United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2008
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
--------- ---------
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
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 Tama Street, Marion, Iowa 52302
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(319) 447-5700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
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 registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Shares of Beneficial Interest - 10,541 shares as of October 24, 2008
1
BERTHEL GROWTH & INCOME TRUST I
INDEX
Part I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (unaudited)
Consolidated Statements of Assets and Liabilities
(Liquidation Basis) - September 30, 2008 3
Consolidated Statements of Assets and Liabilities
(Going Concern Basis) - December 31, 2007 4
Consolidated Statements of Operations (Going Concern Basis)-
three months ended September 30, 2008 and 2007 5
Consolidated Statements of Operations (Going Concern Basis)-
nine months ended September 30, 2008 and 2007 6
Consolidated Statements of Changes in Net Liabilities
(Going Concern Basis)- nine months ended September 30, 2008
and 2007 7
Consolidated Statements of Cash Flows (Going Concern Basis)-
nine months ended September 30, 2008 and 2007 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 1A. Risk Factors 21
Item 6. Exhibits 21
Signatures 21
2
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
(LIQUIDATION BASIS)
September 30, 2008
------------------
(Unaudited)
ASSETS
Loans and investments (Notes B, C, and E), net of
secured note payable of $2,776,217 $2,713,752
Cash and cash equivalents 28,390
Interest and dividends receivable 10,167
Other assets 8,610
----------
TOTAL ASSETS 2,760,919
----------
LIABILITIES AND NET ASSETS (LIABILITIES)
Accounts payable and other accrued expenses 136,792
Due to affiliate 294,938
Distributions payable to shareholders (Note D) 8,833,456
Reserve for estimated costs during
the period of liquidation (Note F) 300,000
----------
TOTAL LIABILITIES 9,565,186
----------
COMMITMENTS AND CONTINGENCIES (Note E)
NET LIABILITIES AVAILABLE FOR LIQUIDATION $6,804,267
==========
See notes to consolidated financial statements.
3
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(GOING CONCERN BASIS)
December 31, 2007
-----------------
(Unaudited)
ASSETS
Loans and investments (Notes B and C) $ 5,316,595
Cash and cash equivalents 102,048
Interest and dividends receivable 19,416
------------
TOTAL ASSETS $ 5,438,059
============
LIABILITIES AND NET ASSETS (LIABILITIES)
Accounts payable and other accrued expenses $ 114,019
Accrued interest payable 2,853
Due to affiliate 257,443
Distributions payable to shareholders (Note D) 8,200,419
Notes payable (Note E) 2,781,106
------------
TOTAL LIABILITIES 11,355,840
------------
COMMITMENTS AND CONTINGENCIES (Note E)
NET ASSETS (LIABILITIES), equivalent to ($561.41) per
share at December 31, 2007:
Shares of beneficial interest (25,000 shares authorized;
10,541 shares issued and outstanding) (4,336,453)
Accumulated net realized losses (3,249,471)
Accumulated net unrealized gains 1,668,143
------------
TOTAL NET ASSETS (LIABILITIES) (5,917,781)
------------
TOTAL LIABILITIES AND NET ASSETS (LIABILITIES) $ 5,438,059
============
See notes to consolidated financial statements.
4
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF OPERATIONS (GOING CONCERN BASIS) (UNAUDITED)
Three Months Ended
September 30, September 30,
2008 2007
---- ----
REVENUES:
Interest income $ 17,224 $ 21,136
Dividend income 4,166 4,168
--------- ---------
Total revenues 21,390 25,304
--------- ---------
EXPENSES:
Management fees (Note G) -- (73,471)
Administrative services 943 928
Trustee fees 6,000 6,000
Professional fees 4,773 4,856
Interest expense 52,435 52,575
Other general and administrative expenses 9,647 10,818
Reserve for estimated costs during liquidation 300,000 --
--------- ---------
Total expenses 373,798 1,706
--------- ---------
Net investment income (loss) (352,408) 23,598
Realized (loss) on forgiveness of debt (200,000) --
Unrealized gain (loss) on investments (241,390) --
--------- ---------
Net increase (decrease) in net assets $(793,798) $ 23,598
========= =========
Per beneficial share amounts:
Net increase (decrease) in net assets $ (75.31) $ 2.24
========= =========
Weighted average shares 10,541 10,541
========= =========
See notes to consolidated financial statements.
