UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2007
[ ] 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
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.)
701 Tama Street, Marion, Iowa 52302
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 447-5700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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 filings
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
As of June 30, 2007, 10,541 Shares of Beneficial Interest were issued and
outstanding with an aggregate market value of $-0- at that time. As of January
25, 2008, 10,541 Shares of Beneficial Interest were issued and outstanding.
EXHIBIT INDEX AT PAGE 38
BERTHEL GROWTH & INCOME TRUST I
2007 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business.................................................... 3
Item 1A. Risk Factors................................................ 4
Item 1B. Unresolved Staff Comments................................... 10
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Shareholders............. 11
PART II
Item 5. Market for the Registrant's Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities.................................................. 11
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 16
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 31
Item 9A(T). Controls and Procedures..................................... 31
PART III
Item 10. Directors, Executive Officers and Corporate Governance...... 32
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.................. 35
Item 13. Certain Relationships and Related Transactions and
Director Independence....................................... 35
Item 14. Principal Accountant Fees and Services...................... 35
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 36
Signatures.................................................. 37
Exhibit Index............................................... 38
2
PART I
Item 1. Business
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Berthel Growth & Income Trust I (the Trust), a Delaware business trust that has
elected to be treated as a business development company under the Investment
Company Act of 1940, was organized on February 10, 1995. The Trust's
Registration Statement was declared effective June 21, 1995, at which time the
Trust began offering Shares of Beneficial Interest (shares). The underwriting
period was completed on June 21, 1997, with a total of $10,541,000 raised. The
Trust's principal office is located at 701 Tama Street, Marion, Iowa 52302. The
Trust is a closed-end management investment company intended as a long-term
investment and not as a trading vehicle.
On May 4, 1998, Berthel SBIC, LLC (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
initially 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 2001, the Trust contributed an
additional $700,000 in capital to the SBIC. The Trust Advisor and Independent
Trustees (Trustees) also serve as the Independent Managers of the SBIC. As used
hereinafter, with respect to investment activities, the term "Trust" includes
investment activities of the SBIC.
Berthel Fisher & Company Planning, Inc. (Trust Advisor) is a corporation
organized under the laws of the State of Iowa on March 20, 1989. The Trust
Advisor is a registered investment advisor organized as a wholly owned
subsidiary of Berthel Fisher & Company (Berthel Fisher). Berthel Fisher, a
financial services holding company, was formed in 1985 as an Iowa corporation to
hold the stock of Berthel Fisher & Company Financial Services, Inc. (Financial
Services), a broker-dealer registered with the National Association of
Securities Dealers, Inc. Financial Services was the dealer-manager for the
Trust's offering of its shares.
In accordance with the prospectus, the Trust was scheduled to terminate upon the
liquidation of all of its investments, but no later than June 21, 2007. However,
the Independent Trustees may extend the term of the Trust for up to two
additional one-year periods if they determine that such extensions are in the
best interest of the Trust and in the best interest of the shareholders, after
which the Trust will liquidate any remaining investments as soon as practicable
but in any event within three years. The Independent Trustees have extended the
term of the Trust for one year to June 21, 2008.
During the years ended December 31, 2007 and 2006, the Trust continues to have a
deficiency in net assets, as well as net investment losses during the years
ended December 31, 2006 and 2005. In addition, the SBIC is in violation of the
maximum capital impairment percentage permitted by the SBA. On August 22, 2002,
the SBA notified the SBIC that all debentures, accrued interest and fees were
immediately due and payable. The SBIC submitted a plan of debt and interest
repayment to the SBA on January 31, 2003 and received a response dated February
21, 2003. On September 1, 2003, management signed a loan agreement ("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%. On August 2,
2007, the loan agreement was extended one year to September 1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement. The note payable is secured by substantially all assets of the SBIC.
3
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 December 31, 2007, total assets and liabilities of the Trust are
$5,438,059 and $11,355,840, 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 investment objective of the Trust is to provide capital appreciation
potential and current income by investing primarily in subordinated debt,
preferred stock and related equity securities issued by small and medium sized
companies that the Trust Advisor believes offer the opportunity for growth or
appreciation of equity value while being able, if required to do so, to service
current yield bearing securities. The Trust, through its Trust Advisor, directs
its investment efforts to small and medium sized companies which, in the view of
the Trust Advisor, provides opportunities for significant capital appreciation
and prudent diversification of risk. The Trust seeks investments in a variety of
companies and industries. The securities of portfolio companies purchased by the
Trust typically will be rated below investment grade, and more frequently, not
rated at all. The securities of portfolio companies will often have significant
speculative characteristics.
Item 1A. Risk Factors
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AN INVESTMENT IN THE TRUST INVOLVES A NUMBER OF SIGNIFICANT RISKS AND WILL BE
AFFECTED BY OTHER IMPORTANT FACTORS RELATING TO INVESTMENTS IN TRUSTS GENERALLY,
AND RELATING TO THE STRUCTURE AND INVESTMENT OBJECTIVES OF THE TRUST IN
PARTICULAR. AS A RESULT OF THESE RISKS AND FACTORS, THERE IS NO ASSURANCE THAT
THE TRUST WILL BE ABLE TO CARRY OUT ITS INVESTMENT PROGRAM SUCCESSFULLY.
GOING CONCERN CONSIDERATIONS
During the years ended December 31, 2007 and 2006, the Trust continues to have a
deficiency in net assets, as well as net investment losses during the years
ended December 31, 2006 and 2005. In addition, the SBIC is in violation of the
maximum capital impairment percentage permitted by the SBA. On August 22, 2002,
the SBA notified the SBIC that all debentures, accrued interest and fees were
immediately due and payable. The SBIC submitted a plan of debt and interest
repayment to the SBA on January 31, 2003 and received a response dated February
21, 2003. On September 1, 2003, management signed a loan agreement ("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%. On August 2,
2007, the loan agreement was extended one year to September 1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement. The note payable 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 December 31, 2007, total assets and liabilities of the Trust are
$5,438,059 and $11,355,840, 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.
4
GENERAL NATURE OF INVESTMENTS
While investments in highly leveraged companies offer the opportunity for
current income and capital appreciation, such investments involve a high degree
of business and financial risk and can result in loss of all invested principal.
Furthermore, Portfolio Companies may be created for the purpose of undertaking
specific transactions and may have no operating histories. The Trust Advisor
anticipates that most of the Portfolio Companies will be highly leveraged as a
result of (i) the Trust's investment, and (ii) debt instruments issued to other
securities holders of such Portfolio Companies. If a Portfolio Company cannot
generate adequate cash flow to meet debt service, all or part of the principal
of such company's debt may not be repaid and, in such event, the value of the
Trust's subordinated debt or equity participation could be reduced or
eliminated.
In addition, high leverage and other general business risks (such as labor
problems, casualty losses, increases in operating expenses, disputes with
suppliers or customers and other problems that require additional company
resources) may have a magnified effect on Portfolio Companies. The effects of a
deterioration of the general economy may have a more pronounced effect on the
profitability of such highly leveraged companies as well. In addition, such
companies may be less diversified than other companies and, therefore, are more
negatively impacted by business cycles.
The interest rate that the Trust charges on debt investments will be subject to
the usury laws of the states in which it conducts its business. Such laws may
limit the amount of interest that the Trust may legally charge. Whether an
equity participation is or is not considered interest may not be clearly
established in some states. There can be no assurance that some of the equity
received by the Trust will not be valued in a way that causes the Trust to
exceed a state's usury limitations, subjecting the Trust to severe penalties,
including loss of interest, treble damages and forfeiture of principal.
Enhanced Yield Investments consist of Mezzanine Investments and Other
Investments. Mezzanine Investments are investments that are designed to yield a
projected return over the life of the investment that is higher than secured
debt financing, but lower than equity financing. Mezzanine Investments represent
a layer of corporate financing between equity and senior debt. Senior debt is
debt typically provided by financial institutions on a secured basis. Other
Investments include all securities invested in by the Trust that are not
Mezzanine Investments, including High Yield Debt Investments (commonly referred
to as "junk bonds"), Venture Investments, Bridge Investments and Publicly Traded
Securities. Enhanced Yield Investments may include investments in financially
troubled companies, including companies undergoing workouts or whose outstanding
debts have been restructured. The sensitivity of such companies to general
economic conditions, such as recessions or changes in interest or inflation
rates, fluctuations in local or general business conditions, increases in
operating expenses, work stoppages or other labor disputes or disputes with
suppliers or customers, will be heightened due to such financial troubles.
Furthermore, since the Trust generally will invest in less than investment grade
or in unrated securities, the financial risks associated with its investments
will be very high. The Trust's investments generally will be made in unrated
securities purchased in private placements.
5
EFFECT OF INTEREST RATE SENSITIVITY ON SENIOR DEBT
Fluctuations in interest rates may have an adverse impact on the Trust
indirectly through the effect of interest rate fluctuations on Portfolio
Companies. Many of the Trust's investments consist primarily of subordinated
debt and equity securities issued by Portfolio Companies that have also issued
senior debt. The payment of any amounts due on the Trust's investment will,
therefore, generally be subject to the payments due, if any, on debt senior to
the Trust's investment. Furthermore, since senior debt typically bears interest
at a floating rate, while other debt typically does not, increased interest
rates may shift more of a company's available funds to the senior lenders. If a
Portfolio Company cannot generate sufficient cash flow to meet such increased
interest payments the shift of funds to senior lenders could decrease or
eliminate the amount realized on the Trust's investment.
