead, market conditions, competition and
general economic factors.
The undersigned acknowledges that his right to purchase the Notes hereunder
is not transferable or assignable by him.
If the undersigned is more than one person, the obligations of the
undersigned shall be joint and several and the representations and warranties
herein contained shall be deemed to be made by, and be binding upon, each such
person and his heirs, executors, administrators, successors and assigns.
Indemnification
- ---------------
The undersigned agrees to indemnify and hold harmless the Corporation
against any and all liabilities, losses, costs, damages, fees (including
attorney's fees) and other expenses which the Corporation may sustain or incur
by reason of the undersigned's breach of any representation or warranty
contained herein; or by reason of any action improperly taken by the undersigned
relating to the sale of the Notes.
B-6
<PAGE>
Date of Execution:
- ------------------ ----------------------------------------
Signature
Date of Execution:
- ------------------ ----------------------------------------
Signature
----------------------------------------
Printed or Typewritten Name
----------------------------------------
Printed or Typewritten Name
----------------------------------------
Street Address
----------------------------------------
City, State, Zip Code
----------------------------------------
Telephone
----------------------------------------
Social Security Number or
Tax ID Number
B-7
<PAGE>
The investments purchased hereunder shall be held as follows:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
------------------------------------
B-8
<PAGE>
APPENDIX "C"
Indenture
---------
C-1
<PAGE>
________________________________________________
GENESIS FINANCIAL GROUP, INC.
a Virginia Corporation
___________________________
Indenture
Dated as of July ___, 1997
___________________________
$7,500,000
Corporate Promissory Notes with 3 1/2 Year Maturity Date
________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Section Heading Page
<S> <C> <C> <C>
1 DEFINITIONS AND INCORPORATION 1
BY REFERENCE
1.01 Definitions 1
1.02 Other Definitions 2
1.03 Incorporation by Reference of Trust 2
Indenture Act
1.04 Rules of Construction 3
2 THE SECURITIES 3
2.01 Form and Dating 3
2.02 Execution and Authentication 3
2.03 Registrar 4
2.04 Corporation to Hold Money in Trust 4
2.05 Securityholder Lists 4
2.06 Registration, Transfer and Exchange 4
2.07 Replacement of Lost or Stolen 4
Securities
2.08 Outstanding Securities 5
2.09 Cancellation 5
2.10 Defaulted Interest 5
3 PREPAYMENT OF NOTES 5
3.01 Notices to Registrar 5
3.02 Selection of Notes to be Prepaid 6
3.03 Notice of Prepayment 6
3.04 Deposit of Prepayment Amount 6
3.05 Effect of Notice of Prepayment 6
3.06 Notes Prepaid in Part 7
4 COVENANTS 7
4.01 Certain Definitions 7
4.02 Payment of Securities 8
4.03 Limitation on Liens 8
4.04 Payment of Dividends 9
4.05 Corporate Existence 10
4.06 Maintenance of Principal Properties 10
4.07 Ownership of Restricted Subsidiaries 10
4.08 SEC Reports 11
4.09 No Lien Created 11
4.10 Compliance Certificate 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
5 SUCCESSOR CORPORATION 11
5.01 When Corporation May Merge, etc. 11
5.02 When Securities Must Be Secured 11
6 DEFAULTS AND REMEDIES 12
6.01 Events of Default 12
6.02 Acceleration 13
6.03 Other Remedies 13
6.04 Waiver of Past Defaults 14
6.05 Control by Majority 14
6.06 Limitation on Suits 14
6.07 Rights of Holders to Receive Payment 14
6.08 Collection Suit by Trustee 15
6.09 Trustee May File Proofs of Claim 15
6.10 Priorities 15
6.11 Undertaking for Costs 15
7 TRUSTEE 16
7.01 Duties of the Trustee 16
7.02 Rights of Trustee 17
7.03 Trustee's Disclaimer 17
7.04 Individual Rights of Trustee, etc. 17
7.05 Notice of Defaults 17
7.06 Reports by Trustee to Holders 18
7.07 Compensation and Indemnity 18
7.08 Replacement of Trustee 18
7.09 Successor Trustee by Merger, etc. 19
7.10 Preferential Collection of Claims 19
Against Corporation
8 DISCHARGE OF INDENTURE 19
9 AMENDMENTS, SUPPLEMENTS AND WAIVERS 19
9.01 Without Consent of Holders 19
9.02 With Consent of Holders 20
9.03 Compliance with Trust Indenture Act 20
9.04 Revocation and Effect of Consents 20
9.05 Notation on or Exchange of Securities 21
9.06 Trustee to Sign Amendments, etc. 21
10 MISCELLANEOUS 21
10.01 Trust Indenture Act Controls 21
10.02 Notices 21
10.03 Communication by Holders with Other 22
Holders
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
10.04 Certificate and Opinion as to 22
Conditions Precedent
10.05 Statements Required in Certificate or 22
Opinion
10.06 When Treasury Securities Disregarded 23
10.07 Rules by Trustee and Registrar 23
10.08 Legal Holidays 23
10.09 Governing Law 23
10.10 No Adverse Interpretation of Other 24
Agreements
10.11 Successors 24
SIGNATURES 24
</TABLE>
iii
<PAGE>
INDENTURE dated as of July ____, 1997, is entered into by and between
Genesis Financial Group, Inc. ("Corporation"), and Nancy C. Mattox
("Trustee").
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Corporation's Promissory Notes
(hereinafter collectively referred to as the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
------------------------------------------
Section 1.01. Definitions.
-----------
"Corporation" means the party named as such in this Indenture until a
successor replaces it and thereafter means the successor.
"Default" means any event which is, or after notice or lapse of time or
both would be, an Event of Default.
"Holder" or "Securityholder" means the person who is the holder of any
Security and the person in whose name a Registered Security is registered on the
Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Note" means the Corporation's Promissory Notes issued pursuant to this
Indenture and the Registration Statement.
"Noteholder" means any person who at the time is the holder of any Note.
"Officer" means the Chairman of the Board, the President, any Vice-
President, the Treasurer or the Secretary of the Corporation.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer or Assistant Secretary of the Corporation.
(See Sections 10.04 and 10.05.)
"Principal" of a Security means the amount stated as principal on the face
of the Security.
"Prospectus" means the Notes Prospectus being a part of the Corporation's
SB-1 Registration Statement filed with the SEC pursuant to which this Indenture
has been issued.
"Registered Security" means Securities of the Corporation issued pursuant
to this Indenture and fully registered on the Registrar's books.
1
<PAGE>
"Registered Securityholder" means the registered holder of any Registered
Security.
"Registration Statement" means the SB-1 Registration Statement filed by the
Corporation with the SEC pursuant to the Corporation's offer to sell up to
$7,500,000.00 in Notes to investors.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Notes issued pursuant to this Indenture and the
Registration Statement, as amended or supplemented from time to time.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa et
seq.) as in effect on the date of this Indenture.
"Trustee" means the party named as such in this Indenture until a successor
replaces him and thereafter means the successor.
Section 1.02. Other Definitions.
-----------------
<TABLE>
<CAPTION>
Term Defined in Section
<S> <C>
"Bankruptcy Law" 6.01
"Board of Directors" 4.01
"Consolidated Net Tangible Assets" 4.01
"Custodian" 6.01
"Debt" 4.01
"Event of Default" 6.01
"Legal Holiday" 10.08
"Lien" 4.01
"Principal Property" 4.01
"Registrar" 2.03
"Restricted Property" 4.01
"Restricted Subsidiary" 4.01
"Subsidiary" 4.01
</TABLE>
Section 1.03. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture securityholder" means a Securityholder.
"indenture to be qualified" means this Indenture.
2
<PAGE>
"indenture trustee" means the Trustee.
"obligor" on the indenture securities means the Corporation.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them.
Section 1.04. Rules of Construction.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to
it in accordance with generally accepted accounting principles;
(3) "or" is not exclusive; and
(4) words in the singular include the plural, and in the plural include
the singular.
ARTICLE 2
THE SECURITIES
--------------
Section 2.01. Form and Dating.
---------------
The Securities shall be comprised of the Notes. A copy of a form Note is
appended hereto in Exhibit A. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage. The Corporation
shall approve the form of the Securities and any notation, legend or endorsement
on them. Each Security shall be dated the date of its authentication.
Section 2.02. Execution and Authentication.
----------------------------
One Officer shall sign the Securities for the Corporation. The
Corporation's seal shall be reproduced on the Securities, if deemed necessary by
the Trustee.