5
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF OPERATIONS (GOING CONCERN BASIS) (UNAUDITED)
Nine Months Ended
September 30, September 30,
2008 2007
---- ----
REVENUES:
Interest income $ 56,703 $ 63,103
Dividend income 48,708 12,501
Application, closing, and other fees -- 530
--------- ---------
Total revenues 105,411 76,134
--------- ---------
EXPENSES:
Management fees (Note G) -- (690,710)
Administrative services 3,054 3,402
Trustee fees 18,000 18,000
Professional fees 49,010 51,216
Interest expense 156,258 156,099
Other general and administrative expenses 30,912 34,290
Reserve for estimated costs during liquidation 300,000 --
--------- ---------
Total expenses 557,234 (427,703)
--------- ---------
Net investment income (loss) (451,823) 503,837
Realized (loss) on forgiveness of debt (200,000) --
Unrealized gain on investments 398,374 --
--------- ---------
Net increase (decrease) in net assets $(253,449) $ 503,837
========= =========
Per beneficial share amounts:
Net increase (decrease) in net assets $ (24.04) $ 47.80
========= =========
Weighted average shares 10,541 10,541
========= =========
See notes to consolidated financial statements.
6
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES (GOING CONCERN BASIS)
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007
------------------ ------------------
Shares of Shares of
Beneficial Beneficial
Interest Amount Interest Amount
----------- ----------- ----------- -----------
Net investment income (loss) -- $ (451,823) -- $ 503,837
Realized (loss) on forgiveness of debt -- (200,000) -- --
Unrealized gain on investments -- 398,374 -- --
Distributions payable to shareholders -- (633,037) -- (630,726)
Net liabilities at beginning of period 10,541 (5,917,781) 10,541 (5,211,977)
----------- ----------- ----------- -----------
Net liabilities at end of period 10,541 $(6,804,267) 10,541 $(5,338,866)
=========== =========== =========== ===========
See notes to consolidated financial statements.
7
BERTHEL GROWTH & INCOME TRUST I
CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS) (UNAUDITED)
Nine Months
Ended September 30
2008 2007
---- ----
OPERATING ACTIVITIES:
Net increase (decrease) in net assets $(253,449) $ 503,837
Adjustments to reconcile change in net assets
to net cash flows from operating activities:
Realized loss on forgiveness of debt 200,000 --
Change in unrealized (gain) on investments (398,374) --
Changes in operating assets and liabilities
Loans and investments 25,000 42,308
Interest and dividends receivable 9,249 (14,000)
Other assets (8,610) (8,615)
Accounts payable and other accrued expenses 22,773 18,000
Accrued interest payable (2,853) --
Due to affiliate 37,495 (649,567)
Reserve for estimated costs during liquidation 300,000 --
--------- ---------
Net cash flows from operating activities (68,769) (108,037)
--------- ---------
FINANCING ACTIVITIES:
Payment of debentures (4,889) (4,901)
--------- ---------
Net cash flows from financing activities (4,889) (4,901)
--------- ---------
NET DECREASE IN CASH (73,658) (112,938)
CASH AND CASH EQUIVALENTS, BEGINNING 102,048 257,035
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 28,390 $ 144,097
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 159,111 $ 156,099
Noncash financing activities:
Distributions payable to shareholders 633,037 630,726
See notes to consolidated financial statements.
8
BERTHEL GROWTH & INCOME TRUST I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND PLAN OF LIQUIDATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Trust's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2007. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair representation have
been included. Operating results for the nine months ended September 30, 2008
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2008.
The preparation of the Trust's financial statements in conformity with
accounting principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
The Trust continues to have a deficiency in net assets. Berthel SBIC, LLC
("SBIC"), a wholly owned subsidiary of the Trust, has agreed to liquidate its
portfolio assets in order to pay its indebtedness to the United States Small
Business Administration ("SBA").
In August 2002, the SBA notified the SBIC that all debentures, accrued interest
and fees were immediately due and payable. The SBIC was transferred into the
Liquidation Office of the SBA at that time. On September 1, 2003, management
signed a loan agreement with the SBA for $8,100,000 (after paying $1,400,000 on
the $9,500,000 debentures) with a term of 48 months at an interest rate of
7.49%. In August, 2007, the SBIC and the SBA agreed to a one-year extension to
the loan agreement. 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 September 30, 2008, $2,776,217 is outstanding
under the loan agreement, which is secured by substantially all assets of the
SBIC. The loan agreement contains various covenants, including limits on the
amounts of expenses, other than interest expense, that can be incurred and paid.
