1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 33-98346C
Berthel Fisher & Company Leasing, Inc.
---------------------------------------
(Exact name of small business issuer as
specified in its charter)
Iowa 42-1312639
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
425 Second Street SE Suite 600 Cedar Rapids, IA 52401
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(Address of principal executive offices)
(319)365-2506
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 400,000 shares of Class A
common stock. -------
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
2
BERTHEL FISHER & COMPANY LEASING, INC.
INDEX
Part I. FINANCIAL INFORMATION
- - --------------------------------
Item 1. Financial Statements (unaudited).
Balance sheet - June 30, 1996
Statements of operations - three months ended June 30, 1996 and three
months ended June 30, 1995. Six months ended June 30, 1996 and six
months ended June 30, 1995.
Statements of cash flows - six months ended June 30, 1996 and six
months ended June 30, 1995.
Item 2. Management's discussion and analysis of financial condition and
results of operations.
Signatures
3
BERTHEL FISHER & COMPANY LEASING, INC.
BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
ASSETS
Cash and cash equivalents $ 360,266
Net investment in direct financing leases (Note 4) 7,854,216
Notes receivable 7,838,114
Allowance for possible lease and notes receivable losses (322,349)
-----------
Direct financing leases and notes receivable, net 15,369,981
Other assets 1,671,440
-----------
Total assets $17,401,687
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Note payable under line-of-credit (Note 3) $ 9,696,110
Long-term debt (Note 3) 6,057,106
Other liabilities 872,597
-----------
Total liabilities $ 16,625,813
Commitments and contingencies (Note 7)
Redeemable class B nonvoting convertible stock (Note 5)
No par value
Authorized shares --- 100,000
Issued and outstanding shares --- 75,500 718,893
Stockholder's equity:
Class A common stock
No par value
Authorized shares --- 1,000,000
Issued and outstanding shares --- 400,000 1,000
Additional paid-in-capital (Note 3) 1,758
Retained earnings 54,223
-----------
Total stockholder's equity 56,981
-----------
Total liabilities and stockholder's equity $17,401,687
===========
See Accompanying Notes
4
BERTHEL FISHER & COMPANY LEASING, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ending
June 30
----------------------
1996 1995
--------- --------
Revenue:
Income from direct financing leases $ 258,551 $ 245,180
Management and lease acquisition fees
from affiliates 196,623 288,128
Interest income 280,028 203,407
Gain on early terminations 82,679 65,878
Other revenues 41,948 70,308
--------- ---------
Total revenues 859,829 872,901
Expenses:
Employment compensation and benefits 227,635 200,396
Management fees to affiliates 144,311 168,844
Interest expense 402,795 291,857
Other expenses 233,161 309,277
--------- ---------
Total expenses 1,007,902 970,374
--------- ---------
Loss before income taxes (148,073) (97,473)
Income tax credit (52,707) (33,141)
--------- ---------
Net loss (95,366) (64,332)
Less net income attributable to class B stock 0 0
--------- ---------
Net loss attributable to class A common stock $ (95,366) $ (64,332)
--------- ---------
Loss per common share --------- ---------
Primary $ (.24) $ (.16)
Fully Diluted $ (.24) $ (.16)
See Accompanying Notes
5
BERTHEL FISHER & COMPANY LEASING, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ending
June 30
--------------------------
1996 1995
---------- ----------
Revenue:
Income from direct financing leases $ 545,061 $ 476,496
Management and lease acquisition fees
from affiliates 399,850 633,131
Interest income 542,166 334,891
Gain on early terminations 198,109 67,582
Other revenues 74,530 94,221
---------- ----------
Total revenues 1,759,716 1,606,321
Expenses:
Employment compensation and benefits 422,826 366,798
Management fees to affiliates 291,925 333,549
Interest expense 806,879 541,053
Other expenses 442,135 503,227
---------- ----------
Total expenses 1,963,765 1,744,627
---------- ----------
Loss before income taxes (204,049) (138,306)
Income tax credit (72,319) (47,024)
---------- ----------
Net loss (131,730) (91,282)
Less net income attributable to class B stock -0- -0-
---------- ----------
