<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended: December 31, 1998
Commission file number: 33-98346C
---------
BERTHEL FISHER & COMPANY LEASING, INC.
(Name of small business issuer in its charter)
IOWA 42-1312639
---- ----------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 SECOND STREET SE, CEDAR RAPIDS, IA 52401
--------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (319) 365-2506
---------------
Securities registered under Section 12(g) of the Exchange Act:
SERIES A SUBORDINATED 5 YEAR NOTES
SERIES B SUBORDINATED 8 YEAR NOTES
Check whether the issuer (1) files all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were: $2,644,984
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 19, 1999, excluding the reported beneficial ownership of
all directors, officers and beneficial owners of more than 5% of the
registrant's voting stock, was $754,474. The Common Stock of the registrant,
which is the registrant's only voting stock, is not actively traded or regularly
quoted.
The number of shares outstanding of the registrant's Common Stock as of March
19, 1999 was 452,529.
Transitional Small Business Disclosure Format Yes No X
--- ---
The exhibit index may be found on page 41.
<PAGE> 2
BERTHEL FISHER & COMPANY LEASING, INC.
1998 FORM 10-KSB
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
Item 1. Business ............................................................................... 3
Item 2. Properties.............................................................................. 6
Item 3. Legal Proceedings....................................................................... 6
Item 4. Submission of Matters of a Vote of Shareholders......................................... 6
PART II
Item 5. Market for the Registrant's Common
Equity and Related Shareholder Matters................................................ 7
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 9
Item 7. Financial Statements and Supplementary Data............................................. 14
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................ 36
PART III
Item 9. Directors and Executive Officers of the Registrant...................................... 36
Item 10. Executive Compensation.................................................................. 38
Item 11. Security Ownership of Certain Beneficial
Owners and Management................................................................. 39
Item 12. Certain Relationships and Related Transactions.......................................... 40
Item 13. Exhibits and Reports on Form 8-K........................................................ 41
SIGNATURES.............................................................................. 42
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
The Company was incorporated under the laws of the State of Iowa on
February 5, 1988, as a wholly owned subsidiary of Berthel Fisher & Company
("BFC"). The Company has been generally engaged in the equipment leasing
business since its inception in 1988, continuing the operations of the leasing
division that had been operated by BFC during 1986 and 1987. The address of the
Company is 100 Second Street SE, Cedar Rapids, Iowa 52401. The Company's
telephone number is (319) 365-2506.
GENERAL
The Company provides a variety of lease financing for telecommunications
and general equipment. The Company's operation is located in the Midwest,
however, its lease portfolio includes leases throughout the United States. As of
December 31, 1998, the Company employed six full time employees.
Telecommunications represents the largest percentage of the business
generated by the Company for its own portfolio and for its affiliates. Since the
Company's formation in 1988, approximately 90% of the leases and finance
contracts originated by the Company for itself and for its affiliates has been
in the Public Communications Industry. The Public Communications Industry
includes companies that provide independent private payphone services and
telecommunications services to hotels, universities, hospitals and inmate
confinement facilities. The Company's leasing and financing programs are
marketed primarily to end-users on a nationwide basis. The marketing involves
visiting in person with these end-users, direct mail campaigns, attending trade
shows and advertising in selected trade publications. In addition, the Company
works closely with, and receives referrals from manufacturers that provide
equipment to the Public Communications Industry. The Company does not have any
formal business agreements with manufacturers. The Company relies upon its
customers to select the equipment the customers desire to lease from the
Company, and does not seek to influence a customer's choice of equipment.
Financing arrangements with individual customers can exceed 5% of the Company's
loan and lease portfolio.
Although the Company has provided leasing and financing programs of general
equipment since 1988, the General Equipment Group was not formally established
until 1995. This division specializes in providing lease financing on equipment
in the $5,000 to $250,000 range. This lease financing is primarily marketed to
manufacturers and vendors of equipment in this targeted dollar range. Once a
manufacturer or vendor relationship is established the manufacturer or vendor
refers their customers to the Company for the lease or financing of specific
equipment. The Company has working relationships, but no formal agreements, with
several manufacturers and vendors. The lease financing programs are marketed to
manufacturers and vendors by calling directly on those companies, attending
industry specific trade shows, and utilizing direct mail and advertising. The
Company has one salesperson in this division. The General Equipment Group
currently has relationships with banks that permit the Company and the banks to
work together to offer leasing to the bank's customers. The Company handles all
of the administration of leasing programs for the banks. It negotiates the lease
with the customer, closes the transaction and does the billing and collections.
The participating bank normally provides up to 80% of the funding for these
specific lease transactions. In selected transactions the bank will receive a
referral fee, but will not provide any of the funding for the transaction.
The Company has recently expanded its business in the ATM industry. In
1995, the Company began a relationship with a manufacturer of ATM cash
dispensing equipment. The distributors for this manufacturer refer their lease
applicants to the Company for approval. If approved, the distributors work
together with their customers and the Company to complete the lease transaction
and install the ATM equipment. Lease customers are typically owners of
convenience stores, restaurants, bars or gas stations. The average transaction
size is $10,000. Because the transaction size is small, the Company limits its
ATM business to credit worthy customers, and relies heavily on background checks
and personal guarantees. This portion of the Company's business has increased
gradually, and represented approximately 8% of the Company's lease and notes
receivable portfolio as of December 31, 1998. Approximately 48% of the Company's
portfolio was comprised of telecommunications equipment as of December 31, 1998.
One customer, Murdock Communications Corporation, accounted for 12% of the
income from direct financing leases in 1998. This same customer accounted for 6%
of the income from direct financing leases in each of the years ended
<PAGE> 4
ITEM 1. BUSINESS (CONTINUED)
December 31, 1997 and December 31, 1996.
Since 1991 the Company has sponsored three limited partnerships,
Telecommunications Income Fund IX, L.P. ("TIFIX"), Telecommunications Income
Fund X, L.P. ("TIFX"), and Telecommunications Income Fund XI, L.P. ("TIFXI")
(collectively referred to as the "TIFS") whose purpose is to own leasing
contracts. As the sponsor and general partner of these partnerships, the Company
has originated and managed lease portfolios owned by the partnerships. The
partnerships benefit from the ownership of the portfolio of leases generated by
the Company, and the Company has been compensated for its efforts by receipt
from the partnerships of fees for origination of lease contracts, fees for
management of the lease portfolios during the partnerships' operating phase and
a general partner's interest.
TIFIX and TIFX have been operating since 1991 and 1993, respectively. TIFIX
and TIFX are required under the terms of the partnership agreements to be
liquidated by December 31, 1999 and December 31, 2002, respectively. TIFXI began
offering units to the public on December 23, 1997. The minimum offering of
$1,200,000 was reached on February 13, 1998. As of March 19, 1999, 7,273 units
have been sold at a value of $7,273,000.
The Company purchased a $1,000,000 portfolio of consumer notes receivable
from a finance company in July, 1998. The Company paid $950,000 plus a placement
fee of $50,000. The underlying notes carry interest at approximately 17.5%, with
monthly payments due over approximately five years. The notes are subject to
risk of collection as well as risk of prepayment. The seller has agreed to
replace notes that become past due more than 45 days or are prepaid during the
first year after the purchase. The Company has contracted with the finance
company to provide servicing.
The Company has certain conflicts of interest, including conflicts with its
parent company, Berthel Fisher & Company. The Company has addressed these
conflicts by establishing a board of directors that includes independent
directors. The Board addresses conflicts carefully, with a view to having
contractual relationships between the Company and its parent meet reasonable
standards that would be imposed if the Company were contracting with unrelated
third parties. The Company has the fiduciary duty of a general partner with
respect to the TIFS. The main conflict between the Company and these limited
partnerships exists because the Company has a duty to supply lease contracts to
these partnerships to utilize cash generated for investment by the partnerships.
If there are insufficient lease contracts, in order to meet its fiduciary duty
to the partnerships, the Company will originate leases for the partnerships
before it originates leases for its own portfolio.
From January 1995 through December, 1996, instead of sponsoring additional
funds such as the TIFS, the Company pursued a business plan that focused on
originating leases and finance contracts for the Company's own portfolio while
continuing to provide lease originations to utilize cash available for lease
originations in the TIFS. In December, 1996, primarily because the Company did
not have sufficient cash to continue implementing this plan, the Board of
Directors turned its efforts to re-establish the business plan that the Company
followed prior to 1995, i.e., to sponsor funds such as the TIFS for which it
will originate leases from which the Company will derive management fees and
origination fees. The Company will continue to originate leases for its own
portfolio.
The telecommunications industry, particularly the pay telephone and long
distance facets of the industry, is heavily regulated by the Federal
Communications Commission and by various state public utility commissions.
Regulation is not directed at the ownership or leasing of telecommunications
equipment, but is focused primarily on the business of the Company's customers
that operate in the industry. Generally, regulation affects rates that can be
charged and the relationship of the regional Bell operating companies ("RBOC's")
to the rest of the pay telephone industry. The FCC has proposed regulations
affecting long distance rates. The majority of the customers of the Company are
operating within the range of rates proposed by the FCC. Some customers are
below the proposed range and will be able to increase their rates. Those
customers whose rates exceed the highest rates permitted by the FCC will reduce
their rates, but management does not expect such reductions to affect those
customers' ability to make lease payments.
<PAGE> 5
ITEM 1. BUSINESS (CONTINUED)
The Company's results of operations depend in part upon its ability to
realize the residual equipment value reflected on its balance sheet. At the
inception of a direct finance lease, the Company estimates the fair market value
of the underlying equipment that would be obtained at the end of the initial
lease term. This estimate is based upon the Company's judgement, as supported by
data from the used equipment market, discussions with manufacturers, and
consultations with equipment users. The estimated residual value is recorded on
the Company's balance sheet. Residual values ascribed to individual items of
equipment depend upon various variables including, but not limited to, the
technical specifications of the equipment, potential obsolescence of the
equipment, performance and capabilities of the equipment, the scientific and
financial strength and reputation of the equipment's manufacturer and the
widespread availability of long-term maintenance for the equipment.
Realization of residual values depends on many factors, several of which
are not within the Company's control, including general market conditions at the
time of the original contract's expiration, the cost of comparable new
equipment, the extent, if any, to which the equipment has become technologically
or economically obsolescent during the contract term and the effects of any
additional or amended government regulations. Although it is possible that
technological obsolescence could affect the residual value of telecommunications
equipment, the Company's experience is that obsolescence does not have a
significant effect on residual values. Telecommunications equipment can
generally be upgraded to current technology using software or hardware
enhancements that can be installed in a cost-effective manner.
Upon the expiration of an equipment lease contract for which a residual
value has been recorded, the original lease customer will (i) purchase the
equipment outright, (ii) extend the lease for an additional term, or (iii)
return the equipment to the Company. Should the equipment be returned to the
Company, the Company seeks to sell or re-lease it. At the end of the initial
lease term, when the equipment is either sold or re-leased, the amount by which
the net proceeds exceed or fall short of the residual value is recorded as a
gain or loss, respectively. When equipment for which a gain has been recorded is
re-leased, the Company recognizes the gain ratably over the term of the new
lease.
To date the Company's primary source of funding has been its revolving
credit line, subordinated notes payable, and borrowings from its Parent. At
December 31, 1997, the Company had a $10,000,000 revolving credit line (the
"Credit Agreement") with Firstar Bank Milwaukee, N.A. ("Firstar"). The revolving
credit line was terminated on June 30, 1998. Management is currently attempting
to establish a new line of credit with another financial institution.
From time to time the Company will consolidate a portion of its lease
portfolio to be used as collateral for fixed rate and fixed term loans. The
Company determines the average maturity of the consolidated leases and obtains
fixed rate and fixed term loans using the consolidated leases as collateral. The
term and interest rate of the financing offered by banks financing this
collateral is matched to the average maturity of the leases. Utilizing this type
of financing allows the Company to establish a spread between the financing
interest rate and the rates of return on a certain portfolio of leases. At
December 31, 1998, the Company had outstanding borrowings of $57,751 from
various banks in fixed rate loan transactions. The Company also had a note and a
subordinated debenture payable to the Parent at December 31, 1998 in the amount
of $725,000 and $2,000,000, respectively.
In June, 1996, the Company began raising funds pursuant to a registration
statement on Form SB-2 filed with the Securities and Exchange Commission. The
Company terminated sales of the Company's Series A Subordinated 5-Year Notes
with detachable warrants and sales of Series B Subordinated 8-Year Notes with
detachable warrants (collectively the "Notes") in October after the Company had
sold $3,001,000 of the Notes. Series A Notes pay interest on a monthly basis at
an annual rate of 9.5% and are due 5 years from issuance. Series B Notes pay
interest on a monthly basis at an annual rate of 10% and are due 8 years from
issuance. The termination of the sales of the notes was deemed necessary by the
Company as it pursued its plans to slow the growth of the Company to better
match its funding capacity.
The Company completed a private placement best efforts offering for the
issuance of $2 million of
<PAGE> 6
ITEM 1. BUSINESS (CONTINUED)
Series A preferred stock and warrants. The Company issued $424,774 of preferred
stock and $60,682 of warrants to its Parent in exchange for the conversion of a
subordinated note payable to its Parent of $264,980 and the contribution of
restricted stock of a public company with an estimated fair value of $220,476.
The Company has issued a total of $1,750,000 of preferred stock and $250,000 of
warrants totalling $2,000,000 out of a total registered amount of $2,000,000.
48,629 shares of class A common stock were issued in 1998 upon the exercise of
48,629 warrants. Proceeds received for the exercise of these warrants totalled
$575,245, net of issuance costs of $8,303.
The telecommunications financing industry is extremely competitive and many
of the Company's competitors are larger. Banks are competitors on a local basis
for the leasing business of individual companies, and many other sources of
capital are used by businesses. The leasing industry is very capital intensive,
and banks limit the amount of credit they will provide to any one borrower.
Therefore, management believes that in many cases the Company is able to provide
lease financing to customers after customers reach their limit with their normal
bank lenders.