The loan agreement also contains various events of default, including a decrease
in the aggregate value of the SBIC's assets of 10% or greater. The SBA granted
the SBIC until October 2, 2008 to cure the default on the debt. The default was
not cured and therefore, the SBA may exercise its right to take possession of
the Trust's assets as provided in the loan documents.
The Trust has defaulted on the SBA debt and as a result, the unaudited financial
statements have been presented under the liquidation basis of accounting
effective September 30, 2008. A disposition of all of the assets and
satisfaction of all liabilities of the Trust is considered to be imminent and
the disposition period is anticipated to extend no later than June 21, 2009. As
management has taken steps to initiate a complete disposition of the assets and
satisfaction of the liabilities of the Trust by June 21, 2009, the information
provided in the financial statements reflects the adoption of the liquidation
basis of accounting effective the close of business on September 30, 2008 in
accordance with accounting principles generally accepted in the United States.
A statement of assets and liabilities available for liquidation and a
consolidated statement of changes in net assets available for liquidation are
the principal financial statements presented under the liquidation basis of
accounting. Under the liquidation basis of accounting, assets are stated at
their approximate net realized value, which is the non-discounted amount of
cash, or its equivalent, into which an asset is subsequently converted in the
9
due course of business less direct costs, while liabilities are reported at
their estimated net settlement amount, which is the non-discounted amounts of
cash, or its equivalent, expected to be paid to liquidate an obligation in the
due course of business, including direct costs. These estimates will be
periodically reviewed and adjusted as appropriate. The valuation of assets at
their approximate net realized value and liabilities at their anticipated net
settlement amount, represent estimates, based on present facts and
circumstances, of the net realizable value of the assets and the costs
associated with carrying out the plan for disposing of the Trust's assets and
satisfying its liabilities ("Plan"). The actual values and costs associated with
carrying out the Plan are expected to differ from amounts reflected in the
accompanying financial statements because of the Plan's inherent uncertainty.
These differences may be material. In particular, the estimates of costs will
vary with the length of time necessary to complete the Plan. Accordingly, it is
not possible to predict with certainty the timing or aggregate amount that will
ultimately be distributed to the investors, if any, and no assurance can be
given that the distributions will equal or exceed the estimate presented in the
accompanying statement of assets and liabilities available for liquidation.
Additionally, under the liquidation basis of accounting, the Trust is required
to estimate and accrue for all future general and administrative expenses and
other costs expected to be incurred during the disposition of the Trust's assets
and satisfaction of its liabilities. These estimates will be periodically
reviewed and adjusted as appropriate. There can be no assurance that these
estimated values will be realized. Such amounts should not be taken as an
indication of the timing or amount of future distributions to be made by the
Trust.
Any cash proceeds from the liquidation of the Trust's portfolio assets will
first go to satisfy the debt to the SBA secured by the loans and investments,
then to pay the unsecured accrued distributions payable to shareholders, then to
pay any remaining unsecured liabilities of the Trust and finally, any remaining
proceeds will be allocated 80% to the shareholders and 20% to the Trust Advisor
as specified in the Trust prospectus.
The following are significant assumptions utilized by the Trust in assessing the
value of the portfolio and the expected net settlement amount of liabilities
included in the statement of assets and liabilities available for liquidation at
September 30, 2008.
Cash and cash equivalents: Cash and cash equivalents include cash and highly
liquid interest-bearing deposits with original maturities of three months or
less.
Loan and investment valuation: Valuation of loans and investments held by the
Trust are discussed in Note B.
Liquidation expenses: Under the liquidation basis of accounting, the Trust is
required to estimate and accrue for costs associated with implementing and
completing the Plan. The estimated costs of disposition of assets and
satisfaction of liabilities includes trustee fees, professional services,
corporate expenses (insurance, audit and other filing expenses) and interest
expense and are reflected as operating expenses in the consolidated financial
statements. These amounts can vary significantly due to, among other things, the
timing of assets sales and the timing and amounts associated with discharging
known and contingent liabilities and claims. As a result, the Trust has accrued
the projected costs including trustee fees, professional fees and various other
wind-up costs expected to be incurred during the projected period to complete
the disposition of assets and satisfaction of its liabilities and final
dissolution of the Trust. These expense accruals will be periodically reviewed
for adequacy and adjusted from time to time as projections and assumptions
change. Changes to the accruals will be recorded as adjustments to net assets in
liquidation in future periods.
