Document:

Form 10-QSB Exhibits Index

Exhibit 10.1.           Genesis Financial, Inc. Stock

Investment Agreement dated January 25, 2002

 

 

GENESIS FINANCIAL, INC.

STOCK INVESTMENT AGREEMENT

 

This Agreement is made as of January 25,

2002, among GENESIS FINANCIAL, INC., a Washington corporation (the “GENESIS”),

and the Purchasers listed in Section 1.1.2, below (the “Purchasers”).

 

1.                                       Authorization

and Sale of Common Stock and Convertible Debt.

 

1.1.                              Common Stock.

 

1.1.1.                     Authorization.  GENESIS will authorize the sale and issuance

of up to 500,000 shares (the “Shares”) of its common stock (the “Common

Stock”).

 

1.1.2.                     Sale of Common Stock. Subject to

the terms and conditions hereof, GENESIS will severally issue and sell to each

of such Purchasers, and the Purchasers will severally buy from GENESIS, the total

number of shares of Common Stock at the aggregate purchase price set forth in

the following table.  References to

“Purchaser” in the remainder of this Stock Investment Agreement (this

“Agreement”) will be to the individual listed purchasers set forth in the

Table, or all of the listed purchasers, as the context requires.

 

	

  Name

  	

   

  	

  Shares

  	

   

  	

  Consideration

  	

   

  
	

  Michael A. Kirk (“Kirk”)

  	

   

  	

  25,000

  	

   

  	

  $

  	

  25,000

  	

   

  
	

  Douglas B. Durham (“Durham”)

  	

   

  	

  25,000

  	

   

  	

  $

  	

  25,000

  	

   

  
	

  Temporary Financial Services, Inc. (“TFS”)

  	

   

  	

  200,000

  	

   

  	

  $

  	

  200,000

  	

   

  
	

  Temporary Financial Services, Inc. (“TFS”)

  	

   

  	

  250,000

  	

   

  	

  50,000

  shares of TFS Common Stock valued at $5.00 per share or $250,000 in the

  aggregate.

  	

   

  
	

  Totals

  	

   

  	

  500,000

  	

   

  	

  $

  	

  500,000

  	

   

  

 

1.2.                              Convertible

Debt.  In addition to the Common Stock

being purchased pursuant to Section 1.1, TFS will also loan Genesis $200,000 in

the form of Convertible Debt, evidenced by a Convertible Note (the “Convertible

Note”), incorporating the following terms and conditions is attached as Exhibit

A.

 

1.2.1.                     The

Convertible Note will mature on January 4, 2004.

 

1.2.2.                     The

interest rate will be 6%, and interest shall accrue from the date the principal

amount is advanced to GENESIS.

 

1.2.3.                     TFS

will enter into appropriate subordination agreements with GENESIS’ senior

lender if required by Genesis’ senior secured lender or if necessary to

facilitate favorable terms on the senior secured debt.

 

1.2.4.                     The

Convertible Note will contain loan covenants and default provisions that mirror

the default provisions of any senior secured debt.

 

1.2.5.                     The

Convertible Note will be convertible into additional shares of Genesis’ common

stock at the rate of $1.00 per share for the principal at the date of

conversion (up to a maximum of 200,000 shares).  If the holder of the Convertible Note elects to convert, the

interest accrued to the date of conversion may be converted into stock at the

rate of $1.00 per share, or paid in cash, at the election

 

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of Genesis. 

The Convertible Debt may be converted into Common Stock at any time

after January 1, 2003.

 

1.2.6.                     The

common stock underlying the conversion feature of the Convertible Note is

hereafter referred to as the Conversion Stock.

 

2.                                       Closing

Dates: Delivery

 

2.1.                              Closing Dates. The closing of the

purchase and sale of the Common hereunder shall be held at the offices of

Temporary Financial Services, Inc. at 1:00 p.m., on January 25, 2002 (the

“Closing”), or at such other time and place that GENESIS and the Purchasers

shall agree (the date of the Closing is hereinafter referred to as the “Closing

Date”).

 

2.2.                              Delivery.

 

2.2.1.                     At the Closing, GENESIS will

deliver to each Purchaser a certificate or certificates, registered in such

Purchaser’s name and in the amount as set forth on the Section 1.1.2, against

payment of the purchase price.

 

2.2.2.                     At the Closing, GENESIS will

deliver to TFS, the executed Convertible Note against payment of the face

amount.

 

2.2.3.                     At Closing, TFS will deliver

payment for the Common Stock, the Convertible Note, and a Certificate for

50,000 shares of TFS Common Stock.

 

3.                                       Representations

and Warranties of GENESIS

 

3.1.                              Organization and Standing;

Articles and Bylaws. GENESIS is a corporation duly organized and existing

under, and by virtue of, the laws of the State of Washington and is in good

standing under such laws. GENESIS has requisite corporate power and authority

to own and operate its properties and assets, and to carry on its business as

presently conducted and as proposed to be conducted. GENESIS is not presently qualified

to do business as a foreign corporation in any jurisdiction, and the failure to

be so qualified will not have a materially adverse affect on GENESIS’ business

as now conducted or as now proposed to be conducted.

 

3.2.                              Corporate Power. GENESIS will

have at the Closing Date all requisite legal and corporate power and authority

to execute and deliver this agreement, to sell and issue the Common Stock

hereunder, and to carry out and perform its obligations under the terms of this

Agreement.

 

3.3.                              Subsidiaries. GENESIS has no

subsidiaries or affiliated companies and does not otherwise own or control,

directly or indirectly, any equity interest in any corporation, association or

business entity.