Management believes that its experience in the telecommunications industry
permitted it to compete favorably with other leasing companies that provide
lease financing. This experience allowed the Company to analyze lease
opportunities more quickly and thoroughly than its competition and to propose
lease terms that were advantageous to the Company. The Company's experience in
the telecommunications market enabled it to write leases that other lease
companies may decline because of their lack of experience in analyzing the
collateral and other factors that effect the efficacy of lease opportunities.
The Company uses its salesperson and managerial staff to find potential lease
candidates, and it receives a significant portion of its lease opportunities as
a result of its reputation for providing lease financing and advertising that it
places in telecommunications industry publications. There is aggressive
competition in the general equipment leasing market, and the Company expects to
meet that competition by providing competitive lease rates and service.
ITEM 2. PROPERTIES
The Company's headquarters are located in downtown Cedar Rapids, Iowa. The
premises are leased at a cost of $4,864 per month.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company, TIF IX, TIF X, North American Communications
Group ("NACG"), and others filed a suit against Shelby County, Tennessee
("County"). The County removed that suit from Tennessee State court to Federal
Court. The suit alleges, among other things, damages for wrongful termination of
the pay phone contract between NACG and Shelby County and racial discrimination
by the County against NACG. The County has filed an answer and discovery is in
the initial stages.
Telcom Management Systems filed a suit against the Company, TIF IX, and
others in Federal Court in Dallas, Texas during February 1998. The plaintiffs
purchased equipment from TIF IX out of a bankruptcy. They alleged that when they
attempted to sell the equipment at a later date, TIF IX had not provided good
title. The Company filed a Motion for Summary Judgement, which is still pending.
After filing the suit, the plaintiff transferred assets in lieu of bankruptcy.
The bankruptcy trustee is now reviewing the transfer to determine if the
transfer was done in Fraud of Creditors. The litigation is on hold until the
trustee makes a decision, then the motion for summary judgement must be
responded to. The Company believes the motion should be granted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of shareholders through the
solicitation of proxies or otherwise during the period covered by this report.
<PAGE> 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no public trading market for any of the Company's debt or equity
securities.
<TABLE>
<CAPTION>
Number of Number of
Shareholders Shares Outstanding
Title of Class at December 31, 1998 at December 31, 1998
-------------- -------------------- --------------------
<S> <C> <C>
Class A Common 13 452,529
Class B Nonvoting Convertible 31 74,500
Series A Preferred 38 125,000
</TABLE>
The Company has never paid or declared any dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the foreseeable
future.
The Class B Stock carries a 12% noncumulative dividend limited to 25% of
the Company's income before taxes each year up to a maximum of $1.20 per share.
The Class B Stock is convertible to Class A Common Stock of the Company on a one
for one basis. The Class B Stock is redeemable at $10.00 per share for a 30 day
period after the tenth anniversary of the issuance date (April 1990 to December
1991) at the option of the holder. Class B Stock not redeemed during that time
is automatically converted to Class A Common Stock on a one for one basis. The
Company declared dividends on Class B Stock of $-0- in 1998, $-0- in 1997, and
$-0- in 1996.
The Company paid dividends of $140,001 on the Series A Preferred Stock in
1998, and $58,810 on the Series A Preferred Stock in 1997. The Company has also
accrued $35,288 of dividends payable at December 31, 1997, with this amount
still outstanding at December 31, 1998.
Securities sold within the past three years not registered under the
Securities Act:
<TABLE>
<CAPTION>
Number of Total
Date Title of Class Shares Sold Offering Price Commissions
---- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
12/31/96 Units consisting of
Series A Preferred
Stock, "A" Warrants
and "B" Warrants 31,250 $ 500,000 $ 33,750
01/01/97 Units consisting of
thru Series A Preferred
12/31/97 Stock, "A" Warrants
and "B" Warrants 93,750 1,500,000 101,250
</TABLE>
The Company granted Berthel Fisher & Company Financial Services, Inc., an
affiliate of the Company, the exclusive right to sell the Units on a best
efforts basis. The Units were sold only to accredited investors within the
meaning of 17 code of Federal Regulations (CFR) 230.501(a) promulgated pursuant
to the Securities Act of 1933.
Berthel Fisher & Company subscribed for $500,000 of the Units. $264,980 was
issued upon conversion of debt, $220,476 of which was issued upon the
contribution to the Company of restricted stock of a public company having a
value of $220,476, and $14,544 in cash.
Exemption from registration from the Securities Act of the Units was
claimed under Regulation D. The Units consisting of Series A Preferred Stock,
"A" Warrants and "B" Warrants was offered only to accredited investors.
<PAGE> 8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS (CONTINUED)
SERIES A PREFERRED STOCK
The Company's undesignated Preferred Stock may be issued in one or more
series, to bear such title or designation as may be fixed by resolution of the
Board of Directors prior to the issuance of any shares thereof. Each series of
Preferred Stock will have such voting powers, if any, preferences, and other
rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board of
Directors adopted prior to the issuance of any shares of such series of
Preferred stock.
The Series A Preferred Stock is the first series of Preferred Stock
designated by the Board of Directors. The Board has no present plans to issue
any other series of Preferred Stock. However, holders of the Preferred Shares
should be aware that the holders of any series of the Preferred Stock which may
be issued in the future could have voting rights, rights to receive dividends or
rights to distribution in liquidation superior to those of holders of the
Preferred Shares or Common Stock, thereby diluting or negating the voting
rights, dividend rights or liquidation rights of the holders of the Preferred
Shares of Common Stock.
Dividends
Each Share of Series A Preferred Stock is entitled to cumulative annual
dividends of 8% payable if, as and when declared by the Board of Directors on
March 31, June 30, September 30, and December 31, with dividends to be
distributed April 15, July 15, October 15 and January 15. With respect to the
first dividend to be paid after issuance of a particular share of Series A
Stock, the 8% dividend shall be prorated from the date of issuance to the March
31, June 30, September 30, or December 31 immediately following such date of
issuance. Unpaid dividends will accumulate and be payable prior to the payment
of dividends on the Common Stock. Series A Stock does not participate in
dividends declared on Common Stock or any other class of stock issued by the
Company. At December 31, 1998, the Company had paid $140,001 of dividends on the
Series A Preferred Stock in 1998, $58,810 in 1997, and had accrued an additional
$35,288.
Conversion Rights
Unless previously redeemed by the Company, the holders of shares of Series
A Preferred Stock are entitled at any time to convert each share of Series A
Preferred Stock into .875 share of Class A common stock. No fractional shares of
common stock will be issued but in lieu thereof the Company shall pay an
equivalent amount in cash.
A & B Warrants
Each "A" Warrant granted the holder of the "A" Warrant the right to
purchase one share of Class A Common Stock ("Common Stock") of the Company for
$12.00 per Share. Each "B" Warrant grants the holder of the "B" Warrant the
right to purchase one share of Common Stock of the Company for $14.00 per share.
The "A" Warrants and "B" Warrants may be referred to herein collectively as the
"Warrants".
Each "A" Warrant expired on April 30, 1998. An "A" Warrant was exercisable
at any time prior to its expiration date. From and after the expiration date of
each "A" Warrant, each "A" Warrant not theretofore exercised shall be void and
of no effect. Each "B" Warrant expires on April 30, 1999. A "B" Warrant may be
exercised at any time prior to its expiration date. From and after the
expiration date of each "B" Warrant, each "B" Warrant not theretofore exercised
shall be void and of no effect. Each Warrant may expire on an earlier date upon
certain changes in control or in the event of an initial public offering.
The exercise price with respect to each "A" warrant was $12.00 per share of
common stock. The exercise price with respect to each "B" warrant is $14.00 per
share of common stock. A warrant may be exercised by paying the exercise price
and surrendering the warrant certificate to the Company and its principal office
with the Election to Purchase form set forth on the warrant certificate duly
completed and exercised by the holder. Upon exercise of a warrant and payment of
the exercise price, the number of
<PAGE> 9
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS (CONTINUED)
shares of common stock as to which the warrant is exercised will be issued. The
payment of the exercise price must be made in full and in cash at the principal
office of the Company. During 1998, there were 48,629 warrants exercised.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Total revenues for the year ended December 31, 1998 decreased approximately
7% from the same period in 1997. Total revenues in 1997 decreased by
approximately 20% over the same period in 1996. The decline in lease and
interest income in 1998 and 1997 is attributed to the decline in the Company's
investments in direct financing leases and notes receivable. The decline in
direct financing leases and notes receivable is due to early termination of
leases and decreased available capital. During the third quarter of 1998, the
Company sold approximately $6.2 million of its net investment in leases and
notes. Approximately $4.5 million of the proceeds received from the disposition
of these leases were used to pay off the Company's line of credit agreement,
which was terminated on June 30, 1998. These sales, along with other lease
dispositions, resulted in a gain on lease terminations in 1998 of $414,135
compared to $54,554 in 1997 and $147,300 in 1996. The decrease of income from
direct financing leases was partially offset from acquisition fee income
received from TIF XI, which is a 5% fee on the equipment purchased by TIF XI for
investments in leases and notes. The Company's 1998 income from acquisition fees
was $265,760, compared to none in 1997 and previous years.
Management and administrative fee income represent fees paid to the Company
by TIFIX, TIFX, and TIF XI. The Company earns management fees from the TIF's
based upon a percentage of lease rentals received by the partnerships. The
management fee percentages are 5%, 5%, and 2% for TIF IX, TIF X, and TIF XI,
respectively. Management fees from TIF IX were discontinued on May 1, 1998, when
that partnership entered its liquidation phase, and caused this income to
decrease from $274,588 in 1997 to $63,606 in 1998. Management fee income from
TIF X decreased from $353,109 in 1997 to $214,324 in 1998 due primarily to early
termination of leases in 1998. Management fee income derived from TIF XI is 2%
of lease and note payments, and were $12,599 in 1998, the first full year of
operations for this partnership. The Company also receives administrative
reimbursement fees from TIF IX, TIF X, and TIF XI. These fees are a flat amount
per month of $7,000 from each of the three TIF's. TIF XI's administrative fee
began in February, 1998, and totalled $77,000 for the year. Effective January 1,
1999, the TIF IX administrative fee will decrease from $7,000 per month to
$5,000 per month.
The Company had a net loss in 1998 of $230,131, but had comprehensive
income of $185,484. The difference of $415,615 is attributable to an unrealized
gain on securities available for sale. The Company currently has a security
classified as available for sale. A portion of the security was purchased in
1998 for $601,250 and its value increased $528,984 during the year. The other
portion of the security purchased in prior years increased in value by $146,816
in 1998. The gross unrealized gain of $675,800 is reduced by the estimated tax
effect of $260,185 to a net unrealized gain of $415,615. This net unrealized
gain is shown on the income statement as other comprehensive income and is taken
directly to stockholders' equity on the balance sheet, along with carrying the
asset at fair market value. In 1998, the Company also received not readily
marketable securities from two entities with a total estimated fair value of
$208,684 for the termination of leases and notes.
On October 25, 1996, the Board of Directors of the Company resolved to
significantly downsize the staff of the Company in order to reduce employment
costs in an effort to bring the Company to a break-even level of operations.
This reduction decreased 1997 employee compensation and benefits by $456,167
from 1996. Employee compensation and benefits was relatively stable in 1998
compared to 1997.
Until the first quarter of 1997, the Company paid its Parent one-half of
the management fees it received from TIFIX and TIFX. The Parent company agreed
to forego its share of these management fees beginning March 1, 1997. Expenses
for management fees and other general and administrative expenses were stable
between 1998 and 1997.
<PAGE> 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
During 1994 the Company made the decision to raise funds within the Company
to originate the majority of its new lease and finance contract business rather
than to raise funds through the sponsorship of new limited partnerships. In
March 1995, therefore, the Company negotiated an increased availability in its
revolving line of credit from $2,800,000 to $10,000,000. This increased line of
credit provided the Company with the funds necessary to increase its lease and
financing contract portfolios during 1995 and 1996. The revolving credit line
was terminated on June 30, 1998. Management is currently attempting to establish
a new line of credit with another financial institution. This resulted in a
decrease in interest expense in 1998 from $1,743,345 to $1,307,461.
Since the Company's inception in 1988, four of its customers have filed for
protection of the Bankruptcy Act while lease or finance transactions with the
Company were outstanding. These bankruptcies are discussed below. Because of the
potentially serious ramifications to the Company of a customer bankruptcy, the
Company strives to place itself in a position to be able to avoid losses in a
bankruptcy situation. The Company relies primarily on personal guarantees and
first security interests in equipment to ameliorate the effects of bankruptcy.
In lease or finance transactions involving pay telephones, the Company also
obtains agreements from the owners of pay telephone locations that permit the
Company to operate the pay telephones after a default of the Company's customer.
This allows the Company to obtain the most protection possible for the ongoing
operation of equipment.
The first of the Company's customers to file for protection of the
Bankruptcy Act was Value-Added Communications ("VAC"), which filed a petition
under Chapter 11 of the Bankruptcy Act on October 10, 1995 in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. At the
time VAC's petition for bankruptcy was filed, VAC had several leases with the
Company. Measured at December 31, 1995, VAC's leases had a net investment
balance of $927,731, which represented approximately 6.2% of the Company's total
net investment in leases and financing contracts. As a result of the Company's
secured position with respect to its VAC leases and because VAC's leases had
been guaranteed by a strong guarantor, the Company was able to negotiate a
settlement with VAC that resulted in the VAC leases being paid in full and the
equipment being leased to MCI Telecommunication Corporation. This lease was
subsequently sold.
On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia, Inc.
("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy
Code. This bankruptcy petition was dismissed on May 22, 1996 and, in connection
therewith, the Company exercised its right to manage the assets leased to UTS.
The net investment in the leases at the time the assets were repossessed was
approximately $432,000. The Company, two affiliated partnerships for which the
Company acts as General Partner, and UTS were named in a lawsuit, filed by
another creditor of UTS. The creditor was claiming $360,000 in compensatory
damages and $350,000 in punitive damages. Based on offers to purchase the pay
telephone equipment and an expected settlement offer related to the lawsuit, the
Company expected to incur a loss upon the sale or re-lease of this equipment.