As of September 30, 2008, total gross assets and liabilities of the Trust are
$5,537,136 and $12,341,403, 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 accompanying financial statements do
not include any adjustments that may result if the Trust is unable to continue
as a going concern.
10
NOTE B - FAIR VALUE DISCLOSURES
Fair Value Measurements
Effective January 1, 2008, the Trust adopted FASB Statement No. 157, Fair Value
Measurements ("FAS No. 157"), which provides a framework for measuring fair
value under generally accepted accounting principles. FAS No. 157 applies to all
financial instruments that are being measured and reported on a fair value
basis.
As defined in FAS No. 157, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, the
Trust uses various methods including market, income and cost approaches. Based
on these approaches, the Trust often utilizes certain assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk and or the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated, or generally
unobservable inputs. The Trust utilizes valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable inputs. Based on
the observability of the inputs used in the valuation techniques the Trust is
required to provide the following information according to the fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the
information used to determine fair values. Financial assets and liabilities
carried at fair value will be classified and disclosed in one of the following
three categories:
Level 1 -- Valuations for assets and liabilities traded in active exchange
markets. Valuations are obtained from readily available pricing sources for
market transactions involving identical assets or liabilities.
Level 2 -- Valuations for assets and liabilities traded in less active dealer or
broker markets. Valuations are obtained from third party pricing services for
identical or similar assets or liabilities.
Level 3 -- Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted cash flow
models and similar techniques, and not based on market exchange, dealer, or
broker traded transactions. Level 3 valuations incorporate certain assumptions
and projections in determining the fair value assigned to such assets or
liabilities.
For the period from January 1, 2008 to September 30, 2008, the application of
valuation techniques applied to similar assets and liabilities has been
consistent. The following is a description of the valuation methodologies used
for instruments measured at fair value:
Investment Securities
The fair value of investment securities is the market value based on quoted
market prices, when available, or market prices provided by recognized broker
dealers. If listed prices or quotes are not available, fair value is based upon
internally developed models that use unobservable inputs due to the limited
market activity of the instrument. Substantially all of the Trust's investments
are illiquid and therefore are valued using internally developed models that use
unobservable inputs.
Derivative Instruments
Certain derivatives with limited market activity are valued using internally
developed models that consider unobservable market parameters.
Loans
Where observable market prices are not available, fair value is based upon
estimated cash flows adjusted for credit risk which are discounted using an
interest rate appropriate for the maturity of the applicable loans or the
11
unfunded commitments. The Trust's loans are carried at fair value and included
in Loans on the balance sheet are generally classified within level 3 of the
valuation hierarchy due to the lack of observable pricing data. The fair value
of these level 3 loans is calculated with a discounted cash flows model using
market-based credit spreads of comparable debt instruments or credit derivatives
of the specific borrower or comparable borrowers. Results of discounted cash
flow calculations may be adjusted, as appropriate, to reflect other market
conditions or the perceived credit risk of the borrower.
In determining the appropriate levels, the Company performs a detailed analysis
of the assets and liabilities that are subject to FAS No. 157. At each reporting
period, all assets and liabilities for which the fair value measurement is based
on significant unobservable inputs are classified as Level 3.
Fair Value on a Recurring Basis
The table below presents the balances of assets and liabilities measured at fair
value on a recurring basis as of September 30, 2008.
Total Level 1 Level 2 Level 3
----- ------- ------- -------
Investment securities $4,799,662 $ -- $ -- $4,799,662
Derivative instruments 73,150 -- -- 73,150
Loans 617,157 -- -- 617,157
---------- ----------- ----------- ----------
Total assets $5,489,969 $ -- $ -- $5,489,969
========== =========== =========== ==========
The changes in Level 3 assets and liabilities measured at fair value on a
recurring basis are summarized as follows:
Investment Derivative
Loans Securities Instruments
----- ---------- -----------
Balance, December 31, 2007 $ 866,666 $4,438,425 $ 11,504
Total net gains (losses) included in:
Net increase (decrease) in net assets (224,509) 361,237 61,646
Purchases, sales, issuances and settlements, net (25,000) -- --
Transfers into/out of Level 3 -- -- --
---------- ---------- ----------
Balance, September 30, 2008 $ 617,157 $4,799,662 $ 73,150
========== ========== ==========
Net unrealized gains (losses) included in net income
for the nine months ending September 30, 2008 $ (24,509) $ 361,237 $ 61,646
12
NOTE C -LOANS AND INVESTMENTS
September 30, 2008 December 31, 2007
------------------ -----------------
Cost Valuation Cost Valuation
---- --------- ---- ---------
Communications & Software:
EDmin.com, Inc.