No Security shall be valid until the Officer manually signs the Note. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Corporation shall authenticate Securities for original issue in the
aggregate principal amount of up to $7,500,000 as provided for in the
Registration Statement. The aggregate principal amount of Securities outstanding
at any time may not exceed that amount except as provided in Section 2.07.
3
<PAGE>
Section 2.03. Registrar.
---------
The Corporation shall maintain an office where Securities may be presented
for registration of transfer or for exchange ("Registrar") and for payment. The
Registrar shall keep a register of the Registered Securities and of their
transfer and exchange. The Corporation may have one or more Co-Registrars, any
one or all of whom may be Officers.
Section 2.04. Corporation to Hold Money in Trust.
----------------------------------
The Corporation shall hold in trust for the benefit of Securityholders all
money held by the Corporation for the payment of principal and/or interest on
the Securities and shall notify the Trustee of any default by the Corporation in
making any such payment. The Corporation shall segregate the money and hold it
as a separate trust fund.
Section 2.05. Securityholder Lists.
--------------------
The Corporation shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Registered Securityholders and provide the Trustee with a copy of the list as
updated upon request in writing.
Section 2.06. Registration, Transfer and Exchange.
-----------------------------------
The Corporation will issue fully Registered Securities in the form of
Exhibit A attached hereto.
Subject to applicable state and federal laws, including, without
limitation, securities laws, the Corporation will permit a Securityholder to
exchange or transfer a Note. To permit such transfer or exchange, the
Corporation shall authenticate Securities at the Registrar's and/or Trustee's
request. The Corporation will not charge a fee for any such exchange or
transfer.
Section 2.07. Replacement of Lost or Stolen Securities.
----------------------------------------
If the Holder of a Security claims that the Security has been lost,
destroyed or wrongfully taken, the Corporation shall issue and authenticate a
replacement Security corresponding to the Security that was lost, destroyed or
wrongfully taken, if the requirements of the Virginia Uniform Commercial Code
are met. In the event any lost, destroyed or wrongfully taken Security shall
have matured or is about to mature, the Corporation may pay the same if the
requirements of the applicable provisions of the Virginia Uniform Commercial
Code are met. An indemnity bond must be sufficient in the judgment of the
Corporation and Trustee to protect the Corporation, Trustee, the Registrar or
any Co-Registrar from any loss which any of them may suffer if a Security is
4
<PAGE>
replaced. The Corporation may charge for its expenses in replacing a Security
for the reasons set forth herein.
Section 2.08. Outstanding Securities.
----------------------
Securities outstanding at any time are all Securities authenticated by the
Corporation except for those canceled by it and those described in this Section.
Securities outstanding include those held by the Corporation or its affiliates.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Corporation receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Corporation pays in cash, by wire transfer, or by certified funds,
either by personal delivery or by certified mail to the last known address of
the Securityholder on a maturity date in an amount sufficient to pay Securities
payable on that date, then on and after that date such Securities cease to be
outstanding and interest on them ceases to accrue. Such Securities carry no
rights except the right to receive payment.
Section 2.09. Cancellation.
------------
The Corporation at any time may deliver Securities to the Registrar for
cancellation. The Registrar shall cancel and destroy all Securities surrendered
for exchange, payment or cancellation. The Corporation may not issue new
Securities to replace Securities it has paid and delivered to the Registrar for
cancellation.
Section 2.10. Defaulted Interest.
------------------
If and to the extent the Corporation defaults in a payment of any principal
and/or interest due under any Registered Security, it shall pay the defaulted
installment plus interest to the persons who are Registered Securityholders in
accordance with the respective terms set forth under the Note.
ARTICLE 3
PREPAYMENT OF NOTES
-------------------
Section 3.01. Notices to Registrar.
--------------------
If the Corporation wants to prepay the Notes as provided therein, it shall
notify the Registrar and Trustee of the prepayment date and the principal amount
of Notes to be prepaid.
If the Corporation wants to prepay a portion of the principal amount of the
Notes on a pro-rata basis, it shall notify the Registrar and Trustee of the
amount of the reduction and the basis for it.
5
<PAGE>
Section 3.02. Selection of Notes to be Prepaid.
--------------------------------
If less than all Notes are to be prepaid, the Registrar and Trustee shall
select the Notes to be prepaid by a method the Registrar and Trustee consider
fair and appropriate. The Registrar and Trustee shall make the selection from
Notes outstanding not previously prepaid in part. The Registrar and Trustee may
select for prepayment portions of the principal of Notes that have an
outstanding principal balance larger than $1,000. Notes and portions of them
they select shall be in amounts of $1,000 or an integral multiple of $1,000.
Provisions of this Indenture that apply to Notes selected for prepayment in full
also apply to portions of Notes selected for prepayment.
Section 3.03. Notice of Prepayment.
--------------------
At least 5 days but not more than 30 days before a prepayment date, the
Corporation shall mail and first publish notice of prepayment as provided in
Section 9.02.
The notice shall identify the Notes to be prepaid and shall state:
(1) the prepayment date;
(2) the prepayment amount;
(3) the name and address of the Registrar;
(4) that Notes prepaid in full must be surrendered to the Registrar to
collect the prepayment amount;
(5) that interest on Notes prepaid in full ceases to accrue on and after
the prepayment date; and
(6) the remaining principal indebtedness outstanding under Notes to be
prepaid in part.
The Registrar shall give the notice of prepayment in the Corporation's name
and at its expense.
Section 3.04. Deposit of Prepayment Amount.
----------------------------
On or before the prepayment date, the Corporation shall deposit in a
separate corporate account money sufficient to pay the prepayment amount on all
Notes to be prepaid, in full or in part, on that date.
Section 3.05. Effect of Notice of Prepayment.
------------------------------
Once notice of prepayment is given, Notes called for prepayment in full
become due and payable on the prepayment date
6
<PAGE>
and at the prepayment amount stated in the notice, unless a Noteholder shall
provide Corporation with a written objection as to the prepayment amount within
five (5) days after receipt of the notice of prepayment. Upon receipt of a
written objection, the Corporation shall recalculate the principal and interest
outstanding under the Note and shall pay the amount agreed upon by the
Corporation and Noteholder. Upon surrender of the Notes to the Registrar and
after any prepayment adjustment is made to a Note as provided herein, such Notes
shall be paid as stated in the notice.
Section 3.06. Notes Prepaid in Part.
---------------------
Upon prepayment of a Note in part only, the Registrar shall certify for the
Noteholder the principal balance remaining under the Note.
ARTICLE 4
COVENANTS
---------
Section 4.01. Certain Definitions.
-------------------
"Board of Directors" means the Board of Directors of the Corporation or any
committee of the Board.
"Consolidated Net Tangible Assets" means the consolidated net worth of the
Corporation, as determined under generally acceptable accounting principles, all
as shown on the Corporation's most recent consolidated balance sheet.
"Debt" means any debt for borrowed money or any guarantee of such a debt.
"Lien" means any mortgage, pledge, security interest or lien.
"Principal Property" means any property owned by the Corporation or a
Restricted Subsidiary except any such property which, in the opinion of the
Board of Directors, is not of material importance to the total business
conducted by the Corporation and its Subsidiaries.
"Restricted Property" means:
(1) any Principal Property,
(2) any Debt of a Restricted Subsidiary, or
(3) any shares of stock of a Restricted Subsidiary, not owned or hereafter
acquired by the Corporation or a Restricted Subsidiary.
7
<PAGE>
"Restricted Subsidiary" means a Subsidiary deemed to be a significant
subsidiary under the Rules and Regulations of the SEC in effect at the time the
determination is made.
"Subsidiary" means a corporation of which the Corporation, the Corporation
and one or more Subsidiaries, or one or more Subsidiaries at the time own a
majority of the corporation's outstanding stock having voting power under
ordinary circumstances to elect a majority of that corporation's board of
directors.
Section 4.02. Payment of Securities.
---------------------
The Corporation shall promptly pay the principal of, interest on and
amounts owing under the Securities on the dates and in the manner provided in
the Securities. An installment of principal, interest or other obligation due
and owing shall be considered paid on the date it is due if the Registrar pays
on that date money designated for and sufficient to pay the installment in the
manner provided in Section 2.08 of this Indenture. The Corporation shall pay
interest on overdue principal installments or on such other obligations owed by
the Corporation at the rate borne by the applicable Security.
Section 4.03. Limitation on Liens.
-------------------
The Corporation shall not, and it shall not permit any Restricted
Subsidiary to, create, incur or assume a Lien on Restricted Property to secure a
Debt unless:
(1) the Lien equally and ratably secures the Securities and the Debt.