 

3.4.                              Capitalization. The authorized

capital stock of GENESIS consists, or at the Closing Date will consist, of

100,000,000 shares of common stock, of which 1,400,000 shares are issued and

outstanding, and 10,000,000 shares of Preferred Stock, none of which

 

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is issued and outstanding. The outstanding

shares have been duly authorized and validly issued, and are fully paid and

nonassessable. GENESIS has reserved shares of Common Stock for issuance

hereunder, 224,000 shares of common stock for issuance upon conversion of the

Convertible Note, and 650,000 shares of common stock for issuance to employees,

consultants, or directors under stock plans or arrangements approved by its

Board of Directors. No options to purchase shares of common stock are currently

issued and outstanding. All outstanding securities of GENESIS were issued in

compliance with applicable federal and state securities laws.

 

3.5.                              Authorization. All corporate

action on the part of GENESIS, its directors and shareholders necessary for the

authorization, execution, delivery and performance of this Agreement by

GENESIS, the authorization, sale, issuance and delivery of the Common Stock,

the Convertible Note and the Conversion Stock and the performance of all of

GENESIS’ obligations hereunder has been taken or will be taken prior to the

Closing. This Agreement, when executed and delivered by GENESIS, shall

constitute a valid and binding obligation of GENESIS, enforceable in accordance

with its terms. The Shares, when issued in compliance with the provisions of

this Agreement, will be validly issued, fully paid and nonassessable.

 

3.6.                              Financial Statements. GENESIS is

a newly formed company and all of the company’s initial capitalization will be

the result of the transactions described in this Agreement.  Accordingly, financial statements will not

be required prior to the Closing Date.

 

3.7.                              Material Liabilities. GENESIS

has no material liabilities or obligations, except the liabilities and

obligations incurred in connection with the organization of the corporation and

the preparation of documentation for this transaction.

 

3.8.                              Litigation, etc. There are no

actions, suits, proceedings or investigations pending against GENESIS or its

properties before any court or governmental agency (nor, to the best of GENESIS’

knowledge, is there any reasonable basis for or threat of such litigation).

 

3.9.                              Employees. To the best of

GENESIS’ knowledge, no employee of GENESIS is in violation of any term of any

employment contract or any other contract or agreement relating to the

relationship of such employee with GENESIS or any other party as a result of

the business conducted or to be conducted by GENESIS.

 

3.10.                        Certain Transactions. GENESIS is

not indebted, directly or indirectly, to any of its officers, directors or

shareholders or to their respective spouses or children, and none of its

officers, directors or, to the best of GENESIS’ knowledge, shareholders, or any

members of their immediate families, are indebted to GENESIS.

 

3.11.                        Material Contracts and

Obligations. Except as noted on Exhibit B (attached), GENESIS is not subject to

any material contracts or obligations.

 

3.12.                        Registration Rights. Except as

set forth in this Agreement, GENESIS is not under any contractual obligation to

register any of its presently outstanding securities or any of its securities

which may hereafter be issued.

 

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3.13.                        Governmental Consent, etc. No

consent, approval or authorization of (or designation, declaration or filing

with) any governmental authority is required in connection with the valid

execution and delivery of this Agreement, or the offer, sale or issuance of the

Common Stock, or the consummation of any other transaction contemplated hereby.

 

3.14.                        Offering.  The offer, sale and issuance of the Common

Stock and the Convertible Debt to be issued in conformity with the terms of

this Agreement, constitute transactions exempt from the registration

requirements of Section 5 of the Securities Act of 1933, as amended (the

“Securities Act”).

 

3.15.                        Brokers or Finders; Other

Offers. Except as described in Exhibit C (attached), GENESIS has not incurred,

and will not incur, directly or indirectly, as a result of any action taken by

GENESIS, any liability for brokerage or finders’ fees or agents’ commissions or

any similar charges in connection with this Agreement.

 

3.16.                        Employee Benefit Plans. GENESIS

does not have any Employee Benefit Plan as defined in the Employee Retirement

Income Security Act of 1974, as amended. 

It is understood by the parties that GENESIS intends to adopt an

Employee Benefit Plan following the Closing Date.  The Employee Benefit Plan will allow for grants of incentive

stock options (ISO’s), and for Non-qualified Stock Options (NQSO’s).  As described in Section 3.4., GENESIS

intends to reserve up to 650,000 Common shares for distribution under the

plan.  Of the 650,000 shares reserved

for issuance under the plan, options for 500,000 shares are reserved for key

employees and/or consultants of GENESIS, and 150,000 may be directed to persons

selected by TFS.  The grant of options

under the plan will be subject to the discretion and approval of the Board of

Directors of GENESIS.  Any options

issued to Kirk, Durham, TFS, Coghlan, or their affiliates will include vesting

at 20% per year over a five year period and an option price of 120% of the fair

market value of the shares at the time of the grant.

 

3.17.                        Minute Books. The minute books

of GENESIS provided to counsel for the Purchasers contain a complete summary of

all meetings of directors and shareholders since the time of incorporation and

reflect all transactions referred to in such minutes accurately in all material

respects.

 

3.18.                        Disclosure. This Agreement with

the Exhibits and GENESIS’ Business Plan, when taken as a whole, do not contain

any untrue statement of a material fact or omit to state a material fact

necessary in order to make the statements contained herein or therein not

misleading in light of the circumstances under which they were made. The

Business Plan and the financial projections contained in the Business Plan were

prepared in good faith; however, GENESIS does not warrant that it will achieve

such financial projections.