Management charged $324,000 to the provision for possible loan and lease losses
for the expected loss in 1996 and reclassified its net investment in the
equipment, net of the specific allowance, to equipment under operating leases
pending the equipment's ultimate sale or re-lease. The equipment was sold during
1997 and the lawsuit was settled in 1998 with no further loss to the Company.
On October 31, 1996, Soil Recovery Services, Inc. ("SRS"), a lessee of the
Company, had an involuntary Petition for Relief under Chapter 7 of the U.S.
Bankruptcy Code filed against it. This was converted to a voluntary Chapter 11
on November 25, 1996. At the time the first petition was filed, SRS had various
leases with the Company that had a net investment totaling $256,500 and
represented 1.4% of the Company's total net investment in leases and finance
contracts. A specific allowance for losses of $100,000 was established through a
charge to the provision for possible loan and lease losses in 1996 based on
estimates of the fair value of the equipment under lease. The Company has
obtained the right to repossess the equipment, sold a portion of the equipment
in 1998, recorded an additional provision of $73,000 in 1998, and is in the
process of selling the remaining equipment. Management believes the specific
allowance is adequate to cover any loss on sale.
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
During the fourth quarter of 1996, management of the Company provided a
specific allowance for a lease with a certain customer for which the Company had
not been receiving lease payments. Management is actively working with such
customer to arrange for a sale of the assets under lease. A charge of $50,000
was recorded to the provision for possible loan and lease losses representing
management's best estimate of the loss on the expected sale of the equipment.
Also, due to the uncertainty as to the timing and amount of future payments from
such customer and as to the sale of the assets under lease, the Company
reclassified its net investment in the lease at December 31, 1996 of $144,972,
net of the specific allowance, to equipment leased under operating leases. The
Company is in the process of selling the equipment and expects no further loss
on sale. The carrying value at December 31, 1998 was $77,841.
In March 1997, the Company foreclosed on a lease with a customer. The net
investment in this lease was $545,189. The Company entered into a management
agreement with a pay phone operator to manage the equipment with the intent to
purchase. The equipment was subsequently sold to such entity for approximately
$150,000 less than the carrying value of the lease. The Company attempted to
collect the deficiency balance from the guarantor under the original lease.
However, since no payments were received, the Company charged $150,000 to the
provision for possible loan and lease losses and wrote off the balance at
December 31, 1997.
During 1997, a lessee of the Company filed for bankruptcy. Due to the
uncertainty over a possible prior lien on the equipment under lease and the
proceeds which may result from sale of the equipment, the Company charged
$150,000 to the provision for possible loan and lease losses and wrote off the
lease balance of $150,000 at December 31, 1997.
The allowance for possible lease losses is based upon a continuing review
of past lease loss experience, current economic conditions, and the underlying
lease asset value of the portfolio. At the end of each quarter a review of the
allowance account is conducted. The allowance for loan and lease losses
consisted of specific allowances for leases of $112,202 and $158,477 at December
31, 1998, and December 31, 1997, respectively, and a general unallocated
allowance of $217,472 and $276,815 at December 31, 1998, and December 31, 1997,
respectively. The general unallocated loss reserve of $217,472 at December 31,
1998 is 4.3% of the lease and note portfolio.
As of December 31, 1998 there were seventeen customers with payments owed
to the Company which were over 90 days past due. When payments are past due more
than 90 days, the Company discontinues recognizing income on those customer
contracts. The contract balance remaining on these contracts was $372,572 at
December 31, 1998. The Company's net investment in these contracts at December
31, 1998 was $310,576. Management is monitoring these contracts and at the
present time has determined the Company's investment in these contracts is
sufficiently collateralized. Management will continue to monitor these contracts
and take the necessary steps to protect the Company's investment.
One customer, SRS, has four contracts with amounts past due over 90 days.
The contract balance remaining on these contracts was $163,811 at December 31,
1998. The Company's remaining net investment in these contracts was $123,468 at
December 31, 1998. The Company is retaining a reserve of $75,000 for this
customer as of December 31, 1998.
YEAR 2000 ISSUE: The Company recognizes that the arrival of the Year 2000 poses
a unique challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000. The costs of ensuring systems are
compatible with the Year 2000 are not believed to be material. There are no
non-information technology processes that the Company has identified which would
affect its operations. An assessment of the readiness of external entities which
it interfaces with, such as vendors, counterparties, customers, and others, is
ongoing. At the present the Company does not contemplate that any specific
charges will be incurred for this assessment, and if there are any related
expenditures, does not expect them to be significant. The Company does not
expect the Year 2000 impact on external parties to have any material adverse
impact on the Company.
<PAGE> 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company is assessing the impact of the Year 2000 issue on information
technology and non-information technology systems used by lessees. No lessee is
contractually obligated to become Year 2000 compliant or to disclose their
capabilities to the Company. The Company has not yet determined whether the Year
2000 issue has been addressed by all of its customers. The Company has contacted
some of its customers and will continue to contact its customers in 1999. If the
Company's customers have not addressed this issue, it could lead to non-payments
of amounts owed to the Company.
The Company has determined that the software it utilizes in its operations is
compatible with the Year 2000. The Company utilizes an unrelated third party for
lease servicing. This third party vendor has been contacted and it has been
determined that their lease servicing application is year 2000 compliant. A
written confirmation regarding compliance of this application has been received
from the software developer.
LIQUIDITY AND CAPITAL RESOURCES:
The Company relies primarily upon debt financing to originate its leases
and notes receivable. At December 31, 1997, the Company had a $10,000,000
revolving line of credit with Firstar Bank Milwaukee, N.A. with an expiration
date of April 30, 1998. The credit line was extended until June 30, 1998, at
which time it was terminated. Management is currently attempting to establish a
line of credit with another financial institution. During the third quarter of
1998, the Company sold approximately $6.2 million of its net investment in
leases and notes. Approximately $4.5 million of the proceeds received from the
disposition of these leases was used to pay off the Company's line of credit
agreement.
From time to time the Company will consolidate a portion of its lease
portfolio to be used as collateral for fixed rate and fixed term loans. The
Company determines the average maturity of the consolidated leases and obtains
fixed rate and fixed term loans using the consolidated leases as collateral. The
term and interest rate of the financing offered by banks financing this
collateral is matched to the average maturity of the leases. Utilizing this type
of financing allows the Company to establish a spread between the financing
interest rate and the rates of return on a certain portfolio of leases. This
type of financing permits the Company to plan for a specific return on a portion
of its lease portfolio. At December 31, 1998, the Company had outstanding
borrowings of $57,751 from various banks in fixed rate loan transactions. The
Company also had a note payable to the Parent for $725,000 at December 31, 1998.
The Company has also raised funds via private placement debt offerings. At
December 31, 1998, the Company was obligated on approximately $2,000,000 of
notes issued pursuant to private placement debt offerings, payable to its
parent. The amount due the parent is payable in 2005.
The Company has completed a private placement best efforts offering for the
issuance of $2 million of Series A preferred stock and warrants. The Company has
issued a total of $1,750,000 of preferred stock and $250,000 of warrants
totalling $2,000,000 out of a total registered amount of $2,000,000. The Company
issued $437,500 of preferred stock and $62,500 of warrants to its Parent. In
1998, the Company received $583,548 from the exercise of 48,629 warrants.
In June, 1996, the Company's registration statement on Form SB-2 was
declared effective, and the Company began raising funds through the best efforts
public offering of its subordinated notes (the "Notes"). Through October 1996,
when sales in this offering were terminated, the Company had raised $3,001,000
on a best efforts basis. These Notes were offered in two series. Series A Notes
pay interest on a monthly basis at an annual rate of 9.5% and are due 5 years
from issuance. Series B Notes pay interest on a monthly basis at an annual rate
of 10% and are due 8 years from issuance. Sales of these Notes were suspended
after management became aware of the pending resignation of the president and
chief financial officer, and after the Company had decided to pursue plans to
slow the growth of the Company to better match its funding capacity and decrease
the size of its workforce.
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company is currently sponsoring a limited partnership,
Telecommunications Income Fund XI, L.P. ("TIFXI") for which the Company will
serve as general partner. TIFXI is offering a minimum of $1,200,000 and a
maximum of $25,000,000 in units of limited partnership interest ("Units") in the
partnership. As of March 19, 1999, 7,273 units were sold. The Company, as
general partner, will originate leases and finance contracts for TIFXI. This
will result in the Company realizing acquisition fees and management fees.
OUTLOOK
This Section and other portions of this Annual Report on Form 10-KSB
contains statements relating to future results of the Company that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to, changes in economic conditions, changes in
interest rates, availability of lease business to the Company, changes in
personnel, regulation of the telecommunications industry, and the success or
failure of the Company's customers as well as other risks and uncertainties. The
Company does not undertake, and specifically disclaims, any obligation to update
any forward-looking statements to reflect events or circumstances occurring
after the date of such statements.
The business of the Company is dependent upon being able to continue
originating leases, both for its own portfolio and for the portfolios of third
party entities, such as the TIF's. If the Company cannot continue to originate
leases, the Company will not be able to grow, either through the expansion of
its portfolio of leases or by deriving revenue from originating and managing
leases for other entities. The successful completion of the Company's business
plan is dependent upon having sufficient funds available to enable the Company
to continue to originate leases. The Company's primary source of capital for
itself was the private placement offering for the issuance of $2 million of
Class A preferred stock and warrants. If these funds are not sufficient, the
Company will have to consider the alternatives for obtaining capital, including
the sale of existing leases owned by the Company and obtaining new capital from
the Company's parent. Such alternative capital may not be available depending
upon a variety of factors, including without limitation the possibility that
purchasers of leases cannot be found, interest rates increase, the Company's
parent has no funds available to it, or the Company fails to operate effectively
in 1999. Management anticipates that cash flows from operations and financing
from the Company's Parent will be adequate to satisfy the Company's minimum
capital requirements for the next twelve months.
The Company's current business plan includes the Company's sponsorship of
TIFXI, for which the Company serves as general partner. The Company registered
interests in TIFXI under the Securities Act of 1933 and is offering those
interests publicly. The maximum offering amount for TIFXI is $25,000,000. The
Company, as general partner, will originate leases and finance contracts for
TIFXI, resulting in the Company realizing acquisition fees and management fees.
The Company may not be able to rely upon the availability of TIF XI's maximum
offering amount to originate leases. TIFXI could not reach the maximum offering
amount due to several factors, including the lack of investor interest. If the
public offering is not successful at the maximum offering amount, the Company
would not be able to originate more leases for TIFXI, and would not realize more
revenue from management fees and acquisition fees. Management anticipates that
the Company's long term success and profitability is highly dependent upon the
successful offering of TIFXI.
The best-efforts public offering of TIFXI is in process and through March
19, 1999, approximately $7,273,000 has been raised out of the maximum offering
amount of $25,000,000. No assurance can be provided that the maximum offering
amount will be raised or that the Company will be profitable upon completion of
the offering.
The Company's long term success is also dependent on its ability to secure
a line of credit agreement. The Company relies primarily upon debt financing to
originate its leases and notes receivable. The Company had a $10,000,000
revolving line of credit with Firstar Bank Milwaukee, N.A. with an expiration
date of April 30, 1998. The credit line was extended until June 30, 1998, at
which time it was terminated. Management is currently attempting to establish a
line of credit with another financial institution.
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and related information as of and for
the years ended December 31, 1998, 1997, and 1996 are included in Item 7:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Berthel Fisher & Company Leasing, Inc.
We have audited the accompanying consolidated balance sheets of Berthel Fisher &
Company Leasing, Inc. (a majority-owned subsidiary of Berthel Fisher & Company)
and subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Berthel Fisher & Company Leasing,
Inc. and subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
February 19, 1999
<PAGE> 16
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 697,072 $ --
Notes receivable (Note 2) 3,001,952 6,836,307
Net investment in direct financing leases (Notes 2 and 5) 2,012,374 7,725,276
Allowance for possible loan and lease losses (Note 3) (329,674) (435,292)
------------ ------------
Notes receivable and direct financing leases, net 4,684,652 14,126,291
Equipment under operating leases, less accumulated depreciation of $62,273 in 1998
and $31,136 in 1997 95,341 117,978
Due from affiliates 77,390 61,932
Receivable from parent under tax allocation agreement 895,900 425,000
Investments in:
Limited partnerships (Notes 4 and 12) 44,422 174,826
Not readily marketable securities, at cost 238,784 30,100
Available-for-sale security, at fair value 1,328,867 51,817
Furniture and equipment, less accumulated depreciation of
$213,303 in 1998 and $167,548 in 1997 145,042 190,760
Deferred income taxes (Note 6) -- 388,362
Deferred costs, less accumulated amortization of $512,013
in 1998 and $335,469 in 1997 (Note 11) 346,775 520,935
Other assets (Note 4) 260,820 319,963
------------ ------------
TOTAL $ 8,815,065 $ 16,407,964
============ ============
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Line-of-credit agreement (Note 5) $ -- $ 6,761,493
Demand note payable to parent (Note 5) 725,000 230,000
Outstanding checks in excess of bank balance 424,053 126,982
Trade accounts payable 101,755 29,619
Due to affiliates 121,450 99,427
Accrued expenses 81,451 197,438
Lease security deposits 138,791 358,243
Deferred income taxes (Note 6) 195,822 --
Notes payable (Note 5) 65,142 1,529,930
Subordinated debentures (Note 5) -- 725,000
Subordinated notes payable (Note 5) 2,997,605 2,996,564
Subordinated debenture payable to parent (Note 5) 2,000,000 2,000,000
------------ ------------
Total liabilities 6,851,069 15,054,696
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 12)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (Note 7) 728,953 730,929
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock, no par value - authorized 125,000 shares,
issued and outstanding 125,000 shares at December 31, 1998 and 1997
($1,750,000 liquidation value, convertible into 109,375 shares of Class A
common stock at December 31, 1998 and 1997) (Note 8) 1,621,422 1,621,422
Class A common stock, no par value-authorized 1,000,000 shares, issued and
outstanding 452,529 and 403,900 shares at December 31, 1998 and 1997, respectively 754,474 63,400
Common stock warrants (Note 9) 121,831 237,660
Accumulated deficit (1,570,640) (1,192,484)
Unrealized gain (loss) on available-for-sale security, net of tax effect 307,956 (107,659)
------------ ------------
Total stockholders' equity 1,235,043 622,339
------------ ------------
TOTAL $ 8,815,065 $ 16,407,964
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 17
BERTHEL FISHER & COMPANY LEASING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Income from direct financing leases $ 655,709 $ 1,049,329 $ 1,376,154
Interest income 686,812 838,265 1,060,118
Management, administration and lease acquisition fees
from affiliates (Note 4) 793,064 772,768 849,266
Gain on early termination of leases 414,135 54,554 147,300
Other 95,264 141,375 139,114
----------- ----------- -----------
Total revenues 2,644,984 2,856,291 3,571,952
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 391,743 398,635 854,802
Management fees to affiliates (Note 11) 246,667 287,146 561,134
Other general and administrative expenses (Note 11) 642,203 684,315 1,062,298
Interest expense (Note 5) 1,307,461 1,743,345 1,791,120
Provision for possible loan and lease losses (Note 3) 437,041 415,052 592,874
----------- ----------- -----------
Total expenses 3,025,115 3,528,493 4,862,228
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (380,131) (672,202) (1,290,276)
INCOME TAXES (Note 6) (150,000) (236,451) (453,720)
----------- ----------- -----------
NET LOSS (230,131) (435,751) (836,556)
COMPREHENSIVE INCOME (LOSS) - Unrealized
gain (loss) on available-for-sale security, net of tax
of $260,184 in 1998 and $(61,000) in 1997, respectively 415,615 (107,659) --
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 185,484 $ (543,410) $ (836,556)
=========== =========== ===========
LOSS PER COMMON SHARE CALCULATION:
Net loss $ (230,131) $ (435,751) $ (836,556)
Dividends on Series A convertible preferred stock (Note 8) (140,001) (94,098) --
----------- ----------- -----------
Net loss attributable to Class A common stock $ (370,132) $ (529,849) $ (836,556)
=========== =========== ===========
Basic $ (.84) $ (1.31) $ (2.09)
=========== =========== ===========
Fully diluted $ (.84) $ (1.31) $ (2.09)
=========== =========== ===========
Weighted average common shares outstanding 438,540 403,900 400,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 18
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAIN (LOSS) ON TOTAL
SERIES A CLASS A COMMON EARNINGS AVAILABLE- STOCKHOLDERS
PREFERRED COMMON STOCK (ACCUMULATED FOR-SALE EQUITY
STOCK STOCK WARRANTS DEFICIT) SECURITY (DEFICIT)
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 1,000 $ 189,969 $ 190,969
Net loss -- (836,556) (836,556)
Amortization of Class B stock
issuance costs -- (8,024) (8,024)
Issuance of Series A preferred stock
and warrants, net of issuance
costs of $1,939 $ 422,835 -- $ 60,682 -- 483,517
Subscription for Series A preferred stock
and warrants 12,726 -- 1,818 -- 14,544
Subscription receivable (12,726) -- (1,818) -- (14,544)
Issuance of common stock warrants -- -- 6,002 -- 6,002
----------- -------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1996 422,835 1,000 66,684 (654,611) (164,092)
Net loss -- -- -- (435,751) (435,751)
Amortization of Class B stock issuance costs -- -- -- (8,024) (8,024)
Issuance of Series A preferred stock
and warrants, net of issuance costs
of $144,981 (including $14,544 of
cash received on subscriptions receivable) 1,198,587 -- 170,976 -- 1,369,563
Issuance of Class A common stock -- 62,400 -- -- 62,400
Change in unrealized (loss) on
available-for-sale security,
net of tax effect -- -- -- -- $ (107,659) (107,659)
Dividends on Series A preferred stock -- -- -- (94,098) -- (94,098)
----------- -------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 1,621,422 63,400 237,660 (1,192,484) (107,659) 622,339
Net loss -- -- -- (230,131) -- (230,131)
Issuance of Class A common stock
upon exercise of warrants, net of
issuance costs of $8,303 -- 575,245 -- -- -- 575,245
Exercise of warrants -- 45,030 (45,030) -- -- --
Expiration of warrants -- 70,799 (70,799) -- -- --
Amortization of Class B stock
issuance costs -- -- -- (8,024) -- (8,024)
Dividends on Series A preferred stock -- -- -- (140,001) -- (140,001)
Change in unrealized gain on
available-for-sale security,
net of tax effect -- -- -- -- 415,615 415,615
----------- -------- ----------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1998 $ 1,621,422 $754,474 $ 121,831 $(1,570,640) $ 307,956 $ 1,235,043
=========== ======== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 19
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (230,131) $ (435,751) $ (836,556)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Gain on early termination of leases (414,135) (54,554) (147,300)
Depreciation of furniture and equipment 76,501 83,192 106,970
Amortization of deferred costs 176,659 176,659 102,273
Other amortization 63,047 30,440 36,006
Provision for possible loan and lease losses 437,041 415,052 592,874
Deferred income taxes 324,000 188,549 (457,871)
Changes in operating assets and liabilities:
Due from affiliates (15,458) (31,002) 58,914
Receivable from parent under tax allocation agreement (470,900) (425,000) --
Other assets 59,143 11,739 79,389
Outstanding checks in excess of bank balance 297,071 126,982 --
Trade accounts payable 72,136 (128,608) (70,558)
Due to affiliates 22,023 (2,611) 25,540
Accrued expenses (115,987) (30,576) (17,877)
------------ ------------ ------------
Net cash from operating activities 281,010 (75,489) (528,196)
------------ ------------ ------------
INVESTING ACTIVITIES:
Investment in available-for-sale security (601,251) -- --
Purchases of equipment for direct financing leases (2,827,118) (2,327,220) (11,687,165)
Repayments of direct financing leases 1,777,404 2,944,913 2,102,819
Proceeds from sale or early termination of direct
financing leases and notes receivable 6,363,403 1,299,597 9,439,276
Issuance of notes receivable (1,062,291) (1,609,538) (3,746,893)
Repayments of notes receivable 4,896,646 1,303,585 1,899,901
Investments in limited partnerships -- (10,000) --
Repayment (issuance) of loans to limited partnerships 124,286 (43,775) 308,165
Distributions from limited partnerships 6,118 2,280 2,280
Net lease security deposits collected (paid) (219,452) (16,633) 244,916
Purchases of furniture and equipment (8,146) (21,540) (123,200)
------------ ------------ ------------
Net cash from investing activities 8,449,599 1,521,669 (1,559,901)
------------ ------------ ------------
</TABLE>
(Continued)
-5-
<PAGE> 20
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Financing costs incurred $ (2,500) $ -- $ (500,365)
Proceeds from line-of-credit agreement 6,711,470 8,223,772 18,323,060
Repayments of line-of-credit agreement (13,472,963) (10,738,310) (17,622,529)
Proceeds from issuance of subordinated notes
payable and related warrants -- -- 3,001,524
Redemption of Class B stock (10,000) -- --
Proceeds from issuance of other borrowings 3,516,140 650,884 1,365,413
Repayments of other borrowings (5,210,928) (1,200,717) (2,290,129)
Proceeds from issuance of Series A preferred stock and warrants -- 1,484,544 --
Proceeds from issuance of Class A common stock 575,245 -- --
Issuance costs for Series A preferred stock and warrants -- (114,981) --
Cash dividends paid on Series A preferred stock (140,001) (94,098) --
------------ ------------ ------------
Net cash from financing activities (8,033,537) (1,788,906) 2,276,974
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 697,072 (342,726) 188,877
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -- 342,726 153,849
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 697,072 $ -- $ 342,726
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for - Interest $ 1,415,391 $ 1,588,809 $ 1,656,418
Noncash investing and financing activities:
Equipment reclassified from direct financing
leases to operating leases -- -- 328,481
Conversion of a note payable to preferred stock -- -- 264,980
Contribution of a not readily marketable security
for preferred stock -- -- 220,477
Increase (decrease) in trade accounts payable
attributed to equipment purchase costs -- -- (300,000)
Amortization of Class B stock issuance costs 8,024 8,024 8,024
Reclassification of security as available-for-sale -- 220,476 --
Change in unrealized gain (loss) on available-for-sale security,
net of tax effect 415,615 (107,659) --
Deferred tax expense (benefit) of change in unrealized
gain (loss) on available-for-sale security 260,184 (61,000) --
Issuance of common stock in connection with
underwriting of subordinated notes payable offering -- 62,400 --
Note receivable converted to investment in not readily
marketable security 183,284 -- --
Direct financing lease converted to investment in not
readily marketable security 25,400 -- --
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE> 21
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS- Berthel Fisher & Company Leasing,
Inc. (the "Company") is a majority-owned (95.3%) subsidiary of Berthel
Fisher & Company (the "Parent"). The Company finances, through direct
financing leases or notes receivables, telecommunications, agricultural,
and general equipment throughout the United States. The financing
agreements with individual customers can be large in relation to the
portfolio as a whole and certain agreements exceed 10% of the Company's
direct financing lease and note receivable portfolio (see Note 2). The
leases may be sold to other entities or retained by the Company for its
own portfolio.
During 1994, the Company formed a wholly-owned subsidiary, Communications
Finance Corporation. All of the assets and liabilities of Communications
Finance Corporation have been assumed by the Company. The Company intends
to keep Communications Finance Corporation as a shell for use in future
financing transactions.
BASIS OF PRESENTATION - The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to
continue as a going concern.
The Company's line of credit agreement was paid in full during 1998 and
not renewed. Also, during the years ended December 31, 1996, 1997 and
1998, the Company incurred net losses of $836,556, $435,751 and $230,131,
respectively. The Company's continuation as a going concern is dependent
upon its ability to obtain financing from its Parent as may be required
and ultimately to attain profitable operations. Management anticipates
that cash flows from operations and financing from the Company's Parent
will be adequate to satisfy the Company's minimum capital requirements for
the next twelve months.
Management's plans for future profitability anticipate the need for the
sponsorship of another public limited partnership, Telecommunications
Income Fund XI, for which the Company will generate fee income. The
best-efforts public offering is in process and through December 31, 1998
$5,784,000 has been raised out of a maximum offering amount of
$25,000,000. No assurance can be provided that the maximum offering amount
will be raised or that the Company will be profitable upon completion of
the offering.
CONSOLIDATION - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
-7-
<PAGE> 22
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 estimated. Material estimates that are
particularly susceptible to significant change in the near-term relate to
the determination of the allowance for possible loan and lease losses and
the estimated unguaranteed residual values of the Company's leased
equipment.
Most of the Company's leases and finance contracts are with customers that
are in the entrepreneurial stage and, therefore, are highly leveraged and
require lease or other financing in place of or to supplement financing
from banks. Although the Company attempts to mitigate its credit risk
through the use of a variety of commercial credit reporting agencies when
processing the applications of its customers, failure of the Company's
customers to make scheduled payments under their equipment leases and
finance contracts could have a material near-term impact on the allowance
for possible lease and loan losses.
Realization of residual values depends on many factors, several of which
are not within the Company's control, including general market conditions
at the time of the original lease contract's expiration, whether there has
been unusual wear and tear on, or use of, the equipment, the cost of
comparable new equipment, the extent, if any, to which the equipment has
become technologically or economically obsolete during the contract term
and the effects of any additional or amended government regulations. These
factors, among others, could have a material near-term impact on the
estimated unguaranteed residual values.
CERTAIN RISK CONCENTRATIONS - The Company's direct financing leases and
the collateral for notes receivables are concentrated in home water
treatment equipment, pay telephones, automated teller machines and
computer equipment, representing approximately 18%, 48%, 8%, and 15% at
December 31, 1998 and 0%, 43%, 21% and 10% at December 31, 1997,
respectively, of the Company's direct finance lease and notes receivable
portfolio.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.
NOTES RECEIVABLE - Notes receivable are carried at the principal balance
outstanding. Interest income on notes receivable is accrued based on
principal amounts outstanding.
NET INVESTMENT IN DIRECT FINANCING LEASES - The Company's primary activity
consists of leasing telecommunications and other types of equipment, under
direct financing leases, generally over a period of three to five years.
At the time of closing a direct financing lease, the Company records the
gross lease contract receivable, an estimated unguaranteed residual value
and unearned lease income. The unearned lease income represents the excess
of the gross lease receivable plus the estimated unguaranteed residual
value over the carrying value of the equipment leased. In addition, the
Company capitalizes all initial direct costs associated with originating
the direct financing lease. The unearned income and initial direct costs
are amortized to income over the lease term so as to produce a constant
periodic rate of return on the net investment in the lease. Lessees are
responsible for all taxes, insurance and maintenance costs.
The realization of the estimated unguaranteed residual value of leased
equipment depends on the value of the leased equipment at the end of the
lease term and is not a part of the contractual agreement with the lessee.
Unguaranteed residual values are based on estimates of amounts
historically realized by the Company for similar equipment and are
periodically reviewed by management for possible impairment.
-8-
<PAGE> 23
Certain of the Company's leases are accounted for as operating leases for
income tax purposes.
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES - The Company performs credit
evaluations prior to approval of a lease or finance contract. As with all
direct financing leases, the Company continues to own the equipment under
lease. The Company will generally obtain a security interest in future
revenues generated from each site in which the equipment is physically
located and in the equipment under a finance contract. Subsequently, the
creditworthiness of the customer and the value of the underlying assets
are monitored on an ongoing basis. The Company maintains an allowance for
possible loan and lease losses which could arise should customers become
unable to discharge their obligations under the agreements. The allowance
for possible loan and lease losses is maintained at a level deemed
appropriate by management to provide for known and inherent risks in the
portfolio. The allowance is based upon a continuing review of past loan
and lease loss experience, current economic conditions, delinquent loans
and leases, an estimate of potential loss exposure on significant
customers in adverse situations, and the underlying asset value. The
consideration of such future potential losses also includes an evaluation
for other than temporary declines in value of the underlying assets.
Leases and notes receivable which are deemed uncollectible are charged off
and deducted from the allowance. The provision for possible loan and lease
losses and recoveries are added to the allowance.
EQUIPMENT UNDER OPERATING LEASES - Equipment leased under operating leases
is stated at cost less accumulated depreciation. The equipment is
depreciated using the straight-line method over the estimated useful lives
of the assets (five years) to the estimated residual value of the
equipment at the end of the lease term. Estimated residual values are
based on estimates of amounts historically realized by the Company for
similar equipment and are periodically reviewed by management for possible
impairment.
INVESTMENTS - The Company accounts for its general partnership interests
in Telecommunications Income Fund IX, L.P. ("TIF IX") and
Telecommunications Income Fund X, L.P. ("TIF X") and Telecommunications
Income Fund XI, L.P. ("TIF XI") under the equity method of accounting.
Under the equity method of accounting, the Company initially records its
investment at cost and subsequently adjusts the carrying value of its
investments for its pro rata share of earnings or losses.
The Company also owns not readily marketable equity interests in entities
over which it does not have the ability to exert significant influence
over the operations of such entities; therefore, such investments are
accounted for at cost.
Should these investments carried at the equity or cost method experience a
decline in value that is other than temporary, the Company will recognize
a loss to reflect such a decline. As these investments are not readily
marketable, no market value can be readily determined.
The Company also has an investment in a marketable equity security
classified as available-for-sale. Available-for-sale securities are
carried at fair value, with unrealized gains and losses reported as a
separate component of stockholders' equity, net of related tax effects. At
December 31, 1998, the security had a cost of $821,727 and an estimated
fair value of $1,328,867, resulting in an unrealized gain of $307,956, net
of tax of $199,184. Fair value is determined using published market
prices.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, depreciation
is computed by the straight-line method over the estimated useful lives of
the assets (generally five to ten years). The Company uses accelerated
methods in computing depreciation for income tax purposes.
-9-
<PAGE> 24
DEFERRED INCOME TAXES - The provision for deferred income taxes is based
on an asset and liability approach. Deferred tax assets or liabilities are
computed based on the difference between the financial statement and
income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expense or credit is based on the changes in the
asset or liability from period to period including the effect of enacted
tax rate changes.
DEFERRED COSTS - Deferred costs consist of financing costs incurred in
connection with the issuance of long-term debt. Deferred financing costs
are being amortized over the life of the related obligation, which ranges
from three to eight years.
STOCK ISSUANCE COSTS - The costs incurred in connection with the issuance
of redeemable Class B nonvoting convertible stock have been deducted from
the proceeds. Such amounts are being amortized by a charge to retained
earnings over a period of ten years, at which time the carrying value of
stock will be equal to its cash redemption value (see Note 7).
SALE OF DIRECT FINANCE LEASES - The Company at times sells direct
financing leases, on a limited recourse basis, to lenders in return for a
cash payment. In the case of default by the lessee, the lender has a first
lien on the underlying leased equipment. In the event the sale or re-lease
proceeds from the underlying equipment do not satisfy the remaining
lessee's obligation to the lender, the Company is responsible for a
predetermined amount of that obligation. When the sale of direct finance
leases occurs, proceeds from the sale, less the net book value of direct
finance leases sold and an estimated loss allowance, are recorded as a
component of gain on early termination of leases.
NET LOSS PER COMMON SHARE - Basic net loss per common share is based on
the weighted average number of shares of Class A common stock outstanding
during the year. Diluted net loss per common share is the same as basic
net loss per share due to the antidilutive effect on net loss per share of
any assumed conversion of convertible securities.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for the Company's year ended December 31, 1998.
Financial statements for earlier periods provided for comparative purposes
have been reclassified to conform with the current year presentation as
required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for the Company's
year ended December 31, 1998. The Company operates in one segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The recognition of
gains or losses resulting from changes in the values of derivatives is
based on the use of each derivative instrument and whether it qualifies
for hedge accounting. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not yet
determined the effect of SFAS No. 133 on the consolidated financial
statements.
-10-
<PAGE> 25
2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES
Notes receivable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
<S> <C> <C>
Notes receivable, collateralized primarily by telephone
equipment and related site agreements and home water
treatment equipment, 14% to 17.5%, maturing
through June 2003 $3,001,952 $6,836,307
</TABLE>
The Company's net investment in direct financing leases consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
<S> <C> <C>
Minimum lease payments receivable $ 2,229,146 $ 8,502,371
Estimated unguaranteed residual values 167,829 981,806
Unamortized initial direct costs 16,601 177,817
Unearned income (401,202) (1,936,718)
----------- -----------
Net investment in direct financing leases $ 2,012,374 $ 7,725,276
=========== ===========
</TABLE>
The balance of direct financing leases sold with recourse that remain
uncollected at December 31, 1998 was $1,535,503. At December 31, 1998 the
Company's contingent liability, under other limited recourse provisions,
totals $285,186.
At December 31, 1998, future minimum lease payments to be received under
the direct financing leases and the estimated unguaranteed residuals to be
realized at the expiration of the direct financing leases are as follows:
<TABLE>
<CAPTION>
MINIMUM ESTIMATED
LEASE PAYMENTS UNGUARANTEED
RECEIVABLE RESIDUAL VALUES
<S> <C> <C>
Year ending December 31:
1999 $1,071,148 $ 95,962
2000 666,227 7,073
2001 398,254 51,678
2002 78,903 5,664
2003 14,614 7,452
---------- --------
Total $2,229,146 $167,829
========== ========
</TABLE>
The Company and certain affiliates purchase a substantial portion of
telecommunications equipment for lease from Intellicall, Inc., a
publicly-held company. The Company's Parent is an investor in a limited
partnership which owns approximately 5% of the outstanding common stock of
Intellicall, Inc. In addition, a principal stockholder of the Company's
Parent is also an investor in this limited partnership.
Additionally, the Company provides financing to certain companies for
which the Parent or its affiliates have an ownership interest in, provide
financing to, or provide investment advisory services for such companies.
The Company's net investment in direct financing leases and notes
receivable with these companies approximated $2,396,756 and $1,355,860 at
December 31, 1998 and 1997, respectively.
-11-
<PAGE> 26
One customer accounted for 10% or more of the amount of income from direct
financing leases during one or more of the years presented, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
<S> <C> <C> <C>
Customer A 12 % 6 % 6 %
</TABLE>
3. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The changes in the allowance for possible loan and lease losses are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 435,292 $ 412,916 $ 291,605
Provision 437,041 415,052 592,874
Charge-offs (542,659) (392,676) (471,563)
--------- --------- ---------
Balance at end of year $ 329,674 $ 435,292 $ 412,916
========= ========= =========
</TABLE>
The allowance for loan and lease losses consisted of specific allowances
for leases of $112,202, $158,477 and $100,000 at December 31, 1998, 1997
and 1996, respectively, and a general unallocated allowance of $217,472,
$276,815, and $312,916 at December 31, 1998, 1997 and 1996, respectively.
On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This bankruptcy petition was dismissed on May 22, 1996
and, in connection therewith, the Company exercised its right to manage
the assets leased to UTS. The net investment in the leases at the time the
assets were repossessed was approximately $432,000. The Company, two
affiliated partnerships for which the Company acts as General Partner, and
UTS were named in a lawsuit, filed by another creditor of UTS. The
creditor was claiming $360,000 in compensatory damages and $350,000 in
punitive damages. Based on offers to purchase the pay telephone equipment
and an expected settlement offer related to the lawsuit, the Company
expected to incur a loss upon the sale or re-lease of this equipment.
Management charged $324,000 to the provision for possible loan and lease
losses for the expected loss in 1996 and reclassified its net investment
in the equipment, net of the specific allowance, to equipment under
operating leases pending the equipment's ultimate sale or re-lease. The
equipment was sold during 1997 with no further loss to the Company and the
lawsuit was settled in 1998 with no further loss to the Company.
On October 31, 1996, a lessee of the Company, Soil Recovery Services, Inc.
("SRS"), had an involuntary Petition for Relief under Chapter 7 of the
U.S. Bankruptcy Code filed against it. This was converted to a voluntary
Chapter 11 on November 25, 1996. At the time the first petition was filed,
SRS had various leases with the Company that had a net investment totaling
$256,500 and represented 1.4% of the Company's total net investment in
leases and finance contracts. A specific allowance for losses of $100,000
was established through a charge to the provision for possible loan and
lease losses in 1996 based on estimates of the fair value of the equipment
under lease. The Company has obtained the right to repossess the
equipment, sold a portion of the equipment in 1998, recorded an additional
provision of $73,000 in 1998 and is in the process of selling the
remaining equipment. Management believes the specific allowance is
adequate to cover any remaining loss on sale.
-12-
<PAGE> 27
During 1996, management of the Company provided a specific allowance for a
lease with a certain customer for which the Company had not been receiving
lease payments. Management is actively working with such customer to
arrange for a sale of the assets under lease. A charge of $50,000 was
recorded to the provision for possible loan and lease losses representing
management's best estimate of the loss on the expected sale of the
equipment. Also, due to the uncertainty as to the timing and amount of
future payments from such customer and as to the sale of the assets under
lease, the Company reclassified its net investment in the lease at
December 31, 1996 of $144,972, net of the specific allowance, to equipment
leased under operating leases. The Company is in the process of selling
the equipment and expects no further loss on sale. The carrying value at
December 31, 1998 was $77,841.
In March, 1997, the Company foreclosed on a lease with a customer. The net
investment in this lease was $545,189. The Company entered into a
management agreement with a pay phone operator to manage the equipment
with the intent to purchase. The equipment was subsequently sold to such
entity for approximately $150,000 less than the carrying value of the
lease. The Company attempted to collect the deficiency balance from the
guarantor under the original lease. However, since no payments have been
received, the Company charged $150,000 to the provision for possible loan
and lease losses and wrote off the balance at December 31, 1997.
During 1997, a lessee of the Company filed for bankruptcy. Due to the
uncertainty over a possible prior lien on the equipment under lease and
the proceeds which may result from sale of the equipment, the Company
charged $150,000 to the provision for possible loan and lease losses and
wrote off the lease balance of $150,000 at December 31, 1997.
4. INVESTMENTS IN LIMITED PARTNERSHIPS
The Company is the general partner of Telecommunications Income Fund IX,
L.P. ("TIF IX"), Telecommunications Income Fund X, L.P. ("TIF X") and
Telecommunications Income Fund XI, L.P. ("TIF XI"). These partnerships are
primarily engaged in the acquisition of equipment for lease to third
parties under a direct finance arrangement. At December 31, 1998 and 1997,
the Company's investment in these partnerships consisted of its allocated
general partnership interest and temporary loans made to the partnerships.
TIF XI's offering period for the sale of limited partnership units has
been extended to December 23, 1999 by the Company as general partner.
Pursuant to the partnership agreement, TIF XI will reimburse the Company
for offering and promotional expenses incurred by the Company up to 3.5%
of the capital raised. The Company has incurred offering and promotional
expenses, net of reimbursement of approximately $202,000, of $167,251 at
December 31, 1998 which is included in other assets. The Company expects
that the sale of TIF XI partnership units during 1999 will be sufficient
to fully reimburse the Company for such costs.
-13-
<PAGE> 28
Combined summarized financial information for TIF IX, TIF X and TIF XI is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
<S> <C> <C>
Assets:
Net investment in direct financing leases
and notes receivable $17,006,000 $27,564,000
Other assets 3,878,000 2,876,000
----------- -----------
Total assets $20,884,000 $30,440,000
=========== ===========
Liabilities and partners' equity
Liabilities:
Notes payable, guaranteed by the Company (Note 12) $ 15,000 $ 5,989,000
Other liabilities 1,588,000 1,640,000
----------- -----------
Total liabilities 1,603,000 7,629,000
Total partners' equity 19,281,000 22,811,000
----------- -----------
Total liabilities and partners' equity $20,884,000 $30,440,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Income from direct financing leases $ 2,492,000 $ 4,776,000 $ 6,070,000
Other revenue 1,090,000 894,000 924,000
Provision for possible losses (352,000) (5,429,000) (1,671,000)
Impairment loss on equipment (65,000) (319,000) (971,000)
Expenses (1,249,000) (2,040,000) (3,148,000)
----------- ----------- -----------
Net income (loss) $ 1,916,000 $(2,118,000) $ 1,204,000
=========== =========== ===========
Income (loss) allocable to the Company $ 1,410 $ (972) $ 680
=========== =========== ===========
Net income (loss) per partnership unit:
TIF IX $ 1.39 $ (3.25) $ 14.83
TIF X $ 18.54 $ (21.11) $ 2.17
TIF XI $ 46.18 $ (40.70) $ --
</TABLE>
TIF IX entered its liquidation phase during the second quarter of 1998
and, therefore, adopted the liquidation basis of accounting as of March
31, 1998. The above summarized financial position data reflects TIF IX's
data as of December 31, 1998 on an estimated net realizable value basis
(liquidation basis). The above summarized statement of operations data
reflects TIF IX only to March 31, 1998 since subsequent thereto TIF IX no
longer reports operating data. In addition, TIF XI began leasing
operations in February 1998 and its operating data is reflected from such
date.
-14-
<PAGE> 29
The Company receives a management fee equal to 5% of the amount of gross
rental payments received by TIF IX and TIF X and 2% of the amount of gross
rental payments received by TIF XI. During the years ended December 31,
1998, 1997 and 1996, gross fees aggregated $282,304, $604,768 and
$702,266, respectively. In addition, the Company is reimbursed for certain
other costs under administrative services agreements. Amounts received by
the Company pursuant to these agreements amounted to $245,000, $168,000
and $147,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. TIF IX entered its liquidation phase May 1, 1998 and, as a
result, the Company will not receive any further management fees from TIF
IX.
The Company also receives a lease acquisition fee equal to 5% of all
leases acquired by TIF XI during the initial funding period. Amounts
received by the Company as acquisition fees were $265,760 for the year
ended December 31, 1998.
5. CREDIT ARRANGEMENTS
The Company had a line-of-credit agreement with a bank. The amount
available to borrow under the line-of-credit was limited to 75% of its
qualified accounts, as defined in the agreement (primarily leases and
notes receivable), but, in no case, could exceed $10 million. The
agreement expired on June 30, 1998. The agreement was not renewed. The
interest rate on amounts outstanding at December 31, 1997 and 1996 was
10.26% and 9.95%, respectively.
The loan agreement contained various restrictive covenants which, among
others, restricted dividend payments except to Class B shareholders and
Series A preferred shareholders and required the Company to maintain
certain financial ratios. As of December 31, 1997 the Company was in
violation of its minimum stockholders' equity and interest coverage ratio.
The Company obtained waivers for such covenants from the lender for 1997.
Notes payable consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
<S> <C> <C>
Note payable to Parent, 10.5%, payable on demand $ 725,000 $ 230,000
Installment loan agreements with banks, 9.0% to 10.5%,
maturing through 2000 with subjective acceleration clauses,
collateralized by net investment in certain direct financing
leases, certain agreements are also guaranteed by the
Company's Parent 57,751 1,517,398
Capital lease obligations, 5.37%, due through 2000 7,391 12,532
---------- ----------
Notes payable $ 790,142 $1,759,930
========== ==========
</TABLE>
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
<S> <C> <C>
Uncollateralized subordinated debentures, 11% to 12%,
maturing through 1998 $ -- $ 725,000
Uncollateralized subordinated notes payable, 9.5% to 10%,
maturing in 2001 and 2004, net of discount 2,997,605 2,996,564
Uncollateralized subordinated debenture payable to
Parent, floating interest rate, maturing in 2005 2,000,000 2,000,000
---------- ----------
Total subordinated debt $4,997,605 $5,721,564
========== ==========
</TABLE>
-15-
<PAGE> 30
Interest expense summarized by category is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Line-of-credit agreement $ 375,510 $ 794,776 $ 953,912
Demand note payable to Parent 62,617 1,410 --
Uncollateralized subordinated note payable to Parent -- -- 31,802
Collateral trust bonds -- 458 11,729
Installment loan agreements with banks 92,159 167,676 254,731
Capital lease obligations 1,065 1,582 1,532
Uncollateralized subordinated debentures 28,872 125,143 125,374
Uncollateralized subordinated debenture to Parent 320,627 227,521 228,277
Uncollateralized subordinated notes payable 404,589 404,589 183,016
Other 22,022 20,190 747
---------- ---------- ----------
$1,307,461 $1,743,345 $1,791,120
========== ========== ==========
</TABLE>
The subordinated debenture payable to Parent bears interest at prime plus
3% (11.5% at December 31, 1998, 1997 and 1996), adjusted semi-annually,
with a minimum interest rate of 6% and a maximum rate of 12%. In October
1995, the Company and its Parent restructured $2,000,000 of the existing
note payable to the Company's Parent into a subordinated debenture. Under
the restructured debenture, the maturity date was extended to December 31,
2005; the debenture was contractually subordinated to the subordinated
notes payable and to collateralized debt; and the Company's Parent was
issued warrants for the purchase of 118,875 shares of common stock of the
Company at $16.82 per share, exercisable through October 5, 2000.
The annual maturities of notes payable and subordinated debt at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 749,430
2000 19,090
2001 2,058,280
2002 4,699
2003 1,248
Thereafter 2,955,000
----------
Total $5,787,747
==========
</TABLE>
6. INCOME TAXES
The results of the Company's operations are included in the consolidated
tax returns of Berthel Fisher & Company. In certain states, the Company
files separate income tax returns. The entities included in the
consolidated returns have adopted the policy of allocating income tax
expense or benefit based upon the pro rata contribution of taxable
operating income or losses. Generally, this allocation results in
profitable companies recognizing a tax provision as if the individual
company filed a separate return and loss companies recognizing benefits to
the extent their losses contribute to reduce consolidated taxes. Deferred
income taxes have been established by each member of the consolidated
group based upon the temporary differences within the entity.
-16-
<PAGE> 31
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current $(474,000) $(425,000) $ 4,151
Deferred 324,000 188,549 (457,871)
--------- --------- ---------
Income taxes $(150,000) $(236,451) $(453,720)
========= ========= =========
</TABLE>
The effective tax rate on loss before income taxes is different from the
prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Income tax at federal statutory rates (34%) $(129,245) $(228,548) $(438,700)
Tax effect increase (decrease) of:
State income taxes, net of federal effect (7,600) (13,900) (25,800)
Other items (13,155) 5,997 10,780
--------- --------- ---------
Income taxes $(150,000) $(236,451) $(453,720)
========= ========= =========
</TABLE>
The tax effect of temporary differences giving rise to the Company's net
deferred income tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
Gross deferred income tax liabilities:
Direct financing leases $ (446,000) $ (824,000)
Unrealized gain on available-for-sale security (199,184) --
Other (51,638) --
----------- -----------
Total (696,822) (824,000)
----------- -----------
Gross deferred income tax assets:
Alternative minimum tax carryforward 84,000 84,000
Allowance for possible loan and lease losses 127,000 169,000
Net operating loss carryforward 290,000 885,000
Unrealized loss on available-for-sale security -- 61,000
Other -- 13,362
----------- -----------
Total 501,000 1,212,362
----------- -----------
Net deferred income tax asset (liability) $ (195,822) $ 388,362
=========== ===========
</TABLE>
At December 31, 1998, the Company's net operating loss carryforward
aggregates $752,000 and expires in 2010.
-17-
<PAGE> 32
7. REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK
The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes
each year, up to a maximum of $1.20 per share. The Class B nonvoting
convertible stock is convertible on a one-for-one basis into Class A
common stock of the Company. The stock is redeemable at $10 per share for
a 30-day period after the tenth anniversary of the issuance date (April,
1990 to September, 1991) at the option of the holder. Shares which are not
redeemed during that time are automatically converted to Class A common
stock on a one-for-one basis. The following summarizes the amounts
pertaining to the Class B nonvoting convertible stock:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
<S> <C> <C>
Redeemable Class B nonvoting convertible stock
(no par value-authorized 100,000 shares, issued
and outstanding 74,500 and 75,500 shares at
December 31, 1998 and 1997, respectively), at
redemption or liquidation value $ 745,000 $ 755,000
Unamortized stock issuance costs (16,047) (24,071)
--------- ---------
Class B nonvoting convertible stock $ 728,953 $ 730,929
========= =========
</TABLE>
During the year ended December 31, 1998, the Company allowed redemptions
aggregating $10,000 outside the standard terms of the stock agreement.
8. PREFERRED STOCK
Each share of the Series A preferred stock is entitled to cumulative
annual dividends of 8% payable, if as and when declared by the Board of
Directors, quarterly. Unpaid dividends will accumulate and be payable
prior to the payment of dividends on the Company's Class A common stock.
The preferred stock is redeemable at any time at the option of the
Company, on not less than 30 days written notice to registered holders.
The redemption price shall be $14.42 per share if redeemed during 1999,
$14.28 per share if redeemed during 2000, $14.14 per share if redeemed
during 2001, and $14.00 per share if redeemed thereafter, plus, in each
case, accumulated unpaid dividends. Unless previously redeemed by the
Company, the holders of the preferred stock are entitled at any time to
convert each share into .875 shares of Class A common stock. The preferred
stock is not entitled to vote on any matter except where the Iowa
Corporation Act requires voting as a class, in which case each share of
stock shall be entitled to one vote per share on those matters where the
preferred stock is voting as a class. The preferred stock is entitled to a
preference on liquidation equal to $14.00 per share, plus accumulated
unpaid dividends.
The Company issued $424,774 of preferred stock and $60,682 of warrants to
its Parent at December 31, 1996 in exchange for the conversion of a
subordinated note payable to Parent of $264,980 and the contribution of
restricted stock of a public company with an estimated fair value of
$220,476.
-18-
<PAGE> 33
9. COMMON STOCK WARRANTS
The Company's common stock warrant activity is summarized as follows:
<TABLE>
<CAPTION>
EXPIRATION EXERCISE NUMBER
DATE PRICE OUTSTANDING
<S> <C> <C> <C>
Issued to the Parent in 1995 in connection
with the subordinated note payable restructuring 2000 16.82 118,875
Issued in 1996 in connection with the subordinated
notes payable offering 2001-2004 16.00 33,011
Issued in 1996 in connection with the preferred
stock/warrant offering:
A Warrant 1998 12.00 30,341
B Warrant 1999 14.00 30,341
--------
Balance at December 31, 1996 212,568
Issued in 1997 in connection with the preferred
stock/warrant offering:
A Warrant 1998 12.00 94,659
B Warrant 1999 14.00 94,659
-------
Balance at December 31, 1997 401,886
Exercise of A Warrants 1998 12.00 (48,629)
Expiration of A Warrants 1998 12.00 (76,371)
-------
Balance At December 31, 1998 276,886
=======
</TABLE>
The Company's Parent exercised 31,250 of the A warrants during 1998 and
was issued 31,250 shares of common stock.
10. PROFIT SHARING PLAN
The Company participates in a qualified profit sharing plan under Internal
Revenue Code Section 401(a), including a qualified cash or deferred
arrangement under Section 401(k), sponsored by Berthel Fisher & Company
Financial Services, Inc. Under the terms of the plan, each participant may
elect to defer compensation from 2% to 15%. A matching contribution equal
to 50% of the deferred compensation of all eligible participants will be
made by the employer up to 4% of each participant's total compensation.
The employee contributions to the plan are fully vested and employer
contributions vest over five years. The Company's contribution for the
years ended December 31, 1998, 1997 and 1996 aggregated $5,695, $6,356 and
$14,927, respectively.
11. MANAGEMENT AND SERVICES AGREEMENTS
The Company pays, under an unwritten agreement with the Company's Parent,
50% of the management fees it receives from TIF IX , TIF X and TIF XI (see
Note 4) to the Company's Parent. The Company's Parent agreed to suspend
indefinitely such payment beginning March 1, 1997 due to the Company's
operating losses. Such management fees paid to the Company's Parent were
$0, $47,146 and $351,134 during 1998, 1997 and 1996, respectively.
In addition, the Company also has an unwritten, month-to-month agreement
with its Parent in which the Company's Parent provides management services
at a yearly rate of $246,667, $240,000 and $210,000 during 1998, 1997 and
1996, respectively.
-19-
<PAGE> 34
The Company, from time to time, will engage the services of Berthel Fisher
& Company Financial Services, Inc., a broker-dealer majority owned by the
Company's Parent. In addition, the Company reimburses Berthel Fisher &
Company Financial Services, Inc. for operating expenses incurred on its
behalf, including certain expenses related to the administrative services
agreements discussed in Note 4. The Company also enters into other
arrangements with the Parent or its affiliates. Following are the amounts
paid or received by the Company to Berthel Fisher & Company or its
affiliates related to these arrangements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
Issuance costs paid (and capitalized) in connection with
the subordinated notes payable offering $ -- $ -- $223,070
Offering expenses incurred in connection with the
Series A preferred stock and warrant offering -- 108,621 --
Interest income 37,186 16,965 --
Operating expense reimbursements 45,300 45,300 50,173
Office rent 58,368 58,368 --
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable for all debts of TIF IX, TIF X and TIF
XI as the general partner.
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF X. The line-of-credit agreement allows TIF X
to borrow the lesser of $4 million ($6 million at December 31, 1997), or
40% of its qualified accounts, as defined in the agreement. The balance
outstanding under this line-of-credit was $15,433 at December 31, 1998 and
$5,354,801 at December 31, 1997. The agreement matures on June 30, 2000,
is cancelable by the lender after giving a 90-day notice and is
collateralized by substantially all assets of TIF X. The note is also
guaranteed by the Company's Parent and a principal stockholder of the
Company's Parent.
In December 1995 the Company entered into a lease agreement for office
space. The lease term began January 1, 1996 and expires December 30, 2000.
Rent is $58,368 per year under the agreement.
In January 1999, TIF XI obtained a line-of-credit agreement with a bank.
The line-of-credit agreement allows TIF XI to borrow the lesser of $2.0
million or 32% of its qualified accounts, as defined in the agreement. The
agreement matures on June 30, 2000, and is cancelable by the lender after
giving a 90-day notice. The agreement is collateralized by substantially
all assets of TIF XI. The note is also guaranteed by the Company's Parent
and a principal stockholder of the Company's Parent.
-20-
<PAGE> 35
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by
the Company based on valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for
lease contracts. The carrying amount for financial instruments included
among cash and cash equivalents, due from affiliates, line-of-credit
agreement, and other short-term payables approximates their fair value
because of the short maturity of those instruments or the variable
interest rate feature of the instruments. Also, the Company's
available-for-sale security is reported at market value. The estimated
fair value of other significant financial instruments are based
principally on discounted future cash flows at rates commensurate with the
credit, interest rate and prepayment risk involved.
The estimated fair values of the Company's other significant financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Notes receivable $3,001,952 $2,851,854 $6,986,307 $7,054,104
Notes payable 790,142 790,498 1,529,930 1,523,359
Subordinated debt 4,997,605 4,997,605 5,721,564 5,721,564
</TABLE>
* * * * *
-21-
<PAGE> 36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's executive officers and directors and their ages and position
with the Company are as follows (the terms of the directors have no expiration
date):
<TABLE>
<CAPTION>
Name Age Positions with Company
---- --- ----------------------
<S> <C> <C>
Thomas J. Berthel 47 President, Chief Executive Officer, Director
Nancy L. Lowenberg 40 Executive Vice President, General Manager, Director
Ronald O. Brendengen 44 Treasurer, Chief Operating Officer, Chief Financial
Officer, Director
Leslie D. Smith 51 Secretary
Emmett J. Scherrman 66 Director
Von L. Elbert 60 Director
James W. Noyce 43 Director
</TABLE>
Thomas J. Berthel, Age 47, Chief Executive Officer (1994-present) of the
Company, served as president from the Company's inception to 1994, and was
elected President in October, 1996. He also serves as Director (inception to
present) of the Company. Mr. Berthel served as President of Berthel Fisher &
Company Financial Services, Inc. from its inception to 1993, and since 1993 has
served as Chief Executive Officer and a Director of Berthel Fisher & Company
Financial Services, Inc. Mr. Berthel also serves as President and Chairman of
the Board of Berthel Fisher & Company, the parent company of both the Company
and Berthel Fisher & Company Financial Services, Inc. Mr. Berthel serves as the
Chairman of the Board and Chief Executive Officer of Berthel Fisher & Company
Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a company
required to file reports pursuant to the Securities Exchange Act of 1934. Mr.