The Lien may equally and ratably secure the Securities and any other
obligation of the Corporation or a Subsidiary. The Lien may not
secure an obligation of the Corporation that is subordinated to the
Securities;
(2) the Lien is on property, Debt or shares of stock of a corporation at
the time the corporation becomes a Restricted Subsidiary;
(3) the Lien is on property at the time the Corporation or a Restricted
Subsidiary acquires the property. The Lien may not extend to any
other property owned by the Corporation or a Restricted Subsidiary at
the time the Lien is created, incurred or assumed;
(4) the Lien secures Debt incurred to finance all or some of the purchase
price or cost of construction of property of the Corporation or a
Restricted Subsidiary. The Lien may not extend to any other property
owned by the Corporation or a Restricted Subsidiary at the time the
Lien is created, incurred or assumed. In the case of any
construction, however, the Lien may extend to unimproved
8
<PAGE>
real property for the construction. The Debt secured by the Lien may
not be incurred more than 120 days after the later of the acquisition,
completion of construction or commencement of full operation of the
property subject to the Lien;
(5) the Lien secures Debt of a Restricted Subsidiary owing to the
Corporation or another Restricted Subsidiary;
(6) the Lien is on property of a corporation at the time the corporation
merges into or consolidates with the Corporation or a Restricted
Subsidiary;
(7) the Lien is on property of a person at the time the person transfers
or leases all or substantially all of its assets to the Corporation or
a Restricted Subsidiary;
(8) the Lien is in favor of a government or governmental entity and
secures payments pursuant to a contract or statute or secures Debt
incurred to finance all or some of the purchase price or cost of
construction of the property subject to the Lien;
(9) the Lien extends, renews or replaces in whole or in part a Lien
("existing Lien") enumerated in Clauses (1) though (8) above. The
Lien may not extend beyond (i) the property subject to the existing
Lien, and (ii) improvements and construction on such property. The
Debt secured by the Lien may not exceed the Debt secured at the time
by the existing Lien;
(10) the Lien arises out of a judgment, decree or court order, so long as
any appropriate legal proceeding which may have been initiated for
review shall not have been finally terminated or so long as the period
within which such proceeding may be initiated shall not have expired;
or
(11) the Lien secures Debt of the Corporation or a Restricted Subsidiary if
such Debt plus all other Debt of the Corporation and its Restricted
Subsidiaries secured by Liens on Restricted Property, excluding Debt
secured by a Lien existing as of the date of this Indenture or
permitted by clauses (1) through (10) above, at the time does not
exceed 5% of Consolidated Net Tangible Assets.
Section 4.04. Payment of Dividends.
--------------------
The Corporation shall not: (a) declare or pay any dividend or make any
distribution on its capital stock or to its stockholders (other than dividends
or distributions payable solely in shares of the capital stock of the
Corporation); (b) purchase, redeem or
9
<PAGE>
otherwise acquire or retire for value any shares of its capital stock; or (c)
permit a Subsidiary to purchase, redeem or otherwise acquire or retire for value
any share of capital stock of the Corporation until the Securities are satisfied
in full.
Section 4.05. Corporate Existence.
-------------------
Subject to Article 5, the Corporation will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises; provided, however, that the Corporation shall
not be required to preserve any right or franchise if it shall determine that
the preservation is no longer desirable in the conduct of the Corporation's
business and that the loss will not be disadvantageous in any material respect
to the Holders.
Section 4.06. Maintenance of Principal Properties.
-----------------------------------
The Corporation will cause all Principal Properties to be maintained and
kept in good condition, repair and working order and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Corporation may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that neither the Corporation nor any Restricted
Subsidiary shall be prevented from discontinuing the operation and maintenance
of any of such Principal Properties or from omitting to make any repairs,
renewals, replacements, betterments or improvements thereof if such
discontinuance or omission is, in the judgment of the Corporation, desirable in
the conduct of the business of the Corporation and its Restricted Subsidiaries
taken as a whole.
Section 4.07. Ownership of Restricted Subsidiaries.
------------------------------------
So long as any of the Securities shall be outstanding:
(a) the Corporation will own directly, or indirectly, through one or
more wholly-owned Subsidiaries, more than 80% of the voting shares, of each
Restricted Subsidiary; and
(b) the Corporation will not permit any Restricted Subsidiary to merge
or consolidate with or into, or to sell, assign, transfer or otherwise
dispose of the assets of such Restricted Subsidiary substantially as an
entirety to any corporation or other person, except where the corporation
surviving in such merger or consolidation, or the person to which such
sale, assignment, transfer or other disposition is made, upon consummation
of such transaction, will be a Restricted Subsidiary.
10
<PAGE>
Section 4.08. SEC Reports.
-----------
The Corporation shall file with the Trustee within 15 days after it files
them with the SEC copies of the annual reports, information, documents, and
other reports (or copies of such portions of any of the foregoing as the SEC may
by rules and regulations prescribe) which the Corporation is required to file
with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. The Corporation also shall comply with the other provisions of TIA (S)
314(a) to the extent applicable.
Section 4.09. No Lien Created.
---------------
This Indenture and the Securities do not create a Lien, charge or
encumbrance on any property of the Corporation or any Subsidiary.
Section 4.10. Compliance Certificate.
----------------------
The Corporation shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Corporation an Officers' Certificate stating whether
or not the signers know of any default by the Corporation in performing its
covenants in Article 4. If they do know of such a default, the Certificate
shall describe the default. The Certificate need not comply with Section 10.05.
The first Certificate shall be delivered to the Trustee by April 30, 1998.
ARTICLE 5
SUCCESSOR CORPORATION
---------------------
Section 5.01. When Corporation May Merge, etc.
--------------------------------
The Corporation shall not consolidate with or merge into, or transfer all
or substantially all of its assets to another corporation unless the resulting,
surviving or transferee corporation assumes by supplemental indenture all the
obligations of the Corporation under the Securities and this Indenture.
Thereafter all such obligations of the predecessor corporation shall terminate.
Section 5.02. When Securities Must Be Secured.
-------------------------------
If, upon any such consolidation, merger or transfer, a Restricted Property
would become subject to an attaching Lien that secures Debt, then before the
consolidation, merger, or transfer occurs, the Corporation by supplemental
indenture shall secure the Securities by a direct Lien on the Restricted
Property. The direct Lien shall have priority over all Liens on the Restricted
Property except those already on it. The direct Lien may equally and ratably
secure the Securities and any other obligation of the
11
<PAGE>
Corporation or a Subsidiary. The Corporation, however, need not comply with
this Section if:
(a) upon the consolidation, merger or transfer the attaching Lien will
secure the Securities equally and ratably with Debt secured by the
attaching Lien; or
(b) The Corporation or a Restricted Subsidiary under clauses (2) through
(11) of Section 4.03 could create a Lien on the Restricted Property to
secure Debt at least equal in amount to that secured by the attaching
Lien.
ARTICLE 6
DEFAULTS AND REMEDIES
---------------------
Section 6.01. Events of Default.
-----------------
Subject to Section 6.02, an "Event of Default" occurs if:
(1) the Corporation defaults in the payment of an installment due under
any Note when the same becomes due and payable, whether at maturity or
otherwise, and the default continues after the expiration of any cure
period provided for under the terms of the Note;
(2) the Corporation fails to comply with any of its other agreements in
the Securities or this Indenture and the default continues for the
period and after the notice specified below;
(3) the Corporation pursuant to or within the meaning of any Bankruptcy
Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property;
(D) makes a general assignment for the benefit of its creditors; or
(E) fails generally to pay its debts as they become due; or
(4) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) is for relief against the Corporation in an involuntary case;
12
<PAGE>
(B) appoints a Custodian of the Corporation or for any substantial
part of its property; or
(C) orders the liquidation of the Corporation;
and the order or decree remains unstayed and in effect for 90 days.
The term "Bankruptcy Law" means title 11, United States Code or any similar
Federal or State law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
A default under clause (2) above is not an Event of Default until the
Trustee or the Holders of at least 25% in principal amount of the Securities
notify the Corporation of the default and the Corporation does not cure the
default within 90 days after receipt of the notice. The notice must specify the
default, demand that it be remedied and state that the notice is a "Notice of
Default."
Section 6.02. Acceleration.
------------
If an Event of Default occurs and is continuing, the Trustee by notice to
the Corporation or the Holders of at least 25% in principal amount of the
Security in default may declare the principal of and accrued interest on all of
the Securities to be due and payable immediately. Notwithstanding anything
herein to the contrary, no Event of Default shall occur if the Corporation and
the effected Securityholders shall negotiate a settlement of any outstanding
default.
Section 6.03. Other Remedies.
