<PAGE>
As filed with the Securities and Exchange Commission on July 7, 2000
Registration No. ___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. ____________
/ / Post-Effective Amendment No.
and/or
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/ / Amendment No. ____________
BERTHEL GROWTH TRUST II
(Exact Name of Registrant as Specified in Charter)
701 Tama Street, Building B
PO Box 609
Marion, Iowa 52302-0609
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, Including Area Code: (319)447-5700
Thomas J. Berthel
Berthel Fisher & Company
701 Tama Street, Building B
PO Box 609
Marion, Iowa 52302-0609
(Name and Address of Agent for Service)
COPIES TO: Michael K. Denney
and
William T. McCartan
Bradley & Riley PC
2007 First Avenue S.E.
Cedar Rapids, Iowa 52402
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this
Registration Statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
check the following box: /X/
It is proposed that this filing will become effective (check appropriate box):
/X/ when declared effective pursuant to section 8(c)
<TABLE>
<CAPTION>
===========================================================================================================================
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===========================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered Per Share(1) Offering Price Registration Fee
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest in Trust 3,000,000 shares(2) $10 $30,000,000 $7,920.00
===========================================================================================================================
</TABLE>
<PAGE>
(1) Shares are offered only in Units of 100 Shares. The minimum required
purchase is five (5) Units (500 shares) or two Units (200 shares) for
individual retirement accounts.
(2) This Registration Statement includes 500,000 shares to cover
over-allotments, if any, pursuant to an over-allotment option granted
to Berthel Fisher & Company Financial Services, Inc.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
ii
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
Cross Reference Sheet
Form N-2
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Prospectus
---- ------------ ----------------------
<S> <C> <C>
PART A - INFORMATION REQUIRED IN A PROSPECTUS
1 Outside Cover Page....................................... Outside Cover Page; Inside Front
Cover Page
2 Inside Front and Outside Back Cover Page................. Inside Front Cover
3 Fee Table and Synopsis................................... Fee Table and Expenses Summary;
Prospectus Summary; Inside Front
Cover
4 Financial Highlights..................................... Not Applicable
5 Plan of Distribution..................................... Plan of Distribution; Terms of the
Offering; Compensation and Fees;
Conflicts of Interest
6 Selling Shareholders..................................... Not Applicable
7 Use of Proceeds.......................................... Use of Proceeds; Investment
Objective and Policies
8 General Description of the Registrant.................... Cover Page; Business; Investment
Objective and Policies; Management
Arrangements; Risk Factors
9 Management............................................... Management Arrangements; Plan of
Distribution; Terms of the Offering;
Compensation and Fees; Investment
Objective and Policies
10 Capital Stock, Long-Term Debt, and Other
Securities............................................... Distribution and Allocations; Summary
of the Declaration of Trust; Tax
Matters; Business
11 Defaults and Arrears on Senior Securities................ Not Applicable
12 Legal Proceedings........................................ Not Applicable
13 Table of Contents of the Statement of Additional
Information.............................................. Not Applicable
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
(INCLUDED IN PROSPECTUS)
14 Cover Page............................................... Cover Page
15 Table of Contents........................................ Not Applicable
16 General Information and History.......................... Not Applicable
17 Investment Objective and Policies........................ Investment Objective and Policies
18 Management............................................... Management Arrangements
19 Control Persons and Principal Holders of
Securities............................................... Business
20 Investment Advisory and Other Services................... Management Arrangements; Conflicts
of Interest; Compensation and Fees;
Terms of the Offering; Investment
Objective and Policies
21 Brokerage Allocation and Other Practices ............... Compensation and Fees; Investment
Objective and Policies
22 Tax Status............................................... Tax Matters
23 Financial Statements..................................... Financial Statements
</TABLE>
iii
<PAGE>
PART C - OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
iv
<PAGE>
Subject to Completion dated July 7, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Preliminary Prospectus
----------
BERTHEL
GROWTH
TRUST II
----------
Up to 2,500,000 shares of Beneficial Interest
(Subject to increase to 3,000,000 shares, at the option
of Berthel Fisher & Company Financial Services, Inc.)
BERTHEL GROWTH TRUST II (the "Trust") is offering shares of beneficial
interest. We are a Delaware business trust that has elected to be treated as a
business development company under the Investment Company Act of 1940. Our
investment objective is long term capital appreciation from investments in small
and medium size companies.
The minimum investment is five units (five hundred shares) or two units
(two hundred shares) for Individual Retirement Accounts. The shares will be sold
through securities brokers that we select at a price of $10 per share. We will
pay a sales load of $.70 per share on the shares you buy.
<TABLE>
<CAPTION>
===========================================================================================================
Price Maximum Proceeds to
To Public Sales Load(1) Trust(2)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (500 share minimum) $ 10 $ .70 $ 9.30
Total Minimum $ 6,000,000 $ 420,000 $ 5,580,000
Total Maximum $25,000,000 $ 1,750,000 $23,250,000
Total Maximum if Option Exercised(3) $30,000,000 $ 2,100,000 $27,900,000
===========================================================================================================
</TABLE>
(See footnotes on following page)
NO MARKET CURRENTLY EXISTS FOR OUR SHARES AND NO MARKET IS EXPECTED TO DEVELOP.
WE WILL NOT LIST OUR SHARES ON A NATIONAL SECURITIES EXCHANGE. IT WILL BE
DIFFICULT FOR OUR SHAREHOLDERS TO SELL THEIR SHARES. WE WILL NOT REDEEM OUR
SHARES EXCEPT IN LIMITED CIRCUMSTANCES. WE RECOMMEND OUR SHARES ONLY AS A
LONG-TERM INVESTMENT. SEE "TRANSFERABILITY OF SHARES" ON PAGE 61.
THIS INVESTMENT CARRIES MANY RISKS. YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR FACTORS THAT SHOULD BE
CONSIDERED BEFORE INVESTING IN OUR SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.
The date of this prospectus is _____________.
<PAGE>
(1) The sales load does not reflect an underwriting fee and syndication fee
we will pay. The underwriting fee is 2% of the share price. The
syndication fee is 1% of the share price. We will pay these fees to
Berthel Fisher & Company Financial Services, Inc., the dealer manager.
Berthel Financial Services may reallow some or all of the underwriting
fee to selling group members. See "Terms of the Offering" and "Plan of
Distribution."
(2) The proceeds do not reflect other expenses of issuance and distribution
of the shares, such as registration fees, cost of printing, legal fees,
accounting fees, trustee fees and other similar costs. These expenses
will not be more than 3.5% of the aggregate purchase price of all of
the shares sold. See "Terms of the Offering" and "Plan of
Distribution."
(3) We may offer up to 500,000 shares in addition to the 2,500,000 shares
originally offered. See "Terms of the Offering."
This prospectus sets forth concisely the information that you should
know about us before investing in our shares. You should read this prospectus
carefully and retain it for future reference. The prospectus is available on the
SEC's website at http://www.sec.gov. and at www.berthel.com.
The shares are offered on a best efforts basis. Until we accept funds
from the sale of 600,000 shares, money paid by subscribers will be deposited in
an interest-bearing bank escrow account with Firstar Bank, N.A. After we accept
funds from the sale of the first 600,000 shares, money paid by subscribers will
be paid directly to us. If subscriptions for $6,000,000 of shares have not been
received and accepted within ninety days from the date of this prospectus, no
shares will be sold unless we extend the offering for up to two additional
periods of ninety days each. If at any time within ninety days (180 days or 270
days if we extend this offering for one or two ninety day periods) from the date
of this prospectus at least $6,000,000 of shares are properly subscribed for, we
will accept those subscriptions and admit the purchasers of such shares as
shareholders. If we don't sell at least 600,000 shares, we will refund all
subscribers' funds in full, together with each subscriber's pro rata share of
any interest earned on the subscriber's subscription amount without deduction
for any expenses.
After we accept proceeds from the first subscriptions, we may continue
to offer for sale the remaining shares and accept subscriptions for such shares
until all of the shares are sold or until the date the offering terminates. The
offering will terminate ninety days following the effective date of this
prospectus unless we extend the offering for up to two additional periods of
ninety days each. See "Terms of the Offering."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION
TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR
CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY
FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different or additional information. We are not offering shares for sale in any
jurisdiction where such offer or sale is not permitted. You should not assume
that the information in this prospectus is accurate on any date other than the
date set forth on the front cover of this prospectus.
This prospectus contains forward-looking statements that involve risks
and uncertainties. We use words such as "anticipate," "believe," "plan,"
"expect," "future," "intend," "may," "will," "estimate," "continue," and similar
expressions to identify such forward-looking statements. You should not place
undue reliance on these forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks faced by us described in "Risk Factors" and
elsewhere in this prospectus. See "Forward-Looking Statements."
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
----
<S> <C>
Prospectus Summary............................................................ 4
Fee Table and Expenses Summary................................................ 7
Risk Factors.................................................................. 8
Forward Looking Statements.................................................... 17
Use of Proceeds............................................................... 17
Compensation and Fees......................................................... 19
The Business.................................................................. 21
Investment Objective and Policies............................................. 21
Management Arrangements....................................................... 35
Conflicts of Interest......................................................... 45
Distribution and Allocations.................................................. 50
Plan of Distribution.......................................................... 53
Terms of the Offering......................................................... 55
Transferability of Shares..................................................... 61
Summary of The Declaration of Trust........................................... 63
Tax Matters................................................................... 69
Regulation.................................................................... 87
Legal Matters................................................................. 91
Experts....................................................................... 91
Additional Information........................................................ 91
Reports to Shareholders....................................................... 91
Financial Statements.......................................................... 92
Exhibit A - Declaration of Trust.............................................. A-1
Exhibit B - Subscription Documents............................................ B-1
Exhibit C - Notice to California
Investors.................................................................. C-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
prospectus. This summary does not contain all of the information you should
consider before investing in our shares. Each investor is urged to read this
entire prospectus before investing. Unless otherwise noted, the information in
this prospectus assumes we sell 2,500,000 shares. In particular, you should
carefully consider information set forth under the heading "Risk Factors."
THE TRUST................ We are a Delaware business trust organized on June
15, 2000. We have elected to be treated as a
business development company under the Investment
Company Act. See "Regulation." We are a
"non-diversified closed-end" company as defined
under the Investment Company Act.
INVESTMENT OBJECTIVE..... Our investment objective is long term capital
appreciation from investments in small and medium
size companies. See "Investment Objective and
Policies." We will seek investments in companies
which, in the view of our managers, will provide
opportunities for significant capital appreciation
and prudent diversification of risk. We will seek
investments in a variety of companies and
industries. The securities of these companies will
often have significant speculative characteristics.
Until we make our investments, we will hold our
funds in more secure, liquid securities. Many of
the investments we will make are commonly referred
to as venture capital investments. Our investment
objective does not seek current income.
THE OFFERING............. We are offering shares of beneficial interest at
$10 per share. You must purchase at least five
units (five hundred shares) ($5,000), unless you
are purchasing shares for your IRA. If you are
purchasing shares for your IRA, you must purchase
at least two units (200 shares) ($2,000). Until we
accept funds from the sale of $6,000,000 of shares,
funds paid by subscribers will be deposited in an
interest-bearing bank escrow account with Firstar
Bank, N.A. If we do not sell $6,000,000 of shares
all subscribers' funds will be promptly returned in
full, together with each subscriber's share of any
interest earned on their investment, without
deduction for any expenses. After we accept funds
from the sale of $6,000,000 of shares, funds paid
by subscribers will not be paid to an escrow
account, but instead will be paid directly to us.
The offering will terminate if we do not sell
$6,000,000 of shares within ninety days of the date
of this prospectus or within 180 days or 270 days
if we extend the offering for one or two additional
periods of ninety days each.
RISK FACTORS............. An investment in the Trust involves a number of
significant risks. As a result of these risks, we
may not be able to achieve our investment
objective. You should review carefully all of the
risk factors set forth in "Risk Factors."
Significant risks include the following:
- Investing in our shares is highly
speculative and you could lose some or all
of the amount you invest.
4
<PAGE>
Because of our focus on small and medium
sized companies, market conditions will
likely affect the value of our shares.
General economic conditions, and general
conditions in industries in which our
portfolio companies do business will also
affect the value of our shares.
- There is currently no secondary market
for our shares and we intend to take
steps to prevent such a market from ever
developing. An investment in our shares
will be illiquid. Additionally, we will
not redeem our shares on an ongoing
basis and our shareholders cannot
exchange their shares for shares of any
other fund.
- We will primarily acquire securities of
privately held small and medium sized
businesses in what are commonly referred
to as venture capital investments. These
securities are illiquid, involve a high
degree of business and financial risk
and accordingly, are speculative.
- We may borrow funds in order to make
investments in portfolio companies and
for operational purposes. In addition,
we intend to form an SBIC that will use
leverage by issuing debentures or senior
securities. By using leverage in either
of these two ways, we will magnify gains
or losses in our portfolio value.
Leverage will increase our vulnerability
to adverse developments in the general
economy or in our portfolio companies.
TERM OF THE TRUST........ The Trust will terminate upon the liquidation of
all of its investments, but no later than December
31, 2011, or ten (10) years from the final closing
of the sale of the shares offered hereby, if later
(see "Terms of the Offering"). However, the
independent trustees have the right to extend the
term of the Trust for up to two (2) one-year
periods if they determine that such extensions are
in the best interest of the Trust and in the best
interest of the shareholders, after which the Trust
will liquidate any remaining investments as soon as
practicable but in any event within three (3)
years. See "Summary of the Declaration of Trust."
TRUST ADVISOR............ Berthel Fisher & Company Planning, Inc. ("Berthel
Planning"), a corporation organized under the laws
of the State of Iowa on March 20, 1989, is the
trust advisor. The principal office of Berthel
Planning is located at 701 Tama Street, Building B,
PO Box 609, Marion, Iowa 52302-0609. Berthel
Planning was organized as a subsidiary of Berthel
Fisher & Company to serve as a registered
investment advisor. All of the voting stock of
Berthel Planning is owned by Berthel Fisher &
Company. Berthel Fisher & Company, a financial
services holding company, was formed in 1985 as an
Iowa corporation to hold the stock of Berthel
Financial
5
<PAGE>
Services, a broker-dealer registered with the
National Association of Securities Dealers, Inc.
Berthel Financial Services is the dealer manager
selling the shares on our behalf.
INDEPENDENT TRUSTEES..... We will have at least two independent trustees who
will supervise our operations and investments. The
independent trustees must approve all of our
investment decisions. Other significant actions of
the Trust will also require the approval of the
independent trustees. See "Investment Objective and
Policies."
FEES AND EXPENSES........ We have entered into a Management Agreement with
Berthel Planning, the trust advisor. We will pay
Berthel Planning an annual management fee equal to
2.5% of the value of our assets. The management fee
will be paid monthly in arrears. The amount of any
monthly management fee will be determined by
reference to the net value of our assets as of the
first day of that quarter. After we have returned
to shareholders all of the amounts invested by
shareholders, we will pay Berthel Planning an
incentive distribution equal to 20% of all
subsequent distributions from the Trust. We will
pay all expenses associated with our operation,
such as legal, accounting and administrative
expenses. Selling commissions paid by us will vary
between 2% and 7% of the aggregate purchase price
of all shares sold, depending on the number of
shares purchased by an investor. We will pay an
underwriting fee of 2% of the price of all shares
sold. We will also pay a syndication fee of 1% of
the price of all shares sold. See "Terms of the
Offering" and "Compensation and Fees."
DISTRIBUTIONS............ After the completion of the offering, unless a
majority of the independent trustees determine that
a distribution is not in the best interest of the
Trust and the shareholders, we will make quarterly
distributions of all gross cash funds provided from
our operations to the extent that we have cash
available for such distributions. All distributions
will be made 99% to the shareholders and 1% to
Berthel Planning until we have distributed to
shareholders an amount equal to the entire amount
originally invested by investors. Thereafter, we
will make all distributions 80% to the shareholders
and 20% to Berthel Planning.
We do not presently intend to distribute capital
during the first five years following the
completion of the offering. However, with the
approval of the independent trustees, we may
distribute capital if in our opinion there are
insufficient investment opportunities available, or
if such distribution is warranted for the benefit
of the shareholders. After the first five year
period, we may distribute any capital that we, with
the approval of the independent trustees, believe
is not necessary for operations. See "Distributions
and Allocation."
LEVERAGE................. In order to make investments, we may seek to borrow
from banks, insurance companies and other
institutions up to the maximum extent permitted by
the Investment Company Act. See "Investment
Objective and Policies." We presently intend to
organize a small business investment company
("SBIC") as a
6
<PAGE>
subsidiary. If funds are available to do so, we
expect may invest at least $5,000,000 of the
proceeds in the SBIC. An SBIC is formed through the
United States Small Business Administration
("SBA"). If formed, the SBIC will issue debentures
or participating securities through the SBA, which
will have the effect of leveraging the investment
of the Trust in the SBIC. This will increase the
risk of loss to the Trust. See "Investment
Objective and Policies."
REGULATION............... We have elected to be treated as a business
development company under the Investment Company
Act. The Investment Company Act imposes
restrictions on our activities, including
restrictions on the nature of our investments, the
use of borrowed funds and our issuance of
securities, options, warrants or other rights. The
Investment Company Act also requires that a
majority of our Trustees be individuals who are not
"interested persons" of the Trust as defined in the
Investment Company Act. Such restrictions may
prohibit, or render inadvisable, certain
investments that would otherwise be suitable for
investment by the Trust. See "Regulation."
As our manager, Berthel Planning will be subject to
the provisions of the Investment Advisers Act,
which governs the payment of compensation based on
capital gains in an investment advisory contract
between an investment adviser and a business
development company. See "Regulation."
We will be subject to substantial regulation by the
SBA if we form an SBIC subsidiary. These
regulations will limit the types and structures of
the investments of the SBIC subsidiary.
FEE TABLE AND EXPENSES SUMMARY
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (1)
Sales Load (as a percentage of offering price) (2) .....................................7.00%
Syndication fee ........................................................................1.00%
Underwriting fee .......................................................................2.00%
ANNUAL EXPENSES (as a percentage of net assets attributable to shares)(3)
Management fees (4).....................................................................2.50%
Interest payments on borrowed funds (5).................................................NONE%
Other expenses
Operating expenses........................................... 2.10%
Independent trustees fees and expenses ........................ 33%
Total other expenses....................................................................2.43%
Total Annual Expenses...................................................................4.93%
</TABLE>
---------------------------
7
<PAGE>
(1) This table does not include other expenses incurred in connection with
our organization and offering. These expenses, which will not exceed
3.5% of offering proceeds, will be paid from offering proceeds. This
table also does not include acquisition fees and acquisition expenses
that may be paid in connection with the purchase of investments by the
trust.
(2) The seven percent sales load assumes that volume discounts are not
available to any investor. Volume discounts benefit investors who make
large investments in the trust. Volume discounts will not increase
proceeds to the trust, but will decrease the amount of commission paid.
(3) We have assumed annual expenses based on the sale of the maximum number
of shares and the payment of the maximum expenses. We have shown all
percentages based upon our estimated first year expenses.
(4) We compute Management Fees each year on the basis of 2.5% of the total
assets of the Trust.
(5) Assumes no leverage.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Example(1) 1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming payment of a 10% sales load
and a 5% annual return: $144 $233 $322 $545
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This example is based on our estimate of first year expenses. We have
assumed that expenses will stay the same throughout the life of the
trust. Because this is an example, you should not consider these
expenses to be representative of future actual expenses. Future actual
expenses may be more or less than those shown. We have also assumed for
this example that none of the annual return comes from realized capital
gain. The example does not reflect distributions to Berthel Planning
after all shareholders have received return of their investment amount.
The purpose of the foregoing table is to assist you in understanding
the various costs and expenses that you will bear directly or indirectly if you
decide to invest in the Trust. Management fees and other expenses are based on
estimated amounts for our first full fiscal year. The example is based on
estimated amounts and is entirely hypothetical. The five percent return is only
a hypothetical example that is required by law to be used to demonstrate the
costs and expenses of an investment in our shares. YOU SHOULD NOT CONSIDER THE
EXAMPLE TO BE A PROMISE FROM US OF PAST OR FUTURE PERFORMANCE OR EXPENSE. OUR
ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN IN THE TABLE.
RISK FACTORS
AN INVESTMENT IN THE TRUST INVOLVES A NUMBER OF SIGNIFICANT RISKS. AS A
RESULT OF THESE RISKS, YOU COULD LOSE SOME OR ALL OF AN INVESTMENT IN OUR
SHARES. IN ADDITION TO THESE RISK FACTORS HEREUNDER YOU SHOULD ALSO CONSIDER THE
SECTION ENTITLED "CONFLICTS OF INTEREST" BEGINNING ON PAGE 45.
INVESTMENT RISKS
INVESTING IN OUR SHARES IS HIGHLY SPECULATIVE AND YOU COULD LOSE SOME
OR ALL OF THE AMOUNT YOU INVEST.
8
<PAGE>
The value of our shares may decline and may be affected by numerous
market conditions that could result in the loss of some or all of your
investment in our shares. The securities markets frequently experience extreme
price and volume fluctuation which affect market prices for securities of
companies generally, and small and medium sized companies in particular. Because
of our focus on small and medium sized companies, market conditions will likely
affect the value of our shares. General economic conditions, and general
conditions in industries in which our portfolio companies do business will also
affect the value of our shares.
INVESTING IN OUR SHARES MAY BE INAPPROPRIATE FOR YOUR RISK
TOLERANCE.
Investing in our shares may force you to bear more risk than you should
or can bear. We will invest in accordance with our investment objective, which
may result in an above average amount of risk and volatility or loss of
principal. Our investments in portfolio companies will probably be highly
speculative and aggressive; therefore, an investment in our shares may not be
suitable for you.
VENTURE CAPITAL RISKS
THE INABILITY OF OUR PORTFOLIO COMPANIES TO BUILD A BUSINESS FROM THEIR
IDEAS OR PLANS WOULD HAVE A NEGATIVE IMPACT ON OUR INVESTMENT RETURNS.
The possibility that our portfolio companies will not be able to
commercialize their technologies, products or business concepts presents
significant risk. Additionally, although some of our portfolio companies may
already have a commercially successful product or product line when we invest,
many products and services of small and mid-size companies have a limited market
or life span. Thus, the ultimate success of these companies often depends on
their ability to continually innovate in increasingly competitive markets.
Their inability to do so could affect our investment returns.
THE INABILITY OF OUR PORTFOLIO COMPANIES TO SUCCESSFULLY MARKET THEIR
PRODUCTS OR SERVICES WOULD HAVE A NEGATIVE IMPACT ON OUR INVESTMENT
RETURNS.
Even if our portfolio companies are able to develop their products and
services, the market for new products and services is highly competitive and
rapidly changing. Success is difficult to predict and the marketing efforts of
our portfolio companies may not be successful.
AN INVESTMENT STRATEGY FOCUSED PRIMARILY ON SMALL AND MEDIUM SIZED
PRIVATELY-HELD COMPANIES PRESENTS CERTAIN CHALLENGES, INCLUDING THE
LACK OF AVAILABLE INFORMATION ABOUT THESE COMPANIES, A DEPENDENCE ON
THE TALENTS AND EFFORTS OF THEIR MANAGERS AND A GREATER VULNERABILITY
TO ECONOMIC DOWNTURNS.
We will invest primarily in small and medium sized privately-held
companies. Generally, very little public information exists about these
companies and we will be required to rely on the ability of Berthel Planning to
obtain adequate information to evaluate the potential returns from investing in
these companies. Also, privately-held companies frequently have less diverse
product lines and smaller market presence than larger competitors. They are thus
generally more vulnerable to economic downturns and may experience substantial
variations in operating results. These factors could affect our investment
returns.
OUR PORTFOLIO COMPANIES WILL LIKELY HAVE SIGNIFICANT COMPETITION.
