<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, 1999
Commission file number: 33-98345C
BERTHEL FISHER & COMPANY LEASING, INC.
--------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
IOWA 42-1312639
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
701 TAMA STREET, MARION, IA 52302
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (319) 447-5700
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 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: $1,700,652
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 2000, excluding the reported beneficial ownership of
all directors, officers and beneficial owners of more than 5% of the
registrant's voting stock, was $878,703. 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 8,
2000 was 453,154.
Transitional Small Business Disclosure Format Yes No X
--- ---
The exhibit index may be found on page 40.
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BERTHEL FISHER & COMPANY LEASING, INC.
1999 FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
<S> <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 Common Equity and Related Stockholder
Matters............................................. 6
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 9
Item 7. Financial Statements and Supplementary Data............. 13
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 35
PART III
Item 9. Directors and Executive Officers of the Registrant...... 35
Item 10. Executive Compensation.................................. 37
Item 11. Security Ownership of Certain Beneficial Owners and
Management.......................................... 38
Item 12. Certain Relationships and Related Transactions.......... 39
Item 13. Exhibits and Reports on Form 8-K........................ 40
SIGNATURES.............................................. 41
</TABLE>
2
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PART I
ITEM 1. BUSINESS
The Company was incorporated under the laws of the State of Iowa on February 5,
1988. The Company is a majority-owned (95%) 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 701 Tama Street, Marion, Iowa 52302. The Company's telephone number
is (319) 447-5700.
The Company provides a variety of lease financing for telecommunications and
general equipment and operates in one segment. The Company's operation is
located in the Midwest, however, its lease portfolio includes leases throughout
the United States. As of December 31, 1999, the Company employed seven full time
employees.
The public communications industry represents the largest percentage of the
business generated by the Company for its own portfolio and for its affiliates.
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.
The Company has recently expanded its business in the automated teller machine
("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 6% of the
Company's lease and notes receivable portfolio as of December 31, 1999. At
December 31, 1999, telecommunications equipment, in home water treatment
equipment, and computer equipment comprised approximately 47%, 22%, and 17%,
respectively, of the Company's portfolio. Two customers accounted for 38.7% of
the income from direct financing leases in 1999. Murdock Communications
Corporation accounted for 24% and Internet Navigator accounted for 14.7% of the
income from direct financing leases.
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, 2005 (having been extended from December 31, 1999 by a vote of
the partners in 1999) and December 31, 2002, respectively. TIFXI completed
offering units to the public on December 23, 1999. A total of 12,593 units were
sold in TIF XI at a value of $12,593,000, out of a maximum offering of
$25,000,000.
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The Company purchased a $1,000,000 portfolio of consumer notes receivable
collateralized by in home water treatment equipment 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 Company has contracted with the finance
company to provide servicing. The principal balance remaining on these notes was
$790,424 at December 31, 1999.
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.
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 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.
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,
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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.
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, 1999, the
Company had outstanding borrowings of $13,915 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, 1999 in the amount of $175,000 and
$2,000,000, respectively.
In June, 1996, the Company began raising funds pursuant to a registration
statement on Form SB-2 file 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 the 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 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.
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 sales 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.
5
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ITEM 2. PROPERTIES
The Company does not own any real estate. In 1999, its headquarters was located
in downtown Cedar Rapids, Iowa. The Company leased office space at a cost of
$4,864 per month. Effective February, 2000, the Parent moved its headquarters to
Marion, Iowa, and the Company will lease space at a cost not yet determined.
ITEM 3. LEGAL PROCEEDINGS
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 for approximately $450,000. 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.
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for any of the Company's debt or equity
securities.
<TABLE>
<CAPTION>
Number of Number of
Stockholders Shares Outstanding
Title of Class at 12/31/99 at 12/31/99
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<S> <C> <C>
Class A Common 13 453,154
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 September
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 1999, $-0- in 1998, and
$-0- in 1997.
The Company paid dividends of $139,995 on the Series A Preferred Stock in 1999,
and $140,001 in 1998. The Company has accrued dividends payable $35,288 as of at
December 31, 1999.
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Securities sold, but 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> <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.
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.
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. The Company paid $139,995 of dividends on the Series A Preferred Stock
in 1999, $140,001 in 1998, $58,810 in 1997, and has accrued an additional
$35,288.
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
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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. Each "B" Warrant expired on April
30, 1999. The Warrants were exercisable at any time prior to their expiration
dates. From and after the expiration dates of the Warrants, the Warrants not
theretofore exercised became void and of no effect.