ILLIQUIDITY OF THE INVESTMENTS
Most of the investments of the Corporation consist of securities acquired
directly from their issuers in private transactions. They are usually subject to
restrictions on resale and are generally illiquid. Usually there is no
established trading market for such securities into which they could be sold. In
addition, most of the securities are not eligible for sale to the public without
registration under the Securities Act of 1933, as amended, which would involve
delay and expense. Restricted securities generally sell at a price lower than
similar securities that are not subject to restrictions on sale.
LIQUIDATION OF INVESTMENTS
In accordance with the prospectus, the Trust was scheduled to terminate upon the
liquidation of all of its investments, but no later than June 21, 2007. However,
the Independent Trustees may extend the term of the Trust for up to two
additional one-year periods if they determine that such extensions are in the
best interest of the Trust and in the best interest of the shareholders, after
which the Trust will liquidate any remaining investments as soon as practicable
but in any event within three years. The Independent Trustees have extended the
term of the Trust for one year to June 21, 2008. If the Trust's debt investments
do not mature prior to the end of the Trust's term, or if the Trust is not
otherwise able to liquidate such investments in the normal course of business
prior to the expiration of its term, the Trust could incur substantial capital
losses resulting from the liquidation of debt securities prior to their maturity
if interest rates at the time of liquidation are higher than the interest rates
earned by such debt securities. The Trust Advisor will seek to negotiate
maturities of investments within the stated term of the Trust. If the Trust is
unable to sell or liquidate its equity interests or other securities before the
end of the Trust's term and the Trust is forced to liquidate in a short period
of time, there will be a substantial discount taken in order to sell the
security.
FOLLOW-ON INVESTMENTS
Following its initial investment, the Trust may make additional debt and equity
investments in Portfolio Companies ("Follow-On Investments") to increase its
investment in a Portfolio Company, to convert convertible securities that were
acquired in the original financing, to exercise warrants and options, to
preserve the Trust's proportionate ownership when a subsequent financing is
pursued or made or to protect the Trust's initial investment when a Portfolio
Company's performance does not meet expectations. The Trust will have the
discretion to make any Follow-On Investments as it determines, subject to the
availability of capital. The failure to make such Follow-On Investments may, in
certain circumstances, jeopardize the continued viability of a Portfolio Company
and the Trust's initial investment. The necessity of making Follow-On
Investments and the level of the minimum number of Shares that may be sold may
limit the number of companies in which the Trust has the ability to invest.
There can be no assurance that the Trust will have sufficient funds to make
necessary Follow-On Investments or that, following a Follow-On Investment, the
Trust will not lose the entire amount of its initial and Follow-On Investment.
6
In deciding whether to make a Follow-On Investment, the Trust Advisor will
exercise its business judgment and apply similar criteria as it does with
initial investments.
DISTRIBUTIONS TO INVESTORS
The Trust intends to make quarterly distributions of all cash revenues to the
extent it has cash available for such distributions. These distributions must be
approved by a majority of the Trustees and made within sixty days of the end of
each quarter. No distributions have been made to investors since 1999.
Distributions from the SBIC to the Trust are restricted under SBA regulations.
Under SBA regulations, the SBIC subsidiary is not able to distribute income to
the parent unless it has "earnings available for distribution" as defined by the
SBA. Accordingly, the SBIC had no distributable cash. No assurance can be
provided that any distributions will be made in the future.
LEVERAGE
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%. The SBIC also paid an
annual 1% SBA loan fee on the outstanding balance.
On August 22, 2002, the SBA notified the SBIC that all debentures, accrued
interest and fees were immediately due and payable. The SBIC submitted a plan of
debt and interest repayment to the SBA on January 31, 2003 and received a
response dated February 21, 2003. On September 1, 2003, management signed a loan
agreement ("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%. On August 2, 2007, the loan agreement was extended one year to September
1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement. The note payable 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.
COMPETITION FOR INVESTMENTS
A large number of entities and individuals compete for the kinds of investments
made by the Trust. Many of these entities and individuals have greater financial
resources than the Trust. As a result of this competition, the Trust may be
precluded from entering into attractive transactions on terms considered by the
Trust Adviser to be prudent in light of the risks to be assumed.
INTEREST RATE AND STOCK MARKET FLUCTUATIONS
The Trust anticipates that Enhanced Yield Investments generally will pay
interest at fixed rates. Therefore, if interest rates generally rise while such
investments are outstanding, Investors in the Trust may receive interest income
at lower rates than are then prevailing in the market place.
General fluctuations in the prices of securities on the stock markets may affect
the value of the investments held by the Trust. Moreover, the business plans of
certain Portfolio Companies may include the sale of segments of their business.
Stock market fluctuations may affect the amount Portfolio Companies can receive
from the sale of certain segments of their businesses, which will affect the
value of the Trust's investment in those Portfolio Companies.
7
LIMITED NUMBER OF INVESTMENTS AND INDUSTRY CONCENTRATION
While the Trust Advisor intends to limit the exposure of the Trust's capital in
any single investment, the Trust's capital will be invested in a limited number
of Portfolio Companies, and financial difficulty on the part of any single
Portfolio Company will expose it to a greater risk of loss than would be the
case if it were a "diversified" company holding numerous investments.
The Trust intends to spread its investments among several industries. If the
most attractive Enhanced Yield Investments available to the Trust Advisor and
the Trust are concentrated in a small number of industries, the Trust's
portfolio may become concentrated in those industries. As such, the Trust may be
exposed to the risk of adverse developments in or affecting any industry to a
greater extent than if its investments were dispersed over a greater variety of
industries.
TAXATION OF THE TRUST AS A CORPORATION
The anticipated tax consequences to Shareholders of an investment in the Trust,
such as the pass-through of income, gain, losses and other deductions, depends
upon the classification of the Trust as a partnership, rather than an
association taxable as a corporation, for federal income tax purposes. The Trust
has not requested an advance ruling from the Internal Revenue Service (the
"IRS") that it be treated as a partnership for federal income tax purposes. The
IRS would likely deny any such request since the Trust will not satisfy all of
the requirements contained in published IRS Procedures for obtaining such an
advance ruling. Instead, Bradley & Riley, P.C., counsel to the Trust, has
delivered its opinion that, provided the Trust is not a publicly traded Trust,
the Trust will be classified is a partnership for federal income tax purposes.
Unlike a tax ruling, an opinion of counsel has no binding effect on the IRS and
there can be no assurance that the IRS will not challenge the classification of
the Trust as a partnership for federal income tax purposes. Moreover, continued
eligibility of the Trust for classification as a partnership will depend on no
adverse changes of law and the Trust's not becoming a publicly traded
partnership as described below. Since the Trust will not be eligible for the tax
treatment available to investment companies registered as such under the
Investment Company Act, the Trust would be required to pay income tax at
corporate tax rates on its net income if it were classified as an association
taxable as a corporation.
In recent years, the Treasury Department and members of Congress have on
multiple occasions proposed to classify trusts and limited partnerships with
interests which are widely held, such as the Trust, as corporations rather than
partnerships for federal income tax purposes. The Internal Revenue Code of 1986
was amended to provide that certain "publicly traded partnerships" will be
classified as corporations for federal income tax purposes. The Declaration of
Trust provides for the Trust to satisfy one of certain safe harbors for avoiding
classification as a publicly traded partnership contained in an IRS Advance
Notice and proposed Regulations recently issued by the IRS. Accordingly, it is
not anticipated that the Trust will be a publicly traded partnership. However,
there is no assurance that regulations will not be promulgated or legislation
will not be passed that would cause the Trust to be classified as a corporation
or publicly traded partnership. The Declaration of Trust provides that if it
appears likely that the Trust will be classified as a corporation or a publicly
traded partnership for federal income tax purposes, the Trust Advisor may take
such steps as it deems necessary to minimize the adverse tax consequences of
such classification. Such steps could include the amendment of the Declaration
of Trust, reorganization of the Trust as a regulated investment company pursuant
to section 851 of the Code, liquidation of the Trust or such other steps as may
be deemed appropriate to the Trust Advisor and the Independent Trustees at such
time.
8
TAX CONSIDERATIONS FOR FOREIGN INVESTORS
The tax treatment applicable to a foreign Investor who invests in the Trust is
complex and subject to uncertainty and will vary depending upon the particular
circumstances of a particular Investor. Foreign Investors should consult their
tax advisers with respect to the possible federal, state, local and foreign tax
consequences of an investment in the Trust.
RELIANCE ON THE TRUST ADVISOR
Pursuant to the Management Agreement between the Trust and the Trust Advisor,
the Trust will only make Enhanced Yield Investments recommended by the Trust
Advisor. Accordingly, an Investor in the Shares must rely upon the ability of
the Trust Advisor in identifying, structuring and making Enhanced Yield
Investments consistent with the Trust's investment objectives and Policies.
There are no employment agreements between the Trust Advisor and its key
management personnel. No assurances can be given as to the continuing
availability of such management services during the life of the Trust. Such
management services could cease to be available to the Trust under various
circumstances, including a change in the control of the Trust Advisor.
Furthermore, management will not be evaluated by the Shareholders.
TRUST ADVISOR'S BROAD DISCRETION OVER THE USE OF PROCEEDS
All decisions with respect to the management of the Trust will be made
exclusively by the Trustees and the Trust Advisor. Shareholders have no right or
power to take part in the management of the Trust. Accordingly, no person should
purchase Shares unless such person is willing to entrust the management of the
Trust to the Trust Advisor, subject to overall supervision of the Trustees.