9
<PAGE>
Small to medium-sized companies often face significant competition,
both from other early-stage companies and from more established companies.
Competitors of our portfolio companies may have strategic capabilities such as
an innovative management team or an ability to react quickly to changing market
conditions, while more established companies may possess significantly more
experience and greater financial resources than our portfolio companies. These
factors could affect our investment returns.
OUR INVESTMENT RETURNS WILL DEPEND ON THE SUCCESS OF OUR PORTFOLIO
COMPANIES AND THEIR KEY PERSONNEL.
Our success will depend upon the success of our portfolio companies.
Their success, in turn, will depend in large part upon the abilities of their
key personnel. The day-to-day operations of our portfolio companies will remain
the responsibility of their key personnel. Competition for qualified personnel
is intense at any stage of a company's development. The loss of one or a few key
managers can hinder or delay a company's implementation of its business plan.
Our portfolio companies may not be able to attract and retain qualified managers
and personnel. Any inability to do so may negatively impact our investment
returns.
SOME OF OUR PORTFOLIO COMPANIES MAY NEED ADDITIONAL CAPITAL, WHICH MAY
NOT BE READILY AVAILABLE.
Our portfolio companies will often require substantial additional
financing after our first investment to satisfy their continuing working capital
requirements. A round of financing is typically intended to provide a company
with only enough capital to reach the next stage of development. It is possible
that one or more of our portfolio companies will exhaust its capital and then
will not be able to raise additional financing or may be able to do so only at a
price or on terms which are unfavorable to us. Either of these events could
negatively impact our investment returns.
RISKS OF THE TRUST
THERE IS CURRENTLY NO PUBLIC MARKET FOR OUR SHARES AND WE INTEND TO
TAKE ACTIONS TO PREVENT SUCH A MARKET.
There is currently no secondary market for our shares and we intend to
take steps to prevent such a market from ever developing. Though we cannot
guarantee that a limited market will not develop, an investment in our shares
will be illiquid. Additionally, we will not redeem our shares on an ongoing
basis and our shareholders cannot exchange their shares for shares of any other
fund.
BY BORROWING MONEY, OR BY ISSUING PARTICIPATING SECURITIES THROUGH A
SMALL BUSINESS INVESTMENT COMPANY, WE MAY SUFFER INCREASED LOSSES.
We may borrow funds in order to make investments in portfolio
companies and for operational purposes. In addition, we intend to form an
SBIC that will use leverage by issuing debentures or participating
securities. By using leverage in either of these two ways, we will magnify
gains or losses in our portfolio value. Leverage will increase our
vulnerability to adverse developments in the general economy or in our
portfolio companies. See "Establishment of a Small Business Investment
Company" under "Investment Objective and Policies."
WE ARE NOT LIKELY TO REALIZE RETURNS ON OUR INVESTMENTS IN PORTFOLIO
COMPANIES FOR SEVERAL YEARS. THUS, AN INVESTMENT IN OUR SHARES IS ONLY
APPROPRIATE FOR INVESTORS
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<PAGE>
WHO DO NOT NEED SHORT-TERM LIQUIDITY OR CURRENT INCOME FROM AN
INVESTMENT IN OUR SHARES.
It will take a significant period of time before we are able to fully
invest the proceeds of this offering. A portion of our funds will be held in
reserve for follow-on investments and future management fees and other expenses.
Additionally, our investments typically will take at least several years before
the portfolio company is in a position to sell its shares in a public offering,
engage in a sale or merger or buy back its shares. The securities of our
portfolio companies are likely to be "restricted" under Rule 144 of the
Securities Act and thus can not be sold unless we satisfy the requirements of
Rule 144. Accordingly, it will likely be several years before we are able to
sell our investments and make any distributions of gains to our shareholders.
Additionally, because we expect to take up to two years to fully invest the net
proceeds of the offering, less an appropriate reserve for follow-on investments
and future management fees and other expenses, there is an increased risk that
our shares will decline in value after a shareholder purchases them.
WE HAVE NOT YET IDENTIFIED ANY PORTFOLIO COMPANY INVESTMENTS.
We have not yet identified any potential investments for our portfolio
and, thus, you will not be able to evaluate any specific portfolio company
investments prior to purchasing our shares. Additionally, our investments will
be selected by Berthel Planning, subject to the approval of our independent
trustees, and our shareholders will not have input into our investment
decisions. Both of these factors will increase the risk of investing in our
shares.
WE MAY INVEST IN A LIMITED NUMBER OF PORTFOLIO COMPANIES OR INDUSTRIES,
WHICH WILL INCREASE OUR RISK OF LOSS.
We intend to spread our investments among several portfolio companies
and industries. In the early phase of our operations, with the approval of the
independent trustees, we may make investments in a limited number of portfolio
companies utilizing all of our available capital. If the most attractive
investments available to us are concentrated in a small number of industries,
our portfolio may become concentrated in those industries. This will increase
the risk that we will suffer losses. However, financial difficulty on the part
of any single portfolio company will expose us to a greater risk of loss than if
we held many investments. It is possible we will invest in only a few portfolio
companies. See "Portfolio Concentration" under "Investment Objective and
Policies." If we do this, we will have significantly more risk than if we held
more investments.
THERE ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST THAT COULD IMPACT
OUR INVESTMENT RETURNS.
There are significant potential conflicts of interest arising because
of our business model and the relationships of the Trust with Berthel Planning
and its affiliated companies. For a complete discussion of these conflicts, you
should review the section of this Prospectus entitled "Conflicts of Interest."
In summary, conflicts will arise because:
- the personnel of Berthel Planning perform or may perform
similar services for other investment funds and serve as
officers or directors of other entities. Thus, such personnel
are not able to devote all of their time to the Trust;
- new investment opportunities that meet the Trust's investment
objective may be offered to or reviewed by another fund
managed by Berthel Planning or another company affiliated with
Berthel Planning, and may not be offered to or reviewed by
either Berthel Planning or the Trust;
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<PAGE>
- Berthel Planning has an interest in our profits,
which may affect its decisions with respect to our
investments in portfolio companies;
- our legal counsel may also serve as legal counsel to
Berthel Planning;
- the contractual and other arrangements between the Trust and
Berthel Planning, TJB Capital and their affiliated companies,
including Berthel Financial Services, have not been
established by arm's length negotiations; and
- Berthel Financial Services is the dealer manager for the
offering.
WE ARE A CLOSED-END INVESTMENT COMPANY AND WILL NOT REDEEM OUR SHARES.
We are a closed-end fund and will not redeem our shares at the request
of shareholders. Shareholders cannot exchange shares for shares of any other
fund. This means that if you wish to sell our shares, it is unlikely that you
will be able to do so. Historically, when it has been possible to sell shares of
a closed-end investment company like the Trust, the shares have often sold at a
discount to their net asset value. This is likely to be true in our case, since
we may not realize a return on our investments for many years.
VALUING OUR PORTFOLIO IN THE FUTURE WILL BE DIFFICULT AND INEXACT AND
MAY NOT REFLECT THE TRUE VALUE OF OUR INVESTMENTS IN PORTFOLIO
COMPANIES.
We will value our portfolio from time to time based on our best
estimate of the value of each of our individual investments in portfolio
companies. However, there is typically no public market for the securities of
small, privately-held companies. We may also consult with accounting firms,
investment banks and other consulting firms when needed to assist in valuation
of our investments. Portfolio valuation, however, is inherently subjective. The
values placed on our portfolio companies may not reflect the actual value of
these companies.
WE WERE ONLY RECENTLY FORMED AND HAVE NO PRIOR OPERATING HISTORY. OUR
SUCCESS WILL DEPEND, TO A LARGE DEGREE, ON THE EXPERTISE AND EXPERIENCE
OF BERTHEL PLANNING.
Although the personnel of Berthel Planning have experience in making
venture capital investments, the Trust was only recently formed and has no
operating history. Our success in identifying investment opportunities and
pursuing and managing such investments is dependent upon the expertise and
experience of the personnel of Berthel Planning and the ability of Berthel
Planning to attract and retain quality personnel.
A CHANGE IN OUR RELATIONSHIP WITH BERTHEL PLANNING COULD HAVE AN
ADVERSE EFFECT ON OUR ABILITY TO ACHIEVE OUR INVESTMENT OBJECTIVE.
Achieving our investment objective depends in large part on our ability
to utilize the experience, contacts and specialized knowledge in venture capital
investing of Berthel Planning. The management agreement may be terminated by
Berthel Planning or the Trust, in either case upon delivery of written notice of
termination at least sixty days prior to the termination date. If the management
agreement is terminated, our success will depend in large part on our ability to
obtain investment advisory services similar to those offered by Berthel
Planning. Our investment returns may be significantly negatively impacted if we
are unable to obtain these services, or if we are only able to do so on less
favorable terms than those offered by Berthel Planning.
CHANGES IN THE PERSONNEL OF BERTHEL PLANNING MAY HAVE AN ADVERSE EFFECT
ON OUR ABILITY TO ACHIEVE OUR INVESTMENT OBJECTIVE.
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<PAGE>
Achieving our investment objective depends in large part on our ability to
utilize the experience, contacts and knowledge of venture capital investing of
the personnel of Berthel Planning. Over the life of the trust, the personnel of
Berthel Planning may change, having an adverse effect on our ability to achieve
our investment objective.
OUR ABILITY TO ACHIEVE OUR INVESTMENT OBJECTIVE DEPENDS UPON OUR
ABILITY TO UTILIZE THE CONTACTS OF BERTHEL PLANNING AND ITS AFFILIATES.
THE AFFILIATES OF BERTHEL PLANNING, HOWEVER, ARE NOT OBLIGATED TO REFER
INVESTMENT OPPORTUNITIES TO US.
Our success depends, in large part, on our ability to utilize the
experience, contacts and specialized knowledge of the personnel employed by
Berthel Planning and its affiliated companies. We expect that many of our
investments will be made in portfolio companies in transactions in which we will
co-invest with contacts of Berthel Planning, its affiliated companies and
Berthel Growth & Income Trust I. There is a potential that an impasse on joint
venture decisions between co-investors will negatively affect the outcome of
investments where we have jointly invested. None of these other parties is
obligated to refer any investment opportunities to us. The Investment Company
Act also restricts our ability to perform transactions with affiliated parties,
including Berthel Growth & Income Trust I. We intend to apply to the SEC for
exemptive relief from this provision to allow the Trust to make co-investments
and follow-on co-investments with Berthel Growth & Income Trust I and SBIC
subsidiaries owned by the Trust and Berthel Growth & Income Trust I. Although
the SEC has granted similar relief in the past, we cannot be certain that our
application for such relief will be granted. Even if we are granted the
requested relief, it will likely be subject to conditions. For example, we
expect that prior to investing with an affiliated party, Berthel Planning will
be required to present the investment opportunity to our management board for
its review. Furthermore, at least a majority of our independent trustees must
conclude that:
- the terms of the transaction, including the price to be paid,
are reasonable and fair to our shareholders and do not involve
overreaching by any other party;
- the transaction is consistent with the interests of our
shareholders and our investment objective and strategies;
- we will not be disadvantaged by making, maintaining or
disposing of the investment; and
- our participation in such investment opportunity will not
benefit any affiliated party or any of their respective
affiliates, except as specifically permitted in the Investment
Company Act.
OUR RETURNS MAY BE SUBSTANTIALLY LOWER THAN THE AVERAGE RETURNS
HISTORICALLY REALIZED BY INVESTMENT FUNDS WITH SIMILAR OBJECTIVES.
Past performance of investment funds with similar objectives is not
necessarily indicative of the future performance of such funds or the Trust. We
cannot guarantee that we will meet or exceed the rates of return historically
realized by the venture capital industry as a whole. Additionally, our overall
return will almost certainly be reduced by certain factors related to our
structure as a business development company required to file reports under the
Securities Exchange Act of 1934, including:
- the lower return we are likely to realize on short-term liquid
investments during the period in which we are identifying
potential investments,
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- the costs of securities law compliance and reporting,
and
- the regular public disclosure required of business development
companies, which could result in the Trust being less
attractive as an investor to certain potential portfolio
companies.
BECAUSE THE MARKET FOR INVESTMENTS IN SMALL TO MEDIUM-SIZED COMPANIES
IS HIGHLY COMPETITIVE, OUR STATUS AS A REGULATED BUSINESS DEVELOPMENT
COMPANY MAY HINDER OUR ABILITY TO PARTICIPATE IN INVESTMENT
OPPORTUNITIES.
We will likely face substantial competition in our investing activities
from private venture capital funds, investment affiliates of large industrial,
technology, service and financial companies, small business investment
companies, wealthy individuals and foreign investors. As a regulated business
development company, we are required to disclose quarterly the name and business
description of portfolio companies and the value of any portfolio securities.
Many of our competitors are not subject to this disclosure requirement. Our
obligation to disclose this information could hinder our ability to invest in
certain portfolio companies. Additionally, other regulations, current and
future, may make us less attractive as a potential investor to a given portfolio
company than a private venture capital fund not subject to the same regulations.
THE VENTURE CAPITAL BUSINESS IS GROWING, AND WITH MORE CAPITAL READILY
AVAILABLE, OUR SUCCESS WILL DEPEND ON A CONTINUING SUPPLY OF FAVORABLE
INVESTMENT OPPORTUNITIES.
There has been a significant amount of new capital invested in venture
capital funds in recent years, and this trend is likely to continue. With the
amount of capital available, some companies that may have had difficulty in
obtaining funding in the past may be able to do so, even if the chances for
success in these investments may be marginal. In addition, there is likely to be
an increasing amount of competition among venture capital funds for the best
investment prospects. Thus, our success will be largely dependent on our ability
to find the most favorable opportunities in a highly competitive venture capital
market, while avoiding the marginal prospects.
OUR SUCCESS WILL BE SIGNIFICANTLY AFFECTED BY THE STATE OF THE
SECURITIES MARKETS IN GENERAL AND, MORE SPECIFICALLY, BY THE MARKET FOR
INITIAL PUBLIC OFFERINGS.
We anticipate that a substantial portion of our returns will be
realized through initial public offerings of our portfolio companies. The market
for initial public offerings is cyclical in nature. Thus, we cannot be certain
that the securities markets will be receptive to initial public offerings,
particularly those of early-stage companies. Any adverse change in the market
for public offerings could significantly impact our ability to realize our
investment objective. Our ability to achieve attractive investment returns will
also depend upon the availability of strategic or financial acquirers of our
portfolio companies. The interest of potential buyers in acquiring our portfolio
companies will vary with general economic conditions. The valuations potential
buyers are willing to place on our portfolio companies will vary with the
valuations of comparable publicly-traded companies.
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IF YOU ARE AN ERISA PLAN OR AN IRA, YOU MUST DETERMINE THAT THE
INVESTMENT IN OUR SHARES IS PRUDENT AND MEETS YOUR INVESTMENT
GUIDELINES. WE CAN MAKE NO GUARANTEE THAT OUR ASSETS WILL NOT BE
CONSIDERED "PLAN ASSETS" OF YOUR PLAN OR IRA.
If you are considering an investment though an employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, or ERISA, the
fiduciary acting on your behalf when investing in our shares should satisfy
itself that an investment in the shares is consistent with the prudence
standards of Section 404 of ERISA and is prudent in light of your cash needs and
other ERISA requirements. If you are an ERISA plan or an individual retirement
account, or IRA, you should assure yourself that the investment is not a
prohibited transaction under Section 406 of ERISA or Section 4975 of the
Internal Revenue Code. The Department of Labor has issued regulations that
characterize the assets of some entities as "plan assets" of the ERISA plans and
IRAs that invest in those entities. We anticipate that our shares will be
considered "publicly offered securities" within the meaning of the regulations,
and our assets would not be considered plan assets. However, we strongly urge
you or your fiduciaries to consult your own advisers prior to purchasing our
shares.
FLUCTUATIONS IN INTEREST RATES MAY HURT PORTFOLIO COMPANIES THAT HAVE
BORROWED FUNDS.
Fluctuations in interest rates may have an adverse impact on our
portfolio companies. Some of our investments may be subordinated loans. In
addition, we may purchase equity securities issued by companies that have
borrowed substantial amounts. The payment of any amounts due to us will
generally be subject to the payments due on debt senior to our investment.
Furthermore, increased interest rates may require more of a portfolio company's
available funds to be paid to senior lenders. If a portfolio company cannot
generate sufficient cash flow to meet interest payments it could decrease or
eliminate the amount we realize on our investment. See "Investment Objective and
Policies."
OUR INABILITY OR REFUSAL TO MAKE LATER INVESTMENTS IN A PORTFOLIO
COMPANY AFTER OUR FIRST INVESTMENT COULD HURT OUR PERFORMANCE.
After we make our initial investment in a company, we may be asked or
have the chance to make additional investments in the portfolio company. These
investments are often called "follow- on investments." Our available funds may
limit our ability to make follow-on investments. Also, in some situations we
will simply choose not to make a follow-on investment. If we are not able to
make a follow-on investment, or we choose not to, this may cause the portfolio
company to go out of business. In addition, follow-on investments are often
requested by portfolio companies when their businesses are not operating as
anticipated. In these situations, when we do make a follow-on investment, it is
possible that we will lose the amount of this follow-on investment, along with
the amount of original investment. See "Follow-On Investments" under "Investment
Objective and Policies."
IF WE FORM AN SBIC AND USE "PARTICIPATING SECURITIES" TO OBTAIN
FINANCING FROM THE SBA, IT IS POSSIBLE THAT THE SBA WILL GET ALL OF
ITS MONEY BACK OR OBTAIN A PROFIT, EVEN IF THE OVERALL PERFORMANCE
OF THE SBIC IS POOR AND EVEN IF WE LOSE OUR INVESTMENT IN THE SBIC.
SBA regulations provide that once a distribution is characterized in
a certain fashion, that characterization may not be changed later. Thus, if
our SBIC is profitable for a quarter, or other calendar period, and makes a
"prioritized payment, a "tax distribution" or a "return on capital" as these
terms are used by the SBA, these payments may not be recharacterized as a
"return of capital" if the operations of the SBIC subsequently prove
unprofitable. This might cause the SBA
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to receive distributions early in the life of our SBIC which are characterized
as profits even though the SBIC ultimately proves to be unprofitable. It may
even permit the SBA to receive return of the full amount of its participating
securities investment in the SBIC, while we lose some or all of our capital
investment in the SBIC.
IF WE FORM AN SBIC, THE SBA MAY RESTRICT DISTRIBUTIONS FROM THE SBIC TO
US.
If we form an SBIC, the SBA may restrict distributions from the SBIC to
us if it determines that the value of the SBIC's assets is materially
overstated. Distributions from the SBIC may be further restricted if we do not
have distributable income as defined by the SBA. If we have invested the bulk of
our assets in our SBIC, this would prevent us from making distributions to
shareholders.
IF WE FORM AN SBIC AND USE "PARTICIPATING SECURITIES" TO OBTAIN
FINANCING FROM THE SBA, IT IS LIKELY THAT THE SBA WILL BE ENTITLED
TO MOST OF THE FIRST SEVERAL DISTRIBUTIONS MADE BY THE SBIC.
We expect that if we form an SBIC, the SBIC will accrue losses for
several years from accumulating management fees, amortized organization costs
and other miscellaneous operating expenses. These expenses usually amount to
several million dollars before sufficient profits are realized, which would
entitle the SBA to receive prioritized payments, "tax distributions" or
"returns on capital". Thus, it is likely that the SBA would be entitled to
receive most or all of the first several distributions by the SBIC. As a
result, if we issue SBIC participating securities, distributions to our
shareholders that might otherwise have been made are likely to be delayed.
FEDERAL INCOME TAX RISKS
IF WE ARE TREATED LIKE A CORPORATION FOR TAX PURPOSES, RATHER THAN LIKE
A PARTNERSHIP, THE RETURN TO A SHAREHOLDER WILL SUFFER.
We expect to be treated like a partnership for federal income tax
purposes. This results in "pass-through" treatment of income, gain, losses and
other deductions. We would not be treated as a partnership for federal income
tax purposes, however, if:
- we are incorrect concerning our tax treatment;
- the law relating to partnership treatment changes;
- we are no longer able to qualify for partnership treatment
because we are treated as a "publicly traded partnership" by
the Internal Revenue Service, despite our efforts to prevent
public trading of our shares; or
- we are no longer able to qualify for partnership treatment
because circumstances change.
If we did not qualify for partnership treatment, we would be classified
as an association taxable as a corporation. If this happened, we would be
required to pay income tax at corporate tax rates on our net income. This would
cause the returns to shareholders to suffer. See "Tax Consequences" under "Tax
Matters."
AN INVESTMENT BY A FOREIGN INVESTOR COULD CAUSE HIGHLY ADVERSE TAX
CONSEQUENCES TO THAT FOREIGN INVESTOR.
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The tax treatment applicable to a foreign investor who invests in the
Trust is complex and subject to uncertainty and will vary depending upon the
particular circumstances of a particular investor. We do not know how an
investment in the Trust by a foreign investor would be treated. It is possible
that an investment in the Trust by a foreign investor could have adverse tax
consequences for that investor. See "Tax Considerations for Nonresident Aliens
and Foreign Corporations" under "Tax Matters." If you are a foreign investor you
should consult your tax advisers with respect to the possible federal, state,
local and foreign tax consequences to you of an investment in the Trust.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based such
statements largely on our current expectations and projections about future
events and trends, factors affecting the business of investing in small and
mid-sized companies and the state of the financial markets and the economy in
general. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about the Trust, including, among other things:
- general economic and business conditions and the general state
of the financial markets;
- our expectations and estimates concerning the future growth
and performance of the venture capital sector;
- our expectations and estimates concerning the future growth
and performance of our potential portfolio companies;
- existing and future laws and regulations;
- our ability to successfully implement our investment objective
and strategies;
- our relationship with Berthel Planning and its affiliated
companies; and
- other risk factors described under "Risk Factors" in this
prospectus.
We use words such as "anticipate," "believe," "plan," "expect,"
"future," "intend," "may," "will," "estimate," "continue," and similar
expressions to identify such forward-looking statements. You should not place
undue reliance on these forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks faced by us described in "Risk Factors" and
elsewhere in this prospectus.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this prospectus. Because of these risks
and uncertainties, the forward-looking events and circumstances discussed in
this prospectus may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.
USE OF PROCEEDS
In the following table we set forth our best estimate of how we will
use the proceeds from the sale of shares if we sell 600,000 shares and if we
sell 2,500,000 shares.
<TABLE>
<CAPTION>
Estimated Use of Gross Offering Proceeds
----------------------------------------
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600,000 shares 2,500,000 shares
-------------- ----------------
Amount Percent(1) Amount Percent(1)
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Gross proceeds $6,000,000 100.0% $25,000,000 100.0%
Organizational and Offering Expenses
Selling commissions $ (420,000) 7.0% $(1,750,000) 7.0%
Underwriting fee $ (120,000) 2.0% $ (500,000) 2.0%
Syndication fee $ (60,000) 1.0% $ (250,000) 1.0%
Other expenses(2) $ (210,000) 3.5% $ (875,000) 3.5%
--------- ---- --------- ----
Net proceeds available for operation
of the trust $5,190,000 86.5% $21,625,000 86.5%
</TABLE>
-----------------------
(1) All percentages shown in the table above are percentages of gross
proceeds.
(2) Other expenses include all other expenses of organizing the Trust and
offering the shares, including legal, accounting and printing. We will
not pay other expenses of the organization and offering in excess of
3.5% of the gross proceeds. Amounts of other expenses in excess of 3.5%
of gross proceeds will be paid by Berthel Planning. Although the table
shows that other expenses of organization and offering will be a
maximum of $875,000, we expect the maximum amount to be spent on other
expenses of organization and offering expenses will be less than
$875,000.