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 was $14.00 per
share of common stock. Warrants were exercised by paying the exercise price and
surrendering the warrant certificate to the Company 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 shares of common stock as to which the warrant was exercised were
issued. The payment of the exercise price must have been made in full and in
cash at the principal office of the Company. During 1998, there were 48,629
warrants exercised. In 1999, 625 warrants were exercised.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Total revenues for the year ended December 31, 1999 decreased approximately 36%
from the same period in 1998. Total revenues in 1998 decreased by approximately
7% over the same period in 1997. The decline in lease and interest income in
1999 and 1998 is attributed to the decline in the Company's investments in
direct financing leases and notes receivable. The Company's net investment in
direct financing leases and notes receivable at the end of the year was
$14,561,583 in 1997, $5,014,326 in 1998, and $3,752,585 in 1999. 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 a loss from early terminations of $16,186 in 1999. The decrease of
income from direct financing leases was partially offset from management,
administration, and acquisition fees received from the TIFS. The Company
received fees from the TIFS as outlined in the table below.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
TIF IX administrative fee $ 60,000 $ 84,000
TIF IX management fee -0- 58,826
----------- -----------
Total TIF IX 60,000 142,826
----------- -----------
TIF X administrative fee 84,000 84,000
TIF X management fee 215,609 210,876
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Total TIF X 299,609 294,876
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TIF XI administrative fee 84,000 77,000
TIF XI management fee 53,677 12,602
TIF XI acquisition fee 490,123 265,760
----------- -----------
Total TIF XI 627,800 355,362
----------- -----------
Grand Total $ 987,409 $ 793,064
=========== ===========
</TABLE>
Management, administrative, and acquisition fee income are fees paid to the
Company by the TIFS. The Company earns management fees based upon a percentage
of gross lease and note payments 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 TIF IX
entered its liquidation phase. Management fee income from TIF X will discontinue
effective January 1, 2000, as TIF X entered its liquidation phase on December
31, 1999. Management fee income derived from TIF XI increased due to TIF XI's
increased lease and notes receivable portfolio. The Company also receives
administrative reimbursement fees from TIF IX, TIF X, and TIF XI. These fees are
a flat amount per month and were $5,000, $7,000, and $7,000 for TIF IX, TIF X,
and TIF XI, respectively, for 1999. The Company receives an acquisition fee from
TIF XI equal to 5% of the cost of the equipment for direct financing leases or
the face amount of any notes receivable. The increase in this revenue in 1999
compared to 1998 is due to more purchases of equipment for direct financing
leases and issuance of notes receivable in TIF XI compared to the prior year. As
TIF XI completed its offering phase in December, 1999, it is expected that new
lease and note volume will decrease, resulting in lower acquisition fee income
from TIF XI for the Company in 2000.
Total expenses decreased $566,487 in 1999 compared to 1998, primarily as a
result of interest expense decreasing from $1,307,461 in 1998 to $746,245 in
1999. The decrease in interest expense is due to the sale of leases and notes
mentioned above, with the proceeds used to pay off the line of credit in 1998.
General and administrative expenses were $684,315 in 1997, $640,508 in 1998, and
$538,700. The decrease is due to fewer leases originated in 1999 compared to the
previous two years. Employee compensation and benefits increased $125,422 from
1998 to 1999 as a result of commissions paid for leases originated in TIF XI
(for which the Company receives an acquisition fee) and for leases financed by
other leasing companies. When leases are financed by other leasing companies,
the Company serves as a broker, and receives a commission from the other leasing
company. The Company then pays a commission to its salesperson out of the
revenue
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received. Commission revenue totalled $92,788 for 1999 and is included in other
income.
The Company had a net loss in 1999 of $539,128, and a comprehensive loss of
$793,326, as a result of an unrealized loss on securities available for sale of
$254,198, net of the tax effect. Securities classified as available for sale
include 147,212 common shares of Murdock Communications Corporation and 43,631
common shares of HLM Design, Inc. The Company also holds 398,019 common shares
of Murdock as not readily marketable, at cost due to certain requirements under
Rule 144 of the Securities and Exchange Commission. The Company also has
warrants to purchase 79,279 common shares of Murdock at an exercise price of
$1.125 per share. At December 31, 1999, the market price of Murdock was $2.25
per share. As of March 21, 2000, the price of Murdock had dropped approximately
58% to $.94 per share. The net unrealized loss is shown on the income statement
as other comprehensive income and is taken directly to stockholders' equity on
the balance sheet. Securities held as available for sale are carried on the
balance sheet at fair market value.
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 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 sold the remaining
equipment in 1999 for $32,400, charging the remaining balance to the allowance
for possible loan and lease losses.
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, 1999, net of depreciation, was $46,705.
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 was
$494,764 at December 31, 1999, and represents 13.2% of the lease and note
portfolio. Due to uncertainties surrounding past due customers discussed below
and other leases and notes in the portfolio, the Company charged $414,823 to
provision expense in 1999. Provision expense in 1998 was $437,041. Activity in
the allowance for possible loan and lease losses account for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $ 329,674 $ 435,292
Provision for loan and lease losses 414,823 437,041
Charge-offs, net of recoveries (249,733) (542,659)
----------- -----------
Balance at end of year $ 494,764 $ 329,674
=========== ===========
</TABLE>
As of December 31, 1999 there were four 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 total contract balance remaining on these contracts was
$1,389,122, and the total net investment was $1,301,711 at December 31, 1999.
One customer has two contracts past due with a total contract balance remaining
of $1,367,618 and a total net investment of
10
<PAGE> 11
$1,282,021 at December 31, 1999. The Company also has a note receivable with an
affiliate of the past due customer mentioned previously with a principal balance
remaining of $744,740 at December 31, 1999. This note was not past due more than
90 days at December 31, 1999; the last date a payment was received in 1999 was
September 21. Subsequent to year-end , the Company received a payment from the
customer on this note on February 3, 2000. Included in the 1999 provision
expense of $414,823 was an amount of $125,000 related to the past due contracts.
Management will continue to monitor these contracts and take the necessary steps
to protect the Company's investment.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards ("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. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 for one year. The Company will adopt SFAS No. 133 in the first quarter of
calendar year 2001. The Company has not yet determined the effect of SFAS No.
133 on the consolidated financial statements.
YEAR 2000 ISSUE
As of the date of this filing, the Company has encountered no problems relating
to the year 2000 issue. The Company is not aware of any Y2K problems or
situations encountered by its customers, vendors, affiliates, or others.
LIQUIDITY AND CAPITAL RESOURCES
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, which
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, 1999, the Company had outstanding borrowings of
$13,915 from various banks in fixed rate loan transactions.