An Investor will not have the opportunity to evaluate personally the relevant
economic, financial and other information that will be utilized by the Trust
Advisor in its selection, structuring, monitoring and disposition of investments
and will not receive the detailed financial information prepared by Portfolio
Companies that is available to the Trust Advisor.
NO MARKET FOR SHARES; SHARES ARE ILLIQUID SECURITIES
The Shares will only be transferable in accordance with certain restrictions in
the Declaration of Trust and may be affected by restrictions on resales imposed
by the laws of some states. A Shareholder may not transfer a Share unless the
Shareholder represents and provides documentation satisfactory in form and
substance to the Trust Advisor that such transfer was not effected through a
broker dealer or matching agent that makes a market in Shares or that provides a
readily available, regular and ongoing opportunity to Shareholders to sell or
exchange their Shares through a public means of obtaining or providing
information of offers to buy, sell or exchange Shares. In the case of the sale
of a Share, the Trust Advisor must determine that such sale, assignment or
transfer would not, by itself or together with any other sales, transfers or
assignments, likely result in the Trust's being classified as a publicly traded
partnership. A transferor will not be required to make the representations
described above if he represents that the transfer is affected through an agent
whose procedures have been approved by the Trust Advisor as consistent with the
requirements for avoiding classification as a publicly traded partnership. The
Declaration of Trust also prohibits the transfer of Shares to certain
transferees. There is presently no public market for the Shares, and there are
restrictions contained in the Declaration of Trust that are intended to prevent
the development of a public market. Consequently, Shareholders may not be able
to liquidate their investment in the event of emergency or for any other reason.
Such factors may also affect the price which a Shareholder would be able to
obtain for Shares.
9
REGULATION
The Trust has elected to be treated as a business development company under the
Investment Company Act. Such Act imposes restrictions on the activities of the
Trust, including restrictions on the nature of its investments, the use of
borrowed funds for Trust purposes and its issuance of securities, options,
warrants or other rights, and requires that a majority of the Trustees of the
Trust be individuals who are not "interested persons" of the Trust as defined in
the Investment Company Act. Such restrictions may prohibit the purchase of
certain Enhanced Yield Investments that would otherwise be suitable for
investment by the Trust or render such purchases inadvisable.
Because there are no judicial and few administrative interpretations of portions
of the legislation applicable to the Trust, there is no assurance that the
legislation will be interpreted or administratively implemented in a manner
consistent with the Trust's objectives and intended manner of operation. If the
Trust Advisor, with the approval of the Trustees of the Trust, determines that
the Trust cannot operate effectively under the Investment Company Act, the Trust
Advisor, with the approval of the Trustees, may at some future date decide to
withdraw the Trust's election as a business development company and transform it
into an operating company not subject to regulation under the Investment Company
Act or cause it to liquidate. Such changes may not be effected without the
approval of the Shareholders holding a majority of the outstanding Shares of the
Trust.
The Trust is regulated by the SEC and its subsidiary, Berthel SBIC, is regulated
by the SBA. In addition, changes in the laws or regulations that govern the
Trust and SBIC may significantly affect our business. Any change in the law or
regulations that govern our business could have a material impact on us or our
operations. Laws and regulations may be changed from time to time, and the
interpretations of the relevant laws and regulations also are subject to change,
which may have a material effect on our operations.
CONFLICTS OF INTEREST
The Trust Advisor, the Corporate Trustee and their Affiliates, including the
Dealer Manager and its parent, Berthel Fisher & Company, may be subject to
various conflicts of interest in connection with their relationships and
transactions with the Trust. The contractual and other arrangements between the
Trust and the Trust Advisor, the Corporate Trustee and their Affiliates,
including the Dealer Manager, have not been established by arm's length
negotiations. Such conflicts of interest may include the following: transactions
with the Trust and Portfolio Companies; conflicts as to investment
opportunities; timing of disposition of trust investments; allocation of the
Trust Advisor's time and services; other relationships with Portfolio Companies;
participation by an Affiliate as Dealer Manager; and lack of separate
representation.
Item 1B. Unresolved Staff Comments
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None.
Item 2. Properties
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The Trust does not own or lease any real estate.
Item 3. Legal Proceedings
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None
10
Item 4. Submission of Matters to a Vote of Shareholders
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No matters were submitted to a vote of shareholders, through the solicitation of
proxies or otherwise during the period covered by this report.
PART II
Item 5. Market for the Registrant's Common Equity, Related Shareholder Matters
----------------------------------------------------------------------
and Issuer Purchases of Equity Securities
- -----------------------------------------
The Registrant's shares are not publicly traded. There is no established public
trading market for the shares of the Trust and it is unlikely that any will
develop. The Trust Advisor will resist the development of a public market for
the shares.
Number of Shareholders Number of Shares
Title of Class at January 25, 2008 at January 25, 2008
--------------------------------------------------------------------------
Shares of Beneficial
Interest 883 10,541
The Trust accrued an underwriting return 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. Shareholders were paid $250,000 in July 1996 and
$493,897 in July 1997, leaving $522,791 of the underwriting return remaining to
be paid. There remains to be paid $3,610, which represents interest earned by
the Trust on the investor's funds held in escrow through the initial closing.
Since the final closing, a priority return at 8% simple interest has been
accrued. The earned priority return amounted to $843,280, $845,590, $843,199,
$843,251, and $843,280 in 2003, 2004, 2005, 2006, and 2007, respectively. No
priority return distributions have been paid since 1999. Priority return
distributions payable at December 31 of each year were $4,298,698, $5,144,288,
$5,987,487, $6,830,738, and $7,674,018 for 2003, 2004, 2005, 2006, and 2007,
respectively.
The Trust intends to make quarterly distributions of all cash revenues to the
extent it has cash available for such distributions. These distributions must be
approved by a majority of the Trustees and made within sixty days of the end of
each quarter. The Trustees declared no distributions during 2007. Distributions
from the SBIC to the Trust are restricted under SBA regulations. Under SBA
regulations, the SBIC subsidiary is not able to distribute income to the parent
unless it has "earnings available for distribution" as defined by the SBA.
Accordingly, the SBIC had no distributable cash.
Item 6. Selected Financial Data
-----------------------
Year Ended December 31
-----------------------------------------------------------------------
2007 2006 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 5,438,059 $ 5,926,267 $ 7,954,366 $ 8,449,498 $ 8,968,700
Debentures payable 2,781,106 2,788,590 6,075,209 7,426,919 7,709,172
Net increase (decrease) in
net assets 137,476 1,056,490 670,365 (611,176) 1,302,461
Unrealized gain (loss)
on investments (304,913) 6,089 944,615 3,773 1,916,997
Realized gain on investments -0- 1,510,035 461,534 -0- 173,355
Net increase (decrease) in
net assets per beneficial share 13.04 100.23 63.60 (57.98) 123.56
Distributions per beneficial share -0- -0- -0- -0- -0-
The above selected data should be read in conjunction with the consolidated
financial statements and related notes appearing elsewhere in this report.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Critical Accounting Policy
The Trust's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
financial information contained within these statements is, to a significant
extent, financial information that is based on approximate measures of the
financial effects of transactions and events that have already occurred. Based
on its consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified it most critical
accounting policy to be that related to the valuation of loans and investments.
The Trust's valuation of loans and investments incorporates a variety of risk
considerations, both quantitative and qualitative in establishing a valuation of
loans and investments that management believes is appropriate at each reporting
date. Quantitative factors for the valuation of loans and investments include
the Trust's cost of the investment, terms and liquidity of the 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 prices of securities with
similar quality and yield that are publicly traded and other factors generally
pertinent to the valuation of the investments. Quantitative factors also
incorporate known information about individual loans and investments.
Qualitative factors include the general economic environment in the
Partnership's markets, including economic conditions throughout the Midwest and
in particular the state of certain industries. Management may report a
materially different amount for the provision for loan and lease losses in the
statement of operations to change the valuation of loans and investments if its
assessment of the above factors were different. Although management believes the
valuation of loans and investments as of both December 31, 2007 and 2006 were
adequate, a decline in local economic conditions, or other factors, could result
in increasing losses that cannot be reasonably predicted at this time.
Results of Operations
Net investment income (loss) reflects revenues and expenses excluding realized
and unrealized gains and losses on investments. Interest income for the past
three years is summarized as follows:
2007 2006 2005
---- ---- ----
Portfolio investments $ 78,997 $ 105,977 $ 103,357
Money market 4,244 6,662 3,303
------------- ------------- -------------
Interest income $ 83,241 $ 112,639 $ 106,660
============= ============= =============
Changes in interest earned on portfolio investments reflect the level of
investment in interest earning debt securities and loans. Money market interest
reflects cash resources that are invested in highly liquid money market savings
funds. Dividend income was $16,666 in 2007, $16,667 in 2006, and $74,643 in
2005, reflecting 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 $174,979 in
2006 and $211,257 in 2005. On February 7, 2007, management of the Trust Advisor
decided to waive the management fees for 2006. The Trust accrued management fees
payable to the Trust Advisor for 2006 totaling $174,979 and this forgiveness of
debt was reflected in the financial statements during the first quarter of 2007.
On April 26, 2007, management of the Trust Advisor decided to waive the
management fees for 2005 and prior years. The Trust accrued management fees
payable to the Trust Advisor for 2005 and prior years totaling $515,731 and this
forgiveness of debt was reflected in the financial statements during the second
12
quarter of 2007. On July 25, 2007, management of the Trust Advisor decided to
waive the management fees for 2007. This forgiveness of debt, in the amount of
$73,471, was reflected in the financial statements during the third quarter of
2007.