We have not allocated any portion of the net proceeds to any particular
investment. We intend to use substantially all of the net proceeds for
investment in accordance with our investment objective. Until we have identified
appropriate investments in accordance with our investment objective, we may
invest all of our excess cash in cash items of banks, government securities, and
high quality debt securities maturing one year or less from the time of
investment in such securities.
We will invest at least 50% of the net proceeds of this offering in
accordance with our investment objective within two years from the date of this
prospectus or within one year from the termination of this offering, whichever
is later. Any proceeds of the offering in excess of 50% of the total proceeds
not committed for investment in portfolio companies within two years from the
effective date of this offering or within one year from the last closing,
whichever is later, will be distributed pro rata to the shareholders as a return
of capital.
We will pay organizational and offering expenses from the proceeds of
this offering. Organizational and offering expenses are all expenses incurred by
and to be paid from the assets of the Trust in connection with and in preparing
the Trust for registration and subsequently offering and distributing shares to
the public. These expenses include, but are not limited to, total underwriting
and brokerage discounts and commissions (but not including fees of the
underwriter's attorneys); printing; engraving; mailing; salaries of employees
while engaged in sales activity; charges of transfer agents, registrars,
trustees, escrow holders, depositories and experts; expenses of qualification of
the sale of shares under Federal and State laws, including taxes and fees; and
accountants' and attorneys' fees. If 600,000 shares are sold, such expenses to
be paid from proceeds are estimated to be $810,000. If 2,500,000 shares are
sold, such expenses to be paid from proceeds will not exceed $3,375,000. If
Berthel Financial Services elects to exercise its option to sell an additional
500,000 shares for a maximum of 3,000,000 shares, such expenses to be paid from
proceeds will not exceed $4,050,000. A portion of the organizational and
offering expenses has been advanced or will be advanced by Berthel Planning.
Upon termination of this offering we will reimburse Berthel Planning for such
expenses.
Berthel Planning will pay all organizational and offering expenses
(excluding sales commissions and discounts, the underwriting fee and the
syndication fee) that exceed 3.5% of the purchase price of shares sold in the
offering. Exclusive of organizational and offering expenses
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actually incurred and paid by Berthel Planning, we will not pay more than 10% of
the proceeds of this offering, in the aggregate, to NASD members, or to persons
who are affiliated with, associated with, or related to NASD members.
We will pay, from the proceeds of this offering, the expenses relating
to the purchase or acquisition of assets for our portfolio and fees and
commissions incurred by us in connection with the purchase or acquisition of
assets for our portfolio. Such fees and expenses are not determinable at this
time, but the total of all such fees and expenses will not exceed 3.5% of the
proceeds of this offering. If 600,000 shares are sold, such fees and expenses
will not exceed $210,000. If 2,500,000 shares are sold, such fees and expenses
will not exceed $875,000. If Berthel Financial Services elects to exercise its
option to sell an additional 500,000 shares for a maximum of 3,000,000 shares,
such fees and expenses will not exceed $1,050,000.
COMPENSATION AND FEES
We will pay compensation and fees to Berthel Planning and its
affiliates during the various phases of the organization and operation of the
Trust. We will also pay compensation and fees to the independent trustees. The
following table discloses all compensation and fees Berthel Planning can
receive, either directly or indirectly. The table also shows fees and expenses
we will incur to acquire assets for our portfolio even though such fees and
expenses will not be paid to Berthel Planning or its affiliates.
<TABLE>
<CAPTION>
ORGANIZATION AND OFFERING PHASE
Person
Receiving Estimated Amount of
Compensation Type of Compensation Compensation
------------ -------------------- ------------
<S> <C> <C>
Berthel Financial Selling commissions for the sale Selling commissions will vary
Services and of shares. between 2% and 7% of the purchase
selected sales price of all shares sold.
agents The amount of commission depends on
the number of shares purchased by a
particular investor. Some of the
selling commissions will be paid to
selling agents. See "Terms of the
Offering."
Berthel Financial Underwriting fees for facilitating We will pay an underwriting fee of
Services and the offering of the shares. 2% of the purchase price of all
selected sales shares sold. The fee will be
agents $120,000 if 600,000 shares are
sold, and $500,000 if 2,500,000
shares are sold.
Berthel Financial Syndication Fee for services in We will pay Berthel Financial Services
Services recruiting the selected sales agents. a fee equal to 1% of the aggregate
purchase price of all shares sold. The
fee will be $60,000 if 600,000
shares are sold, and $250,000 if
2,500,000 shares are sold.
Berthel Planning Reimbursement of organizational Amount of reimbursement shall not
and offering expenses, including exceed 3.5% of the aggregate
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legal and accounting fees and purchase price of all shares sold.
printing and mailing expenses, paid Any organizational and offering
or incurred by Berthel Planning in expenses (excluding selling
connection with organizing the commissions and discounts, the
Trust and offering the shares. underwriting fee and the
syndication fee) of the Trust in
excess of this amount will be paid by
Berthel Planning.
OPERATING PHASE
Berthel Planning Management Fee for providing We will pay Berthel Planning an
management services to the Trust. annual management fee equal to
2.5% of the total assets of the Trust.
See "Management Arrangements." We do not
know what the actual amount of the
management fees will be because the
amount depends on future operations.
Berthel Planning Incentive distribution. Berthel Planning will receive an
incentive distribution equal to
20% of distributions from the Trust
after all shareholders have
received distributions equal to the
amount of their original investments.
See "Management Arrangements." We do
not know what the amount of actual
expenses will be because the
amount depends on future operations.
Berthel Planning Administration expense We will pay to Berthel Planning and its
reimbursement. affiliates the administrative expenses
associated with the administration
of the Trust. See "Management
Arrangements." Actual amounts will
depend on future operations. We do not
know what the actual expenses will be.
Berthel Planning Out-of-pocket costs The Trust will reimburse out-of- pocket
reimbursement. costs and expenses that are directly
allocable and identifiable to the
Trust or its business or investments,
including direct costs of investment.
We cannot determine the actual amounts
of these payments.
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Independent Annual fee, meeting fees and We will pay each of the independent
trustees reimbursement of expenses. trustees an annual fee of $12,000,
plus a fee of $1,000 for each trustee
meeting attended up to an annual
limit of twenty-four meetings. We will
also reimburse the independent trustees
for their out-of-pocket expenses relating
to attendance at such meetings.
Berthel Financial Fees for portfolio transactions. We may pay underwriting fees, finders
Services fees or broker commissions
associated with transactions in
securities of portfolio companies,
if the payments are permitted by
Section 57 of the Investment Company
Act. We cannot now determine the
actual amounts of these payments.
Third Parties Acquisition fees and acquisition The Trust may pay fees and expenses
expenses. to acquire investments for its
portfolio of up to 3.5% of the
aggregate purchase price of all
shares sold. The total of such fees
and expenses will be up to $210,000
if 600,000 shares are sold and up to
$875,000 if 2,500,000 shares are sold.
These fees and expenses will be paid to
non-affiliated third parties and will
not be paid to Berthel Planning or its
affiliates.
</TABLE>
THE BUSINESS
We are a newly-organized, non-diversified, closed-end management
investment company that has elected to be treated as a business development
company under the Investment Company Act. We were formed under the laws of the
State of Delaware on June 15, 2000. Our principal office is located at 701 Tama
Street, Building B, PO Box 609, Marion, Iowa 52302-0609, and our telephone
number is (319) 447-5700.
As of the date of this prospectus, we have issued five hundred shares
each to Thomas J. Berthel and Henry Royer for an aggregate of $10,000 cash.
These individuals have represented that these shares were purchased for
investment purposes only and have undertaken that the shares will be sold only
pursuant to a registration statement under the 1933 Act or an applicable
exemption from the registration requirements thereof. As a result of their
ownership of these shares, Thomas J. Berthel and Henry Royer may be deemed to
control the Trust at the date of this prospectus. When the funds of investors
are released to us from the escrow account, however, their control will
terminate.
INVESTMENT OBJECTIVE AND POLICIES
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INVESTMENT OBJECTIVE AND STRATEGY
Our investment objective is long term capital appreciation from
investments in small and medium size companies. We will invest only in companies
that we believe will experience significant growth over the long term. After
carefully selecting the companies we will invest in, we will seek to enhance
their competitiveness by providing them with managerial assistance in strategy
formulation, recruiting, and general business operations. We will seek to
provide returns to our shareholders primarily through long-term appreciation in
the value of our portfolio companies. Current income is not one of our
objectives.
We have elected to be treated as a business development company under
the Investment Company Act. We will not withdraw such election or change our
investment objective unless such action is authorized by the vote of a majority
in interest of the shareholders.
We intend to invest or commit for investment all of our available
capital within the later of two years from the date of effectiveness of this
prospectus or one year from termination of the offering. We will return to
investors without deduction for front-end fees, any remaining capital
contributions in the Trust that have not been invested or committed for
investment within this period, if these funds will not be utilized or reserved
for operating expenses, working capital or follow-on investments, or distributed
as part of quarterly distributions. However, any net offering proceeds that are
invested in investments that are liquidated during the 60 months following the
date the offering terminates, to the extent not utilized or reserved for
expenses or for follow-on investments, may be reinvested during that sixty (60)
month period. We will distribute to shareholders as soon as practicable any such
proceeds not so reinvested, or committed for reinvestment, utilized or reserved.
We cannot estimate the number of investments that will be liquidated or the
amount of proceeds therefrom that will be reinvested. We anticipate that at the
end of that sixty (60) month period substantially all of our assets will be
invested in portfolio companies.
PRINCIPAL STRATEGIES
We will focus our investments on companies that have not yet sold
shares in an initial public offering that, in our opinion, exhibit potential
for high long-term growth. These opportunities may include seed stage,
development stage and expansion stage financing. These investments are
commonly referred to as venture capital investments. We expect that most of
our investments will be in companies that have some operating record. We may
also invest in special situation opportunities that include bridge financing,
turn around of a declining business, recapitalization of an existing
business, leveraged buyout or acquisition of an existing business.
We may concentrate our portfolio in a few industries and in one or a
few geographic regions of the US. We will invest only in companies that are
headquartered in the United States; however, portfolio companies may have
substantial exposure to international economic conditions.
We will provide follow-on investments to portfolio companies that we
judge to have the highest growth opportunities and conversely, decline follow-on
investments in portfolio companies that have not performed according to our
expectations.
THE TYPES OF SECURITIES WE WILL ACQUIRE
We will make our investments as a sole investor, with other
professional investors or with other persons. Ordinarily we will not be the sole
investor in a company. Other investors may include the management of the
company, other business development companies, small business investment
companies, other institutional investors, venture capital groups and private
individuals. The investment position of the Trust and our co-investors, if any,
in companies will typically involve
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a substantial ownership interest and in some cases may constitute a controlling
ownership interest in such companies.
VENTURE INVESTMENTS
We may make investments in small to medium-sized companies that have
prospects to increase shareholder value. Investments in small to medium-sized
companies have significant speculative characteristics and high risk of loss.
The securities involved may consist only of common or preferred stock. We may
make investments in the form of either debt and equity, or both. We will place
greater emphasis on the equity component and less on the current income
component of these investments.
PUBLICLY TRADED SECURITIES
We may also invest in publicly traded securities. By regulation,
publicly traded securities must not be more than a limited percentage of the
assets in our portfolio to allow us to remain classified as a business
development company. Generally, publicly traded securities and securities of
companies that have a publicly traded class of securities may not exceed 30% of
our total investments, including any cash and short term investments in cash and
cash equivalents. We do not anticipate that investing in publicly traded
securities will be a major activity of the Trust.
MEZZANINE INVESTMENTS
We may make investments that are often referred to as "mezzanine"
investments. Mezzanine investments typically rank above common stock if the
portfolio company liquidates, but still offer the possibility of capital
appreciation. Mezzanine investments may take the form of:
- debt securities that are convertible to equity in a portfolio
company;
- debt securities that are accompanied by warrants to purchase
the common stock of a portfolio company; or
- preferred stock of a portfolio company.
Mezzanine investments will often take the form of debt securities. If
we purchase debt securities, they will typically be rated below investment
grade, and more frequently, not rated at all. In addition, the securities we
purchase will often have speculative characteristics.
The mezzanine securities we purchase may be issued by a portfolio
company for a variety of purposes, including growth and expansion, turn around
of a declining business, recapitalization of an existing business, leveraged
buyout or acquisition of an existing business.
INVESTMENT CRITERIA
We have established investment criteria that will govern the
investments we will seek and acquire. We may from time to time reevaluate and
modify the guidelines. We will use these criteria to structure the types of
investments we seek. However, these criteria are not projections of the return
to be expected from our investments.
The major factors we will consider are discussed below:
- Management. The management of a portfolio company is one of
the most crucial factors impacting its success. We will
consider the integrity, commitment, level of ownership, and
objectives of the management team of a portfolio.
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- Market Opportunity. Market opportunity for a company is also
important to the success of a portfolio company. Before we
will consider investing, a company should have substantial
opportunity for revenue growth through (1) capitalizing on
favorable growth characteristics of the markets it serves, (2)
expanding into new markets or (3) capturing greater market
share within a particular market. In certain more mature
situations a company may not have a substantial opportunity
for revenue growth, and in those cases the company must have a
substantial and defensible position in the market it serves.
- Current Operations. In some cases, historic and current
operating performance will be important when considering an
investment for the Trust. Companies to which we will make
loans (instead of making equity investments) must have
adequate positive cash flow to service this debt.
- Projected Operations. Since we will typically invest for a
longer term (5-7 years), the projected valuation of a
portfolio company is critical to the projected rate of return
and the pricing of the investment. We will analyze a company's
projected performance for reasonableness. We will also analyze
the company's ability to meet the requirements of the proposed
investment. Because debt investments require future cash flows
for principal and interest payments, the projected performance
of a company must be adequate to meet those needs.
- Our Rights. Our investments will often include rights that may
be unusual in other types of investments. Those rights are
often critical to a successful investment. Such rights often
include special liquidity rights such as put and registration
rights, protective rights such as rights to board seats,
antidilution rights and rights to control the board in the
event of a default. The rights we will seek normally require
the company to perform certain duties. We will be aggressive
in negotiating extensive rights to enhance the chance of an
investment's success. We anticipate that our representatives
will serve on the boards of many of the companies. Therefore,
it is an important part of the investment criteria that the
company agree to the rights we require.
- Pricing. Pricing of an investment in a portfolio company is an
important factor. Pricing takes into account the worth of a
company (today and in the future), the percentage of the
company that we are able to acquire with our investment and
any interest or dividends that we will be paid.
PORTFOLIO CONCENTRATION
We will seek to limit our risk with prudent diversification of
investment. We expect that our investments typically will range from $500,000 to
$2,500,000. However, we may make investments of less than $500,000, or more than
$2,500,000.
Generally, we will not invest more than 20% of our available capital in
a single company. When we use the term "available capital" we mean gross
proceeds from the sale of shares less all organizational and offering expenses
and compensation paid out of such proceeds together with funds available to us
from other sources that are available to us to make investments. If we sell only
$6,000,000 of shares, we may invest in as few as five companies.
Even though the limitations discussed above provide restrictions on our
portfolio concentration, if in the opinion of Berthel Planning and the
independent trustees we do not have
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and do not expect to have available capital sufficient to permit a well
diversified portfolio of investments, we will follow a more restrictive policy
intended to enhance our investment diversification. In such case, we will make
investments that will not require significant follow-on investment. Further, we
will not acquire investments that require us to take a lead role in investing in
a company. Instead, we will make investments that permit us to participate with
other investors so the amount of investment we make in any particular company is
smaller than we would invest if we had a greater amount of available capital.
Also, the investments we seek will include a greater proportion of investments
having less risk, such as debt investments and a smaller proportion of equity
investments. The purpose of this policy is to invest in a larger number of
portfolio companies than the minimum permitted by the restrictions set forth
above, thereby spreading the general risk of investment over a larger number of
investments.
INVESTMENTS IN PORTFOLIO COMPANIES INVOLVING AFFILIATES
We expect to invest in portfolio companies that have entered into or
will enter into lease financing arrangements or other financing arrangements
with certain affiliates of Berthel Planning. Such affiliates may include
companies that are wholly owned by Berthel Fisher & Company, or may include
other people and companies affiliated with Berthel Fisher & Company. In each
such case and in all transactions involving these people and companies, the
affiliate will be engaged in the ordinary course of business of providing lease,
loan or other financing or financial services. We may seek an exemptive order
from the SEC to allow us to invest in companies in which some of the affiliates
of Berthel Planning have invested or may invest. We believe that if we do not
obtain an exemptive order we will not be permitted to make such investments.
THE PROCESS WE WILL USE TO SELECT AND STRUCTURE OUR INVESTMENTS
After the release of funds to us from the escrow account, we will begin
investing the proceeds of the offering. This section describes the process we
will use to make investments.
LOCATING INVESTMENTS. We expect that investment opportunities will be
identified for us principally by Berthel Planning. Investment proposals may,
however, come to us from other third party sources, including Berthel Financial
Services and its affiliates, from management of prospective portfolio companies,
the public, and referrals from banks, lawyers, accountants and members of the
financial community. With the approval of the independent trustees, we may pay
such persons finder's fees. If we pay finder's fees, the fees will be in an
amount consistent with applicable law and consistent with industry practice. We
may pay fees to Berthel Financial Services and its affiliates and other
affiliates of the management board, but we will not pay fees to directors,
officers and employees of Berthel Financial Services. An exemptive order from
the SEC is necessary before we pay finder's fees in excess of 1% to people or
companies affiliated with Berthel Planning or Berthel Fisher & Company or with
any Selling Agent acting as principal underwriter for the Trust, and people or
companies affiliated with those selling agents. We may seek such exemptive
orders. We will not pay any finder's fees to Berthel Planning, the independent
trustees or TJB Capital in connection with any of our investments. We will be
responsible for reimbursement of all finder's fees paid by Berthel Planning to
non-affiliated parties.
EVALUATING INVESTMENTS. Prior to committing funds to an investment,
Berthel Planning will conduct investigation and research to assess the prospects
and risks of the potential investment. See "Investment Criteria" above. The
experience and expertise of the officers, directors and employees of Berthel
Planning will be essential in evaluating products, markets, industry trends,
financial requirements, competition and management associated with a prospective
portfolio company. See "Management Arrangements." Where appropriate, we may
engage third party experts and consultants to assist in the evaluation of
certain investment opportunities.
STRUCTURING INVESTMENTS. The terms of our investments typically will be
negotiated directly with the prospective company or its affiliates. Berthel
Planning will be responsible for structuring
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the terms of a proposed investment, including the purchase price, the type of
security to be purchased and the future involvement of the Trust and its
affiliates in the company's business (including representation on its board of
directors). Berthel Planning will seek terms of the investment that provide for
the capital needs of the company and comply with our requirements for such
investments.
APPROVAL PROCESS FOR INVESTMENTS. We will only make investments
recommended by Berthel Planning and approved by the independent trustees. In
recommending an investment, Berthel Planning will submit to the independent
trustees a summary of the terms of the investment, a description of the company
and any other information that is necessary to enable the independent trustees
to review whether the proposed investment is appropriate. The independent
trustees will meet as frequently as needed to review recommended investments and
to approve investments. We anticipate that the independent trustees may meet as
often as one to two times per month, especially during the investment period. If
an investment is approved by the independent trustees, Berthel Planning will
attempt to consummate the investment on terms not materially dissimilar to those
approved. If the terms of the proposed investment change materially after
approval by the independent trustees, Berthel Planning will submit the revised
terms of the investment for approval by the management board and the independent
trustees.
INVESTMENT MONITORING AND FOLLOW-ON SUPPORT
Our investments will typically require active monitoring. Our strategy
requires that we participate in the major business decisions of portfolio
companies. In many cases, our representatives will serve as members of the board
of directors of these companies. Such managerial assistance is required of a
business development company and is intended to enable us to exercise
significant influence and provide management assistance with respect to many
company matters. These matters include such things as capital structure,
budgets, profit goals, diversification strategy, financing requirements,
management additions or replacements and development of a public market or other
liquidity alternative for our investment. In connection with services by our
representatives as directors of these companies, the portfolio company may
reimburse us for expenses incurred. All fees earned by our representatives for
service as directors will be paid to us. When necessary or appropriate, Berthel
Planning may engage third party consultants with the requisite financial or
management expertise to assist the management of portfolio companies on specific
problems. Berthel Planning may also, where appropriate, in the best interests of
the Trust and when specific expertise is required, retain third parties to
represent us on the boards of directors of companies. In this case, fees earned
for such director services may be paid directly to the third parties.
After making its initial investment in a portfolio company, the Trust
may be asked or given the chance to make an additional investment. We may make
these investments to take advantage of warrants or other preferential rights, or
otherwise to increase our position in a successful or promising company.
Follow-on investments will be considered much like an initial investment.
Follow-on investments will be subject to the same approval process as our other
investments.
THE PROCESS WE WILL USE FOR LIQUIDATION OF OUR INVESTMENTS
We will work closely with each portfolio company to develop different
alternatives to provide liquidity for our investment. These activities may
include, among other things, providing counsel and advice with respect to a
public offering, assisting the company in engaging an underwriter for a public
offering, providing counsel and advice with respect to a sale to a third party
and assisting the company in engaging an investment banker to locate a third
party acquirer.
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If it is permitted by the Investment Company Act, or if we obtain an
exemptive order permitting it, affiliates of Berthel Planning may be engaged by
and earn fees from portfolio companies for services in generating liquidity,
such as investment banking or mergers and acquisitions advice. Such engagements
must be approved by a majority of the independent trustees.
After we invest in a company, we will continually review all
alternatives that may generate liquidity of our investments. Our objective in
pursuing alternatives to generate liquidity will be to maximize the total return
the Trust receives for its investment.
Subject to the supervision of the independent trustees, Berthel
Planning will be responsible for the decision and the actions necessary to
liquidate an investment. See "Conflicts of Interest." A decision to fully or
partially liquidate an investment will be reviewed by the independent
trustees. In recommending the liquidation of an investment, Berthel Planning
will provide the independent trustees a summary of the transaction, expected
returns, and other information necessary to support the liquidation of the
investment as a reasonable and appropriate action relative to our objectives
regarding liquidation of investments. We will consider the actual facts and
circumstances of each investment at the particular time the liquidation of an
investment is being proposed, and will make a decision based upon such facts
and circumstances.
The liquidation of an investment may occur at different stages of any
particular investment. Liquidation of securities making up an investment may
occur without our affirmative decision. This is especially true for debt
securities that are to be repaid by a certain date. It is also true for other
securities that have redemption, put, call or other features that automatically
lead to or cause the liquidation of the security. Normal events that lead to the
liquidation of common stock or preferred stock ownership include public
offerings of equity securities by the company, the sale of the company to a
third party, and the sale of our ownership interest in a portfolio company to a
third party. In the case of a public offering, we may have registration rights
which allow us to sell some or all of our position in the initial registration
or in a later offering. We may also sell in the market securities we hold in a
publicly traded company. We may also distribute freely tradeable securities to
our shareholders so that each shareholder may make his or her own choice
regarding liquidation of the security. A distribution of this type may likely
occur where we have such a large block of stock that it would drastically
depress stock prices if we tried to liquidate this stock quickly. If stock or
other securities are distributed, the shareholder will be subject to brokerage
fees that we would have paid otherwise. Sales of such securities by shareholders
may also be subject to legal or practical restrictions which may entail certain
additional expenses. Distributions of this type would be completed where we
believe that shareholders will receive greater net benefit from liquidating the
stock or securities themselves.
The sale of the company or the sale of our securities to a third party
buyer will generally involve a negotiated transaction where we may receive all
cash or all securities or a combination thereof. Usually in such a transaction
any loans we have made to the company will become due and will be either prepaid
or assumed. Such a transaction may also invoke other rights that we may have as
a part of our investment.
Timing of the liquidation of our investments will usually depend upon,
among other things, a company's performance, the judgment of the controlling
investors (which may include us) as to value, the ability of the company to
refinance its outstanding securities, other financial market opportunities and
the future prospects of the company. For example, in growth situations a
company's need for capital may necessitate an entry into the public markets.