Net loss attributable to class A common stock $ (131,730) $ (91,282)
========== ==========
Loss per common share
Primary $ (.33) $ (.23)
Fully Diluted $ (.33) $ (.23)
See Accompanying Notes
6
BERTHEL FISHER & COMPANY LEASING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30,1995
-------------------------------------
OPERATING ACTIVITIES
Net (Loss) $ (131,730) $ (91,282)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization 41,355 46,738
Provision for uncollectible accounts 85,014 40,590
Gain on early termination of leases and notes (198,109) (2,695)
Gain on redemption of Class B non-voting
convertible stock -0- (27,280)
Gain on redemption of convertible preferred
stock of subsidiary -0- (20,447)
Gain on sale of monitoring contracts -0- (65,585)
Depreciation 36,418 14,997
Changes in operating assets and liabilities:
Recoverable/payable under tax allocation agreement (56,859) (34,974)
Other assets (31,675) 37,100
Trade accounts payable (174,846) 350,420
Accrued expenses (61,516) (117,851)
--------- ---------
Net cash provided by (used in) operating activities (491,948) 129,731
INVESTING ACTIVITIES
Purchases of equipment for direct financing leases (6,139,723) (2,491,830)
Repayments of direct financing leases 1,028,145 1,275,817
Proceeds from sale or early termination of
direct financing leases 5,290,716 125,967
Issuance of notes receivable (3,394,584) (1,510,100)
Repayments of notes receivable 921,342 353,124
Proceeds from early termination of notes receivable 1,599,619 -0-
Distributions from (investments in) limited partnersships 414,444 (39,144)
Net lease security deposits collected(repaid) 112,365 25,967
Purchases of furniture and equipment (87,907) (56,733)
Payments from monitoring contracts -0- 535,742
--------- ----------
Net cash provided by (used in) investing activities (255,583) (1,781,190)
7
BERTHEL FISHER & COMPANY LEASING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
FINANCING ACTIVITIES
Net proceeds from (repayments) of notes payable 1,120,610 2,179,456
Proceeds from issuance of long term debt 1,316,792 1,204,080
Repayments of long term debt (1,483,455) (1,471,882)
Redemption of convertible preferred stock
of subsidiary -0- (129,510)
Redemption of Class B non-voting convertible stock -0- (172,720)
Cash dividends paid on Class B non-voting
convertible stock -0- (114,600)
----------- ------------
Net cash provided by financing activities 953,947 1,494,824
----------- ------------
Net increase (decrease) in cash and cash equivalents 206,416 (156,635)
Cash and cash equivalents at beginning of period 153,849 374,826
----------- ------------
Cash and cash equivalents at end of period $ 360,265 $ 218,191
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 792,341 $ 500,239
Income taxes 4,170 116,519
Noncash investing and financing activities:
Amortization of Class B nonvoting convertible
stock issuance costs 4,017 4,012
See accompanying notes.
8
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principle for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. These financial statements
should be read in conjunction with the Company's registration statement on Form
SB-2 filed with the Securities and Exchange Commission.
2. ORGANIZATION
Berthel Fisher & Company Leasing, Inc. (the "Company") is a wholly-owned
subsidiary of Berthel Fisher & Company (the "Parent"). During the year ended
December 31, 1993, the Company formed a wholly-owned subsidiary, Security
Finance Corporation. Security Finance Corporation was established to provide
financing services to the home security industry. During 1995, all assets and
liabilities of Security Finance Corporation were assumed by the Company, and
Security Finance Corporation was subsequently dissolved. During the year ended
December 31, 1994, the Company formed a wholly-owned subsidiary, Communications
Finance Corporation. All of the assets and liabilities of Communications
Finance Corporation have been assumed by the Company. The Company intends to
keep Communications Finance Corporation as a shell for use in future financing
transactions.
The Company is the general partner in two limited partnerships,
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications
Income Fund X, L.P. ("TIF X"). The Company accounts for its general
partnership interests in TIF IX and TIF X under the equity method of
accounting. (See Note 6).