Trustee fees represent compensation for services rendered to the Trust. Each
Independent Trustee is paid $1,000 per month for these services. In accordance
with the SBA loan agreement, discussed in more detail below, the Trust continues
to accrue the trustee fees, but is not paying them. The Trust does not have
sufficient cash available to pay the trustee fees. Fees payable to the trustees
were $114,000 as of December 31, 2007.
Professional fees were $63,618, $25,549, and $69,360 in 2007, 2006, and 2005,
respectively, and include legal and accounting expenses. Other general and
administrative expenses were $47,441 in 2007, $47,527 in 2006, and $53,035 in
2005.
Interest expense is on the note payable to the SBA and was $210,369 in 2007,
$314,381 in 2006, and $556,276 in 2005. The Trust issued debentures totalling
$9,500,000 for which the SBA has demanded repayment; this debt was refinanced
during 2003, as described in the following paragraph.
During the years ended December 31, 2007 and 2006, the Trust continues to have a
deficiency in net assets, as well as net investment losses during the years
ended December 31, 2006 and 2005. In addition, the SBIC is in violation of the
maximum capital impairment percentage permitted by the SBA. On August 22, 2002,
the SBA notified the SBIC that all debentures, accrued interest and fees were
immediately due and payable. The SBIC submitted a plan of debt and interest
repayment to the SBA on January 31, 2003 and received a response dated February
21, 2003. On September 1, 2003, management signed a loan agreement ("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%. On August 2,
2007, the loan agreement was extended one year to September 1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement. The note payable 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 December 31, 2007, total assets and liabilities of the Trust are
$5,438,059 and $11,355,840, 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 changes in unrealized gains and losses and the realized gains and losses on
investments recognized during the previous three years are summarized below:
Unrealized gains (losses): 2007 2006 2005
- -------------------------- ---- ---- ----
Childs & Albert, Inc. $ -0- $ 472,065 $ (472,065)
Physicians Total Care, Inc. -0- 100,000 1,100,000
Feed Management Systems (304,913) -0- -0-
Media Sciences International -0- (565,976) (50,382)
Pickerman's Development Company -0- -0- 633,032
IMED Devices, Inc. -0- -0- 265,970)
------------ ------------ ------------
Total unrealized gain $ (304,913) $ 6,089 $ 944,615
============ ============ ============
13
Realized gains (losses): 2007 2006 2005
- ------------------------ ---- ---- ----
FutureMatrix Interventional, Inc. $ -0- $ 500,000 $ -0-
Childs & Albert, Inc. -0- (172,065) -0-
International Pacific Seafoods -0- -0- 100,000
Media Sciences International -0- 1,182,100 994,566
Pickerman's Development Company -0- -0- (633,032)
------------ ------------ ------------
Total realized gain $ -0- $ 1,510,035 $ 461,534
============ ============ ============
The change in the unrealized gains and losses and the realized 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 realized gains and losses reflect investments that have either
been 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.
The investment objective of the Trust is to provide capital appreciation
potential and current income by investing primarily in subordinated debt,
preferred stock and related equity securities issued by small and medium sized
companies that the Trust Advisor believes offer the opportunity for growth or
appreciation of equity value while being able, if required to do so, to service
current yield bearing securities. The Trust seeks investments in a variety of
companies and industries. The securities of portfolio companies purchased by the
Trust typically will be rated below investment grade, and more frequently, not
rated at all. The securities of such portfolio companies will often have
significant speculative characteristics. The Trust's investments at December 31,
2007, 2006, and 2005 are summarized by type of investment in the table below.
December 31, 2007
-----------------
Cost Fair Value
---- ----------
Debt securities and loans $ 474,461 $ 866,666
Preferred stocks 1,139,479 1,139,479
Warrants to purchase common stock 11,504 11,504
Common stocks 2,023,008 3,298,946
------------ -----------
$ 3,648,452 $ 5,316,595
------------ -----------
December 31, 2006
-----------------
Cost Fair Value
---- ----------
Debt securities and loans $ 516,769 $ 908,974
Preferred stocks 1,139,479 1,139,479
Warrants to purchase common stock 11,504 11,504
Common stocks 2,023,008 3,603,859
------------ -----------
$ 3,690,760 $ 5,663,816
============ ===========
December 31, 2005
-----------------
Cost Fair Value
---- ----------
Debt securities and loans $ 2,024,420 $ 1,916,625
Preferred stocks 1,139,479 1,139,479
Warrants to purchase common stock 186,209 2,471,504
Common stocks 2,293,506 2,082,973
------------ -----------
$ 5,643,614 $ 7,610,581
============ ===========
14
Whenever possible, the Trust will negotiate enhancements to the securities
purchased in the form of warrants to purchase shares of common stock in
portfolio companies, options to force redemption of securities by portfolio
companies ("Put Options"), and registration rights should a portfolio company
begin to offer its shares in the public market. Agreements with portfolio
companies may also include restrictive covenants that contribute to sound
management practices at portfolio companies. Regardless of terms that the Trust
is able to achieve with any portfolio company, there is no assurance that any
investment made by the Trust will be repaid or redeemed at a profit; and there
is risk of total loss of any investment made by the Trust.
The difference between cost and fair value of the investments represents
accumulated unrealized gains and losses. Accumulated unrealized gains and losses
are reflected in the statements of assets and liabilities. Changes in
accumulated unrealized gains and losses are reflected in the statements of
operations.
Liquidity and Capital Resources
Net cash from operating activities was a net use of cash of $147,503 in 2007
compared to a net source of cash of $3,207,207 in 2006. This decrease in cash
flow is primarily due to the net changes in loans and investments. The Trust had
a net use of cash for financing activities of $7,484 and $3,286,619 in 2007 and
2006, respectively, relating to the payment of debt to the SBA.
During the years ended December 31, 2007 and 2006, the Trust continues to have a
deficiency in net assets, as well as net investment losses during the years
ended December 31, 2006 and 2005. In addition, the SBIC is in violation of the
maximum capital impairment percentage permitted by the SBA. On August 22, 2002,
the SBA notified the SBIC that all debentures, accrued interest and fees were
immediately due and payable. The SBIC submitted a plan of debt and interest
repayment to the SBA on January 31, 2003 and received a response dated February
21, 2003. On September 1, 2003, management signed a loan agreement ("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%. On August 2,
2007, the loan agreement was extended one year to September 1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement. The note payable 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.
The loan agreement with the SBA is due as follows:
Maturity Date Amount
------------- ------
September 1, 2008 $2,781,106
As of December 31, 2007, total assets and liabilities of the Trust are
$5,438,059 and $11,355,840, 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 Trust intends to make quarterly distributions of all cash revenues to the
extent it has cash available for such distributions. These distributions must be
approved by a majority of the Trustees and made within sixty days of the end of
each quarter. The Trustees declared no distributions during 2007. Distributions
from the SBIC to the Trust are restricted under SBA regulations. Under SBA
15
regulations, the SBIC subsidiary is not able to distribute income to the parent
unless it has "earnings available for distribution" as defined by the SBA.
Accordingly, the SBIC had no distributable cash.
Regardless of the ability to make current distributions in cash, the Trust has
accrued an 8% priority return to beneficial owners of the Trust since June 1997.
A 10% underwriting return was accrued through the final closing of the offering
on June 21, 1997. Accrued underwriting and priority returns amounted to
$8,200,419, $7,357,139, and $6,513,888 as of December 31, 2007, 2006, and 2005,
respectively. No distributions have been paid to beneficial owners of the Trust
since 1999.
On February 26, 2008, the Trust entered into an agreement with a financial
services firm to assist in the sale of the Trust's remaining portfolio of
investments.
Inflation
The Trust does not believe that moderate rates of inflation experienced in the
United States over the last three years have had a material effect on its
operations.
Item 7A. 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 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, or rights to acquire common stock. Securities held for
investment 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 December 31, 2007, the portfolio is valued at fair value, as determined by
the 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 rely
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.
16
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 December 31, 2007, the amount at risk was $5,316,595 and
consisted of the following:
Cost Fair Value
---- ----------
Debt securities and loans $ 474,461 $ 866,666
Preferred stocks 1,139,479 1,139,479
Warrants to purchase common stock 11,504 11,504
Common stocks 2,023,008 3,298,946
-------------- -------------
$ 3,648,452 $ 5,316,595
============== =============
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 $2,781,106 as of
December 31, 2007, which represents the fair value of the loan to the SBA.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following financial statements and related information as of the years ended
December 31, 2007, 2006 and 2005 are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities
Consolidated Statements of Operations
Consolidated Statements of Changes in Net Assets (Liabilities)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
17
McGLADREY & PULLEN
CERTIFIED PUBLIC ACCOUNTANTS
Report Of Independent Registered Public Accounting Firm
To the Independent Trustees and Stockholders
Berthel Growth & Income Trust I
Marion, Iowa
We have audited the accompanying consolidated statements of assets and
liabilities of Berthel Growth & Income Trust I and Subsidiary ("Trust") as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in net assets (liabilities) and cash flows for the years
ended December 31, 2007, 2006 and 2005. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Berthel Growth &
Income Trust I and Subsidiary as of December 31, 2007 and 2006, and the results
of their operations and their cash flows for the years ended December 31, 2007,
2006 and 2005, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements for the years ended December 31, 2007,
2006 and 2005 have been prepared assuming that the Trust will continue as a
going-concern. As discussed in Note 1 to the Financial Statements, the Trust
continues to have a deficiency in net assets, as well as net losses. In
addition, Berthel SBIC, LLC, 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. These events raise substantial doubt about
the Trust's ability to continue as a going-concern. Management's plans
concerning these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
McGladrey & Pullen LLP is a member firm of RSM International- An affiliation of
separate and independent legal entities.