General market conditions will also influence when we are able to liquidate an
investment. Typically, we will negotiate with management, directors and other
major investors to maximize financial returns.
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We may engage brokers, including our affiliates, selling agents or
their affiliates, to assist in the disposition of portfolio investments if
permitted by the Investment Company Act. We may engage these same parties as
underwriters and/or brokers to assist us in the sale of our assets or securities
if permitted by the Investment Company Act. The underwriters of a public
offering of a company's securities and brokers assisting in the sale of a
company's securities or assets may be compensated for such services to the
extent permitted by law and the rules of the NASD. The engagement of an
affiliate of Berthel Planning by the Trust will require prior approval by a
majority of the independent trustees, and may also require an exemptive order
from provisions of the Investment Company Act.
We will bear the costs of disposing of an investment to the extent not
paid by the company.
VALUATION OF OUR INVESTMENTS
Berthel Planning will perform a valuation of our assets on a quarterly
basis. The management board will determine the fair value of investments for
which no market exists, which will include most investments to be made by the
Trust.
We may make investments in companies for which market quotations are
readily available and whose securities are freely tradable. Valuations of
such companies will be as follows: (1) securities traded on a securities
exchange or the NASDAQ National Market System will be valued at the closing
price on the last trading day prior to the date of valuation and (2)
securities traded in the over-the-counter market will be valued at the
average of the closing bid and asked prices for the last trading day prior to
the date of valuation. If the publicly traded securities are owned by our
SBIC subsidiary, such public securities will be valued as follows: (1)
over-the-counter securities will be valued at the average bid price at the
close for the valuation date and the preceding two days, and (2) listed
stocks will be valued at the average of the close for the valuation date and
the preceding two days.
Some public securities are restricted from free trading. Restrictions
may include legal restrictions such as Rule 144, contractual restrictions such
as an agreement not to sell securities for a period of time following an initial
public offering, or practical restrictions such as those that exist if we were
to hold a large block that could not be sold without severely depressing prices.
Valuations on these securities will be set by discounting the closing sales or
bid price to reflect the illiquidity caused by such restrictions.
Cash and cash equivalent investments will usually be valued at cost.
These investments will generally be highly liquid. See "Temporary Investments,"
below.
The independent trustees will review all quarterly valuations and
determine whether the valuations conform to the valuation policy. Berthel
Planning must adjust any valuation that does not conform to the satisfaction of
the independent trustees.
The independent trustees will review the valuation policies from time
to time to determine their appropriateness and make changes as necessary. The
independent trustees may also hire independent firms to review or conduct a
valuation.
In connection with the annual examination of our financial statements,
our independent public accountants will review the procedures applied by Berthel
Planning in valuing portfolio securities and investments and will inspect
underlying documentation as to whether such procedures are reasonable and such
documentation is appropriate.
TEMPORARY INVESTMENTS
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While we seek and evaluate companies for investment, we will invest our
available funds in interest bearing bank accounts, bank money markets (not
including money market mutual funds), treasury securities with maturities of
less than one year and/or certificates of deposit with maturities of less than
one year. These investments may also include commercial paper (rated or unrated)
and other short-term securities. Any change in this investment policy must be
approved by the independent trustees.
Investments constituting cash, cash items, securities issued or
guaranteed by the United States Treasury or United States government agencies
and high quality debt securities (commercial paper rated in the two highest
rating categories by Moody's Investor Services, Inc. or Standard & Poor's
Corporation, or if not rated, issued by a company having an outstanding debt
issue so rated, or corporate bonds rated at least A) with maturities of less
than one year at the time of investment will be treated as qualified investments
for determining whether we have 70% of our total assets invested in qualified
investments for purposes of complying with the business development company
provisions of the Investment Company Act.
We expect that substantially all of our available funds, less permitted
or required reserves, will be invested or committed for investment in portfolio
companies by the later of two years from the date of this prospectus and one
year from termination of the offering. Funds committed for investment will be
invested in temporary investments until invested in companies for our portfolio.
MISCELLANEOUS ISSUES THAT WILL AFFECT OUR INVESTMENTS
ORIGINAL ISSUE DISCOUNT AND PAYMENT IN KIND SECURITIES
Our investments may include zero coupon or other debt obligations
having an original issue discount. The receipt of all or a portion of interest
income on such obligations is deferred, often until maturity. In certain other
instances, our investments may include securities that pay interest or dividends
in kind, i.e., in securities, for an initial period of time. We may also
purchase treasury or other high quality debt securities having an original issue
discount. If we invest in securities with original issue discount or that pay
interest or dividends in kind, the amount of cash we distribute to you may be
less than the total taxable income, if any, that we allocate to you for that
year.
INVESTMENT RESTRICTIONS
As a business development company, we are limited in our choice of
investments under the Investment Company Act. See "Regulation."
We will not purchase any securities on margin (except for the use of
short-term credit necessary for the clearance of transactions), purchase or sell
commodities or commodities contracts, write put or call options, purchase or
sell real estate (except in connection with leveraged buyouts) or real estate
mortgage loans, lend portfolio securities to any other person or enter into
repurchase agreements with respect to portfolio securities. Except for
commitments to invest funds in companies beyond our initial investment in such
companies, we will not enter into reverse repurchase agreements, firm commitment
agreements or standby commitment agreements.
We will not (a) engage in short term trading resulting in portfolio
turnover greater than 100% annually; (b) engage in short sales, excluding short
sales against the box; or (c) invest more than 5% of our assets in foreign
securities where we would pay equalization tax.
OPERATING EXPENSES
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We will pay all operating expenses not specifically required to be paid
by Berthel Planning or not paid or reimbursed by a portfolio company. These
operating expenses are in addition to the management fee paid to Berthel
Planning. The operating expenses that we will pay include the items described
under "Operating Expenses" under "Management Arrangements."
LEVERAGE AND RESTRICTIONS ON BORROWING
Unless we obtain an exemptive order from the SEC, we may not borrow
more than fifty percent of our net assets. We plan to borrow funds to make
investments, pay expenses (except for the payment of organizational and offering
expenses advanced by Berthel Planning). We may also borrow funds if we form a
small business investment company. If we form an SBIC subsidiary it is likely
that we will seek an exemptive order permitting us to borrow amounts in excess
of these limits. See "Establishment of a Small Business Investment Company,"
below and "Regulation." We use the term "leverage" to mean investments made
while borrowings by the Trust exceed five percent (5%) of Trust assets.
ESTABLISHMENT OF A SMALL BUSINESS INVESTMENT COMPANY
We plan to form a subsidiary that will apply for a license to operate
as a small business investment company ("SBIC"). If this license is obtained, it
will give us access to additional financing from the Small Business
Administration. The SBIC has not been formed and has not yet filed its license
application. Our license application may not be approved.
An SBIC is a regulated investment company licensed by the Small
Business Administration ("SBA") that may have access to loans or other financing
from the SBA. The government-backed funding that is available is in the form of
debentures and/or preferred stock-like securities. However, even if our
subsidiary obtains an SBIC license, the SBA may not have funds to make available
to us. To qualify for funds that may be available, the small business investment
company must conform to certain rules and regulations regarding investments.
SBICs are required to invest in companies having characteristics very similar to
the characteristics of companies in which we will seek to invest.
We will need to make a significant investment in our subsidiary to
enable it to obtain a small business investment company license. The minimum
investment to license a small business investment company is $10,000,000 for
SBICs in the participating securities program and $5,000,000 in the debenture
program. We may count toward this amount investments made after our application
for an SBA license is filed but before the license is issued if we submit the
investments to the SBA for approval prior to the investments being made.
If we form a small business investment company, its investments will be
subject to our investment objective and guidelines unless the independent
trustees approve separate criteria and/or guidelines for the SBIC. Any separate
objective or guidelines approved for the SBIC shall be consistent with the
general objective of the Trust. Any leverage obtained by the SBIC will comply
not only with our Declaration of Trust and with the regulations of the SBIC, but
also with the provisions of the Investment Company Act, if applicable. Leverage
must be reviewed and approved by the independent trustees, and Berthel Planning
must certify to the Trust that the leverage complies with all applicable rules
and regulation or that waivers, variances or exemptions from such rules and
regulation have been secured.
ORGANIZATION AND LICENSING
We will organize our SBIC as a limited partnership if we wish to
participate in the participating securities program, because an SBIC in that
program is required to be in the form of a
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limited partnership. If we are in the debenture program, we may organize the
SBIC as a limited liability company. The entity that we form will apply for the
SBIC license.
The initial stage in a license application is a management assessment
conducted by the SBA to determine, on a preliminary basis, whether the proposed
management of the SBIC appears to be qualified. Through the management
assessment process, the SBA will determine which of two leverage programs the
SBIC will be permitted to utilize, the participating securities program or the
debenture program. We discuss both of the programs below.
After completion of the management assessment, the formal licensing
process begins. During the formal licensing process, the SBA will determine
whether we have a qualified management team and whether the SBIC has a good
chance of operating profitably. The SBA will review our business plan,
projections and legal documents, and conduct reference and other background
checks on our management team. The process presently is taking from 6 to 10
months. You should not rely on the SBA's review of our management or plan in
deciding whether to invest.
DEBENTURE FINANCING
The SBA presently provides financing or "leverage" to SBICs in two
forms: "debentures" and "participating securities."
Debentures are more commonly used by SBICs that plan to invest in
portfolio companies having the ability to service debt. Debentures are unsecured
loans issued by the SBIC that require the semi-annual payment of interest only,
with a ten year maturity. The interest rate is established when the SBIC issues
the debentures. The general partner of the SBIC is not personally liable for the
repayment of SBA debentures.
The amount of debentures used by an SBIC may not exceed approximately
three times the initial capital up to $17.5 million of the SBIC's capital plus
twice the amount of initial capital in excess of $17.5 million up to $35.1
million of the SBIC's capital.
SBICs using debentures may distribute their realized earnings to
investors. However, other distributions are limited to assure full payment of
SBA debentures.
PARTICIPATING SECURITIES FINANCING
We intend to apply for SBA financing in the form of "participating
securities." Pursuant to this program, SBA financing is obtained by issuing to
the SBA securities that are similar to preferred stock.
Participating securities generally are better suited for SBICs
investing in early stage businesses or businesses that are not likely to be able
to repay debt. Participating securities are issued in the form of preferred
limited partnership interests pursuant to which SBA becomes a preferred limited
partner of the SBIC. Participating securities provide SBA both (i) a current
return (which SBA calls a "prioritized payment") at a rate determined by the
SBA, and (ii) a share of the SBIC's profits (typically between 7% and 12%).
For the fiscal year beginning October 1999, SBA regulations provide
that the maximum amount of leverage available to an SBIC is $105.2 million. This
amount will be adjusted effective on October 1, 2000 and on each subsequent
October 1. If we obtain an SBIC license, the amount of leverage available to the
SBIC will depend on how much capital the SBIC has, and will also depend on
whether the SBIC uses debentures or participating securities. SBA's regulations
provide
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that an SBIC may use participating securities in an amount up to twice the
amount of its private paid-in capital, up to $105.2 million.
If we use preferred securities, the SBA will be entitled to receive a
preferred return (referred to by SBA as a "prioritized payment") before we
receive any distributions from the SBIC. The SBA will also be entitled to a
limited profit participation when distributions of profits are made to us.
Prioritized payments are contingent upon and only payable from the cumulative,
realized profits of the SBIC, if any. Participating securities (together with
earned but unpaid prioritized payments) have priority in liquidation over our
ownership interests. Participating securities mature and are redeemable ten (10)
years after their issuance.
After the SBA receives its prioritized payments, profits may be
distributed proportionately to us and the SBA. The SBIC's profits are computed
after deducting the prioritized payment payable to the SBA.
The SBA permits "tax distributions" on a quarterly basis. The amount of
the "tax distribution" equals the SBIC's profits multiplied by the sum of the
highest individual or corporate Federal and state tax rate applicable to the
type of income (capital gains or ordinary income) being distributed. However,
the rate will be adjusted to reflect the deduction of state taxes on the Federal
return. The tax rates used will be those of the state in which the principal
office of the SBIC is located. The SBA is entitled to share in each "tax
distribution" in proportion to its profit participation rate.
Once prioritized payments and tax distributions are made, the SBIC will
set aside funds to satisfy its working capital needs pursuant to an SBA
regulation requiring maintenance of liquidity. The SBIC may also, with SBA
approval, set aside reasonable reserves to meet contingent liabilities and
protect existing investments. The SBIC may distribute (during the year) and is
obligated to distribute (annually) the remainder of its cumulative realized
earnings. The SBA defines retained earnings available for distribution as being
the SBIC's net realized, cumulative earnings less unrealized depreciation on
portfolio companies (but excluding unrealized appreciation). The SBA's share of
such distributions depends on the ratio of the SBA's capital invested to the
amount of its outstanding preferred securities.
FACTORS AFFECTING THE PERFORMANCE OF AN SBIC INVESTMENT
The SBA may restrict distributions from an SBIC to us if it determines
that the value of the SBIC's assets are materially overstated.
SBA regulations provide that once a distribution is characterized in a
certain fashion, that characterization may not be changed later. Thus, if our
SBIC is profitable for a quarter, or other calendar period, and makes a
"prioritized payment," a "tax distribution" or a "return on capital" as these
terms are used by the SBA, these payments may not be recharacterized as a
"return of capital" if the SBIC subsequently proves unprofitable. This might
cause the SBA to receive distributions early in the life of our SBIC which are
characterized as profits even though the SBIC ultimately proves to be
unprofitable. It may even permit the SBA to receive return of the full amount of
its participating securities investment in the SBIC, while we may lose some or
all of our capital investment in the SBIC.
We would expect that if we form an SBIC, the SBIC will accrue losses
for several years from accumulated management fees, organization costs and other
operating expenses. These expenses usually amount to several million dollars
before sufficient profits are realized, which would entitle the SBA to receive
prioritized payments, "tax distributions" or "returns on capital". Thus, it is
likely that the SBA would be entitled to receive most or all of the first
several distributions from
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the SBIC. As a result, if we issue SBIC preferred securities, distributions to
our shareholders that might otherwise have been made are likely to be delayed.
RESTRICTIONS ON INVESTMENTS BY SBICS
There are several restrictions on the investments of an SBIC we would
not otherwise have to meet in our operations:
- An SBIC only may invest in "Small Businesses," and must invest
at least 20% of its invested funds in "Smaller Enterprises."
SBA regulations define a Small Business as one with tangible
net worth of less than $18 million and average after-tax
income (exclusive of loss carry-forwards) for the prior 2
years of less than $6 million. Companies failing that test may
still qualify if they meet certain size standards for their
industry group based on the number of employees (typically 500
for a manufacturing company, for example) or gross revenues.
- SBA regulations provide that an SBIC may not invest more than
20% of the amount of its regulatory capital in any single
company. The SBA may approve a larger percentage if necessary
to protect the SBIC's investment. This means that if we make
an investment of $10 million in our SBIC, then the SBIC may
not invest more than $2 million in a single company without
SBA's approval (regardless of the amount of leverage used by
the SBIC).
- SBA regulations preclude investment in the following types of
businesses: companies whose principal business is relending or
reinvesting (venture capital firms, leasing companies,
factors, banks); many kinds of real estate projects; single
purpose projects that are not continuing businesses;
investments for use outside of the United States; businesses
that are passive and do not carry on an active trade or
business; and businesses that use 50% or more of the funds to
buy goods or services from an associated supplier.
- An SBIC (or 2 or more SBICs acting in concert) and its
controlled or related persons may not control a portfolio
company except on a temporary basis (not exceeding 5 years) to
protect the SBIC's prior investment or in the case of certain
start-up companies.
- SBICs are precluded from making investments in a Small
Business if it would give rise to a conflict of interest.
Generally, a conflict of interest may arise if an associate
(as defined by the SBA) of the SBIC has or makes an investment
in the Small Business or serves as one of its officers or
directors or would otherwise benefit from the financing. SBA
rules permit joint investments with an associate (such as
another fund controlled by affiliates of the General Partner)
to be made on identical terms or on terms which are fair to
the SBIC, although the Investment Company Act of 1940 may
require an exemptive order.
STRUCTURE OF SBIC INVESTMENTS
An SBIC may make investments in the form of debt, debt with equity
features, or equity securities. Debt securities must generally be issued for a
term of not less than 5 years and must have amortization not exceeding "straight
line". The SBA also limits the interest rates and fees associated with SBIC
investments in portfolio companies. An SBIC using participating securities must
invest the amount of the proceeds of its participating securities (i) in common
or some form of
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preferred stock, or (ii) debentures which are not amortized for 5 years, are
unsecured, and have interest contingent upon earnings.
An SBIC may require a portfolio company to repurchase its equity
investment, but only after 5 years, and only for a price based on a
pre-determined formula based on the book value and/or earnings or a third-party
appraisal by a mutually agreed upon, qualified appraiser. Mandatory redemptions
not complying with these requirements will be treated as if they are debt
securities. However, a portfolio company may be required to redeem the SBIC's
equity security if the portfolio company has a public offering, has a change of
control or management or defaults under its investment agreement.
An SBIC may retain its investment in a business which ceases to be a
small business, and may continue to invest in such a "large" business until it
has a pubic offering. Following a public offering by such a "large" business,
the SBIC still may exercise rights to acquire securities obtained while the
business was small.
SBIC OPERATIONS
If we form an SBIC, we will be subject to significant additional
regulations adopted by the SBA intended to assure proper management of SBICs.
Principal regulations include:
- An SBIC must invest its "idle funds" not invested in portfolio
companies, in liquid, safe, short-term investments specified
in the regulations (principally, U.S. government obligations,
repurchase obligations, federally-insured deposits, and
deposits in "well-capitalized" federally-insured financial
institutions).
- An SBIC and its controlled or related persons may provide
management services to portfolio companies in which the SBIC
invests, but may only charge at competitive rates for services
actually rendered.
- The governing board or general partner of an SBIC is required
to value the SBIC's assets annually (semi-annually, if
leverage is used) pursuant to valuation guidelines approved by
SBA.
- An SBIC's ability to borrow funds from third parties is
subject to SBA regulation. Only SBICs using participating
securities may incur unsecured, "temporary" debt. Debt
incurred by SBICs using debentures may be secured only with
SBA's approval.
- SBICs are required to file a variety of reports with the SBA.
These reports include an annual financial statement which is
certified to by the SBIC's independent certified public
accountants, valuation reports as described above, reports as
to changes in the SBIC's management, reports disclosing
material litigation, a brief report describing each
investment, and copies of reports sent to investors and, if
applicable, to the SEC. The SBA conducts regulatory
examinations of each SBIC on an annual basis.
- SBICs issuing leverage are subject to regulations which
provide the SBA with a series of remedies for violations of
the SBA's regulations. The remedies are graduated in severity
depending on the seriousness of the SBIC's financial condition
or its misconduct. For minor regulatory infractions, warnings
are given. For serious infractions, restrictions on
distributions and prohibitions on making new investments may
be imposed. In severe cases, the SBA may require the removal
of the management of the SBIC.
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MANAGEMENT ARRANGEMENTS
Berthel Planning is the trust advisor. The independent trustees are
Thomas R. Gibson and Tom Davis. TJB Capital Management, Inc., a Delaware
corporation, is the corporate trustee, but will not participate in the
management of the Trust. The trust advisor will act as our investment advisor
and will provide us with certain administrative services. The respective duties
and responsibilities of the trust advisor and the independent trustees are
discussed below.
TRUST ADVISOR
Berthel Planning, the trust advisor, is a corporation organized under
the laws of the State of Iowa in 1989. Its principal office is located at 701
Tama Street, Building B, PO Box 609, Marion, Iowa. Berthel Planning was
organized as a subsidiary of Berthel Fisher & Company to serve as a registered
investment advisor. All of the voting stock of Berthel Planning is owned by
Berthel Fisher & Company. Berthel Fisher & Company, a financial services holding
company, was formed in 1985 as an Iowa corporation to hold the stock of Berthel
Financial Services, a broker-dealer registered with the NASD. Berthel Financial
Services is the dealer manager for this offering.
The Declaration of Trust provides that, subject to the supervision of
the independent trustees, the trust advisor has exclusive power and authority to
manage and control our investments. See "Independent Trustees" below. The trust
advisor will be principally responsible for approving our investments and
providing managerial assistance to portfolio companies. Subject to the
supervision of the independent trustees, the trust advisor performs the
management, certain investment advisory and other services necessary for our
operation. We will enter into a management agreement before we receive any
proceeds of the offering from the escrow account. See "Management Agreement"
below. The trust advisor will identify, evaluate, structure, monitor and arrange
for the disposition of our investments. The trust advisor will also manage our
cash and short-term, interest-bearing investments.
The trust advisor will not make a capital contribution to the Trust
except to the extent of any deficit in its capital account upon or prior to the
first distribution in liquidation, as required by Section 14.7 of the
Declaration of Trust. The trust advisor will be allocated one hundred percent of
our profit until such allocations equal the amounts distributable to the trust
advisor. The trust advisor will be allocated one percent (1%) of the losses for
any fiscal period. The trust advisor will be entitled to one percent (1%) of
distributions until shareholders receive return of the entire amount of their
investments, and thereafter, the trust advisor will receive twenty percent (20%)
of Distributions. The trust advisor will also be entitled to an interest in the
Trust based on its capital contribution, if any, made to acquire shares of the
Trust. See "Distributions and Allocation."
Berthel Planning is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is an
"interested person" of the Trust within the meaning of Section 2(a)(19) of the
Investment Company Act.
THE MANAGEMENT BOARD AND DIRECTORS AND OFFICERS OF BERTHEL PLANNING
Berthel Planning and the independent trustees constitute the management board of
the Trust and will be responsible for the management of the Trust and its
business. The following table sets forth certain information as of the date of
the prospectus regarding the management board, including information regarding
the directors and officers of Berthel Planning.
<TABLE>
<CAPTION>
Position Held Principal Occupation
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<PAGE>
Name and Address With Registrant During Past Five Years(1)
---------------- --------------- -------------------------
<S> <C> <C>
Thomas J. Berthel* Chairman of the Board and Chief Executive Officer of Berthel
701 Tama Street Chief Executive Officer of Fisher & Company and affiliated
Building B Berthel Planning companies
PO Box 609
Marion, IA 52302-0609
Henry Royer* President of Berthel Chairman and President of The
701 Tama Street Planning Merchants National Bank of Cedar
Building B Rapids (merged into Firstar Bank of
PO Box 609 Cedar Rapids, N.A. in 1991) from
Marion, IA 52302-0609 1983 to 1994. From 1994 to 1997,
President and CEO of River City
Bank, Sacramento, California.
President of Berthel Planning from
1999.
Von Elbert* Director of Berthel Vice President, Treasurer and Chief
701 Tama Street Planning Financial Officer of Galt Sand
Building B Company from 1988 to 1996. Director
PO Box 609 of Future Systems, Inc., a full-service
Marion, IA 52302-0609 payroll processor, 1991-current.
Ronald O. Brendengen* Treasurer, Chief Operating Chief Operating Officer, Chief
701 Tama Street Officer, Chief Financial Financial Officer and Director of
Building B Officer and Director of Berthel Fisher & Company and
PO Box 609 Berthel Planning related companies
Marion, IA 52302-0609
Leslie D. Smith* Secretary and Director of General Counsel of Berthel Fisher &
701 Tama Street Berthel Planning Company Financial Services, Inc.
Building B and related companies, Associate
PO Box 609 General Counsel for Gateway 2000,
Marion, IA 52302-0609 Inc. from 1993 to 1994 and
Operations Counsel for General
Electric Capital Corporation from
1990 to 1992.
Thomas R. Gibson Independent Trustee Chief Executive Officer of Farm
Bureau Financial Services, 1996-
2000; Executive Vice President of
Farm Bureau Financial Services,
1991-1996; retired, 2000.