 

4.                                       SECTION 4 -

Representations and Warranties of the Purchasers

 

Each Purchaser hereby severally

represents and warrants to GENESIS with respect to the purchase of the Shares

as follows:

 

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4.1.                              Experience. It has substantial

experience in evaluating and investing in private placement transactions of

securities in companies similar to GENESIS so that it is capable of evaluating

the merits and risks of its investment in GENESIS and has the capacity to

protect its own interests.

 

4.2.                              Investment Intent. It is

acquiring the Common Stock for investment for its own account, not as a nominee

or agent, and not with the view to, or for resale in connection with, any

distribution thereof. It understands that the Shares and the Conversion Stock

have not been, and will not be, registered under the Securities Act by reason

of a specific exemption from the registration provisions of the Securities Act,

the availability of which depends upon, among other things, the bona fide

nature of the investment intent and the accuracy of such Purchaser’s

representations as expressed herein and in the Suitability Questionnaire.

 

4.3.                              Rule 144. It acknowledges that

the Common Stock must be held indefinitely unless subsequently registered under

the Securities Act or unless an exemption from such registration is available.

It is aware of the provisions of Rule 144 promulgated under the Securities Act

(Rule 144) which permits limited resale of shares purchased in a private

placement subject to the satisfaction of certain conditions, including, among

other things, the existence of a public market for the shares.

 

4.4.                              No Public Market. It understands

that no public market now exists for any of the securities issued by GENESIS

and that GENESIS has made no assurances that a public market will ever exist

for GENESIS’ securities.

 

4.5.                              Access to Data. It has had an

opportunity to discuss GENESIS’ business, management and financial affairs with

GENESIS’ management and has had the opportunity to review GENESIS’ facilities

and Business Plan. It has also had an opportunity to ask questions of officers

of GENESIS, which questions were answered to its satisfaction. It understands

that such discussions, as well as any written information issued by GENESIS,

including the Business Plan, were intended to describe certain aspects of

GENESIS’s business and prospects but were not a thorough or exhaustive

description.

 

4.6.                              Authorization. This Agreement

when executed and delivered by such Purchaser will constitute a valid and

legally binding obligation of the Purchaser, enforceable in accordance with its

terms.

 

4.7.                              Brokers or Finders. Except as

described in Exhibit C, GENESIS has not incurred and will not incur, directly

or indirectly, as a result of any action taken by such Purchaser, any liability

for brokerage or finders’ fees or agents’ commissions or any similar charges in

connection with this Agreement.

 

5.                                       Purchasers’

Conditions to Closing

 

The Purchasers’ obligations to

purchase the Shares at the Closing are subject to the fulfillment of the

following conditions, the waiver of which shall not be effective against any

Purchaser who does not consent in writing thereto:

 

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5.1.                              Representations and Warranties

Correct. The representations and warranties made by GENESIS in Section 3 hereof

shall be true and correct when made, and shall be true and correct on the

Closing Date.

 

5.2.                              Covenants. All covenants,

agreements and conditions contained in this Agreement to be performed by

GENESIS on or prior to the Closing Date shall have been performed or complied

with in all material respects.

 

5.3.                              Compliance with State Securities

Laws. GENESIS shall have obtained all permits and qualifications required by

any state for the offer and sale of the Shares and the Convertible Debt

(including the underlying stock to be issued on conversion), or shall have the

availability of exemptions therefrom.

 

5.4.                              Legal Matters. All material

matters of a legal nature which pertain to this Agreement and the transactions

contemplated hereby shall have been reasonably approved by counsel to the

Purchasers.

 

5.5.                              Directors. Effective as of the

Closing Date, GENESIS’s Board of Directors will consist of Michael A. Kirk,

Douglas B. Durham and Brad E. Herr.

 

6.                                       SECTION 6 -

GENESIS’s Conditions to Closing

 

GENESIS’s obligation to sell and

issue the Shares at the Closing Date is, at the option of GENESIS, subject to

the fulfillment as of the Closing Date of the following conditions:

 

6.1.                              Representations and Warranties

Correct. The representations made by the Purchasers in Section 4 hereof shall

be true and correct when made, and shall be true and correct on the Closing

Date.

 

6.2.                              Compliance with State Securities

Laws. GENESIS shall have obtained all permits and qualifications required by

any state for the offer and sale of the Shares and the Conversion Stock, or

shall have the availability of exemptions therefrom.

 

6.3.                              Legal Matters. All material

matters of a legal nature which pertain to this Agreement, and the transactions

contemplated hereby, shall have been reasonably approved by counsel to GENESIS

and counsel to Purchasers.

 

6.4.                              Grant of Option.  At or prior to Closing, TFS shall have

provided to Kirk and Durham, an option to purchase up to 200,000 shares of the

Genesis Common Stock that TFS is acquiring pursuant to this Stock Investment

Agreement.  The form of the Option is

attached as Exhibit D.

 

7.                                       SECTION 7 -

Affirmative Covenants of GENESIS

 

GENESIS hereby covenants and

agrees as follows:

 

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7.1.                              Financial Information. Subject

to Section 7.4, GENESIS will mail the following reports to each Purchaser for

so long as such Purchaser is a holder of any of the Common Stock or Convertible

Note:

 

7.1.1.                     As soon as practicable after the

end of each fiscal year, and in any event within 90 days thereafter,

consolidated balance sheets of GENESIS and its subsidiaries, if any, as of the

end of such fiscal year, and consolidated statements of operations and

consolidated statements of cash flows of GENESIS and its subsidiaries, if any,

for such year, prepared in accordance with generally accepted accounting

principles and setting forth in each case in comparative form similar

information for the previous fiscal year, all in reasonable detail and audited

or reviewed by independent public accountants selected by GENESIS.