18
As discussed in Note 1, the investment securities included in the financial
statements have been valued by the Independent Trustees ("Trustees") using
valuation criteria applicable to the licensee. This criteria was established in
accordance with Section 310(d)(2) of the Small Business Investment Act of 1958,
as amended, and 13 CFR 107.503(e)(2) of the SBA regulations. Such investment
securities have been valued at $5,316,595 (98% of assets) and $5,663,816 (96% of
assets) as of December 31, 2007 and 2006, respectively, whose values have been
estimated by the Trustees in the absence of readily ascertainable market values.
We have reviewed the procedures used by the Trustees in preparing the valuations
of investment securities and have inspected the underlying documentation and, in
the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, in the case of those securities with no
readily ascertainable market value, because of the inherent uncertainty of the
valuation, the Trustees' estimate of values may differ significantly from the
values that would have been used had a ready market existed for the securities
and the differences could be material.
We were not engaged to examine management's assertion about the effectiveness of
Berthel Growth & Income Trust I and Subsidiary's internal control over financial
reporting as of December 31, 2007 included in the accompanying Management Report
on Internal Control over Financial Reporting and, accordingly, we do not express
an opinion thereon.
/s/ McGladrey & Pullen, LLP
-----------------------------------
McGladrey & Pullen, LLP
Cedar Rapids, Iowa
March 11, 2008
19
Berthel Growth & Income Trust I
Consolidated Statements Of Assets And Liabilities
December 31, 2007 And 2006
Assets (Note 6) 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------
Loans and Investments (cost 2007 $3,648,452;
2006 $3,690,760) (Note 2) $ 5,316,595 $ 5,663,816
Cash and cash equivalents 102,048 257,035
Interest and dividends receivable, net of allowance for
doubtful accounts 19,416 5,416
-------------------------------
$ 5,438,059 $ 5,926,267
===============================
Liabilities and Net Assets (Liabilities)
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and other accrued expenses (Note 4) $ 114,019 $ 90,019
Accrued interest payable 2,853 --
Due to affiliate (Notes 3 and 4) 257,443 902,496
Distributions payable to stockholders (Note 5) 8,200,419 7,357,139
Note payable (Note 6) 2,781,106 2,788,590
-------------------------------
11,355,840 11,138,244
-------------------------------
Net Assets (Liabilities), equivalent to $(561.41) per share in 2007;
$(494.45) per share in 2006:
Shares of beneficial interest, net of syndication costs of $1,507,237;
25,000 shares authorized, 10,541 shares issued and
outstanding in 2007 and 2006 (4,336,453) (3,935,562)
Accumulated net realized losses (3,249,471) (3,249,471)
Accumulated net unrealized gains 1,668,143 1,973,056
-------------------------------
(5,917,781) (5,211,977)
-------------------------------
$ 5,438,059 $ 5,926,267
===============================
See Notes to Consolidated Financial Statements.
20
Berthel Growth & Income Trust I
Consolidated Statements Of Operations
Years Ended December 31, 2007, 2006 And 2005
2007 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Revenue:
Interest income $ 83,241 $ 112,639 $ 106,660
Dividend income 16,666 16,667 74,643
Application, closing and other fees 1,530 1,500 833
----------------------------------------------------
Total revenue 101,437 130,806 182,136
----------------------------------------------------
Expenses:
Management fees (Note 4) (690,710) 174,979 211,257
Administrative services 4,330 4,004 3,992
Trustee fees (Note 4) 24,000 24,000 24,000
Professional fees 63,618 25,549 69,360
Interest expense 210,369 314,381 556,276
Other general and administrative expenses 47,441 47,527 53,035
----------------------------------------------------
Total expenses (340,952) 590,440 917,920
----------------------------------------------------
Net investment gain (loss) 442,389 (459,634) (735,784)
----------------------------------------------------
Change in unrealized gain (loss) on investments (Note 2) (304,913) 6,089 944,615
Realized gain on investments (Note 2) - 1,510,035 461,534
----------------------------------------------------
Net gain (loss) on investments (304,913) 1,516,124 1,406,149
----------------------------------------------------
Net increase in net assets $ 137,476 $ 1,056,490 $ 670,365
====================================================
Per beneficial share data:
Revenue $ 9.62 $ 12.41 $ 17.28
Expenses 32.35 (56.01) (87.08)
----------------------------------------------------
Net investment gain (loss) 41.97 (43.60) (69.80)
----------------------------------------------------
Change in unrealized gain (loss) on investments (28.93) 0.58 89.61
Realized gain on investments - 143.25 43.79
----------------------------------------------------
Net gain (loss) on investments (28.93) 143.83 133.40
----------------------------------------------------
Net increase in net assets $ 13.04 $ 100.23 $ 63.60
====================================================
Weighted average shares 10,541 10,541 10,541
====================================================
See Notes to Consolidated Financial Statements.
21
Berthel Growth & Income Trust I
Consolidated Statements Of Changes In Net Assets (Liabilities)
Years Ended December 31, 2007, 2006 And 2005
Shares of Beneficial Interest Accumulated Accumulated Total Net
------------------------------- Net Realized Net Unrealized Assets
Shares Amount (Losses) Gains (Losses) (Liabilities)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 10,541 $ (1,053,694) $ (5,221,040) $ 1,022,352 $ (5,252,382)
Net investment (loss) - (735,784) - - (735,784)
Unrealized gain on investments - - - 944,615 944,615
Realized gain on investments - - 461,534 - 461,534
Distributions payable to stockholders
($80 per beneficial share) - (843,199) - - (843,199)
-----------------------------------------------------------------------------------
Balance, December 31, 2005 10,541 (2,632,677) (4,759,506) 1,966,967 (5,425,216)
Net investment (loss) - (459,634) - - (459,634)
Unrealized gain on investments - - - 6,089 6,089
Realized gain on investments - - 1,510,035 - 1,510,035
Distributions payable to stockholders
($80 per beneficial share) - (843,251) - - (843,251)
-----------------------------------------------------------------------------------
Balance, December 31, 2006 10,541 (3,935,562) (3,249,471) 1,973,056 (5,211,977)
Net investment gain - 442,389 - - 442,389
Unrealized (loss) on investments - - - (304,913) (304,913)
Distributions payable to stockholders
($80 per beneficial share) - (843,280) - - (843,280)
-----------------------------------------------------------------------------------
Balance, December 31, 2007 10,541 $ (4,336,453) $ (3,249,471) $ 1,668,143 $ (5,917,781)
===================================================================================
See Notes to Consolidated Financial Statements.
22
Berthel Growth & Income Trust I
Consolidated Statements Of Cash Flows
Years Ended December 31, 2007, 2006 And 2005
2007 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net increase in net assets $ 137,476 $ 1,056,490 $ 670,365
Adjustments to reconcile net increase in net assets
to net cash provided by operating activities:
Accretion of discount on debt securities - (445) (14,120)
Change in unrealized (gain) loss on investments 304,913 (6,089) (944,615)
Realized (gain) on investments - (1,510,035) (461,534)
Changes in operating assets and liabilities:
Loans and investments 42,308 3,463,334 1,889,470
Interest and dividends receivable (14,000) 1,922 102,845
Accrued interest payable 2,853 - (97,014)
Accounts payable and other accrued expenses 24,000 (20,150) 22,650
Due to affiliate (645,053) 222,180 261,410
Deferred income - - (833)
-------------------------------------------------------------
Net cash flows from operating activities (147,503) 3,207,207 1,428,624
-------------------------------------------------------------
Cash Flows (Used In) Financing Activities,
payment of note payable (7,484) (3,286,619) (1,351,710)
-------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (154,987) (79,412) 76,914
Cash and Cash Equivalents:
Beginning 257,035 336,447 259,533
-------------------------------------------------------------
Ending $ 102,048 $ 257,035 $ 336,447
=============================================================
Supplemental Disclosure of Cash Flow Information,
cash paid for interest $ 207,516 $ 314,381 $ 653,290
Supplemental Disclosure of Noncash Financing Activities,
distributions payable to stockholders 843,280 843,251 843,199
See Notes to Consolidated Financial Statements.
23
Berthel Growth & Income Trust I
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Significant Accounting Policies
Organization:
Berthel Growth & Income Trust I (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as a nondiversified, closed-end
management investment company electing status as a business development
company. The Trust was formed on February 10, 1995 under the laws of the
State of Delaware and received approval from the Securities and Exchange
Commission to begin offering shares of beneficial interest (the "Shares")
effective June 21, 1995. 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 to be purchased will consist primarily of subordinated debt,
common stock or preferred stock, combined with equity participation in common
stock or rights to acquire common stock. The Trust offered a minimum of 1,500
shares and a maximum of 50,000 shares at an offering price of $1,000 per
share. The minimum offering of 1,500 shares sold was reached on August 30,
1995. The offering period expired June 21, 1997.
In accordance with the prospectus, the Trust was scheduled to terminate upon
the liquidation of all of its investments, but no later than June 21, 2007.
However, the Independent Trustees may extend the term of the Trust for up to
two additional one-year periods if they determine that such extensions are in
the best interest of the Trust and in the best interest of the shareholders,
after which the Trust will liquidate any remaining investments as soon as
practicable but in any event within three years. The Independent Trustees
have extended the term of the Trust for one year to June 21, 2008.