Tom Davis Independent Trustee Head Basketball coach University of
Iowa, 1986-1999; retired, 1999.
</TABLE>
-----
(1) Additional biographical information is set forth below.
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<PAGE>
An asterisk (*) indicates the person is an interested person as defined
in Section 2(a)(19) of the Investment Company Act.
The following information is a summary of certain prior investment and
related business activities of the principal executive officers of Berthel
Planning and the independent trustees.
Thomas J. Berthel, age 48, serves as Chief Executive Officer and
Chairman of the Board of Berthel Planning and as the Chief Executive Officer of
Berthel Fisher & Company, the parent company of Berthel Planning and Berthel
Financial Services. He has held these positions since 1985. Until June, 1993,
Mr. Berthel served as President of Berthel Financial Services. From 1993 until
the present he has served as Chief Executive Officer and as a Director of
Berthel Financial Services. Mr. Berthel has served or is currently serving as
President and a Director of various other subsidiaries of Berthel Fisher &
Company that act or have acted as general partners of separate private leasing
programs and two publicly sold leasing programs. 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 Underwriter. Mr. Berthel holds a
bachelor's degree from St. Ambrose College in Davenport, Iowa (1974). He also
holds a Master's degree in Business Administration from the University of Iowa
in Iowa City, Iowa (1993). By virtue of his ownership of Berthel Fisher &
Company, the parent of Berthel Planning, Mr. Berthel is a controlling person of
Berthel Planning.
Henry Royer, age 68, is the President of Berthel Planning. Mr. Royer
graduated in 1953 from Colorado College with a B.A. in Money and Banking. Mr.
Royer served as Chairman and President of The Merchants National Bank of Cedar
Rapids (currently Firstar Bank Cedar Rapids, N.A.) from 1983 until August, 1994.
From September, 1994 to 1997 Mr. Royer served as the President and Chief
Executive Officer of River City Bank, Sacramento, California. Mr. Royer joined
Berthel Planning in 1999 after serving as an independent Trustee of Berthel
Growth and Income Trust I from 1996 to 1999.
Ronald O. Brendengen, age 46, is the Chief Operating Officer, Treasurer
and a Director of Berthel Planning. He has served since 1985 as Controller and
since 1987 as the Treasurer and a Director of Berthel Fisher & Company, the
parent company of Berthel Planning. He was elected Secretary and Chief Financial
Officer of Berthel Fisher & Company in 1994. He also serves as Treasurer and 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.
Von Elbert, age 61, is a Director of Berthel Planning. He has served as
a Director of Berthel Fisher & Company and its subsidiaries since May, 1991.
From 1978 to 1988, Mr. Elbert was the President of TLS, Co., a data processing
company. From 1988 to 1996, Mr. Elbert served as the Vice President, Treasurer
and Chief Financial Officer of Galt Sand Company, a manufacturer of wearing
apparel. Mr. Elbert has served as Chairman and President of Camden, Inc., an
amusement company since 1996. Mr Elbert has also served as a director of Future
Systems, Inc., a full-service payroll processor, since 1993. He was elected
Chairman of Future Systems, Inc. in 2000. Mr. Elbert received his BBA degree
from the University of Iowa in 1962, and his CPA certification in 1963.
Leslie D. Smith, age 53, is a Director and the Secretary of Berthel
Planning. In 1994 Mr. Smith was named General Counsel of Berthel Fisher &
Company. Mr. Smith was awarded his B.A. in Economics in 1976 from Iowa Wesleyan
College, Mount Pleasant, Iowa, and his J.D. in 1980 from the University of
Dayton School of Law, Dayton, Ohio. Mr. Smith was employed as an Associate
Attorney and as a Senior Attorney for Life Investors Inc., Cedar Rapids, Iowa,
from 1981
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<PAGE>
through 1985. 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, and was responsible for
managing the legal department of a GECC 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.
Thomas R. Gibson, age 56, is an independent trustee of the Trust.
Mr. Gibson served as Chief Executive Officer of Farm Bureau Financial
Services from 1996 until his retirement in 2000. Farm Bureau Financial
Services is a group of companies offering life insurance and investment
products to clients in 14 states through 1,600 agents, and property/casualty
products in six states through 700 agents. He served in various capacities
with Farm Bureau Financial Services since 1966, including Executive Vice
President and General Manager from 1991 to 1996. Mr. Gibson serves as a
director of Macksburg Milk, LLC (1998 - present), Fields Holding Company Ltd.
(2000 - present) and Parkwood Reinsurance Company Ltd. (2000 - present). Mr.
Gibson has served as director of FBL Financial Group (1996 - 2000) and Access
Air Holdings, Inc., (1997 to 2000). Mr. Gibson attended Iowa State
University (1962 - 1964) and graduated from Drake University in 1966 with a
B.S. in Business Administration. Mr. Gibson is a Chartered Life Underwriter,
Registered Principal (NASD), Fellow of Life Management Institute, Member of
the American Academy of Actuaries and Fellow of the Society of Actuaries.
Tom Davis, age 61, is an independent trustee of the Trust. Mr. Davis
retired in 1999 from his position as the head basketball coach of the University
of Iowa, a position he had held since 1986. Mr. Davis' overall record as a head
coach was 543-290 (.652). He also held head coaching positions at Lafayette
(1971 - 1977), Boston College (1977 - 1982) and Stanford (1982 - 1986). Mr.
Davis graduated from Wisconsin - Platteville with a B.A. degree. He received
his Masters of Science from the University of Wisconsin - Madison and his
Ph.D. from the University of Maryland. He has also served as a consultant and
clinician with Nike, Inc. (1977 - 1982, 1986 - 1999).
MANAGEMENT AGREEMENT
We will enter into a Management Agreement with Berthel Planning before
we receive any proceeds of the offering from the escrow account. The management
agreement will have been approved by the independent trustees before we receive
proceeds of the offering from the escrow account. Unless earlier terminated, the
management agreement will remain in effect until December 31, 2011, and
thereafter will continue in effect from year to year if approved by the
Management Board (with a majority of the independent trustees approving), or by
a majority in interest of the shareholders. The management agreement is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party or by a vote of a majority in interest of
shareholders.
Pursuant to the management agreement, Berthel Planning will perform
management services and certain investment advisory and other services necessary
for the operation of the Trust. The management agreement provides that Berthel
Planning will receive as compensation for its services an annual management fee
(the "Management Fee"). The management fee shall be computed at an annual rate
of 2.5% of the value of the assets of the Trust and paid monthly in arrears. The
amount of the management fee to be paid at the end of a particular month shall
be determined by multiplying the value of the assets of the Trust as of the last
day of the previous quarter by .0020833 (one-twelfth of 2.5%). The amount of the
management fee to be paid at the end of the month in which the initial closing
occurs shall be determined by multiplying the value of our assets (determined
after reduction for selling, organization and other expenses) immediately
following the release of funds to us from the escrow account by .0020833,
pro-rated on a daily basis for the number of days in the period beginning with
the date of release of funds to us from the escrow account and ending with the
last day of the first month in which the release of funds from the escrow
account occurs.
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Berthel Planning is entitled to a Management Share. See "Distributions
and Allocation" and "Summary of the Declaration of Trust." The Investment
Company Act and the Advisers Act currently restrict the aggregate amount that
can be paid to a fund advisor. See "Regulation."
The management agreement and the Declaration of Trust require us to
indemnify the managing persons to the fullest extent allowed by law, against any
losses, liabilities, judgments, expenses and amounts paid in settlement of any
claims sustained by such managing person in connection with the Trust. We are
also required to indemnify them against claims by us or any shareholders, or
against any loss suffered by us that arises out of any action or inaction of a
managing person if, in any such foregoing case, the managing person determined
in good faith that such course of conduct was in our best interest, the managing
person was acting on behalf of or performing services for us, such course of
conduct was within the scope of our Declaration of Trust and the action of the
managing person did not constitute gross negligence or intentional misconduct.
To the extent that the managing person is successful in defense of any action,
suit, claim, issue or proceeding, we shall indemnify the managing person against
the expenses, including attorneys' fees, actually and reasonably incurred in
connection therewith. In addition to the foregoing, in the absence of a
determination by a court or administrative agency that the person seeking
indemnification is not liable by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duties as described in Section 17(h) of the
Investment Company Act, indemnification by us may be authorized only upon a
reasonable determination based upon a review of the facts by the independent
trustees or by independent counsel in a written opinion that the person seeking
indemnification is entitled thereto. Indemnification is recoverable only out of
our net assets and not from shareholders. We will not incur the cost of that
portion of any insurance, other than public liability insurance, that insures
any person against any liability for which indemnification hereunder is
prohibited. However, we are permitted to purchase insurance coverage for
permitted indemnification.
OPERATING EXPENSES
We will pay all operating expenses paid or incurred in connection with
the operation of the Trust and not specifically required to be paid by Berthel
Planning or not paid or reimbursed by a portfolio company. These operating
expenses are in addition to the management fee paid to Berthel Planning.
The operating expenses that we will pay include, but are not limited
to, the following:
- our share of transaction and other out of pocket expenses
incident to the evaluation, acquisition and disposition of
investments, whether or not such transactions are completed;
- all trust administration expenses including but not limited to
accounting, legal and consulting fees, to the extent that
those expenses were incurred by Berthel Planning in carrying
out its responsibilities under the Declaration of Trust;
- fees and expenses of the independent trustees;
- finder fees;
- fees of unaffiliated transfer agents;
- registrars and disbursing agents;
- portfolio transaction expenses;
- interest;
- legal and accounting expenses;
- costs of printing and mailing proxy materials and reports to
shareholders;
- custodian fees;
- taxes;
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<PAGE>
- expenses for required and optional insurance and bonding; and
- all litigation costs and other extraordinary or nonrecurring
expenses and other expenses properly payable by the Trust.
Affiliates of Berthel Planning providing such services will receive
payment for such services on terms approved by the independent trustees as being
not less favorable to us than those obtainable from unaffiliated parties.
Berthel Planning will provide us with certain administrative services
for the purpose of maintaining certain of our books and records and handling our
communications and correspondence with shareholders. We will pay Berthel
Planning for such services on terms approved by the independent trustees as
being not less favorable to us than those terms we could obtain from
unaffiliated parties. Such expenses will not exceed the lesser of actual cost or
the amount that is competitive with that charged for comparable administrative
services in the same geographic area by unrelated third parties. We will not
reimburse Berthel Planning or any of its affiliates for rent or depreciation,
utilities, capital equipment, other administrative items of Berthel Planning or
salaries, fringe benefits, travel expenses or other administrative items
incurred or allocated to any controlling person of the Berthel Planning.
Berthel Planning will provide us, at its expense, with the office
space, facilities, equipment and certain personnel (whose salaries and benefits
will be paid by Berthel Planning) necessary to enable the Trust to conduct its
business, subject to such supervision and review by the independent trustees as
they determine to be necessary and appropriate.
INDEPENDENT TRUSTEES
The independent trustees will provide overall guidance and supervision
with respect to our operations, will approve our investments and will perform
the various duties imposed on the directors of business development companies by
the Investment Company Act. Among other things, the independent trustees will
supervise our management arrangements, the custody arrangements with respect to
portfolio securities, the selection of accountants, and transactions with
affiliates. Initially there are two independent trustees, but the number of
independent trustees will thereafter be fixed by the independent trustees in
office and may be as many as eight but not less than two.
The Investment Company Act requires that a majority of the management
board consist of trustees who are not "interested persons" of the Trust, as
defined in the Investment Company Act. If at any time interested persons
constitute a majority of the management board, the remaining independent
trustees will designate one or more successor independent trustees so as to
restore the number of independent trustees to a majority of the management
board. If no independent trustee remains, the trust advisor must call a meeting
of the shareholders within 90 days to elect a sufficient number of independent
trustees who are not interested persons of the Trust in order to comply with the
requirements of the Investment Company Act.
Each independent trustee will receive from us (i) an annual fee of
$12,000, and (ii) a fee of $1,000 for each meeting of the management board
attended up to an annual limit of $24,000 in meeting fees, for a total maximum
of $36,000 annually. We will also reimburse independent trustees for certain
out-of-pocket expenses relating to attendance at such meetings. Independent
trustees will not receive any additional compensation from us or the portfolio
companies for any additional services rendered.
THE PRIOR FUND -- BERTHEL GROWTH & INCOME TRUST I
40
<PAGE>
IF YOU DECIDE TO INVEST IN THIS FUND YOU WILL NOT ACQUIRE ANY OWNERSHIP
OF THE INVESTMENT FUND DESCRIBED IN THIS SECTION -- BERTHEL GROWTH &
INCOME TRUST I.
Berthel Planning is the sponsor and serves as the manager of Berthel
Growth & Income Trust I. Shares of beneficial interest in Berthel Growth &
Income Trust I were sold to the public. The offering of the shares of Berthel
Growth & Income Trust I started on June 21, 1995 and concluded on June 21, 1997.
Berthel Growth & Income Trust I raised $10,541,500 in its public offering of
shares. Berthel Planning provides management and administrative services to
Berthel Growth & Income Trust I, similar to the services it will provide to us.
We will furnish to you upon request, without charge, a copy of the most
recent annual report of Berthel Growth & Income Trust I filed with the SEC on
form 10-K and the most current quarterly report of Berthel Growth & Income Trust
I on form 10-Q. For a reasonably fee, we will also provide you with copies of
the Exhibits to such forms. Copies of these reports are also available online at
www.sec.gov. Requests for these materials should be mailed to Ms. Diane
Anderson, Berthel Fisher & Company Financial Services, Inc., 701 Tama Street,
Building B, P O Box 609, Marion, IA 52302-0609.
In the offering of shares of Berthel Growth & Income Trust I, investors
purchased 10, 541 of the 25,000 shares offered by Berthel Growth & Income Trust
I. The total capital contributions for the purchase of these shares were
$10,541,500. The expenses paid by Berthel Growth & Income Trust I for the
offering of its shares were $1,507,237. This left Berthel Growth & Income Trust
I with available funds of $9,034,263 for investment.
SELECTED FINANCIAL INFORMATION FOR THE PRIOR FUND, BERTHEL GROWTH & INCOME FUND
I
The following table sets forth selected balance sheet and income
statement information concerning Berthel Growth & Income Trust I from its
inception through June 30, 2000. If you invest in the Trust, you will not
acquire any interest in Berthel Growth & Income Trust I. The investments and
results of Berthel Growth & Income Trust I do not indicate the investments that
we will make or the results we will achieve. In fact, we may not perform as well
as Berthel Growth & Income Trust I. Our returns may be substantially lower than
the returns of Berthel Growth & Income Trust I.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS $4,242,814 $5,887,979 $6,590,958 $11,191,710 $6,084,733 $11,234,083
PORTFOLIO INVESTMENTS $0 $1,405,000 $2,800,000 $9,060,728 $11,774,502 $20,821,656
PER SHARE OF BENEFICIAL
INTEREST:
NET ASSET VALUE $827.38 $662.24 $625.27 $1,061.73 $577.24 $1,065.75
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 10, SIX MONTHS
1995 YEAR ENDED ENDED
TO DECEMBER 31, JUNE 30,
DECEMBER =================================================================
31, 1995 1996 1997 1998 1999 2000
-------- ----- ----- ----- ---- ----
41
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) ($14,683) $120,346 $167,229 $188,104 ($104,582) ($28,878)
Unrealized gain (loss) on investments $0 ($1,000,000) 0 $5,255,928 ($2,195,298) $5,598,713
Realized gain (loss) on investments 0 0 0 0 ($1,930,000) $0
Net gain (loss) on investments 0 ($1,000,000) 0 $5,255,928 ($4,125,298) $5,598,713
Net Increase(decrease) in net assets ($14,683) ($879,654) $167,229 $5,444,032 ($4,263,697) $5,569,834
Distributions paid 0 ($250,000) ($647,508) ($569,029) ($486,550) $ 0
Distributions paid and accrued ($126,787) ($707,693) ($881,717) ($843,280) ($843,280) ($420,485)
Net investment income (loss) ($4.64) $16.70 $16.70 $17.84 ($9.93) ($2.74)
Unrealized gain (loss) on
investments 0 ($138.77) 0 $498.62 ($208.26) $531.14
Realized gain (loss) on investments 0 0 0 0 ($183.09) $0
Net gain (loss) on investments 0 ($138.77) 0 $498.62 ($391.35) $531.14
Net Increase(decrease) in net assets ($4.64) ($122.07) $16.70 $516.46 ($404.49) $528.40
Distributions paid $0.00 ($34.69) ($64.67) ($53.98) ($46.16) $0
Shares outstanding at end of period 5,128 8,891 10,541 10,541 10,541 10,541
Weighted average shares outstanding 3,167 7,206 10,013 10,541 10,541 10,541
during the period
</TABLE>
42
<PAGE>
Selected Additional Information Concerning Investments by the Prior Fund,
Berthel Growth & Income Trust I
The following table sets forth additional information concerning investments by
Berthel Growth & Income Trust I and its wholly owned subsidiary, Berthel SBIC,
LLC, as of June 30, 2000. If you invest in the Trust, you will not acquire any
interest in Berthel Growth & Income Trust I. In addition, the investments and
results of Berthel Growth & Income Trust I do not indicate the investments that
we will make, or the results we will achieve. In fact, we may not perform as
well as Berthel Growth & Income Trust I. Our returns may be substantially lower
than the returns of Berthel Growth & Income Trust I.
<TABLE>
<CAPTION>
FAIR MARKET
DATE OF INITIAL VALUE AS OF
PORTFOLIO COMPANY INVESTMENT INVESTMENT COST JUNE 30,
2000
<S> <C> <C> <C> <C>
COMMUNICATIONS AND SOFTWARE:
VisionComm, Inc. Warrants to purchase 889,153 shares
of common stock at $.8414 per
share April 30, 1996 $0 $100,000
McLeod USA, Inc. 38,877 shares of common stock in
exchange for original investment in
LIVEware 5, Inc. December 11, 1997 $610,000 $705,618
Object Space, Inc. 108,108 shares of Series B
convertible preferred stock December 30, 1998 $404,800 $400,000
iBeam Broadcasting 545,442 shares of common stock May 13, 1999 $486,373 $7,890,728
Corporation Unsecured 10% Note due September,
2000 $499,920 $499,920
Edmin.com, Inc. 200,000 shares of 9%, Series A September 30, 1999 $728,000 $728,000
cumulative convertible preferred
stock.
Warrant to purchase 20,000
shares of common stock at $4.00
per share $0 $0
Cadapult Graphic 100,000 Shares of 11.5%, Series A
Systems, Inc. Cumulative convertible preferred November 8, 1999 $930,000 $930,000
stock Warrants to purchase 333,000
shares of common stock at $3.125
to $4.50 per share $0 $0
Bristol Retail 500,000 shares of 12% cumulative
Solutions convertible preferred stock January 12, 2000 $820,083 $820,083
Warrants to purchase 425,000 shares
of common stock at $.01 per share $179,917 $244,086
43
<PAGE>
<CAPTION>
FAIR MARKET
DATE OF INITIAL VALUE AS OF
PORTFOLIO COMPANY INVESTMENT INVESTMENT COST JUNE 30,
2000
<S> <C> <C> <C> <C>
TOTAL COMMUNICATIONS AND SOFTWARE (59.2% of $4,659,093 $12,318,435
total loans and investments as of June 30, 2000)
HEALTHCARE PRODUCTS AND SERVICES:
SunStar Healthcare, Inc. 100,000 shares, 10% convertible
(realized loss) redeemable Preferred Stock and
warrants to purchase 120,000 shares April 12, 1999 $930,000 $0
of common stock at $4 to $5 per
share
Physicians Total Care 10% unsecured note due October, September 29, 1999 $600,000 $600,000
2004
Warrant to purchase 350,000 common
shares at $.035 to $5 per share $0 $0
600 shares of common stock $3,000 $3,000
Inter-Med, Inc. 1,743.248 shares of common stock May 3, 1999 $650,000 $650,000
Futuremed Interventional, 13.5% promissory note due February,
Inc. 2005 February 28, 2000 $904,203 $904,203
Warrants to purchase 383,111 shares
of common stock at $.01 per share $102,640 $102,640
TOTAL HEALTHCARE PRODUCTS AND SERVICES (10.8% of total
loans and investments as of June 30, 2000) $3,189,843 $2,259,843
MANUFACTURING:
Hicklin Engineering, L.C. 10% subordinated note due June 2003 June 30, 1998 $400,000 $400,000
Warrant for 6,857 membership
interests at $.01 per share $0 $0
12% unsecured subordinated note
due January 2001 through December
2004 $23,000 $23,000
Easy Systems, Inc. 11% unsecured subordinated debenture February 26, 1999 $777,422 $777,422
due March, 2004
Warrants to purchase 531,393 shares $0 $0
of stock at $2.10 per share
142,857 shares of Series B preferred
stock $300,000 $300,000
The Schebler Company 13% promissory note due March 2005 January 12, 2000 $156,258 $156,258
Warrants to purchase 1.66% of
common stock at $.01 per share $11,504 $11,504
166,666 shares of 10% convertible
cumulative preferred stock $166,667 $166,667
166,666 shares of common stock $166,667 $166,667
TOTAL MANUFACTURING (9.6% of total loans and investments as of June $2,001,518 $2,001,518
30, 2000)
OTHER SERVICE INDUSTRIES:
Soil Recovery Services, Inc. 15% convertible subordinated
(realized loss) debentures May 31, 1996 $1,000,000 $0
Kinseth Hospitality 14% note due May 2003 May 16, 1997 $2,000,000 $2,000,000
Company, Inc. Warrants for 25% of the outstanding
common stock at $0.01 per share $0 $0
International 12% subordinated note due June 2003
Pacific Seafoods,
44
<PAGE>
<CAPTION>
FAIR MARKET
DATE OF INITIAL VALUE AS OF
PORTFOLIO COMPANY INVESTMENT INVESTMENT COST JUNE 30,
2000
<S> <C> <C> <C> <C>
Inc. through June, 2005 June 1, 1999 $1,000,000 $1,000,000
Warrants to purchase 1,501 shares of
common stock for $.76 per share $0 $0
ServeCore Business 3,663 shares of common stock October 21, 1999 $990,000 $990,000
Solutions, Inc.
Pickerman's Development 12% Promissory Note due April
Company 2005 April 3, 2000 $214,663 $214,663
Warrants to purchase 656,000 shares
of common stock at $.01 per share $37,197 $37,197
TOTAL OTHER SERVICE INDUSTRIES (20.4% of total loans and investments
as of June 30, 2000) $5,241,860 $4,241,860
TOTAL LOANS AND INVESTMENTS $15,092,314 $20,821,656
</TABLE>
CORPORATE TRUSTEE
TJB Capital was organized as a Delaware corporation on January 25, 1995
for the purpose of organizing Berthel Growth & Income Trust I. Its principal
office is located at 1105 N. Market Street, Suite 1300, Wilmington, Delaware
19801. It is an affiliate of Berthel Planning.
CUSTODIAN
We will act as the custodian of our own securities to the extent
permitted under the Investment Company Act and the rules and regulations
thereunder. We will be subject to the restrictions imposed on self-custodians by
the Investment Company Act and the rules and regulations thereunder. The purpose
of the rules is to insure that securities owned by investment companies are
maintained in a manner subject to independent scrutiny. The rules specify
certain procedures and record keeping requirements with respect to such
securities and, among other things, require that our assets be deposited in the
safekeeping of a bank or other company whose activities are supervised by
federal or state authorities. We have entered into an agreement with Firstar
Bank, N.A., with respect to the safekeeping of our securities. The principal
business office of Firstar Bank, N.A. is 222 Second Avenue, S.E., Cedar Rapids,
Iowa 52406.
TRANSFERRING AND DISBURSING AGENT
Berthel Planning will act as our transfer agent and disbursing agent.