3. CREDIT ARRANGEMENTS
The Company has a note payable consisting of a line-of-credit agreement
with a bank. The amount available to borrow under the line-of-credit is
limited to 85% of its qualified accounts (primarily leases and notes
receivable) at June 30, 1996, which limit must be reduced to 75% by August 31,
1996 or earlier upon the occurrence of certain events, as defined in the
agreement, but in no case can exceed $10 million. The advance rate was 78 1/2%
of qualified accounts at July 31, 1996. The line-of-credit bears
interest at prime plus 1.7% and is collateralized by substantially all of the
Company's assets. The line-of-credit agreement is guaranteed by the Company's
Parent and a major stockholder of the Company's Parent. The loan agreement
contains various restrictive covenants including, among others, covenants that
restrict dividend payments except to Class B stockholders and requires the
Company to maintain certain financial ratios including a total liabilities to
tangible net worth ratio, as defined in the agreement, of not greater than 3.0.
As of June 30, 1996, the company's ratio was 2.8.
9
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. CREDIT ARRANGEMENTS (CONTINUED)
Long-term debt at June 30, 1996 consists of:
Collateral trust bonds, 9% to 9.5%, maturing through 1997 $ 52,111
Installment loan agreements to banks, 7.75% to 11%, maturing
through April 2000, collateralized by net investment in certain
direct financing leases $ 2,137,746
Subordinated notes payable, interest of 9.5% to 10%, maturing 2001 and 2004,
generally subordinate to all direct and guaranteed third party
debt of the Company $877,269
Unsecured subordinated debentures, interest of 11% to 12%,
maturing in September 1998 $725,000
Subordinated debenture to the Parent, interest of 3% over
prime (11.5% at June 30, 1996), due 2005, generally
subordinated to all direct and guaranteed debt of the Company $ 2,264,980
------------
$ 6,057,106
============
The collateral trust bonds have a first security interest in certain
equipment leases and are redeemable by the bond holder at any time after one
year from the date of issuance subject to certain limitations as defined in the
agreements, including a maximum redemption in any one year of 5% of the total
principal balance outstanding.
In June, 1996, the Company began raising funds through an effective
registration statement for subordinated notes under Form SB-2 filed with the
Securities and Exchange Commission. Through June 30, 1996, the Company had
raised $879,000 under this offering on a best efforts basis. The subordinated
notes payable are subordinate to all indebtedness secured by assets of the
Company but are senior in right of payment to debt held by the Parent.
Each subordinated note is issued with a detachable warrant which
entitles the holder to purchase 11 shares of Class A common stcck of the
Company. Each warrant has been assigned a value of $2 by the Company which
amount is carried as additional paid in capital. This amount will be amortized
over the life of the associated subordnated notes to increase the carrying
value of the subordinated notes to their full redemption value at maturity.
4. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in direct financing leases at June 30, 1996
consists of:
Minimum lease payments receivable $ 9,104,024
Estimated unguaranteed residual values $ 851,996
Unamortorized initial direct costs $ 139,087
Unearned income $(2,240,891)
------------
$ 7,854,216
============
10
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. CLASS B NONVOTING CONVERTIBLE STOCK
The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes each
year, up to a maximum of $1.20 per share. The Class B nonvoting convertible is
convertible on a one-for-one basis up to a maximum of 20% of the Class A common
stock of the Company after conversion. The stock is redeemable at $10 per
share for a 30-day period after the tenth anniversary of the issuance date
(April, 1990 to September, 1991) at the option of the holder. Shares which are
not redeemed during that time are automatically converted to Class A common
stock on a one-for-one basis. The following summarizes the amounts pertaining
to the Class B nonvoting convertible stock as set forth in the balance sheets
at June 30, 1996:
Class B nonvoting convertible stock (no par value-authorized
100,000 shares, issued and outstanding 75,500 shares) at
redemption or liquidation value $ 755,000
Unamortorized stock issuance costs $ (36,107)
-----------
$ 718,893
===========
During the six months ended June 30, 1995, the Company allowed redemptions
aggregating $200,000 outside the standard terms of the stock agreement. This
redemption resulted in a gain of $27,270 which was recorded directly to
retained earnings together with a gain of $20,457 on the redemption of
preferred stock of its former subsidiary, Security Finance Corporation.