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, was
formed during 1997 and received a license to operate as a Small Business
Investment Company from the Small Business Administration ("SBA") on May 4,
1998. 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 2001, the
Trust contributed an additional $700,000 in capital to the SBIC. The Trustees
also serve as the Independent Managers of the SBIC.
Berthel Fisher & Company Planning, Inc. (the "Trust Advisor") is the Trust's
investment advisor and manager. TJB Capital Management, Inc. (the "Corporate
Trustee") provides certain management services necessary for the conduct of
the Trust's business. Shares were offered by Berthel Fisher & Company
Financial Services, Inc. (the "Dealer Manager"). Each of these three entities
is a wholly or majority owned subsidiary of Berthel Fisher & Company.
Going-concern considerations: During the years ended December 31, 2007 and
2006, the Trust continues to have a deficiency in net assets. In addition,
the SBIC was in violation of the maximum capital impairment percentage
permitted by the SBA. The SBIC received notice of default from the Small
Business Administration advising that the SBIC must cure its default on the
outstanding debentures prior to March 22, 2002. Since March 2002, the capital
impairment violation has not been cured.
On August 22, 2002, the SBA notified the SBIC that all debentures, accrued
interest and fees were immediately due and payable. The SBIC submitted a plan
of debt and interest repayment to the SBA on January 31, 2003 and received a
response dated February 21, 2003. On September 1, 2003, management signed a
loan agreement ("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%. On August 2, 2007, the loan agreement was extended
one year to September 1, 2008. 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 December 31, 2007, $2,781,106
is outstanding under the loan agreement with final payment due September 1,
2008. The note payable 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.
24
Berthel Growth & Income Trust I
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Significant Accounting Policies (Continued)
These factors may 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.
Consolidation: The consolidated financial statements include the accounts of
the Trust and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of estimates: The preparation of the Trust's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America 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 the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the valuation by the Trustees
of not readily marketable securities and allowance for doubtful accounts.
Loans and investments: In accordance with accounting practices, investments
that are not readily marketable are valued at fair value, as determined by
the Trustees. The resulting difference between cost and market is included in
the consolidated statements of operations.
In determining fair value for securities and warrants not readily marketable,
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, in making
their evaluation, have relied on financial data of the portfolio companies
provided by the management of the portfolio companies.
Net income (loss) per beneficial share: Net income (loss) per beneficial
share is based on the weighted average number of shares outstanding.
Recent Accounting Pronouncements: The Trust adopted the provisions of
Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes; an interpretation of FASB
Statement No. 109", effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes". It requires a recognition threshold and measurement attribute for
financial statement disclosure of tax positions taken, or expected to be
taken, in an income tax return. This Interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Trust has adopted FIN 48 and it did
not have a material impact on its financial position and results of
operations.
25
Berthel Growth & Income Trust I
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2. Loans and Investments
Valuation
-----------------------------
Company Security 2007 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Communications and Software:
EDmin.com, Inc. 261,203 shares of 9% Cumulative Redeemable
--------------- Convertible Series A
Software provider to educational Preferred Stock; call options beginning May 2004.
institutions $ 972,812 $ 972,812
-----------------------------
Total communications and software (18% and 17% of total loans and investments as of
December 31, 2007 and 2006, respectively) 972,812 972,812
-----------------------------
Health Care Products and Services:
Physicians Total Care, Inc. 8% uncollateralized promissory note due December 31, 2009. 700,000 700,000
---------------------------
Provider of point-of-care
prescription medication systems
to physicians' offices. 100,000 shares of common stock. * -- --
Inter-Med, Inc. 2,491.3031 common shares; put options beginning May 2006
- --------------- and call options beginning May 2007, both expiring upon
Manufacturer and importer of products the occurrence of a specified event. *
for the U.S. dental market 672,279 672,279
FutureMatrix Interventional, Inc. 905,203 shares of common stock. * 2,460,000 2,460,000
- ---------------------------------
Medical device manufacturer.
1,899,783 shares of CeloNova Biosciences, Inc.
(f/k/a IMED) common stock (a FutureMatrix affiliate). * -- --
-----------------------------
Total health care products and services (72% and 68% of total loans and investments as of
December 31, 2007 and 2006, respectively) 3,832,279 3,832,279
-----------------------------
Manufacturing:
Feed Management Systems 435,590 shares of common stock. * -- 304,913
- -----------------------
Software provider for the agricultural
industry.
The Schebler Company 13% subordinated note due February 2008. 166,666 166,666
- --------------------
Manufacturer of industrial equipment.
Warrants to purchase 1.66% of common shares at $.01
per share, with put options beginning January 2007 and
ending January 2022 or upon the occurrence of a
specified event. * 11,504 11,504
166,666 shares of 10% convertible cumulative preferred
stock, with put options beginning January 2007 and
ending January 2022 or upon the occurrence of a specified
event. 166,667 166,667
166,666 shares of common stock, with put options
beginning January 2007 and ending January 2022 or upon
the occurrence of a specified event. * 166,667 166,667
-----------------------------
Total manufacturing (10% and 14% of total loans and investments as of
December 31, 2007 and 2006, respectively) 511,504 816,417
-----------------------------
26
Berthel Growth & Income Trust I
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2. Loans and Investments
Section 2
Valuation Valuation
-----------------------------
Company Security 2007 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Other service industries:
Kinseth Hospitality Company, Inc.
- ---------------------------------
Hotel and restaurant industries. 15% secured note receivable. -- 42,308
-----------------------------
Total other service industries (0% and 1% of total loans and investments as of
December 31, 2007 and 2006, respectively) -- 42,308
-----------------------------
Total loans and investments $ 5,316,595 $ 5,663,816
=============================
* Non-income producing investment.
There were no purchases of loans and investments for the years ending December
31, 2007, 2006, and 2005. Collection of notes receivable and proceeds from sales
of investments for the years ending December 31, 2007, 2006, and 2005 were
$42,308, $3,515,585, and $1,933,802, respectively.
The changes in unrealized gains and losses and the realized gains and losses on
investments recognized during the previous three years are summarized below:
2007 2006 2005
-------------------------------------
Unrealized gains (losses):
Childs & Albert, Inc. $ -- $ 472,065 $ (472,065)
Physicians Total Care, Inc. -- 100,000 1,100,000
Feed Managements Systems (304,913) -- --
Media Sciences International -- (565,976) (50,382)
Pickerman's Development Company -- -- 633,032
IMED Devices, Inc. -- -- (265,970)
-------------------------------------
Total unrealized gain (loss) $ (304,913) $ 6,089 $ 944,615
=====================================
Realized gains (losses):
FutureMatrix Interventional, Inc. $ -- $ 500,000 $ --
Childs & Albert, Inc. -- (172,065) --
International Pacific Seafoods -- -- 100,000
Media Sciences International -- 1,182,100 994,566
Pickerman's Development Company -- -- (633,032)
-------------------------------------
Total realized gain (loss) $ -- 1,510,035 $ 461,534
=====================================
27
Note 3. Due to Affiliates
Due to affiliates is comprised of the following as of December 31, 2007 and
2006:
2007 2006
----------------------
Accrued management fees $ -- $ 690,710
Note payable to Trust Advisor (non-interest bearing) 10,000 10,000
Other amounts due Trust Advisor 247,443 201,786
----------------------
Due to affiliates $ 257,443 $ 902,496
======================
On February 7, 2007, management of the Trust Advisor decided to waive the
management fees for 2006. The Trust accrued management fees payable to the Trust
Advisor for 2006 totaling $174,979 and this forgiveness of debt was reflected in
the financial statements during the first quarter of 2007. On April 26, 2007,
management of the Trust Advisor decided to waive the management fees for 2005
and prior years. The Trust accrued management fees payable to the Trust Advisor
for 2005 and prior years totaling $515,731 and this forgiveness of debt was
reflected in the financial statements during the second quarter of 2007. On July
25, 2007, management of the Trust Advisor decided to waive the management fees
for 2007.
Note 4. Related Party Transactions
The Trust has entered into a management agreement with the Trust Advisor that
provides for incentive compensation to the Trust Advisor based on the capital
appreciation of the Trust's investments. The Trust pays the Trust Advisor an
annual management fee equal to 2.5% of the combined temporary investment in
money market securities and loans and investments of the Trust. The management
fee is paid quarterly, in arrears, and is determined by reference to the value
of the assets of the Trust as of the first day of that quarter. Management fees
incurred during the years ended December 31, 2006 and 2005 relating to this
agreement aggregated $174,979 and $211,257, respectively. Management fees were a
credit of $690,710 for 2007, resulting from the forgiveness of debt by the Trust
Advisor, as described Note 3. As part of the loan agreement with the SBA, these
expenses can continue to be accrued, but cannot be paid until the SBA loan is
paid in full.
The Trust pays a fee to the independent trustees representing compensation for
services rendered to the Trust. During each of the years ended December 31,
2007, 2006 and 2005, trustee fees totaling $24,000 were accrued. As part of the
loan agreement with the SBA, these expenses can continue to be accrued, but
cannot be paid until the SBA loan is paid in full. The balance payable is
$114,000 and $90,000 as of December 31, 2007 and 2006, respectively.
Note 5. Distributions Payable to Stockholders
Distributions payable represents a 10% accrued underwriting return
("Underwriting Return") and an 8% accrued priority return ("Priority Return").
The Underwriting Return is based on actual interest earned by the Trust on the
investors funds held in escrow through the initial closing, plus 10% simple
annual interest, computed on a daily basis from the initial closing (August 31,
1995) until the final closing (June 21, 1997). The Priority Return is based on
8% simple annual interest computed from final closing on each stockholder's
investment balance in the Trust.