--------------
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal, interest and/or other financial obligations due under the terms of
the applicable Securities or to enforce the performance of any provision of the
applicable Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
13
<PAGE>
Section 6.04. Waiver of Past Defaults.
-----------------------
Subject to Section 9.02, the Holders of a majority in principal amount of
the Securities by notice to the Trustee may waive an existing Default or Event
of Default and its consequences. When a Default or Even of Default is waived,
it is cured and stops continuing.
Section 6.05 Control by Majority.
-------------------
The Holders of a majority in principal amount of the Securities may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on it. The Trustee,
however, may refuse to follow any direction that conflicts with law or this
Indenture, that is unduly prejudicial to the rights of other Securityholders or
that may involve the Trustee in personal liability.
Section 6.06. Limitation on Suits.
-------------------
Subject to Section 6.02, the Securityholders of the Security may not pursue
any remedy with respect to this Indenture or the applicable Security
unless:
(1) the Securityholder(s) holding the Security in default gives the
Trustee written notice of a continuing Event of Default as may be
provided for under the terms of the applicable Security;
(2) the applicable Securityholders holding at least 25% in principal
amount of the Securities make a written request to the Trustee to
pursue the remedy;
(3) such Securityholder or Securityholders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
and
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder holding a similar Security or to obtain a preference or
priority over such a Securityholder.
Section 6.07. Rights of Holders to Receive Payment.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of principal and/or interest on any
Security, or to bring suit for the enforcement of any such payment on or after
the respective due
14
<PAGE>
dates, shall not be impaired or affected without the consent of the Holder of
the Security.
Section 6.08. Collection Suit by Trustee.
--------------------------
If an Event of Default in payment of interest, principal, or any other
obligation as specified in Section 6.01(1) or (2) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Corporation for the whole amount of principal and interest remaining
unpaid to all Securityholders.
Section 6.09. Trustee May File Proofs of Claim.
--------------------------------
The Trustee may file such proof of claim and other papers or documents as
may be necessary or advisable in order to have the claims of the Securityholders
allowed in any judicial proceedings relative to the Corporation, its creditors
or its property.
Section 6.10. Priorities.
----------
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to the applicable Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or priority
of any kind, according to the amounts due and payable on such Securities for
principal and interest, respectively; and
Third: to the Corporation.
The Trustee may fix a record date and payment date for any payment to
Registered Securityholders.
Section 6.11 Undertaking for Costs.
---------------------
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder of Securities pursuant to
Section 6.07, or a suit by Holders of more than 10% in principal amount of the
Securities.
15
<PAGE>
ARTICLE 7
TRUSTEE
-------
Section 7.01 Duties of the Trustee.
---------------------
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise its rights and powers and use the same degree of care
and skill in its exercise as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically
set forth in this Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Trustee and conforming to the
requirements of this Indenture. The Trustee, however, shall
examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section.
(2) The Trustee shall not be liable for any error of judgment made in
good faith, unless it is proved that the Trustee was negligent in
ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any
loss, liability or expense.
16
<PAGE>
(f) The Trustee shall not be liable for interest on any money received by
it except as otherwise agreed with the Corporation.
Section 7.02. Rights of Trustee.
-----------------
(a) The Trustee may rely on any document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an opinion of counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in
reliance on the Certificate or opinion.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its
rights or powers.
Section 7.03. Trustee's Disclaimer.
--------------------
The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Securities, it shall not be accountable for the Corporation's
use of the proceeds from the Securities, and it shall not be responsible for any
statement in the Securities, other than its certificate of authentication, or in
any prospectus used in the sale of the Securities, other than statements
provided in writing by the Trustee for use in such prospectus.
Section 7.04. Individual Rights of Trustee, etc.
----------------------------------
The Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Corporation with the same
rights it would have if it were not Trustee. Any Registrar or Co-registrar may
do the same with like rights. The Trustee, however, must comply with Section
7.10.
Section 7.05. Notice of Defaults.
------------------
If a Default occurs and is continuing and if it is known to the Trustee,
the Trustee shall mail and first publish as provided in Section 10.02 notice of
the Default within 90 days after it occurs. Except in the case of a default in
payment on any Security, the Trustee may withhold the notice if it in good faith
17
<PAGE>
determines that withholding the notice is in the interests of Securityholders.
Section 7.06. Reports by Trustee to Holders.
-----------------------------
Within 60 days after each December 31 beginning with the December 31
following the date of this Indenture, the Trustee shall provide to the
Securityholders specified in TIA (S) 313(c) a brief report dated as of such
December 31 that complies with TIA (S) 313(a). The Trustee also shall comply
with TIA (S) 313(b).
Section 7.07. Compensation and Indemnity.
--------------------------
The Corporation may pay to the Trustee from time to time reasonable
compensation for its services as negotiated between the Trustee and the
Corporation. The Corporation shall reimburse the Trustee upon request for all
reasonable out-of-pocket expenses incurred by it. Such expenses may include the
reasonable compensation and expenses of the Trustee's agents and attorneys. The
Corporation shall indemnify the Trustee against any loss or liability incurred
by it. The Trustee shall notify the Corporation promptly of any claim for which
it may seek indemnity. The Corporation shall defend the claims and the Trustee
shall cooperate in the defense. The Trustee may have separate counsel and the
Corporation shall pay the reasonable fees and expenses of such counsel. The
Corporation need not pay for any settlement made without its consent. The
Corporation need not reimburse any expense or indemnify against any loss or
liability incurred by the Trustee through negligence or bad faith.
To secure the Corporation's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Securities.
Section 7.08. Replacement of Trustee.
----------------------
The Trustee may resign by so notifying the Corporation. The Holders of a
majority in principal amount of the Securities may remove the Trustee by so
notifying the removed Trustee and may appoint a successor Trustee with the
Corporation's consent. The Corporation may remove the Trustee if:
(1) the Trustee is adjudged a bankrupt or an insolvent;
(2) a receiver or other public officer takes charge of the Trustee or its
property; or
(3) the Trustee otherwise becomes incapable of acting.
18
<PAGE>
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Corporation shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Corporation. Immediately after that, the
retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, the resignation or removal of the retiring Trustee shall
become effective, and the successor Trustee shall have all the rights, powers
and duties of the Trustee under this Indenture. A successor Trustee shall give
notice of its succession to each Securityholder as provided in Section 10.02.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Corporation or
the Holders of a majority in principal amount of the Securities may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
Section 7.09. Successor Trustee by Merger, etc.
---------------------------------
If a corporate Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to another
corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
Section 7.10. Preferential Collection of Claims Against Corporation.
------------------------------------------------------
The Trustee shall comply with TIA (S)311(a), excluding any creditor
relationship listed in TIA (S)311(b). A Trustee who has resigned or been removed
shall be subject to TIA (S)311(a) to the extent indicated.
ARTICLE 8
DISCHARGE OF INDENTURE
----------------------
This Indenture and all obligations of the Corporation hereunder shall
terminate upon the payment of all obligations due and owing under the
Securities, as the same may be amended and/or adjusted from time to time.
ARTICLE 9
AMENDMENTS, SUPPLEMENTS AND WAIVERS
-----------------------------------
Section 9.01. Without Consent of Holders.
--------------------------
The Corporation may amend or supplement this Indenture or the Securities
without notice to or consent of any Securityholder:
19
<PAGE>
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in place of
certificated Securities; or
(4) to make any change that does not adversely affect the rights of any
Securityholder.
Section 9.02. With Consent of Holders.
-----------------------
The Corporation may amend or supplement this Indenture or the Securities
without notice to any Securityholder but with the written consent of the Holders
of not less than a majority in principal amount of the Securities. The Holders
of a majority in principal amount of the Securities may waive compliance by the
Corporation with any provision of this Indenture or the Securities without
notice to any Securityholder. Without the consent of each Securityholder
specifically affected, however, an amendment, supplement or waiver, including a
waiver pursuant to Section 6.04, may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the rate or extend the time for payment of interest on any
Security;
(3) reduce the principal of or extend the fixed maturity of any Security;
(4) make any Security payable in money other than that stated in the
Security; or
(5) waive a default in payment of principal or interest on any Security.
Section 9.03. Compliance with Trust Indenture Act.
-----------------------------------
Every amendment to or supplement of this Indenture or the Securities shall
comply with the TIA as then in effect, if applicable.
Section 9.04. Revocation and Effect of Consents.