6. INVESTMENT IN LIMITED PARTNERSHIPS
Combined summarized income statement information for TIFIX and TIFX is as
follows:
SIX MONTHS ENDED JUNE 30
--------------------------
1996 1995
---- ----
Income from direct financing leases $ 3,057,813 $ 3,194,321
Other revenue $ 388,563 $ 70,308
Provision for possible losses $ (782,549) $ (123,841)
Expenses $ (1,593,511) $ (1,090,734)
------------ ------------
Net income $ 1,070,316 $ 2,050,054
============ ============
Net income per partnership unit:
TIFIX $ 9.80 $ 12.39
TIFX $ 4.47 $ 13.34
7. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIFIX. The line-of-credit agreement allows TIFIX to
borrow the lesser of $6.25 million or 32% of its qualified accounts, as defined
in the agreement. The balance outstanding under this line-of-credit was
$4,811,211 at June 30, 1996. The agreement matures on November 30, 1997, and
is cancelable by the lender after giving 90-day notice and is secured by
substantially all assets of TIFIX. The note is also guaranteed by the
Company's Parent and a principal stockholder of the Company's Parent.
11
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIFX. The line-of-credit agreement allows TIFX to
borrow the lesser of $7.25 million or 32% of its qualified accounts, as defined
in the agreement. The balance outstanding under this line-of-credit was
$5,780,852 at June 30, 1996. The agreement matures on November 30, 1997, and
is cancelable by the lender after giving 90-day notice and is secured by
substantially all assets of TIFX. The note is also guaranteed by the Company's
Parent and a principal stockholder of the Company's Parent.
The Company has also guaranteed amounts outstanding under installment loan
agreements of TIFIX and TIFX totaling $2,802,995 at June 30, 1996. The
agreements are collateralized by certain direct financing leases and a second
interest in all assets of TIFIX and TIFX.
In May, 1996, the Company exercised its right to manage the assets
financed for a customer under a note receivable due to default under the
agreement. The note receivable balance at the time the assets were repossessed
approximated $437,000 which amount has been reclassified to furniture and
equipment and is being depreciated on a straight-line basis over its estimated
remainig useful life. This equipment is currently being serviced for the
Company under a short-term management agreement. The Company's intent is to
sell the equipment or lease the equipment to a new lessee. The Company expects
to incur a loss approximating $50,000 upon the sale or lease of this equipment.
Although there can be no assurances, management believes the Company's
allowance for possible losses is sufficient to cover any potential losses with
respect to this equipment. The Company's allowance for possible losses has not
yet been charged for this estimated loss due to ongoing negotiations with a
potential purchaser.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Total revenues in the six months ended June 30, 1996 have increased
approximately 10% over the same period in 1995. This increase is attributable
to increases in lease income, interest income and gains on early termination of
leases and notes receivable. Collectively, these three components increased
46% over the same period in 1995. The primary offset to these increases was
the 36% decrease from 1995 to 1996 in management and lease acquisition fees the
Company receives from the limited partnerships for which it serves as the
general partner.
Lease and interest income have continued to increase as the Company's net
investment in direct financing leases and its notes receivable have increased.
Gains on early termination of leases have increased due to sales of
approximately $4 million of net investment in direct financing leases by the
Company in the first six months of 1996 to provide the Company the capacity to
continue to originate new business. These sales by the Company resulted in
gains of approximately $35,000 in the first six months of 1996 whereas, the
Company did not make such sales in the first six months of 1995. In addition,
certain lease and note receivable customers opted to pay off their leases and
notes prior to full term resulting in gains to the Company of approximately
$163,000 in the first six months of 1996 compared to approximately $68,000 in
1995. Management of the Company believes lease and interest income will
continue to increase as proceeds from sales of the Company's subordinated
notes registered under Form SB-2 enable the Company to originate new leases and
notes receivable and thus, provide sufficient cash flow to avoid further sales
of the Company's lease portfolio.
Management and lease acquisition fees represent fees paid to the Company by
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications
Income Fund X, L.P. ("TIF X"). The Company earns management fees from TIF IX
and TIF X based upon lease rentals received by the partnerships. Management
fees decreased approximately $102,000 or 20% in the first six months of 1996 as
compared to the same period in 1995 due primarily to early termination of
leases in 1996 as well as delinquent lease payments from lessees in 1996.
Management of the Company estimates that management fees from TIF IX and TIF X
will remain consistent throughout the remainder of 1996 due to increased lease
originations in the partnerships. Lease acquisition fees were approximately
$131,000 in the first six months of 1995 while they were $0 in 1996. The
Company earned lease acquisition fees equal to 4% of the cost of equipment in
leases originated for TIF IX and TIF X initial lease originations. The
acquisition fee was only payable to the Company on leases originated and funded
with original debt and equity funds of TIF IX and TIF X and not on reinvested
capital. The Company ceased earning acquisition fees from TIF IX in 1994 and
TIF X in April, 1995 when their respective original equity and debt funds were
fully utilized and originations began to be funded with reinvested capital.
Total expenses during the six months ended June 30, 1996 increased
approximately 13% over the same period in 1995. This increase is attributable
to a 49% increase in interest expense and a 15% increase in employee
compensation and benefits while being offset by 12% decreases in both
management fees and other expenses.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The increased interest expense is a result of the Company increasing the size
of its lease and note receivable portfolio from $11.7 million at June 30, 1995
to $15.4 million at June 30, 1996 using its line-of-credit and other debt
proceeds. Employee compensation and benefits has increased over the prior year
due to the addition of personnel to facilitate and service the increased
portfolio.
The Company pays its parent one-half of the management fees it receives from
TIF IX and TIF X. The management fee income decrease of approximately $102,000
as described above, therefore, resulted in an approximate $51,000 decrease in
managment fee expense. The decrease in other expenses is due primarily to the
sale in 1995 of alarm monitoring contracts, and thus the elimination of the
associated costs of approximately $82,000, which were held by the Company's
former subsidiary, Security Finance Corporation.
In May, 1996, the Company exercised its right to manage the assets financed for
a customer under a note receivable due to default under the agreement. The
note receivable balance at the time the assets were repossessed approximated
$437,000 which amount has been reclassified to furniture and equipment and is
being depreciated on a straight-line basis over its estimated remainig useful
life. This equipment is currently being serviced for the Company under a
short-term management agreement. The Company's intent is to sell the equipment
or lease the equipment to a new lessee. The Company expects to incur a loss
upon the sale or lease of this equipment. Although there can be no assurances,
management believes the Company's loss reserve is sufficient to cover any
potential losses with respect to this equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily upon debt financing to originate its leases and
notes receivable. The Company has a $10 million revolving line-of-credit with
2 banks with an expiration date of November, 1997. The Company is currently
in negotiations with another bank to provide an additional $5 million through a
participation in the existing line-of-credit. The Company will also "match
fund" leases by executing a note payable with a bank for a specific lease. At
June 30, 1996, the Company has notes payable of approximately $2.1 million
payable to banks for these "match fundings" with these notes due in varying
monthly payments through June, 2001.
The Company has also raised funds via private placement debt offerings. At June
30, 1996, the Company is obligated under private placement debt offerings of
approximately $3 million, including $2,264,980 payable to its parent. The
amount due the parent is payable in 2005 while the other obligations are due at
various dates through 1998.
In June, 1996, the Company began raising funds through a public offering of
subordinated notes under a Form SB-2 registration statement filed with the
Securities and Exchange Commission. Through June 30, 1996, the Company had
raised $879,000 under this offering and approximately $1.9 million had been
raised through July 31, 1996. These subordinated notes are offered in two
series, Series A which pays interest on a monthly basis at an annual rate of
9.5% and the notes are due 5 years from issuance. Series B pays interest on a
monthly basis at an annual rate of 10% and the notes are due 8 years from
issuance.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERTHEL FISHER & COMPANY LEASING, INC.
--------------------------------------
(Registrant)
Date August 13, 1996 /s/ David R. Harvey
---------------- ------------------------------
David R. Harvey, President
Date August 13, 1996 /s/ R. Brooks Sherman, Jr.
--------------- --------------------------------------
R. Brooks Sherman, Jr.,
Chief Financial Officer, Treasurer