28
Note 5. Distributions Payable to Stockholders (Continued)
The Trust intends to make quarterly distributions of all cash revenues to the
extent that the Trust has cash available for such distributions. These
distributions must be approved by a majority of the Independent Trustees and
made within 60 days of the end of each quarter. SBA regulations govern the
amount of the SBIC's income available for distributions. As of December 31, 2007
and 2006, no amounts were available for distribution within the SBIC under the
SBA regulations. The distributions payable balance comprises the following:
Underwriting Priority
Return Return Total
---------------------------------------------
Balance, December 31, 2005 $ 526,401 $ 5,987,487 $ 6,513,888
Distributions earned -- 843,251 843,251
---------------------------------------------
Balance, December 31, 2006 526,401 6,830,738 7,357,139
Distributions earned -- 843,280 843,280
---------------------------------------------
Balance, December 31, 2007 $ 526,401 $ 7,674,018 $ 8,200,419
=============================================
Note 6. Note Payable
The SBIC issued debentures payable to the SBA totaling $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.
On August 22, 2002, the SBA notified the SBIC that all debentures, accrued
interest and fees were immediately due and payable. The SBIC submitted a plan of
debt and interest repayment to the SBA on January 31, 2003 and received a
response dated February 21, 2003. On September 1, 2003, management signed a loan
agreement ("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%. On August 2, 2007, the loan agreement was extended one year to September
1, 2008. 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 December 31, 2007, $2,781,106 is outstanding under the loan
agreement with final payment due September 1, 2008. The note payable 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.
Note 7. Federal Income Taxes
The Trust has received an opinion from counsel that it will be treated as a
partnership for federal income tax purposes. As such, under present income tax
laws, no income taxes will be reflected in these financial statements as taxable
income or loss of the Trust is included in the income tax returns of the
investors.
29
Note 8. Financial Highlight Information
In accordance with financial reporting requirements applicable to investment
companies including funds that are exempt from registration requirements, the
Trust was required to disclose certain financial highlight information.
Due to the net liability position of the Trust as of December 31, 2007, the
negative ratios do not represent meaningful data and will, therefore, be
excluded from disclosure in the footnotes.
Note 9. Quarterly Financial Information (Unaudited)
First Second Third Fourth Total
-----------------------------------------------------------------------
2007
-----------------------------------------------------------------------
Total revenue $ 25,242 $ 25,588 $ 25,304 $ 25,303 $ 101,437
Net investment gain (loss) 76,578 403,661 23,598 (61,448) 442,389
Unrealized gain (loss) on investments -- -- -- (304,913) (304,913)
Realized gain (loss) on investments -- -- -- -- --
Net increase (decrease) in net assets 76,578 403,661 23,598 (366,361) 137,476
Increase (decrease) in net assets
per beneficial share $ 7.26 $ 38.30 $ 2.24 $ (34.76) $ 13.04
2006
-----------------------------------------------------------------------
Total revenue $ 22,980 $ 36,626 $ 39,994 $ 31,206 $ 130,806
Net investment (loss) (158,955) (130,238) (95,475) (74,966) (459,634)
Unrealized gain (loss) on investments (51,844) (514,132) 100,000 472,065 6,089
Realized gain (loss) on investments 522,884 1,159,217 -- (172,066) 1,510,035
Net increase in net assets 312,085 514,847 4,525 225,033 1,056,490
Increase in net assets per beneficial share $ 29.61 $ 48.84 $ 0.43 $ 21.35 $ 100.23
Note 10. Subsequent Events
On February 26, 2008, the Trust entered into an agreement with a financial
services firm to assist in the sale of the Trust's remaining portfolio of
investments.
30
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
- --------------------
Within the two years prior to the date of the most recent financial statements,
there have been no changes in or disagreements with accountants of the Trust.
Item 9A(T). 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.
Management Report on Internal Control over Financial Reporting
Management of Berthel Growth & Income Trust I ("BGIT") is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f).
Under the supervision and with the participation of BGIT's management, including
the Chief Executive Officer (principal executive officer) and the Chief
Financial Officer (principal financial officer), BGIT's management conducted an
evaluation of the effectiveness of BGIT's internal control over financial
reporting as of December 31, 2007 as required by the Securities Exchange Act of
1934 Rule 13a-15(c). In making this assessment, BGIT's management used the
criteria set forth in the framework in "Internal Control - Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the evaluation conducted under the framework in "Internal Control -
Integrated Framework," BGIT's management concluded that BGIT's internal control
over financial reporting was effective as of December 31, 2007.
This report does not include an attestation report of BGIT's registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by BGIT's registered public
accounting firm pursuant to temporary rules of the SEC that permit BGIT to
provide only management's report in this Annual Report on Form 10-K.
_________________________ _____________________
Thomas J. Berthel Ronald O. Brendengen
President-Berthel Fisher & Co. CFO-Berthel Fisher & Co.
Planning Inc. Planning Inc.
Advisor to Berthel Growth & Advisor to Berthel Growth &
Income Trust Income Trust
Changes in Internal Controls
No changes occurred during the period covered by this report in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
31
PART III
Item 10. Directors, Executive Officers and Corporate Governance
------------------------------------------------------
A management board consisting of the Independent Trustees and the Trust Advisor
is responsible for the management of the Trust and its business.
Trustees of the Registrant:
- ---------------------------
Corporate Trustee - TJB Capital Management, Inc. was organized as a
Delaware corporation on January 25, 1995 for the purpose of organizing the
Trust. The principal office of the Corporate Trustee is located at 1105 N.
Market Street, Suite 1300, Wilmington, Delaware, 19801. The Corporate
Trustee is an affiliate of the Trust Advisor.
Henry T. Madden (age 78) - Mr. Madden is an Independent Trustee of the
Trust. He was awarded a B.S.M.E. from the University of Notre Dame in 1951
and an M.B.A. from the University of Pittsburgh in 1966. He began his
career as an Industrial Engineer, then Quality Control Manager in Technical
Ceramics for 3M Company in Chattanooga, Tennessee. He became Manager of
Production Engineering, then Manager for a 1,500 employee, $50 million in
sales Allis-Chalmers Plant, manufacturing power and distribution
transformers in Pittsburgh, Pennsylvania. In 1966, he became General Plant
Manager of the Allis-Chalmers, Cedar Rapids, Iowa Plant manufacturing
construction machinery. In 1969, Mr. Madden became Division Manager for
Hydraulic Truck Cranes for Harnischfeger Corporation. In 1975 Mr. Madden
became President, Harnischfeger GMBH in Dortmund, West Germany, a joint
venture with August Thyssen A.G. of West Germany, manufacturing truck
cranes, creating a 100 million deutsche mark business. He also served as
Managing Director for Harnischfeger International Corporation for Europe,
East Europe, and North and West Africa, responsible for all product sales
in those areas. In 1981, Mr. Madden became a consultant to and assumed the
responsibilities of General Manager of Oak Hill Engineering Inc., in Cedar
Rapids, Iowa, a manufacturer of wire harnesses. In 1983, he started a
company, Enertrac Inc., designing, manufacturing and marketing
communications systems. Mr. Madden financed Enertrac Inc. through an
initial public offering and merged it into another company in 1986. Mr.
Madden organized the Institute for Entrepreneurial Management in the
University of Iowa College of Business Administration in 1986, advising
potential and new entrepreneurs and teaching courses on entrepreneurship in
the MBA program, along with courses in Corporate Strategy in the Executive
MBA and MBA programs. Mr. Madden has been consulting with developmental
stage companies since 1981.
Mary Quass (age 58) - Ms. Quass was elected as an Independent Trustee,
effective February 5, 1999. She received a BA Degree from the University of
Northern Iowa in 1972. In 1981, she was appointed General Sales Manager of
KSO and later in 1982 became Vice President and General Manager of KHAK
AM/FM. In 1988, Ms. Quass formed Quass Broadcasting Company, Inc., which
merged with CapStar Broadcasting Partners to form Central Star
Communications, Inc. in 1998. She held the position of President of Quass
Broadcasting until 1998. Upon the merger, Quass served as President and CEO
of Central Star Communications. In 1999 Central Star/Capstar Partners
merged with Chancellor Media to form AMFM, Inc. and Quass continued to
serve as CEO and President of Central Star Communications under AMFM until
she left the company in early 2000. Quass formed a LLC to acquire
businesses and provide consulting services. In 2002 she formed NewRadio
Group, LLC which owns and operates radio stations.
Executive Officers and Directors of the Trust Advisor:
- ------------------------------------------------------
Thomas J. Berthel (age 56) - Mr. Berthel was elected President of the Trust
Advisor in August, 2001, and also serves as Chief Executive Officer and
Chairman of the Board of the Trust Advisor and as Chief Executive Officer
of Berthel Fisher and Financial Services. He has held these positions since
1985. Until June, 1993, Mr. Berthel served as President of the Financial
Services. From 1993 until the present he has served as Chief Executive
Officer and as a Director of the Financial Services. Mr. Berthel is also
President and a Director of various other subsidiaries of Berthel Fisher
that act or have acted as general partners of separate private leasing
programs and two publicly sold leasing programs. He serves as the Chairman
of the Board of Amana Colonies Golf Course, Inc., and, served on the Board
of Directors of Intellicall, Inc., an advanced telecommunications
technologies company in Carrollton, Texas, from November, 1995 to December,
1999. Mr. Berthel holds a Financial and Operation Principal license issued
by the National Association of Securities Dealers, Inc. He is also a
Certified Life Underwriter. Mr. Berthel holds a bachelor's degree from St.