 

7.1.2.                     As soon as practicable after the

end of the first, second and third quarterly accounting periods in each fiscal

year of GENESIS and in any event within 45 days thereafter, a consolidated

balance sheet of GENESIS and its subsidiaries, if any, as of the end of each

such quarterly period, and consolidated statements of operations and

consolidated statements of cash flows of GENESIS and its subsidiaries, if any,

for such period and for the current fiscal year to date, prepared in accordance

with generally accepted accounting principles (other than for accompanying

notes), all in reasonable detail and certified by an officer of GENESIS.

 

7.2.                              Assignment of Rights to

Financial Information. The rights granted pursuant to Section 7.1 may not be

assigned or otherwise conveyed by any Purchaser or by any subsequent transferee

of any such rights without the prior written consent of GENESIS.

 

7.3.                              Termination of Covenants. The

covenants set forth in Sections 7.1 shall terminate and be of no further force

or effect at such time as GENESIS is required to file reports pursuant to

Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the

“Exchange Act”).

 

7.4.                              Key Man Life Insurance. As soon

as possible after the Closing Date, GENESIS shall use its best efforts to

obtain and shall thereafter maintain key man life insurance on the lives of

Michael A. Kirk and Douglas B. Durham in the amount of $-0- each, with all

proceeds payable to GENESIS.

 

7.5.                              Employment Agreements.  GENESIS will enter into employment

agreements with Kirk and Durham.  The

form of the employment agreements are included as Exhibit E (attached).

 

7.6.                              Confidentiality Agreements.

Unless otherwise determined by the Board of Directors, all future employees and

consultants of GENESIS who have access to confidential information shall be

required to execute and deliver Confidentiality Agreements in substantially the

form of Exhibit F attached hereto. 

Prior to Closing, Genesis shall

 

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have obtained such Confidentiality Agreements

from Kirk and Durham (contained in their employment agreements).

 

7.7.                              Taxes and Other Liabilities.

GENESIS will pay and discharge, before the same become delinquent and before

penalties accrue thereon, all undisputed taxes, assessments and governmental

charges upon or against it or any of its properties, and all its other

undisputed material liabilities at any time existing.

 

7.8.                              Notice of Litigation and

Disputes. GENESIS will promptly notify each Purchaser that is entitled to

receive financial statements pursuant to Section 7.1 of any suits or litigation

instituted against it, if such suit would have a material adverse effect on

GENESIS.

 

7.9.                              Election of Directors. So long

as at least one-quarter of the Common Stock issued hereunder and/or upon

conversion of the Convertible Note are held of record by Purchasers, (a) KIRK

and DURHAM agree that in any election of a director or directors of GENESIS,

they shall vote all of their shares of capital stock of GENESIS in such a

manner that immediately after such election GENESIS’ Board of Directors shall

include at least one representative selected by Temporary Financial Services,

Inc., (b) GENESIS will use its best efforts to cause such representative(s) to

be elected to GENESIS’s Board of Directors; and (c) in the event of any vacancy

on the Board of Directors, GENESIS and KIRK and DURHAM will use their best

efforts to fill the vacancy such that the Board will include the

representative(s) selected by Temporary Financial Services,Inc.  If GENESIS is determined to be in default

under its senior credit facility, or is in default under the Convertible Note,

TFS will be entitled to the number of representatives equal to a majority of

the Board of Directors, and that number shall be substituted for “one” in

Paragraph 7.8(a), above.

 

7.10.                        Use of Proceeds. GENESIS shall

use the proceeds from the sale of the Shares and the Convertible Debt for

working capital in accordance with the financial projections included in the

Business Plan.

 

7.11.                        Rule 144 Reporting. With a view

to making available to the Purchasers the benefits of certain rules and

regulations of the Securities and Exchange Commission which may permit the sale

of the Common Stock and Conversion Stock to the public without registration,

after such time as a public market exists for the Common Stock of GENESIS,

GENESIS agrees to use its best efforts to:

 

7.11.1.               Make and keep public information

available, as those terms are understood and defined in Rule 144 under the

Securities Act, at all times after the date that GENESIS becomes subject to the

reporting requirements of the Exchange Act;

 

7.11.2.               Use its best efforts to file

with the Securities and Exchange Commission in a timely manner all reports and

other documents required of GENESIS under the Securities Act and the Exchange

Act (at any time after it has become subject to such reporting requirements);

and

 

8

 

7.11.3.               So long as a Purchaser owns any

Restricted Securities (as defined in Section 8.1 hereof), furnish to the

Purchaser forthwith upon request a written statement by GENESIS as to its

compliance with the reporting requirements of Rule 144, and of the Securities

Act and the Exchange Act (at any time after it has become subject to such

reporting requirements), a copy of the most recent annual or quarterly report

of GENESIS filed with the Securities and Exchange Commission, and such other

reports and documents of GENESIS and other information in the possession of or

reasonably obtainable by GENESIS as a Purchaser may reasonably request in

availing itself of any rule or regulation of the Securities and Exchange

Commission allowing a Purchaser to sell any such securities without

registration.

 

8.                                       SECTION 8 —

Restrictions on Transferability of Securities; Compliance with Securities Act;

Registration Rights

 

8.1.                              Restrictions on Transferability.

The Common Stock and the Convertible Note and/or the Conversion Stock shall not

be sold, assigned, transferred or pledged except in compliance with applicable

laws and regulations governing the transfers of restricted securities.

