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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended September 30, 1999
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From to
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Commission File Number 33-89506
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BERTHEL GROWTH & INCOME TRUST I
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(Exact name of Registrant as specified in its charter)
DELAWARE 52-1915821
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Second Street SE, Cedar Rapids, Iowa 52401
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(Address of principal executive offices) (Zip Code)
(319) 365-2506
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Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Shares of Beneficial Interest - 10,541 shares as of November 2, 1999
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BERTHEL GROWTH & INCOME TRUST I
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Assets and Liabilities -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
three months ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Operations -
nine months ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Changes in Net Assets -
nine months ended September 30, 1999 and September 30, 1998 6
Consolidated Statements of Cash Flows -
nine months ended September 30, 1999 and September 30, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Shareholders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
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ASSETS
Investments in securities (Note B) $12,231,728 $ 9,060,728
Cash 82,585 31,663
Temporary investment in money
market securities 703,833 3,187,453
Interest and dividends receivable 134,595 35,382
Deferred financing costs, net of amortization 105,520 -0-
Other assets 8,054 66,216
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Total Assets 13,266,315 12,381,442
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LIABILITIES
Accounts payable and other accrued expenses 27,194 25,232
Distributions payable to shareholders 1,287,116 1,092,940
Due to affiliate 85,450 71,560
Debenture (Note C) 2,500,000 -0-
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Total Liabilities 3,899,760 1,189,732
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COMMITMENTS AND CONTINGENCIES
NET ASSETS (equivalent to $888.58 per share
in 1999 and $1,061.73 per share in 1998) $ 9,366,555 $11,191,710
=========== ===========
Net assets consist of:
Shares of beneficial interest (25,000 shares
authorized; 10,541 shares issued
and outstanding) $ 5,844,059 $ 6,474,786
Undistributed net investment income 3,522,496 4,716,924
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$ 9,366,555 $11,191,710
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See notes to consolidated financial statements.
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BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30
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1999 1998
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REVENUES:
Interest income $ 135,465 $ 151,494
Dividend income 25,206 -0-
Other income -0- 7,669
Total revenues 160,671 159,163
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EXPENSES:
Management and administrative fees 91,850 55,261
Trustee fees 8,000 8,000
Data processing 1,800 1,800
Auditing and accounting fees 5,700 8,900
Legal expense 14,059 17,263
Amortization of financing costs 3,344 -0-
Other general and administrative expenses (2,745) 16,592
Interest and financing fees 20,546 -0-
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Total expenses 142,554 107,816
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NET INVESTMENT INCOME 18,117 51,347
UNREALIZED GAIN (LOSS) ON INVESTMENTS (1,105,000) 1,919,325
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NET INCREASE (DECREASE) IN NET ASSETS $ (1,086,883) $ 1,970,672
================ ================
PER BENEFICIAL SHARE AMOUNTS:
Net increase (decrease) in net assets $ (103.11) $ 186.95
================ ================
WEIGHTED AVERAGE SHARES 10,541 10,541
================ ================
See notes to consolidated financial statements.
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BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
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1999 1998
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REVENUES:
Interest income $ 398,019 $ 437,945
Dividend income 47,123 -0-
Other Income 15,677 12,835
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Total revenues 460,819 450,780
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EXPENSES:
Management and administrative fees 262,236 166,065
Trustee fees 25,000 26,000
Data processing 5,400 5,400
Auditing and accounting fees 21,960 23,388
Legal expense 118,220 44,752
Amortization of financing costs 6,980 750
Other general and administrative expenses 51,700 29,561
Interest and financing fees 24,934 -0-
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Total expenses 516,430 295,916
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NET INVESTMENT INCOME (LOSS) (55,611) 154,864
UNREALIZED GAIN (LOSS) ON INVESTMENTS (1,105,000) 1,919,325
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NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (1,160,611) 2,074,189
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NOTE A) (33,817) -0-
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NET INCREASE (DECREASE) IN NET ASSETS $ (1,194,428) $ 2,074,189
================ ================
PER BENEFICIAL SHARE AMOUNTS:
Net increase (decrease) in net assets
resulting from operations $ (110.10) $ 196.77
Cumulative effect of a change in accounting principle (3.21) -0-
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NET INVESTMENT INCOME (LOSS) $ (113.31) $ 196.77
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WEIGHTED AVERAGE SHARES 10,541 10,541
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PRO FORMA AMOUNTS APPLYING THE METHODOLOGY
OF ORGANIZATION COSTS RETROACTIVELY:
Net increase (decrease) in net assets $ (1,160,611) $ 2,074,189
Net increase (decrease) in net assets per beneficial share $ (110.10) $ 196.77
See notes to consolidated financial statements.