- ---------------
261,203 shares of 9%, Series A cumulative
convertible preferred stock $ 972,812 $ 972,812 $ 972,812 $ 972,812
---------- ---------- ---------- ----------
Total Communications & Software
(18% and 18% of total loans and investments
as of September 30, 2008 and December 31, 2007,
respectively) 972,812 972,812 972,812 972,812
---------- ---------- ---------- ----------
Healthcare Products & Services:
Physicians Total Care, Inc.
- ---------------------------
8% uncollateralized promissory note due December, 2009 282,795 450,491 307,795 700,000
100,000 shares of common stock 4,000 100,000 4,000 --
Inter-Med, Inc.
- ---------------
2,491.3031 shares of common stock 672,279 1,300,000 672,279 672,279
FutureMatrix Interventional, Inc.
- ---------------------------------
905,203 shares of common stock 102,640 1,000,000 102,640 2,460,000
1,899,783 shares of common stock of CeloNova Biosciences, Inc.
(f/k/a IMED)
(an affiliate of FutureMatrix Interventional, Inc.) -- -- -- --
---------- ---------- ---------- ----------
Total Healthcare Products & Services (52% and 72% of total loans and
investments as of September 30, 2008 and December 31, 2007,
respectively) 1,061,714 2,850,491 1,086,714 3,832,279
---------- ---------- ---------- ----------
Manufacturing:
Feed Management Systems, Inc.
- -----------------------------
435,590 shares of common stock 1,077,422 -- 1,077,422 --
The Schebler Company
- --------------------
13% promissory note due February, 2008 166,666 166,666 166,666 166,666
Warrants to purchase 1.66% of common stock at $.01 per share 11,504 73,150 11,504 11,504
166,666 shares of 10% convertible cumulative preferred stock 166,667 422,027 166,667 166,667
166,666 shares of common stock 166,667 1,004,823 166,667 166,667
---------- ---------- ---------- ----------
Total Manufacturing (30% and 10% of total loans and
investments as of September 30, 2008 and December 31, 2007,
respectively) 1,588,926 1,666,666 1,588,926 511,504
---------- ---------- ---------- ----------
TOTAL LOANS AND INVESTMENTS $3,623,452 $5,489,969 $3,648,452 $5,316,595
========== ========== ========== ==========
13
NOTE D - DISTRIBUTIONS PAYABLE TO SHAREHOLDERS
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.
NOTE E - NOTES PAYABLE
The SBIC issued debentures payable to the SBA totalling $9,500,000 since
inception. The original debenture terms required semiannual payments of interest
at annual interest rates ranging from 6.353% to 7.64%. In addition to interest
payments, the SBIC was required to pay an annual 1% SBA loan fee on the
outstanding debentures balance.
In August 2002, the SBA notified the SBIC that all debentures, accrued interest
and fees were immediately due and payable. The SBIC was transferred into the
Liquidation Office of the SBA at that time. On September 1, 2003, management
signed a loan agreement with the SBA for $8,100,000 (after paying $1,400,000 on
the $9,500,000 debentures) with a term of 48 months at an interest rate of
7.49%. In August, 2007, the SBIC and the SBA agreed to a one-year extension to
the loan agreement. 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 September 30, 2008, $2,776,217 is outstanding
under the loan agreement, which is secured by substantially all assets of the
SBIC. The loan agreement contains various covenants, including limits on the
amounts of expenses, other than interest expense, that can be incurred and paid.
The loan agreement also contains various events of default, including a decrease
in the aggregate value of the SBIC's assets of 10% or greater. The SBA granted
the SBIC until October 2, 2008 to cure the default on the debt. The default was
not cured and therefore, the SBA may exercise its right to take possession of
the Trust's assets as provided in the loan documents.