The Company had a note payable to the Parent for $175,000 at December 31, 1999,
paying off $550,000 in 1999. The Company had a note receivable from TIF X for
$300,000 at December 31, 1999. This note was paid in full in February, 2000,
plus accrued interest.
The Company has also raised funds via private placement debt offerings. At
December 31, 1999, 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
11
<PAGE> 12
issued $437,500 of preferred stock and $62,500 of warrants to its Parent. In
1999, the Company received $8,400 (net of issuance costs of $350) from the
exercise of 625 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.
In 1999, the Company sponsored a limited partnership, Telecommunications Income
Fund XI, L.P. ("TIFXI") for which the Company serves as General Partner. TIFXI
offered a minimum of $1,200,000 and a maximum of $25,000,000 in units of limited
partnership interest. The offering phase of TIF XI ended December 23, 1999, with
a total of 12,593 units ($12,593,000) sold. The Company, as General Partner,
originates leases and finance contracts for TIFXI, resulting 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 XI. 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. Sources for obtaining capital include the sale
of existing leases and notes receivable owned by the Company, obtaining new
capital from the Company's parent, and obtaining a line of credit agreement.
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, the Company is unable to secure a line of credit, or the
Company fails to operate effectively. 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 expects to continue sponsoring limited partnership(s) that would
originate leases and other financing contracts. The Company may register
interests in a new limited partnership, possibly within the next twelve months,
and would serve as the general partner. The partnership interests are intended
to be offered publicly and registered under the Securities Act of 1933. Upon the
successful offering of the partnership interests, the Company would generate
revenue from management and acquisition fees. No assurance can be provided that
the offering of limited partnership interests will be approved by the Securities
and Exchange Commission, that the Company would be successful in offering these
partnership units to the public, or that the Company would be profitable upon
completion of the offering.
The Company is currently exploring various means of refinancing the debt
structure of its balance sheet. Alternatives may include, but are not limited
to, conversion of the Company's subordinated debt to its parent
12
<PAGE> 13
to equity, or the possibility of the parent becoming a public company
with the intent of raising additional capital and contributing a portion of the
funds raised to the Company. If the parent is successful in raising additional
capital, the Company would likely reduce debt from the proceeds received. No
assurance can be provided that the Company, or its parent, will be successful in
their attempts to raise additional funds or reduce debt.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and related information as of and for the
years ended December 31, 1999, 1998, and 1997 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
13
<PAGE> 14
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
March 20, 2000
14
<PAGE> 15
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 241,235 $ 697,072
Notes receivable (Note 2) 2,414,118 3,001,952
Net investment in direct financing leases (Notes 2 and 5) 1,338,467 2,012,374
Allowance for possible loan and lease losses (Note 3) (494,764) (329,674)
----------- -----------
Notes receivable and direct financing leases, net 3,257,821 4,684,652
Equipment under operating leases, less accumulated depreciation of $93,410 in 1999
and $62,273 in 1998 125,625 95,340
Due from affiliates 522,283 105,464
Receivable from parent under tax allocation agreement 910,120 895,900
Investments in:
Limited partnerships (Notes 4 and 12) 32,609 16,348
Not readily marketable equity securities, at cost (Note 4) 657,603 238,784
Available-for-sale equity securities, at fair value (Note 4) 494,944 1,328,867
Furniture and equipment, less accumulated depreciation of
$157,106 in 1999 and $213,303 in 1998 76,983 145,042
Deferred income taxes (Note 6) 183,146 --
Deferred costs, less accumulated amortization of $684,848
in 1999 and $512,013 in 1998 171,439 346,775
Other receivables 37,754 60,540
Other assets (Note 4) 19,118 194,858
----------- -----------
TOTAL $ 6,730,680 $ 8,809,642
=========== ===========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
LIABILITIES:
Demand note payable to parent (Note 5) $ 175,000 $ 725,000
Outstanding checks in excess of bank balance -- 424,053
Trade accounts payable 101,389 113,577
Due to affiliates 115,484 121,450
Accrued expenses 152,022 28,918
Dividends payable 35,288 35,288
Lease security deposits 103,183 138,791
Deferred income taxes (Note 6) -- 195,822
Notes payable (Note 5) 15,594 65,142
Subordinated notes payable (Note 5) 2,993,646 2,997,605
Subordinated debenture payable to parent (Note 5) 2,000,000 2,000,000
----------- -----------
Total liabilities 5,691,606 6,845,646
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 12)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (Note 7) 736,976 728,953
----------- -----------
STOCKHOLDERS' EQUITY:
Series A preferred stock, no par value - authorized 125,000 shares, issued and
outstanding 125,000 shares at December 31, 1999 and 1998 ($1,750,000
liquidation value, convertible into 109,375 shares of Class A
common stock at December 31, 1999 and 1998) (Note 8) 1,621,422 1,621,422
Class A common stock, no par value-authorized 1,000,000 shares, issued and
outstanding 453,154 and 452,529 shares at December 31, 1999 and 1998, respectively 878,703 754,474
Common stock warrants (Note 9) 6,002 121,831
Accumulated deficit (2,257,787) (1,570,640)
Unrealized gain on available-for-sale securities, net of tax effect 53,758 307,956
----------- -----------
Total stockholders' equity 302,098 1,235,043
----------- -----------
TOTAL $ 6,730,680 $ 8,809,642
=========== ===========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 16
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Income from direct financing leases $ 137,368 $ 655,709 $ 1,049,329
Interest income 446,382 686,812 838,265
Management, administration and lease acquisition fees
from affiliates (Note 4) 987,409 793,064 772,768
Gain (loss) on early termination of leases (16,186) 414,135 54,554