Berthel Planning will be reimbursed for such services on terms approved by the
independent trustees as being not greater than the amount that is competitive
with that charged for comparable administrative services in the same geographic
area by unrelated third parties.
INDEPENDENT PUBLIC ACCOUNTANT
We have selected Deloitte & Touche LLP, 222 Third Avenue, S.E., Cedar
Rapids, Iowa, 52401 to audit our annual financial statements and to perform such
other procedures as we may require.
CONFLICTS OF INTEREST
45
<PAGE>
Berthel Planning, TJB Capital, Berthel Financial Services and their
affiliates may be subject to various conflicts of interest in connection with
their relationships and transactions with us. The contractual and other
arrangements between these parties and us have not been established by arm's
length negotiations. The selling agents may also be subject to various conflicts
of interest in connection with their relationships and transactions with us, and
with Berthel Planning and its affiliates, as described below.
CONFLICTS MAY ARISE CONCERNING TRANSACTIONS WITH THE TRUST AND
PORTFOLIO COMPANIES.
Berthel Fisher & Company owns all of the outstanding stock of Berthel
Planning and TJB Capital, and approximately 80.2% of the outstanding stock of
Berthel Financial Services. All of these related entities may perform various
services for us and for the portfolio companies. They may loan money to us or to
the portfolio companies. Their personnel may serve as directors or officers of
portfolio companies. They may provide services in connection with mergers and
acquisitions, leasing, real estate, insurance and economic forecasting. In
exchange, they may receive various fees, commissions and reimbursements if
permitted by law. If we control a portfolio company, the decision to use related
entities to provide services to the portfolio company may not be a disinterested
decision, and the terms and conditions for the performance of such services,
including the amounts and terms of such compensation, may not be determined in
arm's-length negotiations.
Selling agents or their affiliates also may perform a variety of
financial services for us and our portfolio companies. These services may
include raising investment capital for portfolio companies, rendering advice
concerning our investments, assisting us in the purchase or sale of our assets,
and services in connection with mergers and acquisitions, leasing, real estate,
insurance and economic forecasting. If a selling agent or a selling agent's
affiliate provides these services, the selling agent or affiliate may receive
various fees, commissions and disbursements for these services, if payments of
those types are permitted by applicable law and rules of the NASD.
CONFLICTS MAY ARISE WITH RESPECT TO INVESTMENT OPPORTUNITIES.
Berthel Fisher & Company and other people and companies affiliated with
Berthel Planning may make investments for their own accounts and may be in
competition with the Trust for such investments. In addition, Berthel Planning
already manages Berthel Growth & Income Trust I, and may in the future manage
other investment funds including investment funds that have an investment
objective similar to ours. Berthel Planning is obligated to use its best efforts
to provide us with continuing and suitable investment opportunities consistent
with our investment objective and policies. Accordingly, we may not be given the
opportunity to participate in certain investments made by affiliates of Berthel
Planning. In addition, if we reject an investment opportunity for any reason,
Berthel Planning or its affiliates would generally be permitted to accept it. We
will be reimbursed by Berthel Planning or any affiliate of Berthel Planning for
any costs or expenses we pay or incur with respect to an investment we reject
which Berthel Planning or its affiliates accept.
The selling agents are not obligated to present us with any investment
opportunity that comes to their attention, even if it is within our investment
objective. The selling agents and their affiliates may make investments for
themselves and may provide investment advisory and other services to other
parties with an investment objective identical or similar to ours.
Because Berthel Planning currently manages other investment funds, and
may agree to manage other additional funds in the future, it will face conflicts
in the allocation of the investment opportunities that it locates. Berthel
Planning will endeavor to resolve conflicts with respect to investment
opportunities in a manner equitable and consistent with Berthel Planning's
fiduciary
46
<PAGE>
duties. There is a potential that an impasse on joint venture decisions between
co-investors will negatively affect the outcome of investments where we have
jointly invested.
When Berthel Planning locates an investment that it considers
attractive, it will be forced to choose which funds should make the investment.
For the Trust and one or more of the other funds managed by Berthel Planning to
share an investment, the Investment Company Act of 1940 requires that Berthel
Planning, the Trust and the other funds obtain an exemptive order from the SEC.
We expect to apply for an order generally permitting the funds under the
management of Berthel Planning to share investments. We expect, however, that
any exemptive order will include significant restrictions on these investments.
If we obtain an exemptive order, we believe that it will include at least the
following requirements, which Berthel Planning will use to allocate investment
opportunities among the Trust and the other funds under its management, make
possible joint investments among the funds it manages, and to manage any oversee
any joint investments after they are made:
- Allocation of Investments.
- To the extent that the Trust and other funds managed
by Berthel Planning are considering new investments,
and have funds available for investment, Berthel
Planning will review investment opportunities on
their behalf, including investments being considered
on behalf of the other funds managed by Berthel
Planning. Berthel Planning will determine whether a
particular investment is eligible for investment by
the Trust and/or the other funds managed by Berthel
Planning, as the case may be. Ordinarily, if each of
the funds has funds available, an investment would be
suitable for each, as each is likely to have a
similar investment objective.
- If Berthel Planning deems an investment eligible for
investment by the Trust and/or the other funds
managed by Berthel Planning, Berthel Planning will
determine what it considers to be an appropriate
amount that each fund should invest in the particular
investment. Where the aggregate amount recommended
for investment by the Trust and the other funds
managed by Berthel Planning is greater than the
amount of investment available, the amount of
investment available to each of the Trust and the
other funds shall be determined on a pro rata basis
determined by dividing the net assets of each by the
sum of the net assets of the Trust and each of the
other funds managed by Berthel Planning seeking to
make the investment.
- Following the making of the determinations referred
to above, Berthel Planning will distribute written
information concerning all eligible investments to
each potential investor's disinterested trustees or
board members (if applicable). Such information will
include the name of each fund that proposes to make
the investment and the amount of each proposed
investment.
- Information regarding Berthel Planning's
preliminary determinations will be reviewed
by the independent trustees of the Trust,
and any of the other funds that have
dis-interested trustees or directs. The
Trust will only make a joint investment with
another fund managed by Berthel Planning if
a required majority (as defined in section
57(o) of the Investment Company Act of 1940)
of the Trust's independent trustees
conclude, prior to the acquisition of the
investment, that: i. the terms of the
transaction, including the consideration to
47
<PAGE>
be paid, are reasonable and fair to the
shareholders of the Trust and do not involve
overreaching of the investing funds or such
shareholders on the part of any person
concerned;
ii. the transaction is consistent with the
interests of the shareholders of
the Trust and is consistent with the
investing funds' investment
objectives and policies as recited (if
applicable) in filings made by the
investing funds under the Securities Act of
1933, as amended, their
registration statement and reports filed
under the Exchange Act, as
amended, and their reports to shareholders;
iii. the investments by the other funds managed
by Berthel Planning would not disadvantage
the investing funds and that participation
by the Trust would not be on a basis
different from or less advantageous than
that of other funds managed by Berthel
Planning; and
iv. the proposed investment by the other funds
managed by Berthel Planning will not benefit
Berthel Planning or any affiliated entity,
other than the other funds managed by
Berthel Planning making the proposed joint
investment, except to the extent permitted
pursuant to sections 17(e) and 57(k) of the
Investment Company Act of 1940.
- The Trust may decline to participate in the
co-investment, or may purchase less than its full
allocation.
- Investments in Existing Portfolio Companies of Other Funds.
The Trust will not make an investment for its portfolio if
Berthel Planning, or another fund managed by Berthel Planning
or a person controlling, controlled by, or under common
control with Berthel Planning is an existing investor in such
company.
- Joint Investments Must be Same Class of Securities. All
purchases of securities by the Trust effected with another
fund managed by Berthel Planning as a joint participant shall
consist of the same class of securities, including the same
registration rights (if any), and other rights related
thereto, at the same price and on the same terms and
conditions, and the settlement dates will be the same.
- Coordination of Sales and Other Dispositions. If one or more
of the other funds managed by Berthel Planning shall elect to
sell, exchange, or otherwise dispose of a security that is
also held by the Trust, Berthel Planning will notify the Trust
of the proposed disposition at the earliest practical time and
the Trust will be given the opportunity to participate in such
sale on a proportionate basis, at the same price and on the
same terms and conditions as those applicable to other fund
managed by Berthel Planning. Berthel Planning will formulate a
recommendation as to participation by the Trust in such a
disposition, and provide a written recommendation to the
Trust's independent trustees. The Trust will participate in
such disposition to the extent that a majority of its
independent trustees determine that it is in the Trust's best
interest. The Trust and each other fund managed by Berthel
Planning will bear their own expenses associated with the
disposition of a portfolio security.
48
<PAGE>
- Coordination of Follow-On Investments and Exercise of Rights.
If another fund managed by Berthel Planning desires to make a
"follow-on" investment (i.e., an additional investment in the
same entity) in a particular portfolio company whose
securities are held by the Trust or to exercise warrants or
other rights to purchase securities of such an issuer, Berthel
Planning will notify the Trust of the proposed transaction at
the earliest practical time. Berthel Planning will formulate a
recommendation as to the proposed participation by the Trust
in a follow-on investment, and provide the recommendation to
the Trust's independent trustees along with notice of the
total amount of the follow-on investment. The Trust's
independent trustees will make their own determination with
respect to follow-on investments. To the extent that the
amount of a follow-on investment available to another fund
managed by Berthel Planning and the Trust is not based on the
amount of their initial investment, the relative amount of
investment by each other fund managed by Berthel Planning
participating in a follow-on investment and the Trust will be
based on a ratio derived by comparing the remaining funds
available for investment by the Trust and each such other fund
managed by Berthel Planning with the total amount of the
follow-on investment. The Trust will participate in such
investment to the extent that a majority of its independent
trustees determine that it is in the Trust's best interest.
The acquisition of follow-on investments as permitted by this
condition will be subject to the other conditions set forth in
the application.
- Quarterly Review. The Trust's independent trustees will review
quarterly all information concerning co-investments made by
the Trust, including co-investments in which one or more other
fund managed by Berthel Planning declined to participate, so
that they may determine whether all investments made during
the preceding quarter, including those investments they
declined, complied with the conditions set forth above.
- Maintenance of Records. The Trust will maintain the records
required by section 57(f)(3) of the Investment Company Act of
1940 as if each of the transactions permitted under these
conditions were approved by the Trust's independent trustees
under section 57(f).
- Shared Independent Trustees. No independent trustee of the
Trust will act in the equivalent capacity for another fund
managed by Berthel Planning with which the Trust co-invests.
CONFLICTS MAY ARISE WITH RESPECT TO THE TIMING OF DISPOSITION OF OUR
INVESTMENTS.
The interests of Berthel Planning may conflict with the interests of
the shareholders with respect to the timing of the disposition of investments.
Berthel Planning will receive certain amounts based on total distributions to
shareholders as set forth under "Distributions and Allocation" and "Trust
Advisor" under "Management Arrangements." Therefore, Berthel Planning may have
reason to dispose of an investment earlier or later than it would if the
conflict did not exist.
CONFLICTS MAY ARISE CONCERNING THE ALLOCATION OF BERTHEL PLANNING'S
TIME AND SERVICES.
We will not have independent management or employees and will rely upon
Berthel Planning and its affiliates for management and administration. Berthel
Planning also provides management and administrative services to Berthel Growth
& Income Trust I and other companies owned by Berthel Planning's affiliates.
Berthel Planning believes that it and its affiliates have or can attract
sufficient personnel to discharge all of their responsibilities to the Trust.
Conflicts of interest may
49
<PAGE>
arise in allocating management time, services or functions among us and the
other entities to which Berthel Planning and its affiliates may provide similar
services. The officers and directors of Berthel Planning and their affiliates
will devote such time to our affairs as they, in their sole discretion,
determine to be necessary for the conduct of our operations.
CONFLICTS MAY ARISE BECAUSE OF THE RELATIONSHIPS OF BERTHEL PLANNING
AND ITS AFFILIATES WITH PORTFOLIO COMPANIES.
Berthel Planning and its affiliates may have other continuing
relationships with portfolio companies. These relationships could influence
Berthel Planning to take actions, or forebear from taking actions, which it
would not take if the relationships did not exist.
CONFLICTS MAY ARISE BECAUSE BERTHEL FINANCIAL SERVICES IS THE DEALER
MANAGER FOR THE OFFERING.
As an affiliate of Berthel Planning, Berthel Financial Services may
experience a conflict of interest in performing its due diligence in connection
with the public offering of the shares. Although we believe that Berthel
Financial Services has exercised due diligence in its investigation of the
offering, its review cannot be considered independent.
MATERIAL RELATIONSHIPS
The Declaration of Trust imposes various constraints on Berthel
Planning and its affiliates in their dealings with the Trust. The Investment
Company Act also restricts transactions among us , Berthel Planning and their
affiliates. See "Regulation." Generally, transactions involving us and Berthel
Planning, or involving us and affiliates of Berthel Planning, must receive the
prior approval of the SEC or the independent trustees, or both. We do not know
if that approval could be obtained if we requested it. The trustees and Berthel
Planning will be subject to fiduciary duties to us in evaluating the
capabilities, services and compensation of persons rendering services to us.
CONFLICTS MAY ARISE BECAUSE WE DO NOT HAVE OUR OWN LEGAL
REPRESENTATION.
We are represented by the same legal counsel as Berthel Planning,
Berthel Financial Services and their affiliates with respect to most matters.
However, we will pay for the independent trustees to obtain separate counsel if
we have a dispute with the trust advisor, the management board or any of their
affiliates.
DISTRIBUTIONS AND ALLOCATION
GENERAL
Distributions to our shareholders and to Berthel Planning are governed
by Article VIII of the Declaration of Trust. Allocation of profit and loss is
governed by Article IV of the Declaration of Trust, and the interest of
shareholders in income and loss is governed by Article VII of the Declaration of
Trust. These provisions are complex and you should review them with care in
their entirety. Do not rely only on the summary set forth below. You need to
review these important provisions of the Declaration of Trust.
DISTRIBUTION OF CASH
Unless the independent trustees decide that a distribution is not in
the best interests of the Trust, we will make quarterly distributions of cash
that is cash available for distribution.
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- When we use the term "cash available for distribution" we mean
our cash flow plus cash funds available for distribution from
reserves less amounts set aside for restoration or creation of
reserves. Cash available for distribution does not include
realized gains from portfolio companies or other investments
of the Trust, invested funds returned to the Trust, or
principal payments received by the Trust in repayment of loans
made by the Trust.
- When we use the term "cash flow" we mean our cash revenues,
without deduction for depreciation, less cash funds used to
pay all other expenses, debt payments, capital improvements
and replacements. Cash withdrawn from reserves is not included
in cash flow.
- When we use the term "cash revenues" we mean gross cash funds
provided from operation of the Trust, including, without
limitation, the following: all interest earned and paid to the
Trust; all cash dividends earned and paid to the Trust; and
all fees earned and paid to the Trust. Cash revenues do not
include realized gains from portfolio companies or other
investments of the Trust, invested funds returned to the
Trust, or principal payments received by the Trust in
repayment of loans made by the Trust.
We will make the first quarterly distribution within sixty (60) days of
the last day of the first calendar quarter ending after the offering ends. After
that we will make quarterly distributions within sixty (60) days of the end of
each quarter. We may utilize shareholder contributions to make distributions but
in no event will Berthel Planning advance or will we borrow funds to make
distributions, if the amount of the distributions would exceed our accrued and
received revenues for the previous four quarters, less paid and accrued
operating costs with respect to such revenues and costs shall be made in
accordance with generally accepted accounting principles, consistently applied.
If we make a distribution from any source other than our accumulated
undistributed net income, the distribution payment must be accompanied by a
written statement that adequately discloses the source or sources of such
payment. Accumulated undistributed net income is determined in accordance with
good accounting practice and does not include profits or losses realized upon
the sale of securities or other properties or the Trust's net income so
determined for the current or preceding fiscal year.
All quarterly distributions will be made 99% to the shareholders and 1%
to Berthel Planning until we have distributed to the shareholders an amount
equal to the entire amount originally invested by investors. After distribution
of this amount to shareholders, all distributions shall be made 80% to the
shareholders and 20% to Berthel Planning.
RESERVE FOR PAYMENT OF TRUST EXPENSES
Before any distributions are paid, we will establish reserves from
shareholder capital contributions and from gains realized on our investments.
When operating revenue is inadequate we will use these reserves to pay the
ongoing expenses of the Trust, including the management fee to be paid to
Berthel Planning and other costs and expenses incident to our investments,
operation and management. We will normally maintain not less than one percent
(1%) of the offering proceeds as reserves, and will restore any deficit in these
reserves before making a distribution.
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DISTRIBUTIONS OF SHAREHOLDER CONTRIBUTIONS AND CAPITAL
GENERAL. During the first five years following the end of this
offering, we do not intend to return to shareholders the contributions of
investors to the Trust. It is our intention to invest those investor
contributions in portfolio companies. During the existence of the Trust, we will
make quarterly distributions to shareholders of cash available for distribution.
Some portions of these quarterly distributions may be treated for tax purposes
as a return of capital. Additionally, we may distribute shareholder capital if
in the opinion of Berthel Planning and the independent trustees there are
insufficient investment opportunities available, or if distribution is warranted
for the benefit of the shareholders. After the five year period following the
end of this offering, we may distribute any funds that are not necessary for the
operation of the Trust.
CASH AVAILABLE FROM REALIZED GAINS ON INVESTMENTS AND SOURCES OTHER
THAN INTEREST AND DIVIDENDS. Cash received from realized gains on investments
and sources other than interest and dividends may be paid to shareholders or
reserved for general purposes or for follow-on investments within the
limitations set forth under "Investment Objective and Policies." We may reinvest
proceeds resulting from the sale or refinancing of Trust assets if sufficient
cash will be distributed to shareholders to pay state and federal income tax, if
any, created by the sale or refinancing of such assets. We will distribute on a
quarterly basis cash available from investments that is not applied to follow-on
investments or reserved for any other Trust purpose. We will make such
distributions, within 60 days after the end of the calendar quarter, in the
following priority:
(a) 99% to the shareholders, as a class, and 1% to
Berthel Planning, until the shareholders, as a class, have
received the entire amount of the investors' original
investments; and thereafter
(b) 80% to the shareholders, as a class, and
20% to Berthel Planning.
To the extent that making any distribution to Berthel Planning would
cause Berthel Planning to receive cumulative distributions in excess of that
permitted by the Investment Adviser's Act of 1940, we will hold the amount of
that distribution until payment does not violate the terms of the Investment
Adviser's Act of 1940. If the distribution still cannot be made by the time we
cease operations without violating such Act, then the amount that cannot be
distributed to Berthel Planning will be distributed to the shareholders.
ALLOCATION OF PROFITS AND LOSSES
Our profits and losses, including our gains from any sale, transfer,
injury, destruction or other disposition of property, are to be determined as of
the end of each fiscal year. For any fiscal period, profits and losses shall be
allocated as follows:
(a) First, One Percent (1%) to Berthel Planning and
99% to the shareholders until we have distributed to the
shareholders an amount equal to the entire amount originally
invested by investors; and thereafter,
(b) Twenty Percent (20%) to Berthel Planning and
Eighty Percent (80%) to the shareholders.
Notwithstanding the foregoing, to the extent an allocation of losses
after the shareholders have received distributions equal to the entire amount of
the investors' original investments will reduce Berthel Planning's capital
account to a negative amount, the allocation will be made One Percent (1%) to
Berthel Planning and Ninety-nine Percent (99%) to the shareholders until the
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shareholders' capital accounts are zero. No allocation will be made to the
shareholders' accounts that will reduce the shareholders' accounts to a negative
amount.
Except as otherwise provided in the Declaration of Trust, all items of
income, gain, expense, loss, deduction and credit for a particular fiscal period
and any other allocations not otherwise specifically provided for shall be
divided among the shareholders as a class and Berthel Planning in the same
proportions as they share profits or losses, as the case may be, for the fiscal
period.
MINIMUM ALLOCATION TO TRUST ADVISOR
In no event shall Berthel Planning's allocable share of each material
item of Trust income, gain, expense, loss, deduction or credit be less than One
Percent (1%) of such item.
TAX ALLOCATION
If Berthel Planning is treated for federal income tax purposes as
having received an interest in the Trust as compensation for services that
constitutes income to Berthel Planning under the Code, any amount allowed to us
as a deduction for federal income tax purposes (whether as an expense incurred
in the production of income or as an amortization deduction) as a result of such
characterization shall be allocated solely for federal income tax purposes to
Berthel Planning.
DETERMINATION OF DISTRIBUTIONS AND ALLOCATIONS AMONG SHAREHOLDERS
All distributions to and allocations of profits and losses among the
shareholders will be made in the ratio which the number of shares held by each
shareholder bears to the total number of shares held by all shareholders. All
distributions and allocations will be distributed or allocated, as the case may
be, to the persons shown in our records to have been shareholders as of the last
day of the fiscal quarter for which such distribution or allocation is to be
made.
PLAN OF DISTRIBUTION
BEST EFFORTS OFFERING
The shares are being offered on a "best-efforts" basis by Berthel
Financial Services, as dealer manager, and by other broker-dealers selected by
Berthel Financial Services as additional selling agents. Berthel Financial
Services and all of the selling agents are members of the National Association
of Securities Dealers, Inc. The principal address of Berthel Financial Services
is 701Tama Street, Building B, PO Box 609, Marion, Iowa 52302-0609 and its
telephone number at such address is (319) 447-5700. There is no firm commitment
on the part of Berthel Financial Services or any other selling agent to purchase
or pay for any of the shares.
The shares are not being listed on a national securities exchange.
Neither Berthel Financial Services nor any of the selling agents intends to act
as a market maker with respect to the shares. Neither Berthel Financial Services
nor the selling agents may execute a transaction in the shares in a
discretionary account without prior written approval of the transaction by the
owner of the account.
COMPENSATION TO BERTHEL FINANCIAL SERVICES AND SELLING AGENTS; DISCOUNTS
We have agreed to pay Berthel Financial Services the following fees:
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- selling commissions ranging from 2% to 7% of the aggregate
purchase price of the shares sold. If the shares are sold
through a selling agent other than Berthel Financial Services,
Berthel Financial Services will pay all or part of the
commission to the selling agent who sold the shares;
- a syndication fee equal to 1% of the shares sold; Berthel
Financial Services may pay all or part of this fee to the
other selling agents based upon the shares sold by each
selling agents; and
- an underwriting fee equal to 2% of the shares sold.
The selling commissions will range between 2% and 7%. We will pay
selling commissions based on a sliding scale that is dependent upon the number
of shares purchased by a particular investor. When less than a 7% commission is
paid, the difference between 7% commission and the smaller commission will be
used to reduce the purchase price to the investor. This permits investors to
have a discount from the price normally paid for shares. The discount will be
applied to the entire amount invested by a particular investor. The discount and
selling commission on investments in shares is as follows:
<TABLE>
<CAPTION>
Commission on
Total Amount of
Amount Invested Investment Discount to Investor
------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $499,999 7% N/A
$500,000 to $999,999 5% 2%
$1,000,000 and more 2% 5%
</TABLE>
Selling commissions will be paid at each closing, computed on the
aggregate purchase price of the shares sold and accepted by us at each closing.
An investor who receives a selling commission discount will receive the number
of shares purchased without regard to the discount and will be treated as having
made a capital contribution to the Trust in the amount of that investor's
investment without regard to the discount. Because discounts received by
investors results in a lower commission, our proceeds from the sale of shares,
net of commissions, will not be affected by the discounts for volume purchases.
See "Terms of the Offering."
To promote the sale of shares, Berthel Financial Services may pay to
registered representatives non-cash awards that, when aggregated with other
non-cash awards paid in that year by our affiliates, do not exceed the maximum
allowed under the Conduct Rules of the NASD. Such awards shall be paid for by
Berthel Financial Services from its share of selling commissions. The aggregate
value of such awards will not exceed $5,000.