 

8.2.                              Restrictive Legend. Each

certificate representing (i) the Common Stock, (ii) the Convertible Note, (iii)

the Conversion Stock and (iv) any other securities issued in respect of the

Common Stock, the Convertible Note, or the Conversion Stock, upon any stock

split, stock dividend, recapitalization, merger, consolidation or similar

event, shall be stamped or otherwise imprinted with a legend in the following

form (in addition to any legend required under applicable state securities

laws):

 

THE SHARES REPRESENTED BY THIS

CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED. SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED

IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES

UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT

SUCH REGISTRATION IS NOT REQUIRED. COPIES OF THE AGREEMENT COVERING THE

PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO

COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE

SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE

CORPORATION.

 

8.3.                              Each Purchaser and Holder

consents to GENESIS making a notation on its records and giving instructions to

any transfer agent of the Shares or the Conversion Stock in order to implement

the restrictions on transfer established in this Section 8.

 

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8.4.                              Registration Rights.

 

8.4.1.                     Notice of Registration. If at

any time or from time to time GENESIS shall determine to register any of its

securities, either for its own account or the account of a security holder or holders,

other than a registration relating solely to employee benefit plans or a

registration relating solely to a Commission Rule 145 transaction, GENESIS

will:

 

8.4.1.1.                                    promptly

give to each Purchaser under this Agreement written notice thereof; and

 

8.4.1.2.                                    include

in such registration (and any related qualification under blue sky laws or

other compliance), and in any underwriting involved therein, all the

Registrable Securities specified in a written request or requests, made within

20 days after receipt of such written notice from GENESIS, by any Purchaser.

 

8.4.1.3.                                    For

this purpose, the Registrable Securities include all of the Common Stock, and

the Conversion Stock (if any is then outstanding), being purchased by

Purchasers in accordance with the terms of this Stock Investment Agreement. In

this Section 8, the owners of the Registrable Securities at the time of the

proposed registration are referred to as Holders of the securities.

 

8.4.2.                     Underwriting. If the

registration of which GENESIS gives notice is for a registered public offering

involving an underwriting, GENESIS shall so advise the Purchasers as a part of

the written notice given pursuant to Section 8.4.1.1. In such event the right

of any Purchaser to registration pursuant to this Section 8.4 shall be

conditioned upon:

 

8.4.2.1.                                    such Purchaser’s participation

in such underwriting and the inclusion of such Purchaser’s Registrable

Securities in the underwriting to the extent provided herein.

 

8.4.2.2.                                    All Purchasers proposing to

distribute their securities through such underwriting shall (together with

GENESIS and any other shareholders distributing their securities through such

underwriting) enter into an underwriting agreement in customary form with the

managing underwriter selected for such underwriting by GENESIS. Notwithstanding

any other provision of this Section 8.4, if the managing underwriter determines

that marketing factors require a limitation of the number of shares to be

underwritten, the managing underwriter may limit the Registrable Securities to

be included in such registration.

 

8.4.2.2.1.                           GENESIS shall so advise all

Holders and the number of shares of Registrable Securities that may be included

in the registration and underwriting shall be allocated among all Holders in

proportion, as nearly as practicable, to the respective amounts of Registrable

Securities held by such Holders at the time of filing the registration

 

10

 

statement. To facilitate the allocation of

shares in accordance with the above provisions, GENESIS may round the number of

shares allocated to any Holder or other shareholder to the nearest 100 shares.

 

8.4.2.2.2.                           If any Holder or other

shareholder disapproves of the terms of any such underwriting, he may elect to

withdraw therefrom by written notice to GENESIS and the managing underwriter.

Any securities excluded or withdrawn from such underwriting shall be withdrawn

from such registration, and shall not be transferred in a public distribution

prior to 90 days after the effective date of the registration statement

relating thereto, or such other shorter period of time as the underwriters may

require. GENESIS may include shares of Common Stock held by shareholders other

than Holders in a registration statement pursuant to this Section 8.6 to the

extent that the amount of Registrable Securities otherwise includible in such

registration statement would not thereby be diminished.

 

8.4.3.                     Right to Terminate Registration.

GENESIS shall have the right to terminate or withdraw any registration

initiated by it under this Section 8.4 prior to the effectiveness of such

registration whether or not any Holder has elected to include securities in

such registration.

 

8.5.                              Limitations on Subsequent

Registration Rights. From and after the Closing Date, GENESIS shall not enter

into any agreement granting any holder or prospective holder of any securities

of GENESIS registration rights with respect to such securities unless (i) such

new registration rights, including standoff obligations, are on a pari passu

basis with those rights of the Holders hereunder; or (ii) such new registration

rights, including standoff obligations, are subordinate to the registration

rights granted Holders hereunder.

 

8.6.                              Expenses of Registration.  All Registration Expenses incurred in

connection with registrations pursuant to Section 8.4, shall be borne by

GENESIS. Unless otherwise stated, all Selling Expenses relating to securities

registered on behalf of the Holders and all other Registration Expenses shall

be borne by the Holders of such securities pro rata on the basis of the number

of shares so registered.

 

8.7.                              Information by Holder. The

Holder or Holders of Registrable Securities included in any registration shall

furnish GENESIS such information regarding such Holder or Holders, the

Registrable Securities held by them and the distribution proposed by such

Holder or Holders as GENESIS may request in writing and as shall be required in

connection with any registration, qualification or compliance referred to in

this Section 8.

 

8.8.                              Indemnification.  If a registration is effected pursuant to

Section 8.4, GENESIS will indemnify Purchasers, and Purchasers will indemnify

GENESIS for any expenses, claims, losses, damages, or liabilities, which result

to the party seeking indemnification as a result of the misrepresentation or

failure to disclose one or more

 

11

 

material facts by the party from whom

indemnification is sought.  Appropriate

indemnification language will be included in the registration documents at the

time the registration is undertaken.