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BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
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Shares of Shares of
Beneficial Beneficial
Interest Amount Interest Amount
------- -------- -------- -------
Net increase (decrease) in net
assets resulting from operations $(1,160,611) $ 2,074,189
Distributions payable to shareholders --- (630,727) --- (630,726)
Cumulative effect of a change in
accounting principle --- (33,817) --- -0-
Net assets at beginning of period 10,541 11,191,710 10,541 6,590,958
------- ---------- ------- -----------
Net assets at end of period 10,541 $ 9,366,555 10,541 $ 8,034,421
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See notes to consolidated financial statements.
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BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
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OPERATING ACTIVITIES:
Net increase (decrease) in net assets $ (1,194,428) $ 2,074,189
Adjustments to reconcile net investment income
to net cash flows from operating activities:
Unrealized (gain) loss on investments 1,105,000 (1,919,325)
Amortization of organizational and financing costs 6,980 750
Changes in operating assets and liabilities:
Temporary investment in money market securities 2,483,620 894,772
Other assets 58,162 (3,838)
Interest and dividend receivable (99,213) (29,111)
Due to affiliate 13,890 29,710
Accounts payable and accrued expenses 1,962 (9,009)
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Net cash flows from operating activities 2,375,973 1,038,138
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INVESTING ACTIVITIES:
Repayment of VisionComm, Inc. note receivable 700,000 -0-
Investment in:
VisionComm, Inc. -0- (200,000)
Hicklin Engineering, L.C. -0- (400,000)
LIVEware5, Inc. (200,000) -0-
Easy Systems, Inc. (700,000) -0-
Sun Star Healthcare, Inc. (940,000) -0-
Webcasts.com, Inc. (500,000) -0-
Inter-Med, Inc. (500,000) -0-
International Pacific Seafoods, Inc. (900,000) -0-
Edmin.com, Inc. (736,000) -0-
Physicians Total Care (500,000) -0-
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Net cash flows from investing activities (4,276,000) (600,000)
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FINANCING ACTIVITIES:
Distribution payments to shareholders (436,551) (414,154)
SBA commitment and underwriting fees (112,500) -0-
Proceeds from issuance of debenture 2,500,000 -0-
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Net cash flows from financing activities 1,950,949 (414,154)
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NET INCREASE IN CASH 50,922 23,984
CASH AT BEGINNING OF PERIOD 31,663 15,047
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CASH AT END OF PERIOD $ 82,585 $ 39,031
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash financing activities:
Distributions payable to shareholders $ 630,727 $ 216,572
See notes to consolidated financial statements.
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BERTHEL GROWTH & INCOME TRUST I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Berthel Growth & Income Trust I and its wholly-owned subsidiary,
Berthel SBIC, LLC, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the Company's Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair representation have been included. Operating results for the nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The Trust is amortizing nonrefundable Leverage fees paid to the U.S. Small
Business Administration ("SBA") over the term of the SBA's commitment to provide
financing to Berthel SBIC, LLC, a wholly owned subsidiary of the Trust. Fees
paid in March 1999 amounted to $50,000 in exchange for the SBA's commitment to
purchase up to $5,000,000 of debentures issued by Berthel SBIC, LLC. The
commitment term expires September 30, 2003. Additional leverage fees (2%) and
underwriting fees (1/2%) are deducted from the proceeds of each debenture and
are amortized through the maturity date of each debenture. Leverage and
underwriting fees of $62,500 were paid from the proceeds of debentures issued in
1999. Accumulated amortization of leverage and underwriting fees was $6,980 as
of September 30, 1999.
Prior to January 1, 1999, the Company capitalized SBIC organization costs and
amortized these costs over the life of the SBIC. The American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities". SOP 98-5 provides guidance on
the financial reporting of start-up costs and organization costs. SOP 98-5
requires the costs of start-up activities and organization costs to be expensed
as incurred. This SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. Effective January 1, 1999, the Company
adopted this SOP and has written off SBIC organization costs of $33,817 and
reported this as a cumulative effect of a change in accounting principle for the
nine-month period ended September 30, 1999.