Compensation paid to Berthel Financial Services and selling agents in
connection with this offering includes commissions, the syndication fee, the
underwriting fee, sales commissions and the aggregate value of all non-cash
awards to be paid directly to registered representatives. If we paid Berthel
Financial Services' legal fees, such payments would also be considered
compensation to Berthel Financial Services. However, we will not pay Berthel
Financial Services' legal fees. Total payments we will make to Berthel Financial
Services and all selling agents in connection with the offering of shares will
not in the aggregate exceed 10% of the gross proceeds of the offering.
Berthel Financial Services and its affiliates will not receive,
directly or indirectly, any payments or compensation in connection with the
offering and sale of the shares, except as described above.
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Berthel Financial Services may reallow a portion of the selling
commissions and the underwriting fee.
INDEMNIFICATION
We have agreed to indemnify Berthel Financial Services and the selling
agents against certain liabilities, including liabilities under the Securities
Act of 1933. Berthel Planning has also agreed to indemnify Berthel Financial
Services and the other selling agents against certain liabilities, including
liabilities under the Securities Act of 1933. Our agreement to indemnify Berthel
Financial Services or a selling agent does not provide indemnity against any
liability arising out of Berthel Financial Services' or a selling agent's
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties. Neither Berthel Planning nor any person acting as broker-dealer shall be
indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless one or more of the
following conditions are met:
- A court has ruled that the trust advisor or
broker-dealer has not been involved in securities law
violations.
- Claims against the trust advisor or a broker-dealer
have been dismissed by a court and the claims cannot be
re-filed.
- A court approves a settlement of the claims against
the trust advisor or a broker-dealer and finds that
indemnification of the settlement and related costs should be
made. In this case the court must have been advised of the
position of the SEC and the published position of the
relevant state securities regulatory authority as to
indemnification for violations of securities laws.
TERMINATION OF THE OFFERING BY BERTHEL FINANCIAL SERVICES
Berthel Financial Services may terminate the offering if, among other
things,
- certain specified actions, usually associated with
extremely adverse economic and market conditions, have been
taken by the principal national securities exchanges (such as
the New York Stock Exchange) or by governmental authorities or
- other events have occurred or are pending or
threatened which, in the judgment of Berthel Financial
Services, materially impair the investment quality of the
shares.
TERMS OF THE OFFERING
OFFERING OF SHARES
We are offering a maximum of $25,000,000 of shares. If these shares are
sold, Berthel Financial Services can choose to sell up to another $5,000,000 of
shares.
The shares will be sold to the public for $10 per share. You must
purchase a minimum of five units (5,000 shares) (or two units (200 shares) if
you are making an investment for an individual retirement account). After the
first closing, we may adjust the price of shares to market value based on our
net asset value. However, the price will not be reduced below $10. Tenants in
common and joint tenants (other than a husband and wife) purchasing shares must
purchase at
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least five units ($5,000) for each tenant in common or joint tenant. Any
partnership, corporation, trust or other entity that has been formed for the
specific purpose of purchasing shares must purchase at least five (5) units
($5,000) for each beneficial owner of such entity.
Berthel Financial Services and Berthel Planning, the trust advisor, and
their affiliates may, but are not obligated to, purchase up to 10% of the
shares. To the extent Berthel Financial Services, Berthel Planning or their
affiliates purchase shares, they will share in the Trust's profits, losses and
distributions on the same basis as other shareholders. Any purchases of shares
by Berthel Financial Services, Berthel Planning or their affiliates shall not be
counted toward the minimum number of shares necessary to have the first closing.
Shares purchased by Berthel Financial Services, Berthel Planning or their
affiliates will be purchased for investment purposes only. Independent trustees
may not acquire shares.
To the extent shares are sold to Berthel Financial Services, Berthel
Planning, the selling agents and their affiliates and employees, the number of
shares available for purchase by the general public will be reduced.
OFFERING PERIOD
The offering will terminate ninety days following the effective date of
this prospectus unless we extend the offering for up to two periods of ninety
days each.
ACCEPTANCE OF SUBSCRIPTIONS
We can reject your subscription if we choose to do so. If we reject
your subscription, we will notify you promptly and return your subscription
funds. Investors must pay their subscription amount before the trust can accept
their subscription.
If we have not received subscriptions for at least 600,000 shares when
the offering terminates, we will promptly refund any subscription amounts
received with interest, if any, actually earned thereon. If at any time during
the offering period we have received subscriptions for at least 600,000 shares
and all other conditions to closing have been met, we will
- accept such subscriptions at the first closing and issue
shares to the investors who have subscribed, and
- continue to offer for sale the remaining shares until the
offering period has expired or all shares have been purchased.
After the first closing, we will continue to accept
subscriptions at additional closings.
COSTS OF ORGANIZING AND THE COSTS OF THIS OFFERING
Organizational and Offering Expenses. Organizational and offering
expenses include all expenses incurred by us to be paid from our assets in
connection with organizing us and in preparing for registration and subsequently
offering and distributing shares to the public. These expenses include, but are
not limited to
- underwriting and brokerage commissions
- expenses for printing, engraving, mailing
- salaries of employees of Berthel Financial Services while
engaged in sales activity
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- charges of transfer agents, registrars, trustees,
escrow holders, depositories and experts
- expenses of qualification of the sale of shares
under Federal and State laws, including taxes, filing fees,
accountants' fees and attorneys' fees.
We will pay or reimburse Berthel Planning and Berthel Financial
Services for organizational and offering expenses. We will not pay
organizational and offering expenses in excess of 13.5% of the aggregate
purchase price of shares sold. Berthel Planning and Berthel Financial
Services will pay any organizational and offering expenses that in the
aggregate exceed 13.5% of the aggregate purchase price of shares sold.
When we use the term front end fees we mean fees and expenses paid by
the Trust to organize the Trust and to acquire assets for our portfolio,
including the organizational and offering expenses and any other similar fees.
Front end fees paid by the Trust will not exceed 18%.
ESCROW ACCOUNT
We have established an escrow account to hold money from investors
until we have our first closing. The escrow agent is Firstar Bank, N.A., whose
address is Firstar Bank, N.A., 1555 North River Center Dr., Suite 301,
Milwaukee, Wisconsin 53212. All money received from investors prior to the first
closing will be deposited in the escrow account. After the first closing, the
escrow account will not be used; all funds will then be paid directly to us.
Until the first closing, the escrow agent will invest the money it
holds in securities issued or guaranteed by the United States government, fully
insured certificates of deposit or fully insured interest-bearing accounts with
national banks. Money deposited in the escrow account may not be withdrawn by
investors.
INVESTOR SUITABILITY STANDARDS
We are responsible to make every reasonable effort to determine that
the purchase of shares is a suitable and appropriate investment for each
investor. Berthel Financial Services and the selling agents are also responsible
for this. We, Berthel Financial Services and the selling agents will use the
information provided to us by each investor regarding the investor's financial
situation and investment objectives to make this determination.
In order to purchase shares, an investor must meet one of two tests.
The investor must either (i) have a net worth (exclusive of homes, home
furnishings and automobiles) of at least $60,000 and an annual gross income of
at least $60,000 or (ii) have a net worth (exclusive of homes, home furnishings
and automobiles) of at least $150,000. However, some states require investors to
meet different standards. Accordingly, we have established different
requirements for the following states:
CALIFORNIA. Prospective investors in the State of California
must tell us that they either (i) have a net worth (exclusive of homes,
home furnishings and automobiles) of at least $60,000 and an annual
gross income of at least $60,000 or (ii) have a net worth (exclusive of
homes, home furnishings and automobiles) of at least $250,000.
IOWA, AND ARIZONA. Prospective investors in Iowa and Arizona
must tell us that the investment in the shares represents not more
than ten percent (10%) of the investor's net worth. Investors must also
tell us that they either (i) have a net worth (exclusive of homes, home
furnishings and automobiles) of at
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least $60,000 and have had a minimum, gross annual income of $60,000
for each of the last two tax years, and reasonably expect to have a
minimum gross annual income of $60,000 for the current tax year or (ii)
have a net worth (exclusive of homes, home furnishings and automobiles)
of at least $225,000.
The following standards apply to special situations:
Partnerships. In the case of an investor that is a
partnership, we will apply the net worth standards discussed above to
the partnership and we will apply the income standard to each of its
partners.
Trusts. In the case of an investor who is investing as a
trustee (other than the trustee of a qualified plan or IRA as described
below), we will apply the net worth standards to the trust providing
the funds for the investment, and we will apply the annual income
standard to the beneficiaries of the trust who will receive any income
generated by the investment. However, if the trustee is the person who
supplied the money to the trust, we will apply the suitability
standards to the trustee.
Custodians for Minors. In the case of an investor purchasing
shares as custodian for a minor, we will apply the net worth and income
standards to the person providing the funds for the investment.
Joint Purchases. In the case of a husband and wife purchasing
shares jointly, we will apply the net worth standards to their combined
net worth, and we will apply the annual income standard to their
combined income. In the case of other persons jointly purchasing
shares, we will apply the applicable suitability standards to each
joint purchaser without regard to other joint purchasers.
Keogh Plans and IRA's. In the case of an IRA or a Keogh plan
covering only a self-employed individual, we will apply the net worth
and annual income standards to either (i) the individual or individuals
contributing funds to the Keogh plan or IRA or (ii) the trust or
custodial account created in connection therewith.
Qualified Plans. In the case of an investor who is a trustee
of a qualified pension, 401(k) plan, profit-sharing or stock bonus
plan, including a Keogh plan where more than just a self-employed
individual is covered (collectively "Qualified Plans"), we will apply
the net worth standard and the annual gross income standard to the
qualified trust forming part of such plan.
If you are considering a purchase of shares for a qualified plan or an
IRA, you should consider that some income may be considered unrelated business
income and may therefore be subject to federal income taxation to the extent
that the qualified plan or IRA receives income from the Trust of more than
$1,000. See "Investment by Certain Types of Tax Exempt Entities" under "Tax
Matters." In addition, if you are considering an investment for a qualified plan
or IRA, you
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should consider the discussion relating to other issues arising under ERISA and
the Internal Revenue Code in connection with the purchase of shares described
under "Investment by Certain Types of Tax Exempt Entities" under "Tax Matters."
We anticipate that some investors will request a selling agent to serve
as custodian for various IRAs or Keogh plans established to acquire shares. We
expect such selling agents to charge investors who set up such IRA or Keogh
plans initial fees and annual management fees in connection with IRA accounts or
Keogh plans through which shares are acquired. Investors may elect to make their
own arrangements for IRA or Keogh trustees. We will not allow Berthel Planning
and its affiliates to purchase shares during the offering with assets of any
Qualified Plan (including Keogh plans) or IRA if Berthel Planning, a selling
agent who would receive a commission with respect to such purchase, or any of
their employees, affiliates or financial consultants is a fiduciary of such plan
or IRA within the meaning of Section 3(21) of ERISA.
We will not permit a qualified plan (including a Keogh plan) or an IRA
of which any Trustee is a "party in interest" or "disqualified person," as
defined in Section 3(14) of ERISA and Section 4975(e)(2) of the Internal Revenue
Code to purchase shares. See "Investment by Certain Types of Tax Exempt
Entities" under "Tax Matters."
HOW TO SUBSCRIBE
You may subscribe to purchase shares by completing, executing and
delivering a subscription agreement in the form attached to this prospectus as
Exhibit B. Berthel Financial Services or selling agent will provide this form to
you.
To subscribe, you must deliver money with the subscription agreement.
If you are subscribing before the first closing, you must deliver a check
payable to the order of "Firstar Bank, N.A. - Escrow Agent." If you are
subscribing after the first closing, you must deliver a check payable to the
order of "Berthel Growth Trust II". If you authorize a selling agent to pay for
shares by debiting your customer account with the selling agent, you will be
notified by the selling agent of the settlement date for the purchase of the
shares. To pay for shares by this method, however, you must have funds in your
account to cover the subscription payment. If you subscribe for less than
$500,000 of shares, your check must be in the amount subscribed for. If you
subscribe for $500,000 or more of shares, you are entitled to a discount, and
the amount of your check should be in the amount of the total subscription price
less the amount of the discount.
Prior to the initial closing, all checks will be deposited promptly
with the escrow agent. After the first closing, Berthel Financial Services will
forward all checks directly to us. If we do not accept an investor's money, it
will be returned to the investor promptly in full, together with interest
actually earned and received thereon. An investor's money will be returned
promptly in full, together with a pro rata share of any interest actually earned
and received on the money in the escrow account, if we do not accept the
investor's subscription.
You have the right to receive a refund of your investment for a period
of five business days after the date you receive a final prospectus. You may
request a refund in any fashion but, if you do not make your request in an
originally signed and written communication, you must confirm the request in an
originally signed and written communication within 15 business days after you
receive a final prospectus.
Berthel Planning may, in its sole discretion, accept or reject
subscriptions in whole or in part.
Not more than thirty (30) days after we receive your subscription, we
will notify you if your subscription has been rejected. If your subscription is
rejected, we will promptly return to you the
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amount you paid. We will also pay to you the interest, if any, actually earned
and received on the money paid. If we accept your subscription before the first
closing you will be admitted as a shareholder as of the first closing. If you
subscribe after the first closing, you will pay the amount of your investment
directly to us instead of to the escrow agent, subject only to your right to a
refund if the subscription is rejected. If you subscribe after the first
closing, you will be admitted as a shareholder when your subscription agreement
is accepted.
FOREIGN INVESTORS
Nonresident alien individuals, foreign corporations, foreign
partnerships and other nonresident foreign investors may purchase shares.
See "Tax Considerations for Nonresident Aliens and Foreign
Corporations" under "Tax Matters" for information concerning the federal income
tax and reporting consequences to a foreign investor who purchases shares.
If you are a foreign investor, by signing a subscription agreement,
you:
- agree to supply us with certain information, including any
information that we may need to satisfy any legal reporting
requirements;
- indemnify us for any liability incurred by us
because we failed to withhold any taxes or comply with any
reporting requirements if you did not provide us the
information necessary to enable us to withhold or otherwise
comply;
- grant us a power of attorney permitting us to sell
your shares if you do not provide us a completed Internal
Revenue Service Form 4224 each year.
If you are a foreign investor, you should carefully review with your
own tax advisors the Subscription Agreement attached to this prospectus as
Exhibit B and the tax aspects of an investment in shares.
CONDITIONS TO CLOSING
We will have a closing with respect to the offering and sale of shares
and we will be entitled to receive investor funds if all of the following
conditions have been satisfied:
- With respect to the first closing, we have accepted
subscriptions for a minimum of $6,000,000 shares, and the
escrow agent has received full payment of the purchase price
for those shares.
- For each closing after the first closing, we have
received full payment of the purchase price for the shares to
be sold.
- On the date of each closing, Bradley & Riley PC has
delivered or reaffirmed as of such date its opinion to the
effect that we will be treated as a partnership for federal
income tax purposes. See "Tax Matters."
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TRANSFERABILITY OF SHARES
GENERAL
We will record ownership of shares in our books and records as provided
by Delaware law. No transfer or assignment of a shareholder's interest in the
Trust will be effective unless it complies with our Declaration of Trust. Sales,
transfers or assignments of interests in shares will be recognized quarterly.
Shares will be represented by share certificates, and may only be
transferred by following the restrictions on transfer described in this
prospectus and in our Declaration of Trust. To transfer shares, a shareholder
must submit signed transfer documentation in proper form. Except for transfers
incident to divorce and certain transfers or assignments made free of any price
or payment, no sale, transfer or assignment of a shareholder's shares may be
made unless the party receiving the shares (i) meets the applicable suitability
requirements contained in this prospectus or (ii) is a current shareholder of
the Trust.
RESTRICTIONS
A shareholder will not be permitted to make a sale, assignment or
transfer that would result in the transferor or any transferee holding less than
one share, unless Berthel Planning consents. Berthel Planning will only consent
for good cause. No shares may be assigned: (i) to a minor or incompetent, except
in trust, pursuant to the Uniform Gifts to Minors Act or by will or by intestate
succession, or (ii) to a person who is a market maker in securities unless such
person certifies that he is purchasing the shares solely for investment purposes
and not for resale. Except in cases of death of a transferor or by operation of
law, as a condition of transfer, any party to whom shares are transferred must
certify that he satisfies the investor suitability standards described in this
prospectus. See "Investor Suitability Standards" under "Terms of the Offering."
We will not recognize a sale, transfer or assignment or negotiation of
an interest in the Trust if the sale, transfer or assignment, together with all
other such transfers on our books during the immediately preceding 12 months,
would result in the transfer of 50% or more of interests in the Trust. A
shareholder may not transfer a share unless he represents and provides other
documentation satisfactory in form and substance to us that the transfer was not
effected through a broker-dealer or matching agent that makes a market in shares
or that provides a readily available, regular and ongoing opportunity to
shareholders to sell or exchange their shares through a public means of
obtaining or providing information of offers to buy, sell or exchange shares. In
the case of the sale of a share, Berthel Planning must determine that such sale,
assignment or transfer would not, by itself or together with any other sales,
transfers or assignments, likely result in the Trust's being classified as a
publicly traded partnership. We will not require a transferor to make the
representations described above if the transferor represents that the transfer
is effected through an agent whose procedures have been approved by Berthel
Planning. It is anticipated that Berthel Financial Services will be such an
agent.
In addition, pursuant to Section 7704 of the Code and the
Regulations under Section 7704 of the Code, we will not recognize a sale or
other transfer of a share if the sale or transfer, together with all other
such transfers during the same taxable year, would result in the transfer of
more than 2% of the interests in the Trust, except for any transfers that the
Trust determines in its sole and absolute discretion can be disregarded for
purposes of this percentage test.
In connection with any sale, exchange, transfer or assignment, we may
require a satisfactory opinion of counsel that the sale, exchange, transfer or
assignment would not result in a termination of the Trust for purposes of
Section 708 of the Code, cause us to lose our status as a
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partnership, cause us to be classified as a publicly traded partnership and be
taxable as a corporation for federal income tax purposes, violate any federal
securities laws or any state securities or "Blue sky" laws, or violate our
investor suitability standards.
Any sale or transfer of shares in California or involving a California
resident or of shares originally purchased by a California resident requires the
prior written consent of the Commissioner of Corporations of the State of
California, except as provided in the Commissioner's rules. The Subscription
Agreement will bear the following legend:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
Any sale or transfer of shares outside California and not involving California
residents or involving shares not originally purchased by a California resident
does not require the prior written consent of the Commissioner of Corporations
of the State of California.
We intend that no public market for shares will develop. Furthermore,
we intend to use our best efforts to implement the transfer restrictions
contained herein and in our Declaration of Trust so that no public market
develops. The ability of a market to develop will be limited by restrictions on
trading provided in our Declaration of Trust for the purpose of preventing us
from being classified as a publicly traded partnership taxable as a corporation.
See "Publicly Traded Partnerships (PTP)" under "Tax Matters." Shareholders
therefore may not be able to liquidate their investments in the Trust in the
event of an emergency or for any other reason. Moreover, the lack of a public
market may affect the price for which a shareholder would be able to sell
shares. Berthel Financial Services may provide limited services to shareholders
which may assist those shareholders desiring to sell their shares, but Berthel
Financial Service will not value any shares. Accurate information as to the
actual market value of a share at any given date may not be available. To the
extent prohibited by law, rule or regulations, Berthel Financial Services will
not be able to solicit any potential buyers of shares, but may offer only a
matching service to sellers and potential buyers. Berthel Financial Services
will not receive any compensation from the Trust for providing such services.
Berthel Financial Services is under no obligation to provide any service to
shareholders and if provided, such services may be terminated at any time. In
connection with any sale of shares that is arranged by Berthel Financial
Services in the performance of such services, Berthel Financial Services will
receive a fee. Berthel Financial Services intends to charge the seller a $50
service charge per executed order to sell and to charge the buyer a commission
equal to 6% of the gross sales proceeds, but such fees may vary from time to
time. We do not intend to redeem or repurchase shares although reserve the right
to do so under the conditions specified in the Investment Company Act.
ASSIGNMENTS BY OPERATION OF LAW
If any shareholder shall die, with or without leaving a will, or become
incompetent, bankrupt or insolvent, or if shareholder who is a corporation,
partnership or trust dissolves during the Trust term or if any other involuntary
transfer of a shareholder's shares is made, the legal representatives, heirs and
legatees (and spouse, if the shares have been community property of such
shareholder and his or her spouse), bankruptcy assignees, successors, assigns
and corporate, partnership or trust distributees or such other involuntary
transferees shall not become transferees but shall have (subject to the other
terms and provisions hereof) such rights as are provided with respect to such
persons under the law; provided, however, that such legal representatives, heirs
and legatees, spouse, bankruptcy assignees, successors, assigns and corporate,
partnership or trust distributees
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or involuntary transferees may become transferees in accordance with the
provisions of our Declaration of Trust.
SUMMARY OF THE DECLARATION OF TRUST
THE RIGHTS AND OBLIGATIONS OF BERTHEL PLANNING, THE INDEPENDENT TRUSTEES AND THE
SHAREHOLDERS ARE GOVERNED BY THE DECLARATION OF TRUST. A COPY OF THE DECLARATION
OF TRUST IS ATTACHED IN THIS PROSPECTUS AS EXHIBIT A. BEFORE YOU SUBSCRIBE FOR
SHARES, YOU SHOULD FIRST THOROUGHLY REVIEW THE DECLARATION OF TRUST. THIS
SECTION INCLUDES A BRIEF SUMMARY OF SOME OF THE SIGNIFICANT PROVISIONS OF THE
DECLARATION OF TRUST NOT DISCUSSED IN THIS PROSPECTUS. OUR SUMMARY IS NOT A
COMPLETE DISCUSSION OF ALL OF THE PROVISIONS OF THE DECLARATION OF TRUST. YOU
SHOULD REVIEW THE SECTIONS OF THIS PROSPECTUS ENTITLED MANAGEMENT ARRANGEMENTS,
TERMS OF THE OFFERING, PLAN OF DISTRIBUTION, COMPENSATION AND FEES, INVESTMENT
OBJECTIVE AND POLICIES, DISTRIBUTIONS AND ALLOCATION, AND TRANSFERABILITY OF
SHARES. YOU SHOULD ALSO REVIEW THE COMPLETE DECLARATION OF TRUST, WHICH IS
ATTACHED TO THIS PROSPECTUS AS EXHIBIT A.
ACCOUNTING
Our accounting period will end on December 31 of each year. We will
utilize the accrual method of accounting for our operations on the basis used in
preparing our federal income tax returns with such adjustments as may be in our
best interest.
BOOKS AND RECORDS; REPORTS
We will keep appropriate records relating to our activities. Our books,
records and files will be kept at our principal offices at Marion, Iowa. An
independent certified public accounting firm will prepare our federal income tax
returns as soon as practicable after the conclusion of each year. We will use
our reasonable best efforts to obtain the information for those returns as soon
as possible and to cause the resulting accounting and tax information to be
transmitted to the shareholders as soon as possible after receipt from the
accounting firm.
Each shareholder will receive reports as to our activities on at least
a quarterly basis and will receive as soon as practicable after the end of each
year the necessary federal and state income tax information and our annual
financial statements, audited by our accounting firm. As a business development
company, we will also be required to make periodic reports to the Commission
under the Exchange Act, as amended, including Forms 10-K (annual report), 10-Q
(quarterly report) and 8-K (report of significant events). We will provide
copies of such reports to shareholders. Upon the request of an official or
agency administering the securities laws of any state in which the shares are
sold, we will submit to such official or agency the reports and statements
required to be distributed to shareholders pursuant to the Declaration of Trust.
You should review Sections 10.3 and 11.4 of our Declaration of Trust for
detailed information regarding information and reports available to
shareholders.
NO ASSESSMENTS
Assessments are additional amounts of capital paid by a shareholder
beyond the shareholder's subscription commitment. We are prohibited from making
mandatory assessments of any kind.