---------------------------------
A consent to an amendment, supplement or waiver by a Holder of a Security
shall bind the Holder and every subsequent Holder of a Security or portion of a
Security that evidences the same debt as the consenting Holder's Security, even
if notation of the consent is not made on any Security. Any such Holder or
subsequent Holder, however, may revoke the consent as to his Security or portion
of a
20
<PAGE>
Security. The Trustee must receive the notice of revocation before the date the
amendment, supplement or waiver becomes effective. After an amendment,
supplement or waiver becomes effective, it shall bind every Securityholder.
Section 9.05. Notation on or Exchange of Securities.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security, the
Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Corporation or the
Trustee so determine, the Corporation in exchange for the Security shall issue
and the Trustee shall authorize a new Security that reflects the changed terms.
Section 9.06. Trustee to Sign Amendments, etc.
--------------------------------
The Trustee shall sign any amendment, supplement or waiver authorized
pursuant to this Article if the amendment, supplement or waiver does not
adversely affect the rights of the Trustee. If it does, the Trustee may but
need not sign it. The Corporation may not sign an amendment or supplement until
the Board of Directors approves it.
ARTICLE 10
MISCELLANEOUS
-------------
Section 10.01. Trust Indenture Act Controls.
----------------------------
If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision shall control.
Section 10.02. Notices.
-------
Any notice or communication shall be sufficiently given if in writing and
delivered in person or mailed by first-class mail addressed as follows:
If to the Corporation: Genesis Financial Group, Inc.
4206 Williamson Road
Roanoke, VA 24012
Attention: President
If to the Registrar: Genesis Financial Group, Inc.
4206 Williamson Road
Roanoke, VA 24012
Attention: Registrar
21
<PAGE>
If to the Trustee: Nancy C. Mattox
1200 Allen Street
New Castle, VA 24127
Any notice or communication to Securityholders shall be sufficiently given
if mailed by first-class mail to each Registered Securityholder at his address
as it appears on the lists or registration books of the Registrar and shall be
sufficiently given to him if so mailed within the time prescribed.
Failure to give notice or communication to a Securityholder or any defect
in it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the Securityholder receives or reads it.
Section 10.03. Communication by Holders with Other Holders.
-------------------------------------------
Securityholders may communicate pursuant to TIA (S)312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Corporation, the Trustee, the Registrar and anyone else shall
have the protection of TIA (S)312(c).
Section 10.04. Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
Upon any request or application by the Corporation to the Trustee to take
any action under this Indenture, the Corporation shall furnish to the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(2) an opinion of counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
Each opinion of counsel shall be in writing. The legal counsel who renders
it may be an employee of or counsel to the Corporation. The legal counsel shall
be acceptable to the Trustee.
Section 10.05. Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or
22
<PAGE>
opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinions of such person, he has made such
examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether or not, in the opinion of such person, such
condition or covenant has been complied with.
Section 10.06. When Treasury Securities Disregarded.
------------------------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Corporation or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Corporation
shall be disregarded, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Securities which the Trustee knows are so owned shall be so disregarded.
Also, subject to the foregoing, only Securities outstanding at the time shall be
considered in any such determination.
Section 10.07. Rules by Trustee and Registrar.
------------------------------
The Trustee may make reasonable rules for the administration of this
Indenture. Such rules may cover matters relating to action by or at a meeting
of Securityholders. The Registrar may make reasonable rules for its functions.
Section 10.08. Legal Holidays.
--------------
A "Legal Holiday" is a Saturday, a Sunday, a legal holiday or a day on
which banking institutions are not required to be open. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
Section 10.09. Governing Law.
-------------
This Indenture and the Securities shall be governed by the laws of the
State of Virginia.
23
<PAGE>
Section 10.10. No Adverse Interpretation of Other Agreements.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Corporation or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
Section 10.11. Successors.
----------
All agreements of the Corporation in this Indenture and the Securities
shall bind its successors.
Dated: July ___, 1997 Genesis Financial Group, Inc.,
a Virginia corporation
By: ___________________________
Its: __________________________
Attest: _________________________
Secretary
24
<PAGE>
APPENDIX "D"
Articles of Incorporation And Bylaws Of Genesis Financial Group, Inc.
---------------------------------------------------------------------
D-1
<PAGE>
APPENDIX D
ARTICLES OF INCORPORATION
OF
GENESIS FINANCIAL GROUP, INC.
The undersigned hereby forms a stock corporation under the
provisions of Title 13:1 of the Code of Virginia of 1950, as
amended to date, and to that end does by these Articles of
Incorporation set forth the following information:
(a) The name of the corporation is to be known as
Genesis Financial Group, Inc..
(b) The corporation shall have all general powers
provided by law, including those specifically enumerated in
Article 4 of Title 13.1 of the Code of Virginia of 1950, as
amended to date.
(c) The purpose for which this corporation is to be
formed are:
i) To transact any business not prohibited by
law or required to be specifically stated in these Articles
and for which corporations may be incorporated under the
laws of the Commonwealth of Virginia.
ii) To have and to enjoy all the general
powers accorded similar corporations by the laws of the
Commonwealth of Virginia or by the laws of any other state
or territory of which this corporation may be doing business
as now existing or as hereafter enacted.
(d) The aggregate number of shares which the
corpoation shall have authority to issue are as follows:
The aggregate number of shares which the corporation
shall have authority to issue are as follows:
Class Number of Shares
[LOGO OF BOUNDS ----- ----------------
& DORSEY\PC\]
Common 100
<PAGE>
(e) The post office address of the initial registered
office is 19 West Church Avenue, Roanoke, Virginia 24011-
2015, which is located in the City of Roanoke, Virginia.
(f) The name of the initial Registered Agent of this
corporation is Charles N. Dorsey, a Registered Agent who
meets the requirements of Virginia Code (S)13.1-634 and
whose business office is identical with the registered
office of the corporation, who is a resident of Virginia and
a member of the Virginia State Bar.
(g) The number of directors consituting the initial
Board of Directors is 2 and the names and addresses of the
directors are as follows:
Franklin Blankemeyer 1424 Sherwood Avenue
Roanoke, Virginia 24015
Jeff Akers 353 A Woods Avenue
Roanoke, Virginia 24016
(h) The period of time for which this corporation
shall endure shall be unlimited.
Given under my hand this 11th day of June, 1993.
/s/ Charles N. Dorsey,
_______________________________
Charles N. Dorsey, Incorporator
[LOGO OF BOUNDS
& DORSEY \PC\]
<PAGE>
BYLAWS OF
GENESIS FINANCIAL GROUP, INC.
ARTICLE 1 - OFFICE
------------------
The office of the Corporation shall be located in the
City and State designated in the Articles of Incorporation.
The Corporation may also maintain offices at such other
places within or without the United States as the Board of
Directors may, from time to time, determine.
ARTICLE II - SHAREHOLDERS
-------------------------
The Shareholders of the Corporation shall be those who
appear on the books of the Corporation as holders of one or
more shares of the capital stock, and the records of the
Corporation shall be the only evidence as to who are the
shareholders.
ARTICLE III - MEETING OF SHAREHOLDERS
-------------------------------------
Section I - Annual Meeting:
---------------------------
The Annual meeting of the Shareholders of the
Corporation shall be held on the 6th of July of each year,
at the office of the Corporation, unless otherwise stated in
the notice of meeting.
Section 2 - Special Meetings:
-----------------------------
Special meetings of the Shareholders for any purpose or
purposes may be called by the President, the Board of
Directors, or the holders of not less than 20-percent of the
shares then outstanding and entitled to vote at such
meeting.
Section 3 - Notice of Meeting:
------------------------------
Notice of meetings of the Shareholders and waivers of
such notices shall be given or accepted in accordance with
the appropriate provisions of the Virginia Stock Corporation
Act.
[lOGO OF BOUNDS Section 4 - Quorum:
& DORSEY \PC\] -------------------
At any meeting of the Shareholders, the holders of a
majority of the shares entitled to vote shall constitute a
quorum, except as otherwise provided by law. The law holders
of such shares may be present in person or represented by
proxy to constitute such quorum.
<PAGE>
Section 5 - Voting
------------------
At each meeting of the Shareholders, every holder of
shares then entitled to vote may vote in person or by proxy
and shall have one vote for each share registered in his or
her name. Except as otherwise provided by the statute or by
the Articles of Incorporation, any corporate action shall be
authorized by a majority of votes cast at a meeting of
Shareholders by the holders of shares entitled to vote.
ARTICLE IV - BOARD OF DIRECTORS
-------------------------------
Section 1 - Number, Election, and Term of Office:
-------------------------------------------------
The business and affairs of the corporation shall be
managed by a Board of Directors subject to any requirement
of shareholder action requires by law. The Board of
Directors shall be composed of one member. This number may
be changed at any time by amendment of these Bylaws in
accord with the Virginia Stock Corporation Act.