Berthel also serves in various offices and as a Director of various other
subsidiaries of Berthel Fisher & Company. In November, 1995, Mr. Berthel was
elected a director of Intellicall, Inc., a publicly traded company. He also
serves as the Chairman of the Board of Amana Colonies Golf Course, Inc. Mr.
Berthel holds a Financial and Operation Principal license issued by the National
Association of Securities Dealers, Inc. He is also a Certified Life Placement
Agent. Mr. Berthel has also served as an individual general partner of eight
private leasing programs. Mr. Berthel holds a bachelor's degree from St. Ambrose
College, Davenport, Iowa (1974). He also holds a Master's degree in Business
Administration from the University of Iowa, Iowa City, Iowa (1993).
Nancy L. Lowenberg, age 40, has been elected Executive Vice President and
General Manager of the Company beginning January, 1998, and Director since
December, 1996. She previously served the Company as Vice President and Chief
Operating Officer from January, 1997 to September, 1998. From September 1986 to
December, 1996, Ms. Lowenberg was employed by Firstar Bank Iowa, N.A., in Cedar
Rapids as Vice President Commercial Loans for Iowa. As Vice President Commercial
Loans, she was a relationship manager for 62 accounts with approximately
$70,000,000 of committed credit. She had responsibility for annual review and
maintenance of existing accounts and business development. From 1981 to 1986,
Ms. Lowenberg was employed by First Bank Systems. Ms. Lowenberg received her
Bachelor of Science Agricultural Business with a minor in Finance in 1981 from
Iowa State University, Ames, Iowa.
Ronald O. Brendengen, age 44, is the Treasurer, Chief Operating Officer,
Chief Financial Officer and a Director (1988-present) of the Company. He was
elected to his current offices in September, 1998. He has served as Secretary
(1994-March, 1995), Treasurer, (1998-August, 1995), and Chief Financial Officer
(1994-August, 1995) of the Company. He served as Controller (1985-1993),
Treasurer (1987-present, Chief Financial Officer, Secretary and a Director
(1987-present), and was also elected Chief Operating Officer in January 1998, of
Berthel Fisher & Company, the parent company of the Company. Mr. Brendengen also
serves as the Treasurer, Chief Operating Officer, Chief Financial Officer and a
Director of Berthel Fisher & Company Planning, Inc., the trust advisor of
Berthel Growth & Income Trust I, a company required to file
<PAGE> 37
reports pursuant to the Securities Exchange Act of 1934. He also serves in
various offices and as a Director of each subsidiary of Berthel Fisher &
Company. 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 51, is the Secretary (March, 1995-present) of the
Company. Mr. Smith serves as the Secretary and a Director of Berthel Fisher &
Company Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a
reporting company. In 1994, Mr. Smith was named General Counsel of Berthel
Fisher & Company, parent company of the 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 an 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. From 1990 to 1992, Mr. Smith was Operations Counsel for General Electric
Capital Corporation, where he was responsible for managing the legal department
of a GATCH division 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.
Emmett J. Scherrman, age 66, was elected a Director of the Company in
August, 1995. Mr. Scherrman graduated in 1953 from Loras College with a B.A. in
accounting , and attended the U.S. Army Finance School, Ft. Benjamin Harrison,
from 1953 to 1955. Mr. Scherrman served as President (1997 to 1987) and Chairman
of the Board and Chief Executive Officer (1987-1990) of LeaseAmerica
Corporation, Cedar Rapids, Iowa. Since his retirement from LeaseAmerica in 1990,
Mr. Scherrman has served as a consultant to Brenton Bank and Trust Company,
Cedar Rapids, Iowa from 1992 to present. Mr. Scherrman currently serves as a
Director of Brenton Bank and Trust Company; Treasurer and Director of Oak Hill
Engineering, Inc.; Chairman, Board of Trustees, Mount Mercy College; and
Treasurer and Member of the Board of Trustees, Mercy Medical Center.
Von L. Elbert, age 60, was elected Director of the Company in October,
1996. He has served as a Director of Berthel Fisher & Company, the parent of the
Company, since May, 1991. From 1978 to 1988, Mr. Elbert was the President of
TLS, Co., a data processing company. From 1988 to 1996, he served as the Vice
President, Treasurer and Chief Financial Officer of Galt Sand Company, a
manufacturer of wearing apparel. Mr. Elbert also serves as a director of
Mercantile Bank of Eastern Iowa. Mr. Elbert received his BBA degree from the
University of Iowa in 1962.
James W. Noyce, age 43, was elected Director of the Company and of General
Partner in September, 1997. Mr. Noyce has been employed by FBL Financial Group,
Inc. since 1985. He presently serves as Chief Financial Officer of FBL Financial
Group, Inc. (and its affiliates, including Farm Bureau Life Insurance Company),
a position he has held since December, 1995. Prior to December, 1995, he served
FBL Financial Group, Inc. is various capacities, including, from 1991 to
December 1995, as Vice President and Controller. Mr. Noyce graduated in 1978
with a Bachelor of Science and Business Administration (BSBA) in Actuarial
Science and Accounting from Drake University College of Business.
<PAGE> 38
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered during 1996, 1997, and 1998 with respect to the
Chief Executive Officer and the President of the Company:
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
-----------------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation(1)
- ------------------ ---- ------ ----- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas J. Berthel
Chief Executive Officer 1996 $-0- $-0- $-0- $137,571 (2)
1997 $-0- $-0- $-0- $ 22,060 (2)
1998 $-0- $-0- $-0- $ -0- (2)
</TABLE>
_________________________________
(1) Beginning with meetings held after August 1, 1995, directors of the
Company who are also employees of the Company or affiliates of the
Company are paid meeting fees of $150 per meeting; directors of the
Company who are not also employees of the Company or affiliates of the
Company are paid meeting fees of $250 per meeting.
(2) Includes fees received from the parent of the Company for services
provided by Mr. Berthel to Telecommunications Income Fund IX, L.P. and
Telecommunications Income Fund X, L.P., two limited partnerships for
which the Company serves as general partner.
- -------------------------------------------------------------------------------
The Company pays, under an unwritten agreement with the Company's parent,
50% of the management fees it receives from TIFIX and TIFX to the Company's
parent. The Company's parent agreed to suspend indefinitely such payment
beginning March 1, 1997 due to the Company's operating losses. Such management
fees paid to the Company's parent were $0, $47,146, and $351,134 during 1998,
1997, and 1996, respectively.
In addition, the Company also has an unwritten, month-to-month agreement
with its parent in which the Company's parent provides management services at a
yearly rate of $246,667, $240,000, and $210,000 during 1998, 1997 and 1996,
respectively.
<PAGE> 39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Substantially all of the common voting stock of the Company is owned by
Berthel Fisher & Company. The following table sets forth, as of December 31,
1998, the number of shares of the common stock of Berthel Fisher & Company (the
parent of the Company) beneficially owned by (i) each director of the Company,
(ii) each executive officer of the Company named in the Summary Compensation
Table, (iii) each person known by the Company to beneficially own more than five
percent of the outstanding shares of the common stock of Berthel Fisher &
Company, and (iv) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF OUT-
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED(1) STANDING SHARES (2)
- -------------- ---------------- --------------------- -------------------
<S> <C> <C> <C>
Common Thomas J. Berthel (3)
100 Second Street SE 416,583 42.96%
Cedar Rapids. IA 52401
Common Ronald O. Brendengen
100 Second Street SE 27,360 2.82%
Cedar Rapids, IA 52401
Common Fred P. Fisher (4)
10875 Benson Drive, Ste. 130 112,631 11.61%
Overland Park, KS 66210
Common Gary L. Rickels
Rural Route #1 93,808 9.67%
Center Junction, IA 52212
Common Von L. Elbert
315 Andover Lane SE 46,287 4.77%
Cedar Rapids, IA 52403
Common All executive officers and directors
as a group (seven persons) 490,230 50.55%
</TABLE>
___________________
(1) Unless otherwise indicated, each person has sole voting and dispositive
power over such shares.
(2) Based on 969,752 shares of the common stock of Berthel Fisher & Company
outstanding at December 31, 1998.
(3) Does not include 500 shares of Class B Nonvoting Convertible Stock of the
Company owned by Mr. Berthel's wife. The 500 shares are convertible into
less than one tenth of one percent of the Company's common stock. Does not
include an option to purchase 15,000 shares of common stock of Berthel
Fisher & Company.
(4) Includes 104,333 shares owned by Mr. Fisher's individual retirement
account.
<PAGE> 40
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company serves as the general partner of three publicly held limited
partnerships, Telecommunications Income Fund IX, L.P. ("TIFIX"),
Telecommunications Income Fund X, L.P. ("TIFX") and Telecommunications Income
Fund XI, L.P. ("TIFXI"). The Company receives management fees from TIFIX, TIFX,
and TIFXI in its capacity as general partner. The Company had entered into a
consulting contract with Mr. Thomas J. Berthel that provided for twenty percent
of the management fee from TIFIX to be paid to Mr. Berthel for consulting
services provided to the Company in connection with its obligations as the
general partner of TIFIX. The consulting fees paid to Mr. Berthel on account of
services provided to TIFIX were $64,532, $11,219, and $0 in 1996, 1997, and
1998, respectively. Mr. Berthel also provides consulting services to the Company
in connection with the Company's obligations as general partner of TIFX. In
connection with these services, Mr. Berthel was paid $73,039, $10,841, and $0 in
1996, 1997, and 1998, respectively. The payment of these fees were suspended
indefinitely beginning March 1, 1997.
Certain administrative, managerial, consulting and operational services are
provided to the Company by its parent Berthel Fisher & Company ("BFC"). Prior to
October, 1995, these services were provided on a month to month basis pursuant
to terms established from time to time by the Board of Directors of the Company
and the Board of Directors of BFC. The amount of fees were determined on an
annual basis by the Boards of Directors of the Company and BFC. In October,
1995, the Company and BFC entered into a unwritten agreement whereby BFC would
continue to provide these services for the period ending December 31, 1996, and
thereafter on an annual basis subject to the approval of the Boards of Directors
of both companies. The agreement specifies the services to be provided. The
annual charges under this agreement were $246,667, $240,000, and $210,000 during
1998, 1997, and 1996, respectively.
T. J. Berthel Enterprises, Inc., a company owned one-half by the Company's
parent and one-half by Thomas J. Berthel, is the general partner of a limited
partnership that owns approximately 5% of the outstanding common stock of
Intellicall, Inc. An individual who owns approximately 4.8% of the Company's
parent also owns approximately 9.5% of this limited partnership. In November,
1995, Mr. Berthel was elected to serve on the Board of Directors of Intellicall,
Inc.
The Company has a lease with Internet Navigator, Inc. having a net
investment of approximately $183,830 at December 31, 1998. Mr. Von L. Elbert, a
director of the Company, has guaranteed this lease. Mr. Elbert has a 16%
interest in Internet Navigator, Inc. TIFIX has leases with Internet Navigator,
Inc. having a total net investment of approximately $63,145 at December 31,
1998.
Also see Notes 2 and 11 to the financial statements with respect to other
miscellaneous transactions with the Company's parent or its affiliates.
Berthel Fisher & Company owns 95.3% of the Company's Class A common stock.
<PAGE> 41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended, filed as Exhibit
3.1 to Registration Statement No. 33-98346C are hereby incorporated by
reference.
3.2 Bylaws of the Company, as amended, filed as Exhibit 3.2 to
Registration Statement No. 33-98346C are hereby incorporated by
reference.
4.1 Form of Note filed as Exhibit 4.1 to Registration Statement No.
33-98346C is hereby incorporated by reference.
4.2 Form of Indenture by and between the Company and Firstar Trust Co., as
Trustee filed as Exhibit 4.2 to Registration Statement No. 33-98346C
is hereby incorporated by reference.
4.3 Form of Warrant Certificates filed as Exhibit 4.3 to Registration
Statement No. 33-98346C is hereby incorporated by reference.
4.4 Terms of Warrant filed as Exhibit 4.4 to Registration Statement No.
33-98346C is hereby incorporated by reference.
Material Contracts
------------------
10.1 Revolving Loan and Security Agreement filed as Exhibit 10.1 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.2 Management Agreement with Berthel Fisher & Company as Exhibit 10.2 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.3 Incentive Stock Option Plan filed as Exhibit 10.3 to Registration
Statement No. 33-98346C is hereby incorporated by reference.
10.4 Incentive Bonus Plan filed as Exhibit 10.4 to Registration Statement
No. 33-98346C is hereby incorporated by reference.
10.7 Line of Credit with The National Bank of Waterloo filed as Exhibit
10.7 to Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.8 Berthel Fisher & Company Subordinated Debenture and Warrant filed as
Exhibit 10.8 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
10.13 Lease - Business Property (office space) filed as Exhibit 10.13 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.14 Agreement between Southwest Merchant Group and the Company filed as
Exhibit 10.14 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
10.15 Consulting agreement with Thomas J. Berthel filed as Exhibit 10.15 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.16 Amendment to Revolving Loan and Security Agreement filed as Exhibit
10.16 to Registration Statement No. 33-98346C is hereby incorporated
by reference.
10.17 Agreement between Nutmeg Securities Ltd. and the Company filed as
Exhibit 10.17 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
10.18 Amendment to Revolving Loan and Security Agreement filed as Exhibit
10.18 to Registration Statement No. 33-98346C is hereby incorporated
by reference.
10.19 Purchase agreement with Safeguard Financial Group, Inc.
16 Letter on Change in Certifying Accountant filed as Exhibit 16 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
21 Subsidiaries of the Registrant filed as Exhibit 21 to Registration
Statement No. 33-98346C is hereby incorporated by reference.
27 Financial Data Schedule - filed electronically
(b) Reports on Form 8-K
None.
<PAGE> 42
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 FISHER & COMPANY LEASING, INC.
--------------------------------------
(REGISTRANT)
By Berthel Fisher & Company Leasing, Inc.
By: /s/ Thomas J. Berthel Date: March 24, 1999
------------------------------------------------
Thomas J. Berthel
President, Chief Executive Officer
By Berthel Fisher & Company Leasing, Inc.
By: /s/ Ronald O. Brendengen Date: March 24, 1999
------------------------------------------------
Ronald O. Brendengen
Chief Operating Officer,
Chief Financial Officer, Treasurer
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 24, 1999
- ---------------------------------------------------
Thomas J. Berthel
Chief Executive Officer
President, Director
Berthel Fisher & Company Leasing, Inc.
/s/ Nancy L. Lowenberg Date: March 24, 1999
- ---------------------------------------------------
Nancy L. Lowenberg
Executive Vice President, General Mgr. Director
Berthel Fisher & Company Leasing, Inc.
/s/ Ronald O. Brendengen Date: March 24, 1999
- ---------------------------------------------------
Ronald O. Brendengen
C.O.O, C.F.O., Treasurer, Director
Berthel Fisher & Company Leasing, Inc.
/s/ Daniel P. Wegmann Date: March 24, 1999
- ---------------------------------------------------
Daniel P. Wegmann
Controller
Berthel Fisher & Company Leasing, Inc.
<PAGE> 1
PURCHASE AGREEMENT
The PURCHASE AGREEMENT ("Purchase Agreement") is entered into this 14th day
of July, 1998, by and between SAFEGUARD FINANCIAL GROUP, INC. ("Seller"),
located at 3259 East Sunshine, Suite AA, Springfield, Missouri 65804, and
BERTHEL FISHER & COMPANY LEASING, INC. ("Purchaser"), located at 100 Second
Street SE, Post Office Box 74250, Cedar Rapids, Iowa 52407. The Seller will see
and the Purchaser will buy the Loans in accordance with this Purchase Agreement.
The servicing rights with respect to the Loans are being sold by the Seller to
the Purchaser.
1. DEFINED TERMS. The terms set forth in this paragraph are defined as
follows:
(a) "Anniversary Date" means one (1) calendar year after the Closing
Date and the same date each year thereafter.
(b) "Closing Date" means Tuesday, 12:30 M. (CDT), July 14, 1998.
(c) "Cut-Off Date" means the close of business on Monday, July 13,
1998.
(d) "Debtor" means the Borrower/Buyer as identified on a Retail
Installment Contract.
(e) "Defaulted Loan" means any loan that is forty-five (45) days past
due.
(f) "Distributor" means the dealer selling the property to the Debtor.
(g) "Loan" means one (1) Retail Installment Contract.
(h) "Loans" means all of the Retail Installment Contracts that are
listed on Exhibit "A" attached to this Purchase Agreement.
(i) "Outstanding Principal Balance" means that portion of the amount
financed which remains unpaid as of the Cut-Off Date.
(j) "Performing Loan" means a loan exchanged for a Defaulted Loan.
(k) "Property" means the product or goods identified on the Retail
Installment Contract.
(l) "Purchase Price" means the Outstanding Principal Balance of the
Loans as of the Cut-Off Date multiplied times Ninety-Five Percent (95%).
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT
WITH BERTHEL FISHER & COMPANY LEASING, INC. 1.04 1
<PAGE> 2
(m) "Retail Installment Contract" means collectively the following
documents:
(1) Retail Installment Contract, fully executed.
(2) Debtor Credit Application.
(3) Water Treatment Installation Agreement between Debtor and
Distributor, if available.
(4) Completion Certificate of Distributor.
(5) Courtesy Call Report.
(6) Notice Of Right To Cancel to Debtor.
(7) Any additional relevant information or documents with respect
to Debtor or Distributor.
(n) "Security Deposit" means an amount equal to Ten Percent (10%) of
the Purchase Price.
2. SALE AND CONSIDERATION.
(a) Seller hereby sells and assigns to Purchaser the Loans, including
the related servicing rights and all benefits incident to the ownership of
the Loans arising on or after the Cut-Off Date. The Purchase Price for the
Loans shall equal the Outstanding Principal Balance of the Loans identified
on Exhibit "A" as of the Cut-Off Date multiplied times Ninety-Five (95%).
Seller acknowledges that this transaction is a sale of all Seller's
interest in the Loans, not a loan or extension of credit; provided,
however, that interest accrued before the Cut-Off Date remains the property
of Seller.
(b) As of the Closing Date or as soon thereafter as practical,
Purchaser and Seller shall establish a brokerage account with Berthel
Fisher & Company Financial Services, Inc. (the "Account"). The Account
shall be in the name of Seller, shall bear the Tax Identification Number
of the Seller, which is 43-1747577. However, withdrawal of any funds from
the Account shall be restricted such that only the Purchaser may withdraw
funds from the Account during the term of this Purchase Agreement; and, in
order for the parties to comply with the terms of paragraph 2(e) herein,
both parties must agree, in writing, to such withdrawal as contemplated in
paragraph 2(e).
(c) The Security Deposit will be placed in the account by Seller
immediately following the Closing by wire transfer in accordance with the
bank coordinates provided by Purchaser.
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT
WITH BERTHEL FISHER & COMPANY LEASING, INC. 1.04 2
<PAGE> 3
(d) Purchaser may withdraw the funds from the Account for purposes of
investing in United States Government Securities or other similarly rated
financial instruments having a duration of no more than one (1) year.
(e) If Seller is in full compliance with the terms of this Purchase
Agreement on the first Anniversary Date, the Security Deposit plus Three
Percent (3%) shall be forthwith remitted to Seller. Any amount in excess of
the Three Percent (3%) shall be remitted to Purchaser; and, the Account
closed.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller
represents, covenants and warrants to Purchaser the following with respect to
each Loan as of the Closing Date.
(a) Each Retail Installment Contract is a good and valid instrument
and constitutes a valid first lien against the Property enforceable in
accordance with its terms.
(b) Seller is vested with full title to the Loan and has the power
and authority to assign and transfer the Loan to Purchaser under this
Purchase Agreement free and clear of all encumbrances.
(c) There is no requirement for any future advances. There is no
default existing under the Retail Installment Contracts.
(d) The Loan was originated, closed and serviced in compliance with
the Loan documents and all applicable federal, state and local laws,
regulations, ordinances and rules.
(e) There are no undisclosed agreements between Seller and Debtor of
any Retail Installment Contract, directly or indirectly, having any effect
on the obligations of Debtor to make timely payments on the Retail
Installment Contracts.
(f) The Retail Installment Contracts are enforceable according to
their terms. Debtor(s) has(have) no claim(s) or defense(s) to the
performance of its(their) obligations under the Retail Installment
Contracts.
(g) The Loans were executed by the persons purported to be the
Debtors and contain no forged or unauthorized signatures. Each party
thereto was of full age and legal capacity to contract at the time of
execution.
(h) The information set forth on Exhibit "A" is true and correct.
(i) Each Retail Installment Contract is true, correct, complete and
undisputed, and no credit has previously been given to any Debtor which
was gratuitous or was given for a payment made by an employee or agent of
Seller or has arisen from renewal granted for the purpose of concealing
past or present delinquency.
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT
WITH BERTHEL FISHER & COMPANY LEASING, INC. 1.04 3
<PAGE> 4
(j) No fraud occurred on the part of any person in connection with
the origination of the Loan that could adversely affect Purchaser or the
enforceability of the Loan, or result in Purchaser incurring losses.
(k) To Seller's knowledge no damage exists which would materially
affect the value of the Property or the Loan.
(l) Seller is duly organized and in good standing under the laws of
the state of its incorporation. Seller has all requisite organizational
power and authority to own the Loan and to enter into and perform its
obligations under this Purchase Agreement. If for any reason any Retail
Installment Contract is unenforceable, including but not limited to the
ability to pursue remedies in courts of the state where the Property is
located, as a result of the fault of Seller, then in that event Seller
will comply with the provisions of 4(a) of this Agreement.
(m) This Purchase Agreement was executed by an officer of Sellers duly
authorized to do so.
(n) Seller will repurchase within ten (10) days of Purchaser's demand
any Loan for which the first payment is not made by the Borrower/Buyer
within thirty (30) days of its due date. The repurchase price shall be an
amount equal to the Purchase Price for the Loan plus accrued but unpaid
interest through the date of repurchase.
(o) From and after the Closing Date for three hundred sixty (360)
days any Defaulted Loan that is presented by the Purchaser to the Seller
will be exchanged by the Seller for a Performing Loan. The Outstanding
Principal Balance of a Performing Loan shall be equal to or greater than
the Outstanding Principal Balance of the Defaulted Loan. If the Outstanding
Principal Balance of the Performing Loan is greater than the Outstanding
Principal Balance of the Defaulted Loan, Purchaser shall remit to Seller
Ninety-Five Percent (95%) of the excess.
(p) In the event any of the Loans are paid in full by the Debtor
prior to the Loan expiration date (the "Paid Off Loan"), the Paid Off Loan
will be exchanged by the Seller for an active Performing Loan which meets
all the representations and warranties stated herein, just as if said
active Performing Loan was included in the Loans in this Purchase
Agreement. The outstanding Principal Balance of a Performing Loan shall be
equal to or greater than the Outstanding Principal Balance of the Paid Off
Loan. If the Outstanding Principal Balance of the Performing Loan is
greater than the Outstanding Principal Balance of the Paid Off Loan,
Purchaser shall remit to Seller Ninety-Five Percent (95%) of the excess.
4. REMEDIES FOR BREACH.
(a) In the event of a breach of any of the foregoing representations
or warranties by Seller, Seller will be required to cure such breach with
thirty (30) days of written notice from Purchaser; or, if such breach
cannot be cured, Seller will immediately repurchase the
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT
WITH BERTHEL FISHER & COMPANY LEASING, INC. 1.04 4
<PAGE> 5
Loans held by the Purchaser which were affected by the Seller's breach for
an amount equal to the Purchase Price for the related Loan, plus accrued
interest through the date of repurchase.
(b) Seller further agrees to indemnify and forever hold Purchaser
harmless from any and all costs, damages, suits, actions, losses and
expense including reasonable attorney fees arising directly or indirectly
from Seller's breach of any of the foregoing representations, warranties,
covenants or any other provision of this Purchase Agreement.
(c) At Purchaser's option it may waive its right to demand repurchase
under paragraph (a) above. Any such waiver will not diminish or eliminate
Seller's obligation to indemnify Purchaser under paragraph (b) above, which
obligation will remain in full force and affect. The provisions of this
section shall survive the termination of this Purchase Agreement and
constitute a continuing obligation of the parties.
5. CLOSING DATE. Closing shall be held at the office of the Buyer, on
Tuesday at 10:30 A.M. (CDT), July 14, 1998.
(a) At the Closing, or no later than three days after the Closing by
Commercial Carrier, the Seller shall deliver to Purchaser the following
items:
(1) The original Retail Installment Contracts.
(2) The original Assignment of the Retail Installment Contracts
from Seller to Purchaser in recordable form executed in blank along
with originals of any intervening assignments of the Retail
Installment Contract with evidence of its official recording thereon.
A form of Assignment Of Retail Installment Contracts is attached
hereto and by this reference made a part hereof.
(3) Originals of any assumption, modification, substitution or
guaranty agreements, if any.
(4) A statement with the appropriate schedules reflecting the
computations referred to in paragraph 6 of this Purchase Agreement, a
form of which is attached as Exhibit "A".
(b) At the Closing, the Purchaser shall deliver the Purchase Price by
certified funds or by wire transfer to the bank coordinates provided by
Seller.
6. SERVICING OF LOANS. Seller shall service the Loans from the Closing
Date to the servicing transfer date which shall be simultaneous with the Closing
Date for and on behalf of Purchaser in accordance with all applicable federal,
state and local laws, rules and regulations using the same standard of care
Seller would exercise for loans owned for its own account. On the servicing
transfer date, Seller shall remit to Purchaser all sums held or received by
Seller in connection
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT WITH BERTHEL FISHER &
COMPANY LEASING, INC. 1.04 5
<PAGE> 6
with the servicing of the Loans including, without limitation, all principal,
interest, late charges, unapplied funds or funds held in suspense and all funds
held in escrow pursuant to the Loan documents.
7. TIME AND BINDING EFFECT. Time shall always be of the essence and this
Purchase Agreement shall inure to and be binding upon the respective heirs,
representatives, successors and assigns of the parties hereto.
8. NOTICES. Seller and Purchaser agree to provide each other with written
notice of any change of address.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the date first above written, each with the intent to be legally bound.
SELLER: SAFEGUARD FINANCIAL GROUP, INC.
By: /s/ JAMES L. HILL
--------------------------------
Title: President
-----------------------------
PURCHASER: BERTHEL FISHER & COMPANY LEASING, INC.
By: /s/ NANCY L. LOWENBERG
--------------------------------
Title: Executive Vice President
-----------------------------
SAFEGUARD FINANCIAL GROUP, INC., PURCHASE AGREEMENT
WITH BERTHEL FISHER & COMPANY LEASING, INC. 1.04 6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET OF BERTHEL FISHER & COMPANY LEASING, INC. AS OF DECEMBER 31, 1998,
AND THE AUDITED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 697,072
<SECURITIES> 1,612,073
<RECEIVABLES> 5,987,616
<ALLOWANCES> (329,674)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,635,567
<DEPRECIATION> (787,589)
<TOTAL-ASSETS> 8,815,069
<CURRENT-LIABILITIES> 1,063,322
<BONDS> 6,516,700
0
1,621,422
<COMMON> 876,305
<OTHER-SE> (1,262,684)
<TOTAL-LIABILITY-AND-EQUITY> 8,815,065
<SALES> 2,644,984
<TOTAL-REVENUES> 2,644,984
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,280,613
<LOSS-PROVISION> 437,041
<INTEREST-EXPENSE> 1,307,461
<INCOME-PRETAX> (380,131)
<INCOME-TAX> (150,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (230,131)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