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NOTE B -- INVESTMENTS: SEPTEMBER 30, 1999
COST VALUATION
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VISIONCOMM INC.:
Warrants to purchase 889,153 shares
of common stock at $.8414 per share $ -0- $2,808,478
KINSETH HOSPITALITY COMPANY, INC.:
Note receivable 2,000,000 2,000,000
Warrants for 25% of the outstanding
common stock at $0.01 per share -0- 1,500,000
LIVEware5, INC.:
13,633,333 shares of common stock, no par value and
warrants for 600,000 shares at $0.01 per share 400,000 102,250
12% debenture and warrants to purchase 4,000,000
shares at $.001 per share 100,000 100,000
HICKLIN ENGINEERING, L.C.:
Subordinated note 400,000 400,000
OBJECT SPACE, INC.:
108,108 shares of Series B convertible preferred stock 404,800 400,000
EASY SYSTEMS, INC.:
Subordinated debenture and warrants to purchase
290,060 shares of stock at $2.95 per share 700,000 700,000
SUNSTAR HEALTHCARE, INC.:
100,000 shares of 10% Series A convertible preferred stock and
warrants to purchase 100,000 shares common stock at $5.00 and
20,000 shares of common stock stock at $4.00 940,000 1,085,000
INTER-MED, INC.:
1,340.96 shares of common stock 500,000 500,000
WEBCASTS.COM, INC.:
5,000 shares of 8% Series A preferred stock plus warrants to
purchase 1,354,297 shares
of common stock for $1,155 500,000 500,000
INTERNATIONAL PACIFIC SEAFOODS, INC.:
12% subordinated note and warrants to purchase
1,324 shares of common stock for $.76 per share. 900,000 900,000
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EDMIN.COM, INC.:
200,000 shares of Series A cumulative convertible preferred stock
and warrants to purchase 20,000
shares of common stock at $4.00 per share 736,000 736,000
PHYSICIANS TOTAL CARE:
10% promissory note and warrants to purchase 140,000 shares of
common stock for at total of $5,000 and class B warrants to
purchase
210,000 common shares at $5.00 per share 500,000 500,000
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$ 8,080,800 $12,231,728
=========== ===========
VISIONCOMM, INC. VisionComm, Inc. ("VisionComm") is primarily engaged in the
telecommunications and private cable television business. On December 1, 1997
and May 14, 1998, the Trust provided $500,000 and $200,000, respectively, in
financing to VisionComm in the form of a 14% 12-month secured note with
warrants. Effective December 1, 1998, the terms of the $500,000 note receivable
were extended due to VisionComm's negotiations for long-term financing
arrangements. VisionComm repaid the notes in April, 1999 with interest.
Warrants to purchase shares of VisionComm common stock were received in
connection with the aforementioned note investments and a previous note
investment that was repaid in 1996 and 1997. Warrants to purchase VisionComm
common stock at $.8414 per share are summarized as follows:
Number of Shares Expiration Date
---------------- ---------------
104,529 April 30, 2003
41,811 September 30, 2003
742,813 April 20, 2007
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889,153
=======
All warrants provide for a cashless exercise. The Trust has the right to
purchase approximately 19% of the equity ownership of VisionComm. The Trust,
upon the occurrence of certain conditions, may "put" the warrant shares to
VisionComm, beginning after May 15, 2003. VisionComm warrants are valued at
$3.1586 per share, based on a recent preferred stock market transaction as
adjusted to reflect the differences between preferred and common stock. The
shares of VisionComm common stock referred to in the table have been restated to
reflect a 5.9425 to 1 stock split which was effective July 17, 1998.
KINSETH HOSPITALITY COMPANY, INC. On April 16, 1997, the Trust invested in a
senior secured note issued by Kinseth Hospitality Company, Inc. ("Kinseth"),
which is primarily engaged in the hospitality industry. The six-year note
carries a 14% interest rate with interest only payments with a balloon payment
due May 16, 2003. The Trust received a warrant to purchase 25% of Kinseth's
common stock for $11.80. The warrant expires during 2002. Beginning in 2004, the
common shares may be called by Kinseth at a designated multiple or based on
independent valuations. The Trust can "put" the common shares to Kinseth
beginning May 1, 2003 if the
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common stock is not listed on a national exchange or NASDAQ, or prior to May 1,
2003, if other certain conditions are met, at a price based on fair market value
less certain specified provisions. The value at September 30, 1999 was adjusted
downward to reflect declines in market conditions for similar publicly traded
stocks.
LIVEware5, INC. LIVEware5, Inc. ("LIVEware") is a provider of distance based
corporate education via advanced teleconferencing technologies. On December 31,
1997, the Trust acquired 300,000 shares of LIVEware common stock and warrants to
purchase 600,000 shares of LIVEware common stock at a cost of $300,000. The
exercise price of the warrants is $.01 per share of common stock. During
February 1999 the Trust acquired an additional 13,333,333 shares of common
stock. In connection with the February 1999 investment, the original investment
agreement was amended to allow certain employees and other stockholders of
LIVEware to acquire additional shares. The warrants will cancel upon LIVEware
achieving certain levels of revenues and pretax profits beginning in fiscal year
2000.
During August 1999 the Trust purchased $100,000 of LIVEware's 12% debentures,
due September 1, 2004. Interest payments are deferred until September 1, 2000,
at which time all interest accruing since the date of this debenture shall be
paid in full. Thereafter, interest shall be paid quarterly in arrears. In
connection with the purchase of debentures, the Trust received warrants ("1999
Warrants") to purchase 4,000,000 shares of LIVEware's common stock for $.001 per
share and certain terms of the investment agreement were amended. The 1999
Warrants expire during August, 2009. Following the issuance of the 1999 Warrants
the Trust's ownership share is approximately 19% on a fully diluted basis.
During any event of default, the Trust may put the 300,000 shares of common
stock to LIVEware at the greater of $1.00 per share or the fair market value.
The remaining common stock and warrants may be put to LIVEware at fair market
value during any event of default.
HICKLIN ENGINEERING, L.C. Hicklin Engineering, L.C. ("Hicklin") specializes in
manufacturing drive train component test equipment and dynometer systems.
Hicklin designs equipment and integrated test systems used to test vehicular
drive train components. On June 30, 1998, the Trust invested $400,000 in a
Hicklin secured 10% subordinated note due June 30, 2003, and a warrant to
purchase 6,857 units of membership interest at an exercise price of $.01. The
note is collateralized by substantially all the assets of Hicklin. The warrant
expires on May 1, 2006. The exercise of these warrants would give the Trust a
6.86% membership interest in Hicklin. The Trust can "put" the warrant shares to
Hicklin upon the occurrence of certain specified events or beginning June 30,
2003 at a designated multiple or based on independent valuations.
ObjectSpace, INC. ObjectSpace, Inc. provides information technology services to
Fortune 500 companies, assisting its clients in realizing the full potential of
Java for enterprise-level systems. On December 30, 1998, the Trust invested
$404,800 in 108,108 shares of ObjectSpace Series B Convertible Preferred Stock
("Preferred Stock"). The Preferred Stock is subordinated to the claims of other
secured creditors and may be converted into common shares at any time at a price
equal to $3.70 divided by the conversion rate in effect on the date of
conversion. The initial conversion rate was $3.70 per share. Subject to other
investor rights, the Trust can "put" the Preferred Stock to ObjectSpace
beginning January 1, 2003 at a price equal to the greater of fair market value
or the per
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share sales price, payable over three years earning interest at prime interest
rate.
EASY SYSTEMS, INC. Easy Systems, Inc. ("Easy Systems") is a manufacturer of
mixing and measuring equipment used in agricultural and industrial processes.
During February 1999, the Trust invested $700,000 in 11% unsecured subordinated
debentures due March 1, 2004. Interest payments are not scheduled to begin until
March 2000. In addition, the Trust received a warrant to purchase 290,060 shares
of Easy Systems' common stock at an exercise price of $2.95 per share, which
amounts to approximately 5.6% of Easy Systems' fully diluted common equity. The
warrant expires on the earlier of February 2009, or upon the occurrence of a
certain specified event. The Trust also received the right to "put" the shares
to Easy Systems upon the occurrence of certain conditions or beginning February,
2004, at the greater of fair market value or a designated multiple. The right to
"put" the shares expires upon the earlier of a specified event or February,
2009.