The Directors shall be elected at each annual meeting
of the Shareholders. Each Director shall hold office until
the election of his or her successor. Any Director may
resign at any time. Vacancies occurring among the Directors
may be filled by the Directors.
Section 2 - Annual and Special Meetings:
----------------------------------------
Annual meetings of the Board of Directors shall be held
immediately following the annual meeting of the
Shareholders. A majority of the qualified members shall
constitute a quorum. Other regular meetings of the Board may
be held without notice at such time and place as the
Directors may determine.
Section 3 - Special Meetings:
-----------------------------
Special meetings of the Board of Directors may be
called by the President or by one of the Directors, at such
time and place as may be specified in the respective notices
or waivers of notice.
Section 4 - Manner of Acting:
-----------------------------
At all meetings of the Board of Directors, each
[LOGO OF BOUNDS Director present shall have one vote, irrespective of the
& DORSEY\PC\] number of shares of stock, if any, which he or she may hold.
The action of a majority of the Directors present at the
meeting at which a quorum is present shall be the act of the
Board of Directors.
ARTICLE V - OFFICERS
--------------------
<PAGE>
The officers of the Corporation shall be a President,
who shall be a Director and a Secretary/Treasurer, all of
whom shall be elected by the Board of Directors each year as
soon after the annual meeting of the Shareholders as
conveniently may be, and such other Officers as may from
time to time be elected or appointed by the Board of
Directors. The salaries of all Officers shall be fixed by
the Board of Directors. To the extent permitted by law, one
person may hold more than one office of the Corporation.
Each Officer shall hold office until the annual meeting of
the Board of Directors next succeeding his election and
until his successor shall have been elected and qualified or
until his death, resignation, or removal.
ARTICLE VI - PRESIDENT
----------------------
The President shall be the chief executive officer of
the Corporation. The President shall attend and preside at
all meetings of the Board of Directors, exercise general
supervision over the property, business, and affairs of the
Corporation, and do everything and discharge all duties
generally pertaining to his office as the executive head of
a corporation of this character, subject to the control of
the Board of Directors. At each annual meeting of the
Shareholders, the President shall render a general report of
the Corporation's condition in business.
In the absence of the President, the Board of Directors
may designate some other one of their number to discharge
such executive duties as may be required for the time being.
ARTICLE VII - TREASURER
-----------------------
The Treasurer shall, to the extent provided by the
Directors, have charge, and custody, of the funds,
securities of whatsoever nature, and other like property of
the Corporation; the Board of Directors shall designate the
officer or officers, or other persons, who shall give,
negotiate, or endorse checks, notes, and bills as may be
required for the business of the Corporation. The Treasurer
shall have authority to collect funds of the Corporation,
and shall deposit same in such bank or banks as the Board of
Directors from time to time may designate, and the same
shall not be withdrawn thereafter except by checks executed
in accordance with the authority of the Board of Directors.
ARTICLE VIII - SECRETARY
------------------------
The Secretary shall sign, with the President, all
certificates of stock. The Secretary shall keep a book
containing the names of all persons who are now or hereafter
become Shareholders of the Company, showing their places or
residence, the number of shares held by them respectively,
and the time when they respectively became the owners of
[LOGO OF BOUNDS such shares. The Secretary shall further deep a record of
& DORSEY /PC/ the proceedings of the meetings of the Shareholders and
APPEARS HERE] Directors of
<PAGE>
the Corporation; he shall have charge of the seal of the
Corporation, and shall perform such other duties as
pertained to said office, or as the President or Board of
Directors may from time to time require.
ARTICLE IX - DIVIDENDS
-----------------------
The Board of Directors of the Corporation may, from
time to time, declare, and the Corporation may pay dividends
on, its shares only in accordance with the provisions of
(S)43 of the Virginia Stock Corporation Act.
ARTICLE X - CORPORATE SEAL
--------------------------
The Corporate Seal of the Corporation shall be that
impressed upon the margin of this page.
ARTICLE XI - INDEMNIFICATION
----------------------------
The Corporation may indemnify its Directors, Officers,
and Employees in the manner, against the matters, and to the
full extent provided and permitted by (S)13.1-3.1 of the
Code of Virginia of 1950, as amended.
ARTICLE XII- FISCAL YEAR
------------------------
The fiscal year of the Corporation shall be fixed by
the Board of Directors.
The foregoing Bylaws of Genesis Financial Group, Inc.
were duly adopted by unanimous consent of the Board of
Directors of the Corporation in lieu of the Organizational
Meeting.
/s/ Jeff Akers,
-------------------------------
Jeff Akers, Secretary
[LOGO OF BOUNDS
& DORSEY\PC\]
<PAGE>
APPENDIX "E"
Articles of Incorporation and Bylaws
------------------------------------
of Mr. Car Man, Inc.
--------------------
E-1
<PAGE>
APPENDIX D
ARTICLES OF INCORPORATION
OF
MR. CAR MAN, INC.
The undersigned hereby forms a stock corporation under the
provisions of Title 13:1 of the Code of Virginia of 1950, as
amended to date, and to that end does by these Articles of
Incorporation set forth the following information:
(a) The name of the corporation is to be known as Mr.
Car Man, Inc.,
(b) The corporation shall have all general powers
provided by law, including those specifically enumerated in
Article 4 of Title 13.1 of the Code of Virginia of 1950, as
amended to date.
(c) The purposes for which this corporation is to be
formed are:
i) To transact any business not prohibited by
law or required to be specifically stated in these Articles
and for which corporations may be incorporated under the
laws of the Commonwealth of Virginia.
ii) To have and to enjoy all general powers
accorded similar corporations by the laws of the
Commonwealth of Virginia or by the laws of any other state
or territory of which this corporation may be doing business
as now existing or as hereafter enacted.
(d) The aggregate number of shares which the
corporation shall have authority to issue are as follows:
[LOGO BOUNDS
& DORSEY /PC/
APPEARS HERE] Class Number of Shares
----- ----------------
Common 100
<PAGE>
(e) The post office address of the initial registered
is 19 West Church Avenue, Roanoke, Virginia 24011-2015,
which located in the City Roanoke, Virginia.
(f) The name of the initial Registered Agent of this
corportion is Charles N. Dorsey, a Registered Agent who
meets the requirements of Virginia Code (S)13.1-634 and
whose business office is identical with the registered
office of the corporation, who is a resident of Virginia and
a member of the Virginia State Bar.
(g) The number of directors constituting the initial
Board of Directors is 2 and the names and addresses of the
directors are as follows:
Franklin Blankemeyer 142 Sherwood Avenue
Roanoke, Virginia 24
Jeff Akers 353 A Woods Avenue
Roanoke, Virginia 24016
(h) The period of time for which this corporation
shall endure shall be unlimted.
Given under my hand this 11th day of June, 1993
/s/ Charles N. Dorsey
---------------------------------
Charles N. Dorsey, Incorporator
[LOGO OF BOUNDS
AND DORSEY /PC/]
<PAGE>
BYLAWS OF
MR.CAR MAN, INC.
ARTICLE I - OFFICE
------------------
The office of the Corporation shall be located in the
City and State designated in the Articles of Incorporation.
The Corporation may also maintain offices at such other
places within or without the Untied States as the Board of
Directors may, from time to time, determine.
ARTICLE II - SHAREHOLDERS
-------------------------
The Shareholders of the Corporation shall be those who
appear on the books of the Corporation as holders of one or
more shares of the capital stock, and the records of the
Corporation shall be the only evidence as to who are the
shareholders.
ARTICLE III - MEETING OF SHAREHOLDERS
-------------------------------------
Section 1 - Annual Meeting:
---------------------------
The annual meeting of the Shareholders of the
Corporation shall be held on the 6th of July of each year,
at the office of the Corporation, unless otherwise stated in
the notice of meeting.
Section 2 - Special Meeting:
----------------------------
Special meeting of the Shareholders for any purpose or
purposes may be called by the president, the Board of
Directors, or the holders of not less than 20-percent of the
shares then outstanding and entitled to vote at such
meeting.
Section 3 - Notice of Meeting:
------------------------------
Notices of meeting of the Shareholders and waivers of
such notices shall be given or accepted with the appropriate
provisions of the Virginia Stock Corporation Act.
Section 4 - Quorum:
-------------------
At any meeting of the shareholders, the holders of a
[LOGO OF BOUNDS majority of the shares entitled to vote shall constitute a
& DORSEY/PC/ quorum, except as otherwise provided by law. The holders of
APPEARS HERE] such shares may be present in person or presented by proxy
to constitute such quorum.
<PAGE>
Section 5 - Voting
------------------
At each meeting of the Shareholders, every holder of
shares then entitled to vote may vote in person or by proxy
and shall have one vote for each share registered in his or
her name. Except as otherwise provided by statute or by the
Articles of Incorporation, any corporate action shall be
authorized by a majority of votes cast at a meeting of
shareholders by the holders of shares entitled to vote.
ARTICLE IV - BOARD OF DIRECTORS
-------------------------------
Section 1 - Number, Election, and Term of Office:
-------------------------------------------------
The business and affairs of the corporation shall be
managed by a Board of Directors subject to any requirement
of shareholder action required by law. The Board of
Directors shall be composed of one member. This number may
be changed at any time by amendment of these Bylaws in
accord with the Virginia Stock Corporation Act.
The Directors shall be elected at each annual meeting
of the Shareholders. Each Directors shall hold office until
the election of his or her successor. Any Director may
resign at any time. Vacancies occurring among the Directors
may be filled by the Directors.
Section 2 - Annual and Special Meetings:
----------------------------------------
Annual meetings of the Board of Directors shall be held
immediately following the annual meeting of the
Shareholders, at the place of such annual meeting of the
Shareholders. A majority of the qualified members shall
constitute a quorum. Other regular meetings of the Board may
be held without notice at such time and place as the
Directors may determine.
Section 3 - Special Meetings:
----------------------------
Special meetings of the Board of Directors may be
called by the President or by one of the Directors, at
such time and place as may be specified in the respective
notices or waivers of notice.
Section 4 - Manner of Acting:
----------------------------
At all meetings of the Board of Directors, each
[LOGO OF BOUNDS Director present shall have one vote, irrespective of the
& DORSEY\PC\ number of shares of stock, if any, which he or she may hold.
APPEARS HERE] The action of a majority of the Directors present at any
meeting at which a quorum is present shall be the act of the
Board of Directors.
ARTICLE V - OFFICERS
--------------------
<PAGE>
The officers of the Corporation shall be a President,
who shall be a Director and a Secretary/Treasurer, all of
whom shall be elected by the Board of Directors each year as
soon after the annual meeting of the Shareholders as
conveniently may be, and such other Officers as may from
time to time be elected or appointed by the Board of
Directors. The salaries of all Officers shall be fixed by
the Board of Directors. To the extent permitted by law, one
person may hold more than one office of the Corporation.
Each Officer shall hold office until the annual meeting of
the Board of Directors next succeeding his election and
until his successor shall have been elected and qualified or
until his death, resignation, or removal.
ARTICLE VI - PRESIDENT
----------------------
The President shall be the chief executive officer of
the Corporation. The President shall attend and preside at
all meetings of the Board of Directors, exercise general
supervision over the property, business, and affairs of the
Corporation, and do everything and discharge all duties
generally pretaining to his office as the executive head of
a corporation of this character, subject to the control of
the Board of Directors. At each annual meeting of the
Shareholders, the President shall render a general report of
the Corporation's condition in business.
In the absence of the President, the Board of Directors
may designate some other one of their number to discharge
such executive duties as may be required for the time being.
ARTICLE VII - TREASURER
-----------------------
The Treasurer shall, to the extent provided by the
Directors, have charge, and custody, of the funds,
securities of whatsoever nature, and other like property of
the Corporation; the Board of Directors shall designate the
officer or officers, or other persons, who shall give,
negotiate, or endorse checks, notes, and bills as may be
required for the business of the Corporation. The Treasurer
shall have authority to collect funds of the Corporation,
and shall deposit same in such bank or banks as the Board of
Directors from time to time may designate, and the same
shall not be withdrawn thereafter except by checks executed
in accordance with the authority of the Board of Directors.
ARTICLE VIII - SECRETARY
------------------------
The Secretary shall sign, with the President, all
certificates of stock. The Secretary shall keep a book
containing the names of all persons who are now or hereafter
[LOGO OF BOUNDS become Shareholders of the Company, showing their places of
AND DORSEY APPEARS residence, the number of shares held by them respectively,
HERE \PC\] and the time when they respectively became the owners of
such shares. The Secretary shall further keep a record of
the proceedings of the meetings of the Shareholders and
Directors of
<PAGE>
the Corporation; he shall have charge of the seal of the
Corporation, and shall perform such other duties as
pertained to said office, or as the President or Board of
Directors may from time to time require.
ARTICLE IX- DIVIDENDS
---------------------
The Board of Directors of the Corporation may, from
time to time, declare, and the Corporation may pay dividends
on, its shares only in accordance with the provisions of
(S)43 of the Virginia Stock Corporation Act.
ARTICLE X - CORPORATE SEAL
--------------------------
The Corporate Seal of the Corporation shall be that
impressed upon the margin of this page.
ARTICLE XI - INDEMNIFICATION
----------------------------
The Corporation may indemnify its Directors, Officers,
and Employees in the manner, against the matters, and to
full extent provided and permitted by(S)13.1-3.1 of the Code
of Virginia of 1950, as amended.
ARTICLE XII - FISCAL YEAR
-------------------------
The fiscal year of the Corporation shall be fixed by
the Board of Directors.
The foregoing Bylaws of Mr. Car Man, Inc. were duly
adopted by unanimous consent of the Board of Directors of
the Corporation in lieu of the Organizational Meeting.
/s/ Jeff W. Akers
---------------------------
Jeff Akers, Secretary
[LOGO OF BOUNDS
AND DORSEY\PC\
APPEARS HERE]
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 1. Indemnification of Directors and Officers
-----------------------------------------
Sections 13.1-697 and 13.1-702 of the Code of Virginia, as amended, permit
any Virginia Corporation to indemnify its directors and officers against
liability incurred in a proceeding if he conducted himself in good faith and
believed (a) in the case of conduct in his official capacity with the
Corporation that his conduct was in its best interests and (b) in all other
cases that his conduct was at least not opposed to its best interests. In the
case of a criminal proceeding, a Corporation may indemnify a director made party
to such proceeding if he had no reasonable cause to believe his conduct was
unlawful. A Corporation may not indemnify a director under those Sections in
connection with a proceeding by or in the right of the Corporation in which the
director was adjudged liable to the Corporation or in connection with any other
proceeding charging improper personal benefit to the director, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under those Sections in connection with a proceeding by or in the
right of the Corporation is limited to reasonable expenses incurred in
connection with the proceeding. Unless limited by its Articles of
Incorporation, the Corporation is required to provide mandatory indemnification
to an officer or director who entirely prevails in the defense of any proceeding
to which he was a party because he is or was an officer or director of the
Corporation against reasonable expenses incurred by him in connection with the
proceeding. Also, unless limited by the Corporation's Articles of
Incorporation, an officer or director of the Corporation who is a party to a
proceeding may apply for indemnification to the court conducting the proceeding
or seek indemnification in another court of competent jurisdiction. The court
may order indemnification if it determines the officer or director is entitled
to mandatory indemnification as described above, in which case the court shall
also order the Corporation to pay the officers, or directors' reasonable
expenses incurred in obtaining court-ordered indemnification, or, with respect
to a proceeding by or in the right of the Corporation, the officer or director
is found by the court to be fairly and reasonably entitled to indemnification in
view of all the relevant circumstances even though he was adjudged liable, but
any indemnification shall be limited to reasonable expenses incurred. The
Corporation is given the power to make further indemnity to any officers or
directors that may be authorized by the Articles of Incorporation or any By-law
made by the stockholders or any resolution adopted, before or after the event,
by the stockholders, except an indemnity against gross negligence or willful
misconduct.
The Articles of Incorporation of Genesis Financial Group, Inc. provides
that the directors and officers of the Company may be indemnified in the manner,
against the matters, and to the full extent provided by the Code of Virginia.
Item 2. Other Expenses of Income and Distribution
-----------------------------------------
All costs and expenses relating to the issuance and distribution of the
Notes by the Company pursuant to the Offering are set forth in the Prospectus in
the section captioned "Use Of Proceeds" to which section reference is hereby
made.
Item 3. Undertakings
------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to provisions of the Code of Virginia or the Articles of Incorporation
or Bylaws of the Company or resolution of the Company's stockholders adopted
pursuant thereto, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
II-1
<PAGE>
Page 2
September 25, 1997
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
of the Company in connection with the securities being registered, the Company
will, unless in the option 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 Securities Act and will be governed by the final adjudication
of such issue.
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;
(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 the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) For determining any liability under the Securities Act, to treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)1 or (4)
or 497(h) under the Securities Act ((S)(S) 230.424(b)(1), (4) or
230.497(h)) as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Item 4. Unregistered Securities Issued or Sold Within the Past Two Years
----------------------------------------------------------------
Mr. Car Man, Inc. ("MCMI") has sold in excess of $950,000.00 of Contracts
within two years prior to the filing of this Registration Statement. The
offering was consummated in December of 1995. MCMI conducted the prior offering
in reliance upon Rule 504 of Regulation D promulgated under the Securities Act
of 1933 which permits offerings of securities not in excess of $1,000,000.00.
II-2
<PAGE>
Page 3
September 25, 1997
Items 5 and 6. Exhibit Index and Description:
-----------------------------
Exhibit No. Description
- ----------- -----------
(2) Articles of Incorporation and Bylaws of Genesis Financial Group,
Inc. and Mr. Car Man, Inc.
(3) Specimen copy of Note to be issued to investors; and Indenture
(4) Specimen copy of Letter
(6) Lease dated July 14, 1994, and Addenda by and between Rebecca L.
Grasse and Mr. Car Man, Inc. and Lease dated July 17, 1995, and
Addenda by and between J. D. Fralin and Mr. Car Man, Inc.
10(a) Consent of Hope Player and Associates, P.C.
10(a) Consent of Magee, Foster, Goldstein & Sayers, P.C. (included in
Exhibit No. 11)
(11) Opinion of Magee, Foster, Goldstein & Sayers, P.C.
-----------------------------------
FRANKLIN W. BLANKEMEYER, JR.
-----------------------------------
JEFFREY W. AKERS
In accordance with 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 of filing on Form SB-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Roanoke,
State of Virginia, on ___________________, 1997.
(Registrant) Genesis Financial Group, Inc., a Virginia corporation
By (Signature and Title)
----------------------------------------
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
(Signature)
----------------------------------------
Franklin W. Blankemeyer, Jr.
(Title) President, Secretary, Director
--------------------------------------------
Signature)
----------------------------------------
Jeffrey W. Akers
(Title) Vice-President, Treasurer, Director
--------------------------------------------
II-3
<PAGE>
[LETTERHEAD OF HOPE PLAYER AND ASSOCIATES, P.C. CERTIFIED PUBLIC ACCOUNTANTS
APPEARS HERE]
EXHIBIT 10(a)
December 18, 1997
Mr. Richard Sayers
Magee, Foster, Goldstein & Sayers
P O Box 404
Roanoke, Virginia 24003-0404
Dear Mr. Sayers:
This letter is to authorize you to include my Independent Auditor's Report
relating to the audited financial statements for Genesis Financial Group, Inc.
as of December 31, 1995 and 1996 and the years then ended in the securities
registration statements for Genesis Financial Group, Inc. for $7.5 million in
corporate promissory notes.
If you should need any additional information, please do not hesitate to contact
me.
Sincerely,
HOPE PLAYER AND ASSOCIATES, P.C.
/s/ W. Hope Player
W. Hope Player, CPA, CFP, CVA
WHP:fd
<PAGE>
[LETTERHEAD OF MAGEE, FOSTER, GOLDSTEIN & SAYERS APPEARS HERE]
December 22, 1997
Genesis Financial Group, Inc.
4206 Williamson Road
Roanoke, Virginia 24012
Re: Form SB-1 Registration Statement/Offering of Promissory
Notes Totalling $7,500,000.00
Gentlemen:
This letter is delivered to you in connection with Genesis Financial Group,
Inc.'s (the "Company") registration on Form SB-1 of up to $7,500,000.00 in
corporate promissory notes ("Notes").
We have acted as special counsel to the Company in connection with the
offering of the Notes which transaction is more particularly detailed and
described in a preliminary prospectus ("Prospectus") being part of the
Registration Statement filed with the Securities and Exchange Commission to
which reference is hereby made. In connection with rendering this opinion, we
have examined drafts, originals, or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments and
documents as we have deemed necessary or appropriate for the purposes of this
opinion, including:
(a) Copy of the Registration Statement and Pre-Effective Amendments
Nos. 1, 2, 3 and 4 thereto and accompanying form of Prospectus;
(b) Form of Note;
(c) Articles of Incorporation and Bylaws of the Company;
(d) Indenture;
(e) Certificate of Good Standing of the Company from the State
Corporation Commission of the Commonwealth of Virginia; and
(f) Certified Resolutions of the Board of Directors of the Company.
In rendering this opinion, we have relied, as to all matters of fact
material to this opinion, upon certificates of public officials and upon
representations and warranties of the officers and directors of the Company
contained in the aforementioned documents. This opinion is limited to the laws
of the Commonwealth of Virginia and the federal laws of the United States and we
<PAGE>
Page 2
December 22, 1997
express no opinion as to the laws of any other jurisdiction.
Insofar as the opinion herein makes reference to our knowledge or
awareness, they are given subject to the express understanding that we have made
no independent investigation or file or docket search in connection with such
opinions, that "knowledge" or "awareness" does not include constructive notice
or knowledge of any matters or facts and that our "awareness" refers solely to
the actual awareness of attorneys presently with our firm who have worked on
substantive matters for the Company. The statement that something is the case,
"insofar as we are aware" or "to our knowledge" means only that we have made no
independent investigation or file or docket search in connection with such
opinions, that our "knowledge" or "awareness" does not include constructive
notice or knowledge of any matters or facts and that our "awareness" refers
solely to the actual awareness of attorneys presently with our firm who have
worked on substantive matters for the Company. The statement that something is
the case, "insofar as we are aware" or "to our knowledge", means only that we
are not aware of any facts or circumstances which would render such statements
false, and does not imply that we know or have reason to believe that the
statement is true.
For purposes of this opinion, we have assumed, without independent
verification:
(i) The genuineness of all signatures, except those of the executive
officers of the Company;
(ii) The legal capacity of all natural persons who have signed documents
examined by us;
(iii) The authenticity of all documents submitted to us as originals and
the conformity to original documents of all documents submitted to us
as certified or photostatic copies;
(iv) That all drafts of documents submitted to us for review will
constitute the final documents to be executed by the parties with the
exception of minor, immaterial changes and that we have received all
material changes and amendments to the documents previously submitted
in unexecuted, draft form;
(v) The factual accuracy and completeness of all certificates submitted
to us and the factual accuracy and completeness of each of the
representations and warranties as to matters of fact made in the
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Page 3
December 22, 1997
Prospectus.
Based upon and subject to the foregoing, and subject also to the
qualifications set forth below, we are of the following opinion:
1. The Company is a corporation validly existing and in good standing
under the laws of the Commonwealth of Virginia. The Company has the
corporate power and authority to own, use and lease its properties and
to carry on its business as currently conducted and as proposed to be
conducted under the Prospectus. The Company is qualified to do
business as a corporation in those jurisdictions in which the conduct
of its business as described in the Prospectus requires such
qualification.
2. The Notes, when issued and sold by the Company, will be validly and
legally issued; will constitute binding obligations of the Company;
and have been duly authorized by the Company.
3. The execution and/or issuance of the Notes, and the consummation of
the transactions contemplated under the Prospectus will not result in
any breach of any of the terms and conditions of, or constitute a
default under the provisions of: (a) the Company's Articles of
Incorporation or Bylaws; (b) to the best of our knowledge, any
mortgage, loan, commitment, indenture, agreement or other instrument
of which we have knowledge and to which the Company is a party; or
(c) to the best of our knowledge, violate, insofar as it is directed
to the Company, any order of any court or any federal or state
regulatory body or administrative agency having jurisdiction over it.
The opinions contained herein are subject to the following conditions and
qualifications:
(A) The opinion expressed in Paragraph 1, insofar as it relates to the
validity, good standing and corporate existence of the Company in the
Commonwealth of Virginia, is based solely upon the Certificate
referred to in clause (e) above.
The opinions set forth in this letter are limited to the specific issues
addressed herein and to statutes, regulations, rules, decisions, decrees and
facts existing on the date hereof.
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Page 4
December 22, 1997
By rendering such opinions, we disclaim any obligation to advise any party to
whom this opinion is addressed of any change in any of these sources of law or
of any subsequent legal or factual developments which might effect any matters
addressed or opinions set forth herein.
The opinions set forth herein are rendered for the use by the Company in
filing a Registration Statement on Form SB-1 with the Securities and Exchange
Commission. We hereby consent to the references to this firm under the heading
"Legal Matters" and to the filing of this opinion as an exhibit to the
Registration Statement.
Yours very truly,
MAGEE, FOSTER, GOLDSTEIN & SAYERS, P.C.
By: /s/ Richard R. Sayers
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Richard R. Sayers, Vice President