NOTE F - EFFECTS OF ADOPTING THE LIQUIDATION BASIS OF ACCOUNTING
Under the liquidation basis of accounting, the Trust is required to estimate and
accrue for all future estimated general and administrative expenses and other
costs expected to be incurred during the disposition of its assets and
satisfaction of its liabilities. Management's estimate for liquidation costs was
comprised of trustee fees, professional services, corporate expenses (insurance,
audit and other filing expenses) and interest expense. This accrual was
approximately $300,000 as of September 30, 2008. These expense accruals will be
periodically reviewed for adequacy and adjusted from time to time as projections
and assumptions change. We expect changes will be made to estimated costs of
liquidation and such changes to the accruals will be recorded as adjustments to
net assets in liquidation in future periods. These estimates assume that the
final disposition of assets, satisfaction of liabilities and dissolution of the
Trust will be accomplished by June 2009. If there are delays or an acceleration
of these matters, actual costs incurred during the disposition of assets and
satisfaction of liabilities could increase or decrease as a result of a need for
additional or fewer internal and external resources.
NOTE G - MANAGEMENT FEES
Management fees were a credit of $690,710 for the first nine months of 2007 and
zero for 2008. The credit for 2007 is the result of the forgiveness of debt by
the Trust Advisor, as described below.
14
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 is
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, is reflected in
the financial statements during the third quarter of 2007. Management fees have
been waived for 2008.
15
Item 2. 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. Although management believes the
valuation of loans and investments as of both September 30, 2008 and December
31, 2007 were adequate, a decline in local economic conditions, or other
factors, could result in increasing losses that cannot be reasonably predicted
at this time.
The Trust has defaulted on the SBA debt and as a result, the unaudited financial
statements have been presented under the liquidation basis of accounting
effective September 30, 2008. A disposition of all of the assets and
satisfaction of all liabilities of the Trust is considered to be imminent and
the disposition period is anticipated to extend no later than June 21, 2009. As
management has taken steps to initiate a complete disposition of the assets and
satisfaction of the liabilities of the Trust by June 21, 2009, the information
provided in the financial statements reflects the adoption of the liquidation
basis of accounting effective the close of business on September 30, 2008 in
accordance with accounting principles generally accepted in the United States.
A statement of assets and liabilities available for liquidation and a
consolidated statement of changes in net assets available for liquidation are
the principal financial statements presented under the liquidation basis of
accounting. Under the liquidation basis of accounting, assets are stated at
their approximate net realized value, which is the non-discounted amount of
cash, or its equivalent, into which an asset is subsequently converted in the
due course of business less direct costs, while liabilities are reported at
their estimated net settlement amount, which is the non-discounted amounts of
cash, or its equivalent, expected to be paid to liquidate an obligation in the
due course of business, including direct costs. These estimates will be
periodically reviewed and adjusted as appropriate. The valuation of assets at
their approximate net realized value and liabilities at their anticipated net
settlement amount, represent estimates, based on present facts and
circumstances, of the net realizable value of the assets and the costs
associated with carrying out the plan for disposing of the Trust's assets and
satisfying its liabilities ("Plan"). The actual values and costs associated with
carrying out the Plan are expected to differ from amounts reflected in the
16
accompanying financial statements because of the Plan's inherent uncertainty.
These differences may be material. In particular, the estimates of costs will
vary with the length of time necessary to complete the Plan. Accordingly, it is
not possible to predict with certainty the timing or aggregate amount that will
ultimately be distributed to the investors, if any, and no assurance can be
given that the distributions will equal or exceed the estimate presented in the
accompanying statement of assets and liabilities available for liquidation.
Additionally, under the liquidation basis of accounting, the Trust is required
to estimate and accrue for all future general and administrative expenses and
other costs expected to be incurred during the disposition of the Trust's assets
and satisfaction of its liabilities. These estimates will be periodically
reviewed and adjusted as appropriate. There can be no assurance that these
estimated values will be realized. Such amounts should not be taken as an
indication of the timing or amount of future distributions to be made by the
Trust.
Any cash proceeds from the liquidation of the Trust's portfolio assets will
first go to satisfy the debt to the SBA, then to pay the accrued distributions
payable to shareholders, then to pay any remaining unsecured liabilities of the
Trust and finally, any remaining proceeds will be allocated 80% to the
shareholders and 20% to the Trust Advisor as specified in the Trust prospectus.
The following are significant assumptions utilized by the Trust in assessing the
value of the portfolio and the expected net settlement amount of liabilities
included in the statement of assets and liabilities available for liquidation at
September 30, 2008.
Cash and cash equivalents: Cash and cash equivalents include cash and highly
liquid interest-bearing deposits with original maturities of three months or
less.
Loan and investment valuation: Valuation of loans and investments held by the
Trust are discussed in Note B.
Liquidation expenses: Under the liquidation basis of accounting, the Trust is
required to estimate and accrue for costs associated with implementing and
completing the Plan. The estimated costs of disposition of assets and
satisfaction of liabilities includes trustee fees, professional services,
corporate expenses (insurance, audit and other filing expenses) and interest
expense and are reflected as operating expenses in the consolidated financial
statements. These amounts can vary significantly due to, among other things, the
timing of assets sales and the timing and amounts associated with discharging
known and contingent liabilities and claims. As a result, the Trust has accrued
the projected costs including trustee fees, professional fees and various other
wind-up costs expected to be incurred during the projected period to complete
the disposition of assets and satisfaction of its liabilities and final
dissolution of the Trust. These expense accruals will be periodically reviewed
for adequacy and adjusted from time to time as projections and assumptions
change. Changes to the accruals will be recorded as adjustments to net assets in
liquidation in future periods.
17
Results of Operations
Net investment income (loss) reflects the Trust's revenues and expenses
excluding realized and unrealized gains and losses on portfolio investments.
Interest income consists of the following:
Three Months Ending Nine Months Ending
September 30 September 30
2008 2007 2008 2007
---- ---- ---- ----
Portfolio investments $17,072 $19,551 $55,905 $59,580
Money market 152 1,585 798 3,523
------- ------- ------- -------
Interest income $17,224 $21,136 $56,703 $63,103
======= ======= ======= =======
Dividend income $ 4,166 $ 4,168 $48,708 $12,501
======= ======= ======= =======
Changes in interest earned on portfolio investments reflect the level of
investment in interest earning debt securities and loans. Money market interest
is earned on investments in highly liquid money market savings funds. Dividend
income reflects dividends earned on preferred stock investments.
Management fees were a credit of $690,710 for the first nine months of 2007 and
zero for 2008. The credit for 2007 is the result of the forgiveness of debt by
the Trust Advisor, as described below.
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 is
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, is reflected in
the financial statements during the third quarter of 2007. Management fees have
been waived for 2008.
Professional fees were $49,010 for the first nine months of 2008 compared to
$51,216 for 2007 and include legal and accounting fees. Other general and
administrative expenses were $30,912 for the first nine months of 2008 compared
to $34,290 for 2007. Interest expense was $156,258 for the first nine months of
2008 and $156,099 for the same period of 2007 and is interest on the note
payable to the SBA.
The Trust continues to have a deficiency in net assets, as well as net
investment losses. In addition, the SBIC is in violation of the maximum capital
impairment percentage permitted by the SBA. In August 2002, the SBA notified the
SBIC that all debentures, accrued interest and fees were immediately due and
payable. The SBIC was transferred into the Liquidation Office of the SBA at that
time. On September 1, 2003, management signed a loan agreement with the SBA for
$8,100,000 (after paying $1,400,000 on the $9,500,000 debentures) with a term of
48 months at an interest rate of 7.49%. In August, 2007, the SBIC and the SBA
agreed to a one-year extension to the loan agreement. 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 September
30, 2008, $2,776,217 is outstanding under the loan agreement, which is secured
by substantially all assets of the SBIC. The loan agreement contains various
covenants, including limits on the amounts of expenses, other than interest
expense, that can be incurred and paid. The loan agreement also contains various
events of default, including a decrease in the aggregate value of the SBIC's
assets of 10% or greater. The SBA granted the SBIC until October 2, 2008 to cure
the default on the debt. The default was not cured and therefore, the SBA may
exercise its right to take possession of the Trust's assets as provided in the
loan documents.
As of September 30, 2008, total gross assets and liabilities of the Trust are
$5,537,136 and $12,341,403, 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.
18
The Trust carries its portfolio of loans and investments at fair value and
investment valuations are approved by the Independent Trustees. The Trust
recognizes realized gains and losses when investments have been either sold or
written off as deemed to be worthless. Securities that are traded publicly are
valued at the market price less any appropriate discount for reasons of
liquidity or restrictions. The market values attributed to the companies in the
portfolio are reflective of EBITDA or revenue multiples management has
determined to be reasonably obtainable if the portfolio investments were to be
sold in an orderly manner to interested parties. Due to the lack of public
company comparables and the inability to access financial information for
comparable private companies, the EBITDA and revenue multiples used in
determining the fair market value of the Trust's investments are very subjective
and may be materially under or overstated.
The following table reflects the changes in unrealized gains and losses by
portfolio company:
Three Months Ending Nine Months Ending
September 30 September 30
2008 2007 2008 2007
---- ---- ---- ----
FutureMatrix Interventional $ (100,000) $ -- $(1,460,000) $ --
Inter-Med 100,000 -- 627,721 --
Physicians Total Care 58,610 -- 75,491 --
Schebler (300,000) -- 1,155,162 --
----------- ------------- ----------- -------------
Unrealized (loss) gain $ (241,390) $ -- $ 398,374 $ --
=========== ============= =========== =============
The following table represents changes in the values of portfolio companies from
December 31, 2007 to September 30, 2008, reflecting the adoption of FAS 157:
Portfolio Value
---------------
Balance at December 31, 2007 $ 5,316,595
Proceeds received (25,000)
Realized loss on forgiveness of debt (200,000)
Unrealized gain on investments 398,374
-------------
Balance at September 30, 2008 $ 5,489,969
=============
Liquidity and Capital Resources
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 to June 21, 2009.
The Trust continues to have a deficiency in net assets, as well as net
investment losses. In addition, the SBIC is in violation of the maximum capital
impairment percentage permitted by the SBA. In August 2002, the SBA notified the
SBIC that all debentures, accrued interest and fees were immediately due and
payable. The SBIC was transferred into the Liquidation Office of the SBA at that
time. On September 1, 2003, management signed a loan agreement with the SBA for
$8,100,000 (after paying $1,400,000 on the $9,500,000 debentures) with a term of
48 months at an interest rate of 7.49%. In August, 2007, the SBIC and the SBA
agreed to a one-year extension to the loan agreement. The agreement requires
principal payments on the debt to the extent the SBIC receives cash proceeds
19
exceeding $250,000 for the sale or liquidation of investments. As of September
30, 2008, $2,776,217 is outstanding under the loan agreement, which is secured
by substantially all assets of the SBIC. The loan agreement contains various
covenants, including limits on the amounts of expenses, other than interest
expense, that can be incurred and paid. The loan agreement also contains various
events of default, including a decrease in the aggregate value of the SBIC's
assets of 10% or greater. The SBA granted the SBIC until October 2, 2008 to cure
the default on the debt. The default was not cured and therefore, the SBA may
exercise its right to take possession of the Trust's assets as provided in the
loan documents.
The loan agreement with the SBA is due as follows:
Maturity Date Amount
------------- ------
September 1, 2008 $2,776,217
As of September 30, 2008, total gross assets and liabilities of the Trust are
$5,537,136 and $12,341,403, 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 debt owed to the SBA by the SBIC was not paid by September 1, 2008 and a
loan extension has not been approved by the SBA. Due to this default, the SBA
may exercise its right to take possession of the Trust's assets as provided in
the loan documents.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Trust's investment objective is capital appreciation and current income by
making investments through private placements in securities of small and medium
sized privately and publicly owned companies. Securities consist of subordinated
debt, preferred stock, or common stock combined with equity participation in
common stock or rights to acquire common stock. Investments are not held for
trading purposes.
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.
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 September 30, 2008, the amount at risk was $5,489,969 and
consisted of the following:
Cost Valuation
---- ---------
Debt securities and loans $ 449,461 $ 617,157
Preferred stocks 1,139,479 1,394,839
Common stocks 2,023,008 3,404,823
Warrants to purchase common stock 11,504 73,150
------------- -------------
Total loans and investments $ 3,623,452 $ 5,489,969
============= =============
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 $2,776,217 as of
September 30, 2008.
20
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Trust's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO concluded that as of the
end of the period covered by this report, our disclosure controls and procedures
are effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
of 1934 is recorded, processed, summarized, and timely reported as provided in
the SEC's rules and forms.
Changes in Internal Controls
No changes occurred since the quarter ended June 30, 2008 in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
Item 1A. Risk Factors
------------
Management of the Trust does not believe there have been any material changes in
the risk factors which were disclosed in the Form 10-K filed with the Securities
and Exchange Commission on March 25, 2008.
Item 6. Exhibits
--------
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERTHEL GROWTH & INCOME TRUST I
-------------------------------
(Registrant)
Date: November 12, 2008 /s/ Ronald O. Brendengen
-----------------------------------
Ronald O. Brendengen,
Chief Financial Officer &
Treasurer
Date: November 12, 2008 /s/ Daniel P. Wegmann
-----------------------------------
Daniel P. Wegmann, Controller
21