Other 145,679 95,426 141,375
----------- ----------- -----------
Total revenues 1,700,652 2,645,146 2,856,291
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 519,022 393,600 398,635
Management fees to affiliates (Note 11) 240,000 246,667 287,146
Other general and administrative expenses (Note 11) 538,700 640,508 684,315
Interest expense (Note 5) 746,245 1,307,461 1,743,345
Provision for possible loan and lease losses (Note 3) 414,823 437,041 415,052
----------- ----------- -----------
Total expenses 2,458,790 3,025,277 3,528,493
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (758,138) (380,131) (672,202)
INCOME TAXES (Note 6) (219,010) (150,000) (236,451)
----------- ----------- -----------
NET LOSS (539,128) (230,131) (435,751)
COMPREHENSIVE INCOME (LOSS) - Unrealized
gain (loss) on available-for-sale securities, net of tax
of $(164,115) in 1999, $260,184 in 1998 and $(61,000)
in 1997, respectively (254,198) 415,615 (107,659)
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (793,326) $ 185,484 $ (543,410)
=========== =========== ===========
LOSS PER COMMON SHARE CALCULATION:
Net loss $ (539,128) $ (230,131) $ (435,751)
Dividends on Series A convertible preferred stock (Note 8) (139,995) (140,001) (94,098)
----------- ----------- -----------
Net loss attributable to Class A common stock $ (679,123) $ (370,132) $ (529,849)
=========== =========== ===========
Basic $ (1.50) $ (.84) $ (1.31)
=========== =========== ===========
Fully diluted $ (1.50) $ (.84) $ (1.31)
=========== =========== ===========
Weighted average common shares outstanding 452,974 438,540 403,900
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 17
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAIN (LOSS) TOTAL
SERIES A CLASS A COMMON EARNINGS ON AVAILABLE- STOCKHOLDER
PREFERRED COMMON STOCK (ACCUMULATED FOR-SALE EQUITY
STOCK STOCK WARRANTS DEFICIT) SECURITIES (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
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 -- 620,275 (45,030) -- -- 575,245
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
Net loss -- -- -- (539,128) -- (539,128)
Expiration of warrants -- 115,250 (115,250) -- -- --
Issuance of Class A common stock upon
exercise of warrants, net of
issuance costs of $350 -- 8,979 (579) -- -- 8,400
Amortization of Class B stock
issuance cost -- -- -- (8,024) -- (8,024)
Dividends on Series A preferred stock -- -- -- (139,995) -- (139,995)
Change in unrealized gain on
available-for-sale securities,
net of tax -- -- -- -- (254,198) (254,198)
----------- --------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1999 $ 1,621,422 $ 878,703 $ 6,002 $(2,257,787) $ 53,758 $ 302,098
=========== ========= =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 18
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (539,128) $ (230,131) $ (435,751)
Adjustments to reconcile net loss to net cash
from operating activities:
Loss (gain) on early termination of leases 16,186 (414,135) (54,554)
Dividend income received in form of common stock (2,964) -- --
Depreciation of furniture and equipment 67,185 76,501 83,192
Amortization of deferred costs 175,336 176,659 176,659
Other amortization -- 63,047 30,440
Provision for possible loan and lease losses 414,823 437,041 415,052
Deferred income taxes (214,853) 324,000 188,549
Changes in operating assets and liabilities:
Due from affiliates (416,819) (15,458) (31,002)
Receivable from parent under tax allocation agreement (14,220) (470,900) (425,000)
Other receivables 22,786 46,397 --
Other assets 175,740 18,169 11,739
Outstanding checks in excess of bank balance (424,053) 297,071 126,982
Trade accounts payable (12,188) 83,958 (128,608)
Due to affiliates (5,966) 22,023 (2,611)
Accrued expenses 123,104 (168,520) (30,576)
Dividends payable -- 35,288 --
----------- ----------- -----------
Net cash from operating activities (635,031) 281,010 (75,489)
----------- ----------- -----------
INVESTING ACTIVITIES:
Investment in available-for-sale security -- (601,251) --
Purchases of equipment for direct financing leases (224,317) (2,827,118) (2,327,220)
Repayments of direct financing leases 419,422 1,777,404 2,944,913
Proceeds from sale or early termination of direct
financing leases and notes receivable 462,014 6,363,403 1,299,597
Issuance of notes receivable (125,000) (1,062,291) (1,609,538)
Repayments of notes receivable 418,013 4,896,646 1,303,585
Investments in limited partnerships -- -- (10,000)
Repayment (issuance) of loans to limited partnerships -- 124,286 (43,775)
Distributions from limited partnerships -- 6,118 2,280
Net lease security deposits collected (paid) (35,609) (219,452) (16,633)
Purchases of furniture and equipment (735) (8,146) (21,540)
Proceeds from sale of furniture and equipment 1,550 -- --
----------- ----------- -----------
Net cash from investing activities 915,338 8,449,599 1,521,669
----------- ----------- -----------
</TABLE>
(Continued)
18
<PAGE> 19
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONCLUDED)
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Financing costs incurred $ -- $ (2,500) $ --
Proceeds from line-of-credit agreement -- 6,711,470 8,223,772
Repayments of line-of-credit agreement -- (13,472,963) (10,738,310)
Redemption of Class B stock -- (10,000) --
Repayments of subordinated debt (5,000) -- --
Repayment of demand note payable to Parent (550,000) -- --
Proceeds from issuance of other borrowings -- 3,516,140 650,884
Repayments of other borrowings (49,549) (5,210,928) (1,200,717)
Proceeds from issuance of Series A preferred stock and warrants -- -- 1,484,544
Proceeds from issuance of Class A common stock 8,400 575,245 --
Issuance costs for Series A preferred stock and warrants -- -- (114,981)
Cash dividends paid on Series A preferred stock (139,995) (140,001) (94,098)
------------ ------------ ------------
Net cash from financing activities (736,144) (8,033,537) (1,788,906)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (455,837) 697,072 (342,726)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 697,072 -- 342,726
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 241,235 $ 697,072 $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 749,041 $ 1,415,391 $ 1,588,809
Noncash investing and financing activities:
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 (254,198) 415,615 (107,659)
Deferred tax expense (benefit) of change in unrealized
gain (loss) on available-for-sale security (164,115) 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.