GOVERNING LAW
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All provisions of the Declaration will be construed according to the
laws of the State of Delaware except as may otherwise be required by law in any
other state.
CONTROL OF TRUST OPERATIONS
The powers vested in Berthel Planning under the Declaration of Trust
are quite broad. Berthel Planning has full, exclusive and complete discretion in
the management and control of the affairs of the Trust (subject to the general
authority, supervision and review of the management board, and, in some
instances, the independent trustees), and shareholders have no power to take
part in our management, or to bind us.
Berthel Planning has a fiduciary responsibility for the safekeeping and
use of all of our funds and assets, whether or not in its immediate possession
or control. Berthel Planning shall not employ or permit another to employ our
funds or assets in any manner except for our exclusive benefit. No shareholder
shall contract away the fiduciary obligation owed to the shareholder by Berthel
Planning under common law.
The management board (which is comprised of Berthel Planning and the
independent trustees) must approve by at least a majority vote and by at least a
majority of the independent trustees the execution and renewal of the Management
Agreement or any other agreement by which the Trust engages an investment
advisor, agreements with principal underwriters of our securities, appointment
of independent certified public accountants and sales of additional shares at
less than net asset value.
The management board will supervise and review Berthel Planning's other
actions but does not have management or administrative powers over us or our
investments except as described above. The management board nonetheless may
require action by Berthel Planning to the extent necessary to carry out the
fiduciary duties of the management board's members.
A sale, lease, pledge or other transfer of substantially all our assets
outside the ordinary course of its business requires the approval of the holders
of a majority of the outstanding shares.
ROLL-UP TRANSACTIONS
The Declaration of Trust places restrictions on partnership roll-ups. A
roll-up is a transaction involving the acquisition, merger, conversion or
consolidation, either directly or indirectly, of the Trust and the issuance of
securities of a partnership, trust, corporation or other entity that would be
created or survive after the successful completion of a proposed roll-up
transaction. A transaction involving us would not be a roll-up if it were:
- a transaction involving securities that have been for at least
twelve (12) months listed on a national exchange or that are
traded through the National Association of Securities Dealers
Automated Quotation -- National Market System; or
- a transaction involving the reorganization to corporate, trust
or association form of only the Trust if, as a consequence of
the proposed reorganization, there will be no significant
adverse change in any of the following:
(i) shareholder's voting rights;
(ii) the term of our existence;
(iii) the compensation to Berthel Planning; or
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(iv) our investment objectives.
A roll-up would require us to obtain an appraisal, and offer to
shareholders who voted "no" on the proposed roll-up the choice of: (i) accepting
the terms of the roll-up; (ii) remaining as shareholders in the Trust on the
same terms and conditions as existed previously; or (iii) receiving cash in an
amount equal to the shareholders' pro rata share of the appraised value of our
net assets.
We are prohibited from participating in any proposed roll-up which
would:
- result in shareholders having democracy rights that are less
than those provided for under the Declaration of Trust;
- materially impede or frustrate the accumulation of shares by
any purchaser of the securities of the new entity;
- limit the ability of a shareholder to exercise the voting
rights of its securities on the basis of the number of shares
held by that shareholder;
- cause shareholders' rights of access to our records to be less
than those provided for under Article X and Section 11.4 of
the Declaration; or
- result in any of the costs of the transaction to be borne by
us if the transaction is not approved by the shareholders.
SHAREHOLDER MEETINGS
Berthel Planning may call meetings of the shareholders concerning any
matter on which the shareholders may vote as provided by the Declaration of
Trust or by law or to receive and act upon a report of Berthel Planning on
matters pertaining to our business and activities. Shareholders holding ten
percent (10%) or more of the outstanding shares entitled to vote on the matter
may also call meetings by giving notice to us demanding a meeting and stating
the purposes therefor. After calling a meeting or within ten (10) days after
receipt of a written request or requests meeting the requirements of the
preceding sentence, we are required to mail written notice of the place and
purposes of the meeting to all shareholders entitled to vote on the matter. The
meeting shall be held on a date not less than fifteen (15) days nor more than
sixty (60) days after we mail the notice of meeting to the shareholders, at a
time and place specified in the request, or if none is specified, at a time and
place convenient to shareholders. Any shareholder entitled to vote on the matter
may appear at a meeting to vote or vote by proxy, provided that such authority
is granted by a writing signed by the shareholder and delivered to us at or
prior to the meeting.
AMENDMENTS AND VOTING RIGHTS
Berthel Planning may amend the Declaration of Trust without notice to
or approval of the shareholders for the following purposes:
- to cure any ambiguity, formal defect or omission or to correct
or supplement any provision in the Declaration of Trust that
may be inconsistent with any other provision contained in the
Declaration of Trust or in this prospectus or Registration
Statement;
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- to make such other changes or provisions in regard to matters
or questions arising under the Declaration of Trust that will
not materially and adversely affect the interest of any
shareholder;
- to otherwise equitably resolve issues arising under this
prospectus or the Declaration of Trust so long as similarly
situated shareholders are not treated materially differently;
- to maintain our federal tax status and any of our shareholders
as shareholders of this Trust (so long as no shareholder's
liability is materially increased without that shareholder's
consent);
- to make a modification in the manner in which we, after
consultation with our regular accountants or tax counsel,
determine is prudent to modify the manner in which the capital
accounts, or any debits or credits thereto, are computed in
order to comply with such regulations, or to avoid the effects
of unanticipated events that might otherwise cause the
Declaration of Trust not to comply with such regulations, to
make such modification, provided, that such modification is
not likely to have a material effect on the amounts
distributable to any shareholder; and
- to comply with law.
Other amendments to the Declaration of Trust may be proposed either by
Berthel Planning or holders of at least 10% of the shares, either by calling a
meeting of the shareholders or by soliciting written consents. The procedure for
such meetings or solicitations is found at Section 15.2 of the Declaration. Such
proposed amendments require the approval of a majority in interest of the
shareholders given at a meeting of shareholders or by written consents. Any
amendment requiring shareholder action may not increase any shareholder's
liability, change the capital contributions required of shareholders or
shareholder rights in our profits, losses, deductions, credits, revenues or
distributions in more than a de minimis matter, or change a shareholder's rights
on dissolution or any voting rights without the shareholder's consent. Any
amendment which changes Berthel Planning's management rights requires its
consent.
The consent of all shareholders is required for the following
additional actions by the Trust: contravening the Declaration of Trust or the
Certificate of Trust; making it impossible to carry on our activities;
confessing a judgment in excess of 10% of our assets; dissolving or terminating
the Trust, other than as provided by the Declaration of Trust; allowing Berthel
Planning to possess or hold Trust Property for other than a Trust purpose; or
adding new trust advisors except as described below.
REMOVAL OF TRUST ADVISOR
The holders of at least 10% of the shares may propose the removal of a
trust advisor, either by calling a meeting or soliciting consents in accordance
with the terms of the Declaration of Trust. Removal of a trust advisor requires
either the affirmative vote of a majority of the shares (excluding shares held
by Berthel Planning which is the subject of the vote or by its affiliates) or
the affirmative vote of a majority of the independent trustees. Removal of a
trust advisor causes a dissolution of the Trust unless any remaining trust
advisors and a majority in interest of the shareholders (or if there is no
remaining trust advisor, a majority in interest of the shareholders) elect to
continue the Trust. Berthel Planning may not resign without the consent of a
majority of the shareholders and without first giving at least 120 days prior
written notice to the shareholders. The shareholders may replace a removed trust
advisor or fill a vacancy by vote of a majority in interest of the shareholders.
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If a trust advisor is removed, resigns (other than voluntarily without
cause) or is unable to serve, it may elect to exchange its management share for
a series of cash payments from the Trust in amounts equal to the amounts of
distributions to which the trust advisor would otherwise have been entitled
under the Declaration of Trust in respect of investments made by the trust
advisor prior to the date of any such removal, resignation or other incapacity.
The trust advisor would continue to receive its pro rata share of all
allocations to shareholders as provided in the Declaration of Trust which are
attributable to shares owned by the trust advisor.
Alternatively, if we are required to obtain an exemptive order from the
Commission, Berthel Planning may elect to engage a qualified independent
appraiser and cause us to engage another qualified independent appraiser (at our
expense in each case) to value our property as of the date of such removal,
resignation or other incapacity as if the property had been sold at its fair
market value so as to include all unrealized gains and losses. If the two
appraisers cannot agree on a value, they would appoint a third independent
appraiser (whose cost we would bear) whose determination, made on the same
basis, would be final and binding. We may elect to have the have the value
determined by arbitration in accordance with the then current rules of the
American Arbitration Association.
Based on the appraisal, we would make allocations to Berthel Planning's
capital account of profits, losses and other items resulting from the appraisal
as of the date of such removal, resignation or other incapacity as if our fiscal
year had ended, solely for the purpose of determining Berthel Planning's capital
account. If Berthel Planning has a positive capital account after such
allocation, we would deliver our promissory note to Berthel Planning, the
principal amount of which would be equal to Berthel Planning's capital account
and which would bear interest at a rate per annum equal to the prime rate in
effect on the date of removal, resignation or other incapacity as set forth on
such date in the WALL STREET JOURNAL (or if not published on such date, then on
the first date immediately preceding such date that it is published), with
interest payable annually and unpaid principal payable only from funds that
would otherwise have been available for distribution to Berthel Planning.
If the capital account of Berthel Planning has a negative balance after
such allocation, Berthel Planning would be obligated to contribute to our
capital in its sole discretion either cash in an amount equal to the negative
balance in its capital account or a promissory note in such principal amount
maturing five years after the date of such removal, resignation or other
incapacity, bearing interest at the rate specified above. If Berthel Planning
chose to elect the appraisal alternative, its entire interest in the Trust would
be terminated other than the right to receive the promissory note and payments
thereunder as provided above.
INDEPENDENT TRUSTEES
The independent trustees must be individuals who are not "interested
persons" of the Trust under the Investment Company Act (generally, persons who
are not affiliated with us or with affiliates of the Trust). There must always
be at least two independent trustees, but a larger number up to eight may be
specified by the independent trustees from time to time. Each independent
trustee has an indefinite term. Vacancies in the authorized number of
independent trustees are filled by vote of the remaining board members so long
as there is at least one independent trustee; otherwise, Berthel Planning must
call a special meeting of shareholders to elect independent trustees. Vacancies
must be filled within 90 days. An independent trustee may resign effective on
the designation of a successor and may be removed for cause by at least
two-thirds of the remaining management board members, or with or without cause
by action of a majority in interest of the shareholders.
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DISSOLUTION OF TRUST
We will dissolve on the earliest to occur of
- the later of December 31, 2011 or ten years from the end of
the offering; however our existence may be extended for up to
two one-year periods at the discretion of the independent
trustees if they determine that such extensions are in our
best interest and in the best interest of the shareholders,
- the sale of substantially all of our assets,
- the removal, dissolution, resignation, insolvency, bankruptcy,
death or other legal incapacity or disqualification of any
trust advisor,
- the vote of either all shareholders or Berthel Planning and a
majority in interest of the shareholders or
- any other event requiring dissolution by law.
After termination, we will wind up our affairs within three years of the date of
dissolution, unless: (ii) the remaining trust advisors and a majority in
interest of the shareholders (calculated without regard to shares held by
Berthel Planning or their affiliates) elect to continue our operations or (ii)
if there is no remaining trust advisor, a majority in interest of the
shareholders elects to continue our operations. Berthel Planning (or in the
absence thereof, a liquidating trustee chosen by the shareholders) will
liquidate our assets if our operations are not continued.
MANAGEMENT SHARE
The beneficial interests and management rights of Berthel Planning in
its capacity as trust advisor are called the management share. The management
share does not include the shares owned by Berthel Planning. The management
share has no voting rights. It has only the rights given to the trust advisor
under the Declaration of Trust.
TRANSFERABILITY OF INTEREST OF TRUST ADVISOR IN MANAGEMENT SHARE
Berthel Planning may not resign except for cause. Cause does not
include the fact or determination that continued service would be unprofitable
to Berthel Planning. Berthel Planning may not transfer its interest in the Trust
except to pledge it as security for a loan to Berthel Planning if the pledge
does not reduce cash flow distributable to other shareholders and to waive
compensation and fees payable to it under the Declaration of Trust.
TRUST ADVISOR'S CAPITAL ACCOUNT
Berthel Planning must restore any deficit in its capital account upon
or prior to the first distribution in liquidation of the Trust. Berthel Planning
may, however, offset this obligation by waiving all or a portion of its rights
to a distribution of any fees or other compensation due it under the Declaration
of Trust or the management agreement.
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TAX MATTERS
A. BRIEF SUMMARY OF MATERIAL TAX CONSEQUENCES OF INVESTMENT
The following is a brief summary of some of the major tax consequences
discussed in more detail in this section of this prospectus. You should not rely
solely on this brief summary of the tax consequences of an investment in our
shares but should review the entire section entitled "Tax Consequences" and
consult with your own counsel before making an investment decision.
1. We have not requested a ruling from the Internal Revenue Service (the
"IRS") on whether we will be classified as a partnership for tax purposes. We
are relying upon the opinion of our counsel, Bradley & Riley P C, 2007 First
Avenue, S.E., Cedar Rapids, Iowa, that we will be treated as a partnership for
tax purposes. If the IRS determines we are not a partnership for tax purposes,
you would experience a substantial reduction in yield.
2. If the IRS determines that we are a "publicly traded partnership", we
will be treated like a corporation for tax purposes with the result that the
yield to you on your investment will be substantially reduced. Based on
representations by Berthel Planning and an applicable IRS Regulation, our
counsel has rendered an opinion that it is more likely than not that we will not
be treated as a publicly traded partnership.
3. Based on the current published Regulations and Rulings by the IRS, it
is the opinion of our counsel that an investment by you in the Trust will not be
considered a passive activity.
4. Investment in the Trust by employee benefit plans, including
individual retirement accounts or other tax-exempt entities, may result in
additional reporting requirements and may result in the tax exempt entity paying
tax on the income earned from its investment in our shares.
B. TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
for persons considering an investment in our shares. This summary is based upon
the Internal Revenue Code, rules and regulations promulgated thereunder and
existing interpretations thereof, which regulations and interpretations are
subject to change at any time. The following summary discusses the material
aspects of the federal income tax consequences that could affect an investment
in our shares. We cannot provide any assurance that any deductions or other
federal income tax advantages described herein or that a prospective investor in
the Trust may consider available will, in fact, be allowed by the IRS.
The tax opinion rendered by our counsel is based on the facts described in
this prospectus, on the facts we have represented to our counsel, and the facts
determined by our counsel as of the date of the opinion. Any alteration of the
facts may adversely affect the opinion rendered. Further, the opinion is based
upon existing law and applicable current and proposed Treasury Regulations,
current published administrative positions of the IRS contained in Revenue
Rulings and Revenue Procedures, and judicial decisions, all of which are subject
to change, either prospectively or retroactively. Subject to the foregoing and
to certain conditions set forth herein, our counsel is rendering its opinion
that a substantial majority of the material tax benefits contemplated by the
investments in our shares, in the aggregate more likely than not will be
realized.
1. PARTNERSHIP TAX STATUS.
Your ability to realize tax benefits from investing in our shares depends
upon our classification as a partnership for federal income tax purposes, rather
than as an association taxable as a corporation.
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We are relying upon the opinion of our counsel as to its partnership tax
status. Unlike a tax ruling, an opinion of counsel represents only such
counsel's best legal judgment, and has no binding effect or official status of
any kind, and no assurance can be given that the conclusions reached in the
opinion would be sustained by a court if contested.
The Internal Revenue Service has issued regulations that allow an entity to
elect to be taxed as a corporation or as a partnership for tax purposes. Under
Regulation Section 301.7701-4(b), arrangements that are known as trusts, but
which are created simply as a device to carry on a profit- making business are
not taxed as trusts, but rather as a business entity. Under Regulation Section
301.7701-2(c), a business entity with two or more members that is not classified
as a corporation under Regulation Section 301.7701-2(b) (for example, an entity
organized as a corporation under Federal or State statutes or a publicly traded
partnership under Section 7704 of the Code) will be classified as a partnership.
Regulation Section 301.7701-3 provides that an entity can file an election to
select a classification different from the default classification. If the entity
has two or more members and it is not classified as a corporation under
Regulation Section 301.7701-2(b), its default classification is a partnership.
Therefore, the effect of the regulation is that such an entity should, for tax
purposes, be treated as a partnership provided it is not a publicly traded
partnership under the Internal Revenue Code.
It is the opinion of our counsel that, pursuant to existing law and
Treasury Regulations (specifically Regulation Sections 301.7701-2 and
301.7701-3) and provided we are organized and operated in accordance with the
provisions of our Declaration of Trust, we will be treated as a partnership, as
defined in Sections 7701(a)(2) and 761(a) of the Code, for federal income tax
purposes and will not be taxable as a corporation.
If we were classified as an association taxable as a corporation, we would
be subject to federal income tax on our taxable income at regular corporate tax
rates. Our shareholders would not be entitled to take into account their
distributive share of our deductions, if any, and would be subject to tax on
their share of our income to the extent distributed either as dividends from
current or accumulated earnings and profits or, if in excess of the tax basis of
their interests, as capital gain. Our classification as an association taxable
as a corporation would result in a substantial reduction in yield and after-tax
cash flow, if any, to our shareholders.
2. "PUBLICLY TRADED" PARTNERSHIPS.
We will be classified as a partnership for federal income tax purposes.
However, two sections of the Code could affect how we are taxed. Section 7704 of
the Code contains provisions that will, if applicable to us, cause us to be
classified as a "publicly traded" partnership and therefore to be taxed as a
corporation. Section 469(k) of the Code provides that net income from a publicly
traded partnership will not be considered passive income that can offset passive
losses from other activities, but instead is treated like portfolio income that
cannot be used to offset losses from passive activities. Regulation Section.
1.469.2T(c)(3). Each investor who holds an interest in a publicly traded
partnership must treat any loss from the partnership separately from any income
or loss from other publicly traded partnerships. Suspended losses from a
publicly traded partnership may be offset only against future income of that
publicly traded partnership unless and until there has been a complete
disposition of that publicly traded partnership.
Section 7704(b) and Section 469(k) of the Code define the term "publicly
traded partnership" to mean any partnership if 1) interests in such partnership
are traded on an established securities market, or 2) interests in such
partnership are readily tradable on a secondary market (or the substantial
equivalent thereof). Absent actual listing of interests on an exchange or on an
established secondary market, the substantial equivalent of a secondary market
will be deemed to exist if, taking into account all of the facts and
circumstances, the partners are readily able to buy, sell, or exchange their
partnership interests in a manner that is comparable, economically, to trading
on an established
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securities market. Interests in a partnership are readily tradable on a
secondary market or the substantial equivalent thereof if (i) the interests are
regularly quoted by any person, such as a broker or dealer, making a market in
the interests; (ii) any person regularly makes available to the public bid or
offer quotes with respect to interests in the partnership and stands ready to
effect buy or sell transactions at the quoted prices for itself or on behalf of
others; (iii) the holder of an interest in a partnership has a readily
available, regular and ongoing opportunity to sell or exchange such interest
through a public means of obtaining or providing information of offers to buy,
sell or exchange interests; or (iv) prospective buyers and sellers otherwise
have the opportunity to buy, sell or exchange interests in a time frame and with
the regularity and continuity that is comparable to that described in (i), (ii),
or (iii).
Regulation Section 1.7704-1(d) provides that interests in a partnership
will not be treated as traded on an established securities market or on a
secondary market unless the partnership participates in the establishment of the
market or the inclusion of its interests thereon or the partnership recognizes
any transfers by redeeming any transfer made on the market or by admitting the
transferee as a partner or recognizing any rights of the transferee including
the right to receive partnership distributions.
Regulation Section 1.7704-1(e), (f), and (g) also list certain types of
limited transfers that will be disregarded in determining whether a partnership
is publicly traded. In addition to providing for these exempt transfers, the
Regulations state that partnership interests will not be deemed "readily
tradable on a secondary market" (or the substantial equivalent thereof) if
either of the two safe harbors provided for in the Regulations is satisfied. One
of these is the "two percent safe harbor." Regulation Section 1.7704-1(j)(l). It
provides that a secondary market or its equivalent will not exist if the sum of
the percentage interests in partnership capital or profits transferred
(including purchases by the limited partnership of its own interests) during the
partnership's taxable year does not exceed 2.0% of the total interests in
partnership capital or profits. Exempt transfers do not count towards the 2.0%
ceiling.
Exempt transfers are 1) transfers as defined in Regulation Section
1.7704-1(e); 2) transfers pursuant to redemptions and repurchase agreements
meeting certain requirements as specified in Regulation Section 1.7704-1(f); and
3) transfers pursuant to the qualified matching service under Regulation Section
1.7704-1(g).
Transfers using a qualified matching service will not be exempt if the sum
of the percentage interests in the partnership capital or profits transferred
during the taxable year of the partnership exceeds 10% of the total interests in
the partnership. The Regulations contain certain other conditions to prevent a
qualified matching service from operating on a secondary market or the
substantial equivalent thereof. We intend that should any trading of our shares
occur through a qualified matching service we will monitor the trading to
attempt to comply with the qualified matching service provision, and further, we
will apply limitations on the percentage of the shares that can be validly
traded under a qualified matching service under the Regulations.
Berthel Planning has represented to our counsel that (i) we will not list
our shares for trading or otherwise encourage or condone the establishment of a
market for our shares, (ii) Berthel Planning does not expect our shares to be
readily tradeable on a secondary market, based upon its experience with other
limited partnerships and another trust, and (iii) Berthel Planning will not
consent to the assignment, redemption or other disposition of our shares if, in
the opinion of our counsel, the sum of the percentage interests in our capital
or profits assigned, redeemed or otherwise disposed of during any of our taxable
years after such assignment, redemption or other disposition exceeds 2.0% of the
total interest in our capital or profits, excluding exempt transfers. Based upon
these representations, it is the opinion of our counsel that we will not be
treated as "publicly traded partnership."
While Berthel Planning will use its best efforts to limit the type and
number of transfers of our shares to those that will allow us to remain within
the 2.0% safe harbor, Berthel Planning cannot
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guarantee that we will satisfy this safe harbor during each of our taxable
years. It is conceivable that transfers of our shares could occur that would
cause us to fall outside the safe harbor. No assurances can be offered that if
the amount and type of trading in our shares were to fall outside the safe
harbor, the IRS would not maintain that we should be treated as a publicly
traded partnership.
Section 7704(c) of the Code provides that an entity that would otherwise be
treated as a publicly traded partnership under Section 7704(a) of the Code will
not be treated as a publicly traded partnership if more than 90% of the entity's
gross income consists of qualifying income. Qualifying income is defined under
Section 7704(d) of the Code as including interest, dividends, gains from the
sale or disposition of a capital asset (or property described in Section 1231(b)
of the Code) held for the production of income described in subparagraphs of
Paragraph 1 of Section 7704(d) of the Code. However, Section 7704(c)(3) of the
Code provides that the exception for a publicly traded entity having more than
90% of its gross income as qualifying income does not apply to any partnership
that would be a "regulated investment company" described in Section 851(a) of
the Code if such partnership were a domestic corporation.
Section 851(a) of the Code defines a "regulated investment company" as a
domestic corporation that is registered under the Investment Company Act of
1940, as amended, as a management company or unit investment trust or has in
effect an election under the Act to be treated as a business development
company. Because the Trust will register with the SEC under the Investment
Company Act of 1940, as amended, to be treated as a business development
company, the exception for having over 90% of its gross income as qualifying
income is not applicable.
Based upon the undertaking of Berthel Planning to prohibit any transfer of
our shares that would cause us to fall outside the 2.0% safe harbor provided in
the Regulations, our counsel is of the opinion that we will not be a "publicly
traded partnership" within the meