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 March 31, 2005
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 033-89506
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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 Identification No.)
incorporation or organization)
701 Tama Street, Marion, Iowa 52302
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(Address of principal executive offices) (Zip Code)
(319) 447-5700
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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
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Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
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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 April 11, 2005
BERTHEL GROWTH & INCOME TRUST I
INDEX
Part I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (unaudited)
Consolidated Statements of Assets and Liabilities -
March 31, 2005 and December 31, 2004 3
Consolidated Statements of Operations -
three months ended March 31, 2005 and 2004 4
Consolidated Statements of Changes in Net Liabilities -
three months ended March 31, 2005 and 2004 5
Consolidated Statements of Cash Flows -
three months ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 14
Part II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 14
Signatures 14
2
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Loans and investments (Note B) $ 8,428,850 $ 8,079,782
Cash and cash equivalents 252,127 259,533
Interest and dividends receivable 93,081 110,183
Other receivables 721 --
------------ ------------
TOTAL ASSETS $ 8,774,779 $ 8,449,498
============ ============
LIABILITIES AND NET ASSETS (LIABILITIES)
Accrued interest payable $ 63,178 $ 97,014
Accounts payable and other accrued expenses 61,970 87,519
Due to affiliate 482,271 418,906
Deferred income -- 833
Distributions payable to shareholders 5,878,621 5,670,689
Notes payable (Note C) 7,426,919 7,426,919
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TOTAL LIABILITIES 13,912,959 13,701,880
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COMMITMENTS AND CONTINGENCIES
NET ASSETS (LIABILITIES), equivalent to ($487.45)
per share at March 31, 2005
and ($498.28) per share at December 31, 2004:
Shares of beneficial interest (25,000 shares authorized;
10,541 shares issued and outstanding) (1,394,856) (1,053,694)
Accumulated net realized losses (5,141,829) (5,221,040)
Accumulated net unrealized gains 1,398,505 1,022,352
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TOTAL NET ASSETS (LIABILITIES) (5,138,180) (5,252,382)
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TOTAL LIABILITIES AND NET ASSETS (LIABILITIES) $ 8,774,779 $ 8,449,498
============ ============
See notes to consolidated financial statements.
3
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31, March 31,
2005 2004
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REVENUES:
Interest income $ 51,541 $ 72,473
Dividend income 30,819 20,571
Application, closing, and other fees 833 1,250
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Total revenues 83,193 94,294
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EXPENSES:
Management fees 52,022 55,598
Administrative services 1,184 1,188
Trustee fees 6,000 6,000
Professional fees 8,614 18,718
Interest expense 137,164 143,959
Other general and administrative expenses 11,439 9,233
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Total expenses 216,423 234,696
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Net investment loss (133,230) (140,402)
Unrealized gain on investments 376,153 29,374
Realized gain on investments 79,211 --
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Net increase (decrease) in net assets $ 322,134 $(111,028)
========= =========
Per beneficial share amounts:
Net increase (decrease) in net assets $ 30.56 $ (10.53)
========= =========
Weighted average shares 10,541 10,541
========= =========
See notes to consolidated financial statements.
4
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Shares of Shares of
Beneficial Beneficial
Interest Amount Interest Amount
----------- ----------- ----------- -----------
Net investment loss -- $ (133,230) -- $ (140,402)
Unrealized gain on investments -- 376,153 -- 29,374
Realized gain on investments -- 79,211 -- --
Distributions payable to shareholders -- (207,932) -- (210,242)
Net liabilities at beginning of period 10,541 (5,252,382) 10,541 (3,795,616)
----------- ----------- ----------- -----------
Net liabilities at end of period 10,541 $(5,138,180) 10,541 $(4,116,886)
=========== =========== =========== ===========
See notes to consolidated financial statements.
5
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31, March 31,
2005 2004
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OPERATING ACTIVITIES:
Net increase (decrease) in net assets $ 322,134 $(111,028)
Adjustments to reconcile change in net assets
to net cash flows from operating activities:
Accretion of discount on debt securities (5,266) (5,266)
Unrealized gain on investments (376,153) (29,374)
Realized gain on investments (79,211) --
Changes in operating assets and liabilities
Loans and investments 111,562 (20,568)
Interest and dividends receivable 17,102 (25,267)
Other receivables (721) --
Accrued interest payable (33,836) 112,958
Accounts payable and other accrued expenses (25,549) 4,718
Due to affiliate 63,365 79,710
Deferred income (833) (1,250)
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Net cash flows from operating activities (7,406) 4,633
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NET INCREASE (DECREASE) IN CASH (7,406) 4,633
CASH AT BEGINNING OF PERIOD 259,533 248,286
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CASH AT END OF PERIOD $ 252,127 $ 252,919
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 171,000 $ 31,001
Noncash financing activities:
Distributions payable to shareholders 207,932 210,242
See notes to consolidated financial statements.
6
BERTHEL GROWTH & INCOME TRUST I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
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 Trust's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2004. 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 three months ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005.
The preparation of the Trust's financial statements in conformity with
accounting principles generally accepted in the United States of America
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 continues to have a deficiency in net assets. Berthel SBIC, LLC
("SBIC"), a wholly owned subsidiary of the Trust, has agreed to liquidate its
portfolio assets in order to pay its indebtedness to the United States Small
Business Administration ("SBA").
In August 2002, the SBA notified the SBIC that all debentures, accrued interest
and fees were immediately due and payable. The SBIC was transferred into the
Liquidation Office of the SBA at that time. On September 1, 2003, management
signed a loan agreement with the SBA for $8,100,000 (after paying $1,400,000 on
the $9,500,000 debentures) with a term of 48 months at an interest rate of
7.49%. The Agreement requires principal payments on the debt to the extent the
SBIC receives cash proceeds exceeding $250,000 for the sale or liquidation of
investments. As of March 31, 2005, $7,426,919 is outstanding under the loan
agreement, which is secured by substantially all assets of the SBIC. The loan
agreement contains various covenants, including limits on the amounts of
expenses, other than interest expense, that can be incurred and paid. The loan
agreement also contains various events of default, including a decrease in the
aggregate value of the SBIC's assets of 10% or greater.
As of March 31, 2005, total assets and liabilities of the Trust are $8,774,779
and $13,912,959, respectively. These factors raise substantial doubt about the
ability of the Trust to continue as a going concern. No assurance can be given
that the Trust will have sufficient cash flow to repay the debt or that the
Trust will be financially viable.
7
NOTE B -LOANS AND INVESTMENTS
March 31, 2005 December 31, 2004
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Cost Valuation Cost Valuation
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Communications and Software:
EDmin.com, Inc.
- ---------------
255,456 and 249,835 shares of 9%, Series A cumulative convertible preferred
stock as of March 31, 2005 and December 31, 2004, respectively $ 949,824 $ 949,824 $ 927,340 $ 927,340
Media Sciences International, Inc.
- ----------------------------------
1,055,440 and 1,112,797 shares of common stock as of March 31, 2005 and
December 31, 2004, respectively, and 35,000 options to purchase shares
of common stock at various prices 957,942 1,950,453 1,012,777 1,629,135
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Total Communications and Software (34% and 32% of total loans and
investments as of March 31, 2005 and December 31, 2004, respectively) 2,900,277 2,556,475
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Healthcare Products and Services:
Physicians Total Care, Inc.
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10% promissory note due on demand and warrants to purchase
350,000 shares of common stock for at various prices 807,795 -- 807,795 --
700 shares of common stock 4,000 -- 4,000 --
Inter-Med, Inc.
- ---------------
2,491.3031 shares of common stock 672,279 672,279 672,279 672,279
12% promissory note due July, 2005-June, 2006 197,907 197,907 196,792 196,792
FutureMatrix Interventional, Inc. (formerly known as Futuremed)
- ---------------------------------------------------------------
Warrants to purchase 6% of the company at $.01 per share 102,640 2,460,000 102,640 2,460,000
1,899,783 shares of common stock of IMED Devices, Inc.
(an affiliate of FutureMatrix Interventional, Inc.) -- 265,970 -- 265,970
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Total Healthcare Products and Services (43% and 44% of total loans and
investments as of March 31, 2005 and December 31, 2004, respectively) 3,596,156 3,595,041
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Manufacturing:
Childs & Albert
- ---------------
12.5% promissory note due October, 2005 792,794 792,794 789,191 789,191
Warrants to purchase 833.334 shares of common stock at $10 per share 72,065 72,065 72,065 72,065
8
March 31, 2005 December 31, 2004
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Cost Valuation Cost Valuation
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Feed Management Systems, Inc. (formerly Easy Systems, Inc.)
- -----------------------------------------------------------
435,590 shares of common stock 1,077,422 304,913 1,077,422 304,913
The Schebler Company
- --------------------
13% promissory note due March, 2005 166,666 166,666 166,118 166,118
Warrants to purchase 1.66% of common stock at $.01 per share 11,504 11,504 11,504 11,504
166,666 shares of 10% convertible cumulative preferred stock 166,667 166,667 166,667 166,667
166,666 shares of common stock 166,667 166,667 166,667 166,667
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Total Manufacturing (20% and 21% of total loans and investments
as of March 31, 2005 and December 31, 2004, respectively) 1,681,276 1,677,125
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Other Service Industries:
International Pacific Seafoods, Inc.
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1,501 shares of common stock 1,141 1,141 1,141 1,141
Kinseth Hospitality Company, Inc.
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15% note due March, 2007 250,000 250,000 250,000 250,000
Pickerman's Development Company
- -------------------------------
12% promissory notes due April, 2005 through March, 2006 547,663 -- 547,663 --
12% promissory note due on demand 12,520 -- 12,520 --
Warrants to purchase 2,406,250 shares of common stock at $0.01 per share 72,849 -- 72,849 --
---------- ----------
Total Other Service Industries (3% and 3% of total loans and investments
as of March 31, 2005 and December 31, 2004, respectively) 251,141 251,141
---------- ----------
TOTAL LOANS AND INVESTMENTS $8,428,850 $8,079,782
========== ==========
9
NOTE C - NOTES PAYABLE
The SBIC issued debentures payable to the SBA totalling $9,500,000 since
inception. The original debenture terms required semiannual payments of interest
at annual interest rates ranging from 6.353% to 7.64%. In addition to interest
payments, the SBIC was required to pay an annual 1% SBA loan fee on the
outstanding debentures balance.
In August 2002, the SBA notified the SBIC that all debentures, accrued interest
and fees were immediately due and payable. The SBIC was transferred into the
Liquidation Office of the SBA at that time. On September 1, 2003, management
signed a loan agreement with the SBA for $8,100,000 (after paying $1,400,000 on
the $9,500,000 debentures) with a term of 48 months at an interest rate of
7.49%. The Agreement requires principal payments on the debt to the extent the
SBIC receives cash proceeds exceeding $250,000 for the sale or liquidation of
investments. As of March 31, 2005, $7,426,919 is outstanding under the loan
agreement, which is secured by substantially all assets of the SBIC. The loan
agreement contains various covenants, including limits on the amounts of
expenses, other than interest expense, that can be incurred and paid. The loan
agreement also contains various events of default, including a decrease in the
aggregate value of the SBIC's assets of 10% or greater.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
Net investment income (loss) reflects the Trust's revenues and expenses
excluding realized and unrealized gains and losses on portfolio investments.
Interest income consists of the following:
Three Months Ending March 31
2005 2004
---- ----
Portfolio investments $ 50,781 $ 71,746
Money market 760 727
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Interest income $ 51,541 $ 72,473
=========== ===========
Dividend income $ 30,819 $ 20,571
=========== ===========
Changes in interest earned on portfolio investments reflect the level of
investment in interest earning debt securities and loans. Money market interest
is earned on investments in highly liquid money market savings funds. Dividend
income reflects dividends earned on preferred stock investments.
Management fees, calculated as 2.5% of the combined temporary investment in
money market securities and loans and investments balances, were $52,022 for the
first three months of 2005 and $55,598 the same period a year ago. These fees
are currently accrued as payable to the Trust Advisor but are not paid, in
accordance with the loan agreement with the SBA.
Professional fees were $8,614 for the first quarter of 2005 compared to $18,718
for 2004 and include legal, accounting, and other professional fees. The
decrease is due primarily to the accrual of fees in 2004, which were paid by
Berthel Fisher & Company Planning, Inc. (Trust Advisor), for an independent
investment banking firm to assist in the process of liquidating the SBIC's
portfolio.
Other general and administrative expenses were $11,439 for the first three
months of 2005 compared to $9,233 for 2004. Interest expense was $137,164 for
the first quarter of 2005 and $143,959 for the same period of 2004 and is
interest on the note payable to the SBA.
The Trust continues to have a deficiency in net assets, as well as net
investment losses. In addition, the SBIC is in violation of the maximum capital
impairment percentage permitted by the SBA. In August, 2002, the SBA notified
the SBIC that all debentures, accrued interest and fees were immediately due and
payable. The SBIC was transferred into the Liquidation Office of the SBA at that
time. On September 1, 2003, management signed a loan agreement with the SBA for
$8,100,000 (after paying $1,400,000 on the $9,500,000 debentures) with a term of
48 months at an interest rate of 7.49%. The loan is secured by substantially all
assets of the SBIC. The loan agreement contains various covenants including
establishment of a reserve account in the amount of $250,000 with excess cash
paid to the SBA, limits on the amounts of expenses, other than interest expense,
that can be incurred and paid. The loan agreement also contains various events
of default, including a decrease in the aggregate value of the SBIC's assets of
10% or greater.
As of March 31, 2005, total assets and liabilities of the Trust are $8,774,779
and $13,912,959, respectively. These factors raise substantial doubt about the
ability of the Trust to continue as a going concern. No assurance can be given
that the Trust will have sufficient cash flow to repay the debt or that the
Trust will be financially viable.
The change in unrealized and realized gains and losses is summarized in the
following table:
11
Three Months Ending March 31
2005 2004
---- ----
EDmin.com $ -0- $ 11,569
Media Sciences International 376,153 17,805
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Unrealized gain $ 376,153 $ 29,374
============= =============
Media Sciences International $ 79,211 $ -0-
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Realized gain $ 79,211 $ -0-
============= =============
The change in the unrealized gains and losses are the result of carrying the
Trust's portfolio of loans and investments at fair value. The fair value of the
loans and investments are approved by the Independent Trustees, and in the case
of the SBIC, are in accordance with SBA regulations. The Trust recognizes
realized gains and losses when investments have been either sold or written off
as deemed to be worthless. Securities that are traded publicly are valued at the
market price less any appropriate discount for reasons of liquidity or
restrictions.
During the second quarter of 2004, management decreased the liquidity discount
taken on Media Sciences International. Management decreased this discount from
20% to 10% due to the fact that the shares owned by the SBIC were included in a
registration statement filed by Media Sciences.
Liquidity and Capital Resources
The Trust continues to have a deficiency in net assets, as well as net
investment losses. In addition, the SBIC is in violation of the maximum capital
impairment percentage permitted by the SBA. In August, 2002, the SBA notified
the SBIC that all debentures, accrued interest and fees were immediately due and
payable. The SBIC was transferred into the Liquidation Office of the SBA at that
time. On September 1, 2003, management signed a loan agreement with the SBA for
$8,100,000 (after paying $1,400,000 on the $9,500,000 debentures) with a term of
48 months at an interest rate of 7.49%. The loan is secured by substantially all
assets of the SBIC. The loan agreement contains various covenants including
establishment of a reserve account in the amount of $250,000 with excess cash
paid to the SBA, limits on the amounts of expenses, other than interest expense,
that can be incurred and paid. The loan agreement also contains various events
of default, including a decrease in the aggregate value of the SBIC's assets of
10% or greater.
The loan agreement with the SBA is due as follows:
Maturity Date Amount
------------- ------
September 1, 2007 $7,426,919
As of March 31, 2005, total assets and liabilities of the Trust are $8,774,779
and $13,912,959, respectively. These factors raise substantial doubt about the
ability of the Trust to continue as a going concern. No assurance can be given
that the Trust will have sufficient cash flow to repay the debt or that the
Trust will be financially viable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Trust's investment objective is capital appreciation and current income 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. Investments are not held for
trading purposes.
12
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 March 31, 2005, the portfolio is valued at fair value, as determined by
the Independent Trustees ("Trustees"). In determining fair value, investments
are initially stated at cost until significant subsequent events and operating
trends require a change in valuation. 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, there is a risk of total loss of any investment made
by the Trust. At March 31, 2005, the amount at risk was $8,428,850 and consisted
of the following:
Cost Valuation
------------- -------------
Debt securities and loans $ 2,775,345 $ 1,407,367
Preferred stocks 1,116,491 1,116,491
Common stocks 2,879,451 3,361,423
Warrants and options to purchase
common stock 259,058 2,543,569
------------- -------------
Total loans and investments $ 7,030,345 $ 8,428,850
============= =============
On September 1, 2003, the SBIC signed a loan agreement with the SBA. This debt
is carried on the balance sheet at its principal amount of $7,426,919 as of
March 31, 2005, which represents the fair value of the loan to the SBA.
13
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Trust's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO concluded that as of the
end of the period covered by this report, our disclosure controls and procedures
are effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
of 1934 is recorded, processed, summarized, and timely reported as provided in
the SEC's rules and forms.
Changes in Internal Controls
No changes occurred since the quarter ended December 31, 2004 in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
Item 6. Exhibits
--------
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
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: May 12, 2005 /s/ Ronald O. Brendengen
------------ -----------------------------------
Ronald O. Brendengen,
Chief Financial Officer &
Treasurer
Date: May 12, 2005 /s/ Daniel P. Wegmann
------------ -----------------------------------
Daniel P. Wegmann, Controller
Date: May 12, 2005 /s/ Henry Royer
------------ -----------------------------------
Henry Royer,
Executive Vice President
14