19
<PAGE> 20
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS- Berthel Fisher & Company Leasing,
Inc. (the "Company") is a majority-owned (95%) subsidiary of Berthel
Fisher & Company (the "Parent"). The Company operates in one segment. The
Company finances, through direct financing leases or notes receivable,
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, 1997, 1998 and
1999, the Company incurred net losses of $435,751, $230,131 and $539,128,
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 XII, for which the Company would generate fee income. No
assurance can be provided that the offering, if it occurs, will be
successful 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.
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.
20
<PAGE> 21
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 receivable are concentrated in home water
treatment equipment, pay telephones, and computer equipment, representing
approximately 22%, 47%, and 17% at December 31, 1999 and 18%, 48%, and 15%
at December 31, 1998, of the Company's direct finance lease and notes
receivable portfolio, respectively.
Two lessees, related to each other by common ownership, account for
approximately 54% of the Company's direct finance lease and notes
receivable portfolio at December 31, 1999. One of those customers is past
due over 90 days (see Note 3).
The Company's investments are concentrated in one company representing
approximately 82% and 85% of the Company's investments at December 31,
1999 and 1998, respectively.
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 leases
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.
Certain of the Company's leases are accounted for as operating leases for
income tax purposes.
21
<PAGE> 22
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"), 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. Not readily marketable equity securities include
securities restricted as to sale in the public market beyond one year
under rule 144 of the Securities & Exchange Commission.
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 marketable equity securities
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.
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.
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.
22
<PAGE> 23
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. Potential common shares
excluded from the per share computation because they were antidilutive are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
<S> <C> <C> <C>
Redeemable Class B nonvoting convertible stock 74,500 74,500 74,500
Series A convertible preferred stock 109,375 109,375 93,195
Warrants 151,886 276,886 401,886
------- ------- -------
Total 335,761 460,761 569,581
======= ======= =======
</TABLE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("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. In June 1999, the FASB issued SFAS No. 137, which
deferred the effective date of adoption of SFAS No. 133 for one year. The
Company will adopt SFAS No. 133 in the first quarter of calendar year
2001. The Company has not yet determined the effect of SFAS No. 133 on the
consolidated financial statements.
RECLASSIFICATIONS - Certain amounts in the 1998 financial statements have
been reclassified to conform with the 1999 financial statement
presentation.
23
<PAGE> 24
2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES
Notes receivable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
<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 2004 $ 2,414,118 $ 3,001,952
----------- -----------
</TABLE>
The Company's net investment in direct financing leases consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
<S> <C> <C>
Minimum lease payments receivable $ 1,474,473 $ 2,281,860
Estimated unguaranteed residual values 64,027 115,115
Unamortized initial direct costs 5,724 16,601
Unearned income (205,757) (401,202)
----------- -----------
Net investment in direct financing leases $ 1,338,467 $ 2,012,374
=========== ===========
</TABLE>
The balance of direct financing leases sold with recourse that remain
uncollected at December 31, 1999 and 1998 was $598,550 and $1,535,503,
respectively. At December 31, 1999 and 1998, the Company's contingent
liability, under other limited recourse provisions, totals $285,186.
At December 31, 1999, contractual principle maturities of notes
receivable, 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>
CONTRACTUAL MINIMUM ESTIMATED
PRINCIPLE LEASE PAYMENTS UNGUARANTEED
MATURITIES RECEIVABLE RESIDUAL VALUES
<S> <C> <C> <C> <C>
Year ending December 31:
2000 $ 567,984 $ 927,302 $ 24,530
2001 557,209 411,025 28,720
2002 708,865 108,224 3,323
2003 384,317 27,922 7,454
2004 195,743 -- --
---------- ---------- ----------
Total $2,414,118 $1,474,473 $ 64,027
========== ========== ==========
</TABLE>
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 $2,329,589 and $2,396,756 at
December 31, 1999 and 1998, respectively.
24
<PAGE> 25
Two customers 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
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Customer A 24 % 12 % 6 %
Customer B 15 3 --
</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,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 329,674 $ 435,292 $ 412,916
Provision 414,823 437,041 415,052
Charge-offs, net of recoveries (249,733) (542,659) (392,676)
--------- --------- ---------
Balance at end of year $ 494,764 $ 329,674 $ 435,292
========= ========= =========
</TABLE>
The allowance for loan and lease losses consisted of specific allowances
for leases of $443,152, $112,202 and $158,477 at December 31, 1999, 1998
and 1997, respectively, and a general unallocated allowance of $51,612,
$217,472, and $276,815 at December 31, 1999, 1998 and 1997, respectively.
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. 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 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 sold the remaining equipment during 1999 at a loss of
approximately $51,000.
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.