Ambrose College in Davenport, Iowa (1974). He also holds a Master's degree
in Business Administration from the University of Iowa in Iowa City, Iowa
(1993).
32
Ronald O. Brendengen (Age 53) - Mr. Brendengen is the Chief Operating
Officer, Chief Financial Officer, Treasurer and a Director of the Trust
Advisor. He has served since 1985 as Controller and since 1987 as the
Treasurer and a Director of Berthel Fisher. He was elected Secretary and
Chief Financial Officer in 1994, and Chief Operating Officer in January
1998, of Berthel Fisher & Company. He also serves as Chief Financial
Officer, Treasurer and a Director of each subsidiary of Berthel Fisher. Mr.
Brendengen holds a certified public accounting certificate and worked in
public accounting during 1984 and 1985. From 1979 to 1984, Mr. Brendengen
worked in various capacities for Morris Plan and MorAmerica Financial
Corp., Cedar Rapids, Iowa. Mr. Brendengen attended the University of Iowa
before receiving a bachelor's degree in Accounting and Business
Administration with a minor in Economics from Mt. Mercy College, Cedar
Rapids, Iowa in 1978.
Leslie D. Smith (Age 60) - Mr. Smith is a Director and the Secretary of the
Trust Advisor. In 1994 Mr. Smith was named General Counsel of Berthel
Fisher & Company. Mr. Smith was awarded his B.A. in Economics in 1976 from
Iowa Wesleyan College, Mount Pleasant, Iowa, and his J.D. in 1980 from the
University of Dayton School of Law, Dayton, Ohio. Mr. Smith was employed as
Associate Attorney and as a Senior Attorney for Life Investors Inc., Cedar
Rapids, Iowa, from 1981 through 1985 where he was responsible for managing
mortgage and real estate transactions. From 1985 to 1990 Mr. Smith was
General Counsel for LeaseAmerica Corporation, Cedar Rapids, Iowa. In that
capacity, Mr. Smith performed all duties generally associated with the
position of General Counsel. From 1990 to 1992, Mr. Smith was Operations
Counsel for General Electric Capital Corporation located in Cedar Rapids,
Iowa. From 1993 to 1994, Mr. Smith was employed as Associate General
Counsel for Gateway 2000, Inc. in North Sioux City, South Dakota.
33
Item 11. Executive Compensation
----------------------
Set forth is the information relating to all direct remuneration paid or accrued
by the Registrant.
(A) (B) (C) (C1) (C2) (D)
Cash and Securities of property Aggregate of
cash equivalent insurance benefits contingent
Name of individual and Year forms of or reimbursement or forms
capacities in which served Ended remuneration Fees personal benefits of remuneration
TJB Capital Management, Inc. 2007 $0 $ 0 $0 $0
Corporate Trustee 2006 $0 $ 0 $0 $0
2005 $0 $ 0 $0 $0
Henry T. Madden 2007 $0 $ 12,000 $0 $0
Independent Trustee 2006 $0 $ 12,000 $0 $0
2005 $0 $ 12,000 $0 $0
Mary Quass 2007 $0 $ 12,000 $0 $0
Independent Trustee 2006 $0 $ 12,000 $0 $0
2005 $0 $ 12,000 $0 $0
Berthel Fisher & Company Planning, Inc. 2007 $0 $ (690,710) (1) $0 $0
Trust Advisor 2006 $0 $ 174,979 (1) $0 $0
2005 $0 $ 211,257 (1) $0 $0
(1) On February 7, 2007, management of the Trust Advisor decided to waive the
management fees for 2006. The Trust accrued management fees payable to the Trust
Advisor for 2006 totaling $174,979 and this forgiveness of debt was reflected in
the financial statements during the first quarter of 2007. On April 26, 2007,
management of the Trust Advisor decided to waive the management fees for 2005
and prior years. The Trust accrued management fees payable to the Trust Advisor
for 2005 and prior years totaling $515,731 and this forgiveness of debt was
reflected in the financial statements during the second quarter of 2007. On July
25, 2007, management of the Trust Advisor decided to waive the management fees
for 2007. This forgiveness of debt, in the amount of $73,471, was reflected in
the financial statements during the third quarter of 2007.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Shareholder Matters
- ---------------------------
No person owns of record, or is known by the
Registrant to own beneficially, more than five percent of the shares.
Item 13. Certain Relationships and Related Transactions and Director
-----------------------------------------------------------
Independence
- ------------
Related party transactions are described in notes 3 and 4 of the notes to the
consolidated financial statements.
Item 14. Principal Accountant Fees and Services
--------------------------------------
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by
McGladrey & Pullen, LLP for the audit of Berthel Growth & Income Trust I's
annual financial statements for the years ended December 31, 2007 and 2006, and
fees billed for other services rendered by McGladrey & Pullen, LLP and RSM
McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP).
2007 2006
---- ----
Audit Fees (1) $ 45,951 $ 48,850
Audit-Related Fees (2) 8,275 4,200
Tax Services (3) 4,725 4,500
----------- -----------
$ 58,951 $ 57,550
=========== ===========
(1) Audit fees consist of fees for professional services rendered for the audit
of Berthel Growth & Income Trust I's financial statements and review of
financial statements included in the Trust's third quarter report and services
normally provided by the independent auditor in connection with statutory and
regulatory filings or engagements.
(2) Audit-related fees consist of fees for consultation related to preparation
for Sarbanes-Oxley Section 404 compliance and professional services rendered for
the custody report examination required by rule 17f-1 and rule 17f-2 under the
Investment Company Act of 1940 of Berthel Growth & Income Trust I and its
wholly-owned subsidiary, Berthel SBIC, LLC.
(3) Tax services consist of preparation of the Trust's tax return.
35
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Documents filed as part of this report.
1. Consolidated Financial Statements Page No.
--------
Consolidated Statements of Assets and Liabilities
as of December 31, 2007 and 2006 20
Consolidated Statements of Operations for the
Years Ended December 31, 2007, 2006 and 2005 21
Consolidated Statements of Changes in Net Assets (Liabilities)
for the Years Ended December 31, 2007, 2006 and 2005 22
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2007, 2006 and 2005 23
Notes to Consolidated Financial Statements 24
2. Financial Statement Schedules
Financial statement schedules are omitted as they are not required or
are not applicable, or the required information is shown in the
consolidated financial statements and the accompanying notes thereto.
3. Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
99.1 Fidelity Bond
(b) Exhibits
Exhibits to the Form 10-K required by item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index to
Exhibits.
(c) Financial Statements Excluded from Annual Report to Shareholders
Pursuant to Rule 14a3(b) Not applicable.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Thomas J. Berthel
---------------------------------------
Date: March 14, 2008 THOMAS J. BERTHEL,
Chief Executive Officer
(principal executive officer)
of Berthel Fisher & Company
Planning, Inc., Trust Advisor
By: /s/ Ronald O. Brendengen
---------------------------------------
Date: March 14, 2008 RONALD O. BRENDENGEN,
Chief Operating Officer,
Chief Financial Officer and
Treasurer (principal financial
officer) of Berthel Fisher &
Company Planning, Inc.,
Trust Advisor
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Thomas J. Berthel
---------------------------------------
Date: March 14, 2008 THOMAS J. BERTHEL,
Chairman and Director of Berthel
Fisher & Company, Berthel Fisher &
Company Planning, Inc., Trust
Advisor
/s/ Ronald O. Brendengen
---------------------------------------
Date: March 14, 2008 RONALD O. BRENDENGEN,
Director of Berthel Fisher &
Company Planning, Inc.,
Trust Advisor
/s/ Leslie D. Smith
---------------------------------------
Date: March 14, 2008 LESLIE D. SMITH,
Director of Berthel Fisher &
Company Planning, Inc.,
Trust Advisor
/s/ Henry T. Madden
---------------------------------------
Date: March 14, 2008 HENRY T. MADDEN,
Independent Trustee of Berthel
Growth & Income Trust I
/s/ Mary Quass
---------------------------------------
Date: March 14, 2008 MARY QUASS,
Independent Trustee of Berthel
Growth & Income Trust I
/s/ Thomas J. Berthel
---------------------------------------
Date: March 14, 2008 THOMAS J. BERTHEL,
Chairman of the Board and Chief
Executive Officer of TJB Capital
Management, Inc., Trustee of
Berthel Growth & Income Trust I
/s/ Daniel P. Wegmann
---------------------------------------
Date: March 14, 2008 DANIEL P. WEGMANN,
Controller of Berthel Fisher &
Company Planning, Inc.,
Trust Advisor
37
EXHIBIT INDEX
3.1 Certificate of Trust (1)
3.2 Declaration of Trust (2)
10.1 Management Agreement between the Trust and the Trust Advisor (3)
10.2 Safekeeping Agreement between the Trust and Firstar Bank Cedar Rapids,
N.A. (4)
16.0 Letter re change in certifying accountant (5)
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
99.1 Fidelity Bond
(1) Incorporated by reference to the Trust's Registration Statement on
Form N-2, filed with the Commission on February 14, 1995 (File No.
33-89605).
(2) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Trust's Registration Statement on Form N-2, filed with the Commission
on June 21, 1995 (File No. 33-89605).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Trust's Registration Statement on Form N-2, filed with the Commission
on May 9, 1995 (File No. 33-89605).
(4) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Trust's Registration Statement on Form N-2, filed with the Commission
on June 12, 1995 (File No. 33-89605).
(5) Incorporated by reference to Form 8-K filed with the Commission on
October 13, 1995 (File No. 33-89605).
38