SunStar HEALTHCARE, INC. During April 1999, the Trust invested $940,000 in
SunStar Healthcare, Inc. ("SunStar"), an HMO serving the major population
centers of Florida. The Trust appointed Berthel Fisher & Company Financial
Services, Inc. ("BFCFS") as a broker of record and achieved a 6% discount from
the offering price while BFCFS retained 2%. The Trust's investment advisor and
BFCFS are subsidiaries of Berthel Fisher & Company and are therefore related
parties. The Trust purchased 100,000 capital units consisting of one share of
10% Series A Preferred Stock that is convertible into Common Stock and one
warrant to purchase a share of Common Stock. The Preferred Stock is convertible
into common at $3.75 per common share until April 16, 2001, and at 75% of the 90
day average bid price until April 16, 2002. The minimum conversion price is
$2.75 per common share. SunStar may, at its option, redeem all or any portion of
the Preferred Stock at $15.00 per share, plus all accrued and unpaid dividends.
The warrants provide for the purchase of one share of common stock at $5.00 per
share until April 16, 2004. BFCFS also allowed the Trust to receive the broker's
portion of warrants which allow purchase of up to 20,000 shares of SunStar
Common Stock at $4.00 per common share until April 16, 2004. The Trust's equity
ownership amounts to approximately 5.7% of SunStar on a fully diluted basis.
SunStar preferred stock was increased in value as of September 30, 1999,
reflecting increases in the underlying common stock values.
INTER-MED, INC. On May 3, 1999, the Trust invested $500,000 in Inter-Med, Inc.
("Inter-Med"), a manufacturer and importer of products for the U.S. dental
market. The Trust's acquisition of 1,340.96 shares of common stock amounted to
approximately 19.2% of Inter-Med's outstanding common stock. Beginning May,
2006, the Trust may "put" the shares of common stock to Inter-Med at the greater
of fair market value or a designated multiple. Beginning May, 2007, Inter-Med
may elect to purchase ("call") all, but not less than all, of the Inter-Med
common stock owned by the Trust at the greater of fair market value or a
designated multiple. The "put" and "call" rights expire upon the occurrence of a
specified event.
WEBCASTS.COM, INC. During June, $500,000 was invested in Avant Digital
Marketing, Inc. ("Avant"). Avant changed its name to Webcasts.com, Inc.
("Webcasts") on August 18,1999. Webcasts creates and delivers tools and services
enabling the convergence of live video, data and e-commerce. The investment
consists of 5,000 shares of Series A, 8%, Cumulative, Redeemable Preferred
Stock, plus warrants to purchase 1,354,297 shares of common stock for $1,155.
The warrants expire May 14, 2009. If the warrants are exercised, the Trust
ownership would be
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approximately 5.6% on a fully diluted basis. The investments may be put back to
Webcasts at fair market value during the period May 15, 2004 through May 15,
2006.
INTERNATIONAL PACIFIC SEAFOODS, INC. $900,000 was invested in International
Pacific Seafoods, Inc. ("IPS") on June 2, 1999. IPS provides seafood and
supplemental products to wholesale, retail and the food service industry. The
Trust received a 12% Subordinated Note due $250,000 on June 1, 2003; $300,000 on
June 1, 2004; and $350,000 on June 1, 2005. In addition to the note, the Trust
received warrants to purchase 1,324 shares of IPS common stock, currently
equivalent to approximately 25% of IPS, at $.76 per common share. The warrants
expire June 1, 2006 and may be exercised only in the case of certain events that
include a public offering or change of control. The Trust has the right to put
the warrants or shares purchased with warrants back to IPS at fair market value
during the period June 2005 through June 2006 or after an event of default.
Interest payment terms were restructured during August 1999 to allow deferral of
the first four months of interest to the second four months of the investment
term.
EDMIN.COM, INC. EDmin.com provides Internet-based software products, technology
planning, and systems integration to educational institutions. The investment
consists of 200,000 shares of Series A, 9.0% Cumulative Convertible Preferred
Stock. The preferred shares are convertible into common stock on one-for-one
basis, subject to adjustment. After May 31, 2004, the preferred shares may be
redeemed at Edmin.com's option. The Trust appointed BFCFS as a broker of record
and achieved an 8% discount from the offering price and received BFCFS's
warrants to purchase 20,000 shares of common stock of Edmin.com at $4.00 per
share. The Trust's ownership interest is approximately 3.6% of EDmin.com's
common equity, assuming conversion of preferred shares into common stock and
exercise of warrants, on a fully diluted basis.
PHYSICIANS TOTAL CARE INC. Physicians Total Care ("PTC") provides prescription
medication systems to physicians' offices for point-of-care dispensing of
medications to patients. The investment consists of Promissory Notes bearing 10%
interest per annum and due October 1, 2004. All interest accrued to October 1,
2000 will be added to the principal outstanding as of October 1, 2000. After
such date, interest will be paid quarterly in arrears. Upon the occurrence of
certain specified events, the Trust may convert all, but not less than all, of
the principal amount to common stock at a rate of one share of common stock for
each $5.00 of principal outstanding. The Promissory Notes are being purchased in
two tranches: The first tranche is $500,000 and was closed in September 1999.
The second tranche is $250,000. Funding of the second tranche is subject to PTC
raising a specified level of additional capital and achieving specified
operating results. In addition to the notes the Trust received Class A warrants
to purchase 140,000 shares of common stock for a total of $5,000 and Class B
warrants to purchase 210,000 shares of common stock at $5.00 per share. Upon the
occurrence of certain specified events, the exercise price of Class B warrants
will drop to $1.00 per share. The warrants expire during September, 2006 and
will give the Trust a 7.7% ownership stake in the Company on a fully diluted
basis. Upon the occurrence of certain specified events or during the period from
September 27, 2004 to September 27, 2006, the Trust may put the warrants or
warrant shares to PTC at fair market value, plus all accrued and unpaid
dividends.
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SUBSEQUENT INVESTMENTS:
During October 1999 the Trust committed to invest $1,000,000 in common stock
issued by ServeCore Business Solutions, Inc. ("ServeCore".) ServeCore sells
copiers and ancillary equipment in the commercial office market. The first stage
of funding, $700,000, was invested during October in exchange for 2,661 shares
of common stock. The second stage of funding, $300,000, is expected to close
before December 31, 1999 and will result in an additional 1,002 shares of common
stock. Following the second stage of equity financing the Trust will own 28% of
ServeCore's common equity. Upon the occurrence of certain specified events or
during the period from January, 2004 to January, 2006, the Trust may put the
common stock to ServeCore at fair market value.
On October 1, 1999 the Trust purchased an additional $100,000 of LIVEware's 12%
debentures, due September 1, 2004, and subject to the same terms as the August,
1999 debenture purchase.
On November 1, 1999, the Trust invested $100,000 in International Pacific
Seafoods, Inc., and received a 12% subordinated note, with the same terms as the
initial investment.
A $300,000 investment in preferred stock to be issued by Easy Systems, Inc. is
expected to be completed during November 1999.
NOTE C -- DEBENTURES
The Trust issued a $1,000,000 debenture in June, 1999 and two debentures
totalling $1,500,000 in September, 1999, all of which are guaranteed by the SBA.
The debentures require the semiannual payment of interest plus a 1% annual SBA
fee. The debentures are subject to all of the regulations promulgated under the
Small Business Investment Act of 1958, as amended, and consists of the following
at September 30, 1999:
ISSUE DATE MATURITY DATE INTEREST RATE AMOUNT
---------- ------------- ------------- ------
06/25/1999 09/01/2009 7.220% $1,000,000
09/15/1999 03/01/2010 6.460% 800,000
09/28/1999 03/01/2010 6.437% 700,000
----------
$2,500,000
==========
Interest rates on the debentures issued in September, 1999 are applicable
through March 29, 2000, at which time the SBA will establish the final interest
rate.
On October 20, 1999, the Trust issued debentures guaranteed by the SBA totalling
$435,000. The debentures require semiannual interest payments of 6.637% through
March 29, 2000, at which time the stated interest rate and maturity date will be
finalized. The debentures also require payment of an annual 1% SBA fee and are
subject to all of the regulations promulgated under the Small Business
Investment Act of 1958, as amended.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
------------------------- --------------------------
DESCRIPTION:
Unrealized gain (loss) on investments $ (1,105,000) $ 1,919,325 $ (1,105,000) $ 1,919,325
Interest income 135,465 151,494 398,019 437,945
Dividend income 25,206 -0- 47,123 -0-
Management and administrative fees 91,850 55,261 262,236 166,065
Trustee fees 8,000 8,000 25,000 26,000
Legal 14,059 17,263 118,220 44,752
UNREALIZED GAIN (LOSS) ON INVESTMENTS: The Trust had an unrealized loss on
investments for the quarter of $1,105,000 as a result of Management's changes in
valuation as of September 30, 1999. The value of Kinseth warrants were adjusted
downward by $1,250,000 at September 30, 1999 to reflect declines in market
conditions for similar publicly traded stocks. SunStar preferred stock was
increased in value by $145,000 as of September 30, 1999, reflecting increases in
the underlying common stock values.