25
<PAGE> 26
In December 1998, the Company, certain affiliated partnerships, North
American Communications Group ("NACG") (a lessee of the partnerships), and
others filed a suit against Shelby County, Tennessee ("County"). 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 filed an answer and the initial
discovery has been completed. After the initial discovery, it was
determined it was not economical to continue to spend Company funds in an
effort to obtain additional information or to continue the lawsuit.
At December 31, 1999, four customers were past due over 90 days. The
Company's net investment in these contracts was $1,301,711 at December 31,
1999. One customer has two contracts that are past due with a total net
investment of $1,282,021. Management has provided a specific reserve of
$125,000 at December 31, 1999 related to this customer. When payments are
past due more than 90 days, the Company discontinues recognizing income on
the contracts.
4. INVESTMENTS
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, 1999 and 1998,
the Company's investment in these partnerships consisted of its allocated
general partnership interest.
TIF XI's offering period for the sale of limited partnership units was
closed on December 23, 1999 by the Company as general partner. Pursuant to
the partnership agreement, TIF XI reimbursed the Company for offering and
promotional expenses incurred by the Company up to 3.5% of the capital
raised. The Company incurred offering and promotional expenses, net of
reimbursements, of approximately $19,000 and $167,251 at December 31, 1999
and 1998, respectively, which was included in other assets. The remaining
unreimbursed amount at December 31, 1999 was reclassified to the
investment in limited partnership.
Combined summarized financial information for TIF IX, TIF X and TIF XI is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
Assets:
Net investment in direct financing leases
and notes receivable $24,218,000 $17,006,000
Other assets 2,401,000 3,878,000
----------- -----------
Total assets $26,619,000 $20,884,000
=========== ===========
Liabilities and partners' equity
Liabilities:
Notes payable, guaranteed by the Company (Note 12) $ 4,529,000 $ 15,000
Other liabilities 2,376,000 1,588,000
----------- -----------
Total liabilities 6,905,000 1,603,000
Total partners' equity 19,714,000 19,281,000
----------- -----------
Total liabilities and partners' equity $26,619,000 $20,884,000
=========== ===========
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Income from direct financing leases $ 2,425,000 $ 2,492,000 $ 4,776,000
Other revenue 356,000 1,090,000 894,000
Provision for possible losses (339,000) (352,000) (5,429,000)
Impairment loss on equipment -- (65,000) (319,000)
Expenses (1,221,000) (1,249,000) (2,040,000)
----------- ----------- -----------
Net income (loss) $ 1,221,000 $ 1,916,000 $(2,118,000)
=========== =========== ===========
Income (loss) allocable to the Company $ 973 $ 1,410 $ (972)
=========== =========== ===========
Net income (loss) per partnership unit:
TIF IX $ -- $ 1.39 $ (3.25)
TIF X $ 6.08 $ 18.54 $ (21.11)
TIF XI $ 72.99 $ 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, 1999 and 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. TIX X entered its liquidation phase
on December 31, 1999 and, therefore, adopted the liquidation basis of
accounting as of that date. The above summarized financial position data
reflects TIF X's data as of December 31, 1999 on an estimated net
realizable value basis (liquidation basis). The above summarized statement
of operations reflects TIF X to December 31, 1999. In addition, TIF XI
began leasing operations in February 1998 and its operating data is
reflected from such date.
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,
1999, 1998 and 1997, management fees aggregated $269,286, $282,304 and
$604,768, 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 $228,000, $245,000
and $168,000 for the years ended December 31, 1999, 1998 and 1997,
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. TIF X entered its liquidation phase on December 31, 1999 and, as a
result, the Company will not receive any further management fees from TIF
X.
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 $490,123 and $265,760 for
the years ended December 31, 1999 and 1998, respectively.
27
<PAGE> 28
Not readily marketable equity securities and available-for-sale equity
securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
<S> <C> <C>
Not readily marketable equity securities at cost:
Murdock Communications Corporation, 398,019 shares
of common stock $ 602,203 $ --
Murdock Communications Corporation, warrants to
purchase 79,279 shares of common stock at an exercise
price of $1.12 per share, expiring during 2002 -- --
Murdock Communications Corporation, 254 shares
of convertible preferred stock, 8% cumulative dividend,
convertible into 22,578 shares of common stock 25,400 25,400
HLM Design, Inc., 43,631 shares of common stock -- 183,284
Monitronics, Inc., 3,996 shares of common stock 30,000 30,100
---------- ----------
Total $ 657,603 $ 238,784
========== ==========
Available-for-sale equity securities at fair value:
Murdock Communications Corporation, 147,212 and
543,790 shares of common stock at December 31,
1999 and 1998, respectively $ 331,227 $1,328,867
HLM Design, Inc., 43,631 shares of common stock 163,717 --
---------- ----------
Total $ 494,944 $1,328,867
========== ==========
</TABLE>
Due to certain requirements under rule 144 of the Securities & Exchange
Commission, a portion of the Company's common shares held in Murdock
Communications Corporation became restricted beyond one year in 1999 and
were reclassified to not readily marketable equity securities. Also,
shares of HLM Design, Inc. became restricted for less than one year in
1999 and such securities were reclassified to available-for-sale.
The cost and market values of available-for-sale equity securities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
<S> <C> <C>
Cost $ 406,117 $ 821,727
Gross unrealized gains 108,394 507,140
Gross unrealized losses (19,567) --
---------- ----------
Market value $ 494,944 $1,328,867
========== ==========
</TABLE>
As of March 20, 2000, the value of Murdock Communications Corporation
common stock has declined to $.9375 per share representing approximately a
$420,000 decline in value.
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 and was not renewed.
28
<PAGE> 29
Notes payable consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
<S> <C> <C>
Note payable to Parent, 10.5%, payable on demand $175,000 $725,000
Installment loan agreements with banks, 9.0% to 10.5%,
maturing through 2000 with subjective acceleration clauses,
collateralized by certain direct financing leases, certain
agreements are also guaranteed by the Company's Parent 13,915 57,751
Capital lease obligations, 5.37%, due through 2000 1,679 7,391
-------- --------
Notes payable $190,594 $790,142
======== ========
</TABLE>
Subordinated debt consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
<S> <C> <C>
Uncollateralized subordinated notes payable, 9.5% to 10%,
maturing in 2001 and 2004, net of discount $2,993,646 $2,997,605
Uncollateralized subordinated debenture payable to
Parent, floating interest rate, maturing in 2005 2,000,000 2,000,000
---------- ----------
Total subordinated debt $4,993,646 $4,997,605
========== ==========
</TABLE>
Interest expense summarized by category is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Line-of-credit agreement $ -- $ 375,510 $ 794,776
Demand note payable to Parent 81,040 62,617 1,410
Collateral trust bonds -- -- 458
Installment loan agreements with banks 6,667 92,159 167,676
Capital lease obligations 494 1,065 1,582
Uncollateralized subordinated debentures -- 28,872 125,143
Uncollateralized subordinated debenture to Parent 230,000 320,627 227,521
Uncollateralized subordinated notes payable 404,506 404,589 404,589
Other 23,538 22,022 20,190
---------- ---------- ----------
Total $ 746,245 $1,307,461 $1,743,345
========== ========== ==========
</TABLE>
The subordinated debenture payable to Parent bears interest at prime plus
3% (11.5% at December 31, 1999, 1998 and 1997), 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.
29
<PAGE> 30
The annual maturities of notes payable and subordinated debt at December
31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000 $ 180,413
2001 2,048,710
2002 4,699
2003 1,248
2004 949,170
Thereafter 2,000,000
----------
Total $5,184,240
==========
</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.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Current $ (4,157) $(474,000) $(425,000)
Deferred (214,853) 324,000 188,549
--------- --------- ---------
Income taxes $(219,010) $(150,000) $(236,451)
========= ========= =========
</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
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Income tax at federal statutory rates (34%) $(257,767) $(129,245) $(228,548)
Tax effect increase (decrease) of:
State income taxes, net of federal effect (2,000) (7,600) (13,900)
Other items 40,757 (13,155) 5,997
--------- --------- ---------
Income taxes $(219,010) $(150,000) $(236,451)
========= ========= =========
</TABLE>
30
<PAGE> 31
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,
-----------------------
1999 1998
<S> <C> <C>
Gross deferred income tax liabilities:
Direct financing leases $(300,000) $(446,000)
Unrealized gain on available-for-sale security (35,000) (199,184)
Other -- (51,638)
--------- ---------
Total (335,000) (696,822)
--------- ---------
Gross deferred income tax assets:
Alternative minimum tax carryforward 84,000 84,000
Allowance for possible loan and lease losses 96,000 127,000
Net operating loss carryforward 334,000 290,000
Other 4,146 --
--------- ---------
Total 518,146 501,000
--------- ---------
Net deferred income tax asset (liability) $ 183,146 $(195,822)
========= =========
</TABLE>
At December 31, 1999, the Company's net operating loss carryforward
aggregates $868,000 and expires in 2010.
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 (approximately
$670,000 is subject to redemption in 2000 and $75,000 in 2001). 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,
----------------------
1999 1998
<S> <C> <C>
Redeemable Class B nonvoting convertible stock (no par
value-authorized 100,000 shares, issued and outstanding
74,500 shares at December 31, 1999 and 1998,
respectively), at redemption or liquidation value $ 745,000 $ 745,000
Unamortized stock issuance costs (8,024) (16,047)
--------- ---------
Class B nonvoting convertible stock $ 736,976 $ 728,953
========= =========
</TABLE>
During the year ended December 31, 1999 and 1998, the Company allowed
redemptions aggregating $0 and $10,000, respectively, outside the standard
terms of the stock agreement.
31
<PAGE> 32
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 accumulate and are 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 is $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.
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 Warrrants 1998 12.00 (76,371)
--------
Balance At December 31, 1998 276,886
Exercise of B Warrants 1999 14.00 (625)
Expiration of B Warrants 1999 14.00 (124,375)
--------
Balance at December 31, 1999 151,886
========
</TABLE>
The Company's Parent exercised 31,250 of the A warrants during 1998 and
was issued 31,250 shares of common stock.
32
<PAGE> 33
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, 1999, 1998 and 1997 aggregated $6,416, $5,695 and
$6,356, 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
$47,146 in 1997.
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 $240,000, $246,667 and $240,000 during 1999, 1998 and
1997, respectively.
The Company, from time to time, engages 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
------------------------------
1999 1998 1997
<S> <C> <C> <C>
Offering expenses incurred in connection with the
Series A preferred stock and warrant offering $ -- $ -- $108,621
Interest income 84,881 37,186 16,965
Operating expense reimbursements 26,311 45,300 45,300
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable, as the general partner, for all debts
of TIF IX, TIF X and TIF XI.
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 or 40% of its qualified accounts, as
defined in the agreement. 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. The balance outstanding under this line-of-credit was
$2,556,214 at December 31, 1999 and $15,433 at December 31, 1998.
33
<PAGE> 34
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF XI. The line-of-credit agreement allows TIF
XI to borrow the lesser of $4 million or 32% of its qualified accounts, as
defined in the agreement. The agreement matures on June 30, 2002, 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. The balance outstanding under this line of credit was
$1,973,142 at December 31, 1999.
Telecom 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 for
approximately $450,000. 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 Judgment, 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 judgment must be
responded to. No loss, if any, has been recorded in the financial
statements with respect to this matter.
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, and other short-term
payables approximates their fair value because of the short maturity of
those instruments. Also, the Company's available-for-sale securities are
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,
1999 1998
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Notes receivable $2,414,118 2,414,097 $3,001,952 $2,851,854
Notes payable 190,594 190,891 790,142 790,498
Subordinated debt 4,993,646 4,743,646 4,997,605 4,997,605
</TABLE>
* * * * *
34
<PAGE> 35
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 48 President, Chief Executive Officer, Director
Nancy L. Lowenberg 41 Executive Vice President, General Manager, Director
Ronald O. Brendengen 45 Treasurer, Chief Operating Officer, Chief Financial Officer, Director
Leslie D. Smith 52 Secretary
Emmett J. Scherrman 67 Director
Von L. Elbert 61 Director
James W. Noyce 44 Director
</TABLE>
Thomas J. Berthel, Age 48, 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 41, 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. Ms. Lowenberg resigned from the Company
effective February 9, 2000.
Ronald O. Brendengen, age 45, 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
35
<PAGE> 36
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
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 52, 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 67, 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 61, 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 44, was elected Director of the Company and of the 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. in 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.
36
<PAGE> 37
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
for services rendered during 1997, 1998, and 1999 with respect to the Chief
Executive Officer and the President of the Company:
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation(1)
- ------------------ ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Berthel
Chief Executive Officer 1997 $-0- $-0- $ -0- $ 22,060 (2)
1998 $-0- $-0- $ -0- $ -0- (2)
1999 $-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 TIF IX, TIF X, and TIF XI 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, $0, and $47,146 during 1999, 1998,
and 1997, 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 $240,000, $246,667, and $240,000 during 1999, 1998 and 1997,
respectively.
37
<PAGE> 38
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, 1999, 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 of
the Company 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, 1999.
(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.
38
<PAGE> 39
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. ("TIF IX"),
Telecommunications Income Fund X, L.P. ("TIF X") and Telecommunications Income
Fund XI, L.P. ("TIF XI"), for which the Company receives management fees. TIF IX
is in its liquidation phase and no longer pays a management fee to the Company.
TIF X entered its liquidation phase on December 31, 1999, at which time
management fees ceased. The Company had entered into a consulting contract with
Mr. Thomas J. Berthel that provided for twenty percent of the management fee
from TIF IX to be paid to Mr. Berthel for consulting services provided to the
Company in connection with its obligations as the general partner of TIF IX. The
consulting fees paid to Mr. Berthel on account of services provided to TIF IX
were $11,219, $0, and $0 in 1997, 1998, and 1999, respectively. Mr. Berthel also
provides consulting services to the Company in connection with the Company's
obligations as general partner of TIF X. In connection with these services, Mr.
Berthel was paid $10,841, $0, and $0 in 1997, 1998, and 1999, 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 $240,000, $246,667, and $240,000 during
1999, 1998, and 1997, respectively.
The Company has three leases with Internet Navigator, Inc. having a total net
investment of $172,964 at December 31, 1999. Mr. Von L. Elbert, a director of
the Company, has guaranteed these leases. Mr. Elbert has a 16% interest in
Internet Navigator, Inc. TIF IX has two leases with Internet Navigator, Inc.
having a total net investment of $35,131 at December 31, 1999.
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 95.17% of the Company's Class A common stock.
39
<PAGE> 40
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
No reports on Form 8-K were filed in the fourth quarter of
1999.
40
<PAGE> 41
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)
<TABLE>
<S> <C>
By Berthel Fisher & Company Leasing, Inc.
By: /s/ Thomas J. Berthel Date: March 24, 2000
-------------------------------------
Thomas J. Berthel
President, Chief Executive Officer
By Berthel Fisher & Company Leasing, Inc.
By: /s/ Ronald O. Brendengen Date: March 24, 2000
--------------------------------------
Ronald O. Brendengen
Chief Operating Officer,
Chief Financial Officer, Treasurer
</TABLE>
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.
<TABLE>
<S> <C>
/s/ Thomas J. Berthel Date: March 24, 2000
- ------------------------------------------
Thomas J. Berthel
Chief Executive Officer
President, Director
Berthel Fisher & Company Leasing, Inc.
/s/ Ronald O. Brendengen Date: March 24, 2000
- ------------------------------------------
Ronald O. Brendengen
C.O.O, C.F.O., Treasurer, Director
Berthel Fisher & Company Leasing, Inc.
/s/ Daniel P. Wegmann Date: March 24, 2000
- ------------------------------------------
Daniel P. Wegmann
Controller
Berthel Fisher & Company Leasing, Inc.
</TABLE>
41
<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, 1999,
AND THE AUDITED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 241,235
<SECURITIES> 1,185,156
<RECEIVABLES> 5,222,742
<ALLOWANCES> (494,764)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 453,124
<DEPRECIATION> (250,516)
<TOTAL-ASSETS> 6,730,680
<CURRENT-LIABILITIES> 697,960
<BONDS> 5,730,622
0
1,621,422
<COMMON> 884,705
<OTHER-SE> (2,204,029)
<TOTAL-LIABILITY-AND-EQUITY> 6,730,680
<SALES> 0
<TOTAL-REVENUES> 1,700,652
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,297,722
<LOSS-PROVISION> 414,823
<INTEREST-EXPENSE> 746,245
<INCOME-PRETAX> (758,138)
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</TABLE>