 

9.                                       Purchasers’

Right of First Refusal

 

9.1.                              If a Founder (Kirk, Durham or

TFS are the Founders) elects to offer any of the Common Stock or the Conversion

Stock for sale, the selling Founder must first offer to sell the offered Common

Stock or Conversion Stock to the other Founders on the same terms that the

selling Founder plans to offer the shares for sale to other parties.  The non-selling Founders shall then have

thirty days to elect to purchase the Common Stock or Conversion Stock offered

by the Selling Founder on a pro rata basis. 

If any non-selling Founder does not wish to purchase the offered shares,

the other non-selling Founders shall have an additional ten days to elect to

purchase the non-electing shareholders share of the offered Common Stock or

Conversion Stock.  If any of the offered

Common Stock or Conversion Stock is not purchased under this right of first refusal,

for a period of six months thereafter, the selling Founder may offer the Common

Stock or the Conversion Stock to others on the same terms proposed to the other

Founders.  If the selling Founder does

not sell the offered Common Stock or Conversion Stock within six months, the

offer must be withdrawn and the selling Founder may thereafter reoffer to the

other Founders in accordance with these rights of first refusal.

 

9.2.                              These rights of first refusal

shall expire upon the first to occur of the following: (i) the closing of the

first public offering of the Common Stock of GENESIS to the general public

which is effected pursuant to a registration statement filed with, and declared

effective by, the Commission under the Securities Act; (ii) January 1, 2004, or

(iii) as to a Purchaser if such Purchaser no longer holds at least 25% of

shares of Common Stock and/or Conversion Stock (appropriately adjusted for

Recapitalizations) purchased in accordance with the terms of this Stock

Investment Agreement.

 

10.                                 Co-Sale

Rights.

 

10.1.                        If any Founder receives an offer

from a third party to purchase some or all of that Founder’s Common Stock or

Conversion Stock whether purchased in this transaction or acquired in some

other transaction, the other Founders shall have the right to participate in

the sale of the Common Stock or Conversion Stock on the same terms as the

selling Founder.  The selling Founder

must notify the other Founders of the offer, and the other Founders will have

thirty days after notice in which to elect to participate in the sale (or to

purchase the shares offered under the rights of first refusal described in

Paragraph 9).  If a Founder does not

elect to participate in the sale, the remaining Founders shall allocate the

total number of shares to be offered to the purchasing party among them pro

rata based on the number of shares each holds immediately prior to the sale.

 

10.2.                        These co-sale rights shall

expire upon the first to occur of the following: (i) the closing of the first

public offering of the Common Stock of GENESIS to the general

 

12

 

public which is effected pursuant to a

registration statement filed with, and declared effective by, the Commission

under the Securities Act; (ii) January 1, 2004, or (iii) if such selling

Founder no longer holds at least 25% of shares of Common Stock and/or

Conversion Stock (appropriately adjusted for Recapitalizations) purchased in

accordance with the terms of this Stock Investment Agreement.

 

11.                                 Miscellaneous

 

11.1.                        Governing Law. This Agreement

shall be governed in all respects by the internal laws of the State of

Washington.

 

11.2.                        Survival. The representations,

warranties, covenants and agreements made herein shall survive any

investigation made by any Purchaser and the closing of the transactions contemplated

hereby.

 

11.3.                        Successors and Assigns. Except

as otherwise provided herein, the provisions hereof shall inure to the benefit

of, and be binding upon, the successors, assigns, heirs, executors and

administrators of the parties hereto, provided, however, that the rights of a

Purchaser to purchase the Shares shall not be assignable without the consent of

GENESIS.

 

11.4.                        Entire Agreement: Amendment.

This Agreement and the other documents delivered pursuant hereto at the Closing

constitute the full and entire understanding and agreement between the parties

with regard to the subjects hereof and thereof, and no party shall be liable or

bound to any other party in any manner by any warranties, representations or

covenants except as specifically set forth herein or therein. Except as

expressly provided herein, neither this Agreement nor any term hereof may be

amended, waived, discharged or terminated other than by a written instrument

signed by the party against whom enforcement of any such amendment, waiver,

discharge or termination is sought.

 

11.5.                        Notices.

 

11.5.1.               All notices

and other communications required or permitted hereunder shall be in writing

and shall be mailed by registered or certified mail, postage prepaid, sent by

facsimile, or otherwise delivered by hand or by a nationally-recognized

overnight courier, addressed to the last designated address of the party to

receive the notification.  Initial

addresses are set forth on the signature page of this Stock Investment

Agreement.  Addresses may be changed

from time to time by written notice to the other parties in accordance with

this provision.

 

11.5.2.               Each such

notice or other communication shall for all purposes of this Agreement be

treated as effective or having been given (a) in the case of personal delivery

or delivery by facsimile copy, on the date of such delivery, (b) in the case of

a nationally-recognized overnight courier, on the next business day after the

date when sent and (c) in the case of mailing, on the third business day following

that on which the piece of mail containing such communication has been

deposited in

 

13

 

a regularly

maintained receptacle for the deposit of the United States mail, addressed and

mailed as aforesaid.

 

11.6.                        Delays or Omissions. Except as

expressly provided herein, no delay or omission to exercise any right, power or

remedy accruing to any holder of any Shares, upon any breach or default of

GENESIS under this Agreement, shall impair any such right, power or remedy, nor

shall it be construed to be a waiver of any such breach or default, or an

acquiescence therein, or of or in any similar breach or default thereafter

occurring

 

11.7.                        Expenses. GENESIS and each

Purchaser shall bear its own expenses incurred on its behalf with respect to

this Agreement and the transactions contemplated hereby.

 

11.8.                        Counterparts. This Agreement may

be executed in any number of counterparts, each of which may be executed by

less than all of the Purchasers, each of which shall be enforceable against the

parties actually executing such counterparts, and all of which together shall

constitute one instrument.

 

11.9.                        Severability. In the event that

any provision of this Agreement becomes or is declared by a court of competent

jurisdiction to be illegal, unenforceable or void, this Agreement shall

continue in full force and effect without said provision.

 

11.10.                  Titles and Subtitles. The titles

and subtitles used in this Agreement are used for convenience only and are not

considered in construing or interpreting this Agreement.

 

The foregoing Agreement is hereby executed as

of the date first above written.

 

GENESIS FINANCIAL,

INC., a

Washington corporation.

 

	

  By:

  	

  /s/Michael A. Kirk

  	

   

  	

   

  
	

   

  	

  Michael A. Kirk, President

  	

   

  	

   

  
	

   

  	

   

  
	

  By:

  	

  /s/Brad E. Herr

  	

   

  	

   

  
	

   

  	

  Brad E. Herr, Secretary

  	

   

  	

   

  
	

   

  	

   

  
	

  PURCHASERS

  	

   

  
	

   

  	

   

  
	

  /s/Michael A. Kirk

  	

   

  	

  /s/Douglas A. Durham

  	

   

  
	

  Michael A. Kirk (25,000 Shares)

  	

   

  	

  Douglas A. Durham (25,000 Shares)

  	

   

  
	

   

  	

   

  
	

   

  	

   

  
	

  /s/John R. Coghlan

  	

   

  	

   

  
	

  John R. Coghlan, President

  	

   

  	

   

  
	

  Temporary Financial Services, Inc.

  	

   

  
	

  (200,000 shares for cash)

  	

   

  
	

  (250,000 shares for 50,000 TFS shares)

  	

   

  
	

  ($200,000 Convertible Note)

  	

   

  
							

 

14Exhibit 10

Exhibit 10.2            Genesis

Financial, Inc. Convertible Note dated January 25, 2002

 

 

The securities evidenced by this Note and the

underlying Conversion Stock have not been registered under the Securities Act

of 1933, as amended.  Such securities

may not be sold or otherwise transferred except in a transaction which, in the

opinion of securities counsel reasonably satisfactory to GENESIS, is exempt

from registration under applicable federal securities laws or pursuant to an

effective Registration Statement thereunder.

 

GENESIS FINANCIAL,

INC.

 

CONVERTIBLE

NOTE

 

	

  $200,000

  	

   

  	

  January 25, 2002

  	

   

  	

  Spokane, Washington

  

 

FOR VALUE RECEIVED, Genesis

Financial, Inc., a Washington Corporation with offices at 200 North Mullan

Road, Suite 217, Spokane, Washington 99206 (“GENESIS”) promises to pay to the

order of TEMPORARY FINANCIAL SERVICES, INC., a Washington corporation with

offices at 200 North Mullan Road, Suite 213, Spokane, Washington 99206 (“TFS”),

the principal sum of $200,000.00 United States Currency, together with interest

thereon accruing from and after January 25, 2002, as specified in this

Convertible Note (the “Note”).

 

This NOTE is issued upon the

following terms, to which TFS assents and GENESIS, for itself and its

successors, agrees as follows:

 

1.                   

Interest

Rate.  This NOTE shall bear interest at the rate of Six Percent (6%) per

annum.  Simple interest shall accrue on

this NOTE until maturity.  In the event

this NOTE is not paid on the maturity date, this NOTE shall thereafter bear

interest until paid at the rate of Twelve Percent (12%) per annum.

 

2.                   

Maturity.  The

entire outstanding unpaid principal and all accrued but unpaid interest shall

be due and payable at maturity on January 1, 2004; by cash, cashier’s check, or

wire transfer in lawful money of the United States at TFS’s address or at such

other place as TFS may designate in writing ten days before maturity.  

 

3.                   

Transfer.  This

NOTE is non-transferable without the prior written consent of TFS.  Upon an approved transfer, any NOTE executed

and delivered to the transferee shall bear the following restrictive legend:

 

“The securities evidenced by

this certificate have not been registered under the Securities Act of 1933, as

amended.  Such securities may not be

sold or otherwise transferred except in a transaction which, in the opinion of

securities counsel reasonably satisfactory to GENESIS, is exempt from

registration under applicable federal securities laws or pursuant to an

effective Registration Statement thereunder.

 

1

 

4.                   

NOTE

Holder Not Shareholder.  This NOTE does not confer upon TFS any right

to vote or consent or to receive notice as a shareholder of GENESIS by virtue

of TFS’ ownership of the NOTE.  This

provision does not affect rights of TFS as a shareholder of GENESIS through

ownership of GENESIS common shares.

 

5.                   

Conversion

Rights.  TFS, in its sole discretion at any time

after January 1, 2003, and prior to maturity, may convert it, in whole only,

into the face amount equivalent of 200,000 fully paid and nonassessable shares

of the Common Stock of GENESIS (the “Common Stock”) at an equivalent price of

One Dollar ($1.00) per share of Common Stock. 

The shares issuable pursuant to this conversion feature are hereafter

referred to as “Conversion Stock.”

 

The conversion of the NOTE

shall be on the following terms and conditions:

 

(a)                                  In the event TFS notifies GENESIS of its

intention to convert, GENESIS may, at its sole election, pay accrued interest

in cash or may convert the accrued interest into Conversion Stock at the rate

of one share for each one dollar of interest accrued to the date of conversion,

rounded to the nearest whole dollar.