INTEREST AND DIVIDEND INCOME: Below is a summary of interest and dividend income
earned by the Trust.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
------------------------ -------------------------
Interest Income:
Money Market $ 7,941 $ 46,042 $ 49,545 $ 154,602
VisionComm -0- 25,452 25,861 63,233
Hicklin 10,000 10,000 30,000 10,100
Kinseth 70,000 70,000 210,000 210,000
Easy Systems 19,250 -0- 45,339 -0-
International Pacific Seafoods 27,000 -0- 36,000 -0-
Physicians Total Care 274 -0- 274 -0-
Liveware5 1,000 -0- 1,000 -0-
--------- ---------- ----------- ----------
Total Interest Income $ 135,465 $ 151,494 $ 398,019 $ 437,945
========= ========== =========== ==========
The Trust invests idle cash in bank money market accounts, pending investments
in enhanced-yield investments. As such, the interest earned on money market
accounts will vary based on the amount and duration of the idle cash invested.
Dividend Income:
SunStar Healthcare $ 25,206 $ -0- $ 47,123 $ -0-
========= ========== =========== ==========
MANAGEMENT AND ADMINISTRATIVE FEES: The Trust accrues an annual management fee
equal to 2.5% of the total assets of the Trust paid quarterly. The management
fee increased $96,632 and $36,743 for the nine months and quarter ended
September 30, 1999, respectively. Increased management fees are a result of
increased asset valuations and increased investment activity resulting from SBA
financing.
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OTHER GENERAL AND ADMINISTRATION: Other general and administration expenses
increased for the nine months ended September 30, 1999, from $30,311 in 1998 to
$51,700 in 1999. This increase is the result of the purchase of liability
insurance for the Trustees and Trust Advisor, increased travel and meeting
expenses of non-control employees of the Trust Advisor to find new investment
opportunities, and association dues for the SBIC. The Trust was reimbursed from
the Trust Advisor for various general and administrative costs that were
previously expensed, resulting in credit of $2,745 for the third quarter of
1999.
LEGAL: Legal expenses incurred are associated with the structuring and
monitoring of Trust activities and investments. Increased legal expenses are the
result of the SRS bankruptcy for which the Trust has incurred expenses totalling
$82,935 for the nine months ended September 30, 1999, compared to $28,753 for
the same period of 1998.
FORMATION OF AN SBIC: On May 4, 1998, Berthel SBIC, LLC (the "SBIC"), a wholly
owned subsidiary of the Trust within the meaning of Section 2(a)(43) of the
Investment Company Act of 1940, received a license to operate as a Small
Business Investment Company from the Small Business Administration ("SBA"). The
SBIC was formed in 1997. The Trust funded the SBIC with a capital contribution
of $5,000,000, the minimum amount eligible to be contributed in order to receive
leverage under the SBA Small Business Investment Company program.
During March 1999, the SBIC received approval for SBA leverage ("Leverage")
reserved in the form of debentures equal to $5,000,000 to be issued on or prior
to September 30, 2003. In exchange for the approved Leverage, the SBIC paid the
SBA a nonrefundable fee of $50,000 during March, 1999 and the remaining portion
of the Leverage fee in the amount of $100,000 is being deducted pro rata as
proceeds are drawn. Each issuance of Leverage is conditional upon the SBIC's
credit worthiness and compliance with specified regulations, as determined by
the SBA. The SBA may also limit the amounts that may be drawn each year.
YEAR 2000 ISSUE: The Trust recognizes that the arrival of the Year 2000 poses a
unique challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. The Trust has determined that the software
it uses in its operations is compatible with the Year 2000. The cost of making
software compatible with the Year 2000 has been included in the costs of
software billed to the Trust Advisor and is not believed to be material. There
are no non-information technology processes that the Trust has identified which
would affect the Trust's operations. An assessment of the readiness of external
entities which it interfaces with, such as vendors, counterparties, customers,
and others, is ongoing. At the present the Trust Advisor does not contemplate
any specific charges will be incurred for this assessment, but if separate
charges are identified they will be billed to the Trust as incurred. The amount
of such expenditures is not expected to be significant. The Trust does not
expect the Year 2000 impact of external relationships will have a material
adverse impact on the Trust. But, in a worst case scenario, the Trust expects a
Year 2000 related event might delay the processing of cash flows by up to 90
days, but that recovery from the event would not be beyond the Trust's normal
capabilities.
The Trust could incur losses if portfolio companies incur business losses
related to the Year 2000 challenge. In a worst case scenario any investee
company could experience significant disruptions to cash flows and business
processes that would lead to a decrease in the valuation of securities
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17
issued. No investee company is contractually obligated to become Year 2000
compliant. However, the Trust has contacted all investee companies concerning
their readiness for the Year 2000 and is not aware of any investment valuation
that is impaired as a result of the Year 2000 issue. If the Trust becomes aware
of expected or actual business losses resulting from the Year 2000 challenge it
will make appropriate adjustments to investment valuations at that time.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Major Cash Source:
Liquidation of money market securities $ 2,483,620 $ 894,772
Repayment of note receivable 700,000 -0-
Issuance of debenture 2,500,000 -0-
Major Cash Use:
Investments $ 4,976,000 $ 600,000
Distribution payments 436,551 414,154
- --------------------------------------------------------------------------------
Distributions payable of $1,287,116 have been accrued as of September 30, 1999.
The Trust accrued distributions based on 10% simple annual interest computed on
a daily basis from the initial closing (August 30, 1995) until June 21, 1997,
the Final Closing. Since Final Closing, a priority return of 8% simple annual
interest computed on a daily basis has been accrued.
The Trust Advisor is not aware of any regulatory issues that may have a material
impact on the portfolio companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Trust's investment objective is to achieve capital appreciation in the value
of its net assets and to achieve current income principally by making
investments through private placements in securities of small and medium sized
privately and publicly owned companies. Securities consist of subordinated debt,
preferred stock, or common stock combined with equity participation in common
stock or rights to acquire common stock. Securities held for investment at
September 30, 1999 are not held for trading purposes.
The primary risk of the portfolio is derived from the underlying ability of
investee companies to satisfy debt obligations and their ability to maintain or
improve common equity values. Levels of interest rates are not expected to
impact the Trust's valuations, but could impact the capability of investee
companies to repay debt or create and maintain shareholder value.
As of September 30, 1999 the portfolio is valued at fair value, as determined by
the Independent Trustees ("Trustees"). In determining fair value for securities
and warrants, investments are initially stated at cost until significant
subsequent events and operating trends require a change in valuation.
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18
Among the factors considered by the Trustees in determining fair value of
investments are the cost of the investment, terms and liquidity of warrants,
developments since the acquisition of the investment, the sales price of
recently issued securities, the financial condition and operating results of the
issuer, earnings trends and consistency of operating cash flows, the long-term
business potential of the issuer, the quoted market price of securities with
similar quality and yield that are publicly traded and other factors generally
pertinent to the valuation of investments. The Trustees relied on financial data
of the portfolio companies provided by the management of the portfolio
companies.
The Trust Advisor maintains ongoing contact with management of the portfolio
companies including participation on their Boards of Directors and review of
financial information.
There is no assurance that any investment made by the Trust will be repaid or
re-marketed. Accordingly, at September 30, 1999, the entire portfolio value is
at risk in light of the underlying operations and financial health of investee
companies. At September 30, 1999, the amount at risk was $12,231,728; at
December 31, 1998 the amount at risk was $9,060,728. The change is primarily a
result of new investments made during the first nine months of 1999 and the
unrealized loss for the nine months ending September 30, 1999.
At September 30, 1999, the portfolio consisted of the following:
Cost Valuation
----------- -----------
Notes and debentures $ 4,600,000 $ 4,600,000
Warrants to purchase common stock as a
result of note and debenture financings -0- 4,308,478
Preferred stock 2,580,800 2,721,000
Common stock 900,000 602,250
----------- -----------
$ 8,080,800 $12,231,728
=========== ===========
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - none
b. Reports on Form 8-K - none
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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 GROWTH & INCOME TRUST I
-------------------------------
(Registrant)
Date: November 9, 1999 Ronald O. Brendengen/s/
---------------- ----------------------------------------------
Ronald O. Brendengen, Chief Financial Officer,
Treasurer
Date: November 9, 1999 Daniel P. Wegmann/s/
---------------- -----------------------------
Daniel P. Wegmann, Controller
20