 

(b)                                 In order to convert this NOTE into Conversion

Stock, TFS shall surrender, at the principal office of GENESIS, this NOTE duly

endorsed to GENESIS and give written notice to GENESIS that TFS elects to

convert this NOTE.  TFS shall thereafter

be treated for all purposes as the record holder of the Conversion Stock into

which this NOTE is convertible.  As

promptly as possible thereafter, GENESIS shall issue and deliver to TFS

certificates representing the number of shares of Conversion Stock into which

this NOTE has been converted. 

Thereupon, this NOTE shall be deemed to be satisfied and discharged, and

the shares of Conversion Stock shall be fully paid and nonassessable.  Each certificate representing the shares of

common stock into which this NOTE has been converted shall bear the restrictive

legend set forth in Paragraph 3 herein.

 

(c)                                  No conversion shall be made by GENESIS while its

stock transfer books are closed. Any request for conversion received while the

stock transfer books are closed shall be given effect as soon as the stock

transfer books are reopened.

 

(d)                                 The Board of Directors of the Corporation shall

have the right from time to time to adopt specific rules of procedure to carry

out the full intent of the Conversion provisions set forth herein and to do all

reasonable acts necessary thereto, provided that such rules and acts shall not

violate the specific terms of this debt instrument.

 

6.                   

Adjustment

in Number of Shares.  The number of shares of Conversion Stock

issuable upon conversion of this NOTE will be adjusted from time to time to

reflect changes in the capitalization of GENESIS.  When the number of shares of Common Stock of GENESIS outstanding

at any given time is changed to reflect a stock dividend, merger,

recapitalization, or other similar adjustment is made, the number of shares of

Conversion Stock issuable on conversion will be adjusted up or down to give economic

affect to the conversion rights.  For

example, if the conversion rights entitle the holder of the NOTE to 

 

2

 

200,000 shares on January 1 and on January 2

GENESIS issues a one for one stock dividend, the NOTE would thereafter be

convertible into 400,000 shares.

 

7.                   

Notices.  So long

as this NOTE is outstanding, Genesis will notify TFS or the NOTE holder, as the

case may be, of any change in the capitalization of GENESIS that would or could

require an adjustment, in accordance with Paragraph 6, in the number of shares

of Conversion Stock into which the NOTE may be converted.

 

8.                   

Events

of Default.  The following events shall constitute events

of default under this NOTE and shall entitle TFS to the remedies set forth.

 

a.                   

This

NOTE shall be in default upon the failure of GENESIS to pay any interest or

principal payment in accordance with the terms of this NOTE.

 

b.                  

This

NOTE shall be in default in the event: 

GENESIS files any petition under any section of the United States

Bankruptcy Act; any petition is filed against GENESIS under the United States

Bankruptcy Act; GENESIS is adjudged bankrupt; or GENESIS makes any general

assignment or trust deed or trust mortgage for the benefit of creditors; or

takes advantage of any other insolvency act; or if any receiver, trustee,

conservator, custodian, or similar officer is appointed for GENESIS.

 

c.                   

This

NOTE shall be in default if GENESIS is declared to be in default under any

senior credit facility.

 

9.                   

Remedies

on Default.  From and after the date of any default, the

NOTE may be accelerated and TFS may demand payment of the entire unpaid balance

and all accrued but unpaid interest. 

Upon a default, it shall not be necessary for the NOTE holder to declare

the NOTE due. 

 

10.                

Prepayment.  This

NOTE be prepaid at any time after January 1, 2003.  Upon notification of prepayment, TFS shall have thirty days in

which to elect to convert the NOTE to Conversion Stock, or to accept the

prepayment amount.

 

11.                

Costs

of Collection.  If TFS undertakes collection of this NOTE,

GENESIS agrees to pay all costs of collection, including a reasonable

attorney’s fee.  GENESIS waives

presentment for payment, notice of non-payment, protest and demand, and notice

of protest, of demand and of dishonor, and the benefit of any exemption laws.

 

3

 

12.                                 Notices.  Any notice to GENESIS

provided in this NOTE shall be in writing and shall be given and effective upon

(1) actual delivery to GENESIS or (2) mailing such notice by first-class U.S.

mail, addressed to GENESIS at the address listed above or such other address as

GENESIS may designate or (3) by facsimile transmission directed to GENESIS at

GENESIS’s then current facsimile number. 

Any notice to TFS provided in this NOTE shall be in writing and shall be

given and effective upon (1) actual delivery to TFS or (2) mailing such notice

by first-class U.S. mail, addressed to TFS at TFS’s address aforesaid or such

other address as TFS may designate by notice to GENESIS or (3) by facsimile

transmission directed to TFS at TFS’s then current facsimile number.  If notice is sent to either party by

facsimile transmission, the original hard copy shall be forwarded to the party

entitled thereto within ten (10) days of facsimile transmission.

 

13.                                 Miscellaneous. 

This NOTE is to be construed and enforced in accordance with the laws of

the State of Washington.  Jurisdiction

for enforcement and collection of the NOTE shall be the State of Washington,

and venue shall be Spokane County, Washington. 

 

	

   

  	

   

  	

  GENESIS:

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

  By:

  	

  /s/Michael A.

  Kirk

  	

   

  
	

   

  	

   

  	

  Michael A.

  Kirk, President

  	

   

  

 

 

ATTEST:

 

 

	

  /s/Brad E.

  Herr

  	

   

  
	

  Brad E. Herr, Secretary

  	

   

  	 

				

 

 

Accepted by TFS this 25th

day of January, 2002.

 

 

	

  /s/John R.

  Coghlan

  	

   

  	

   

  
	

  John R. Coghlan, President

  	

   

  

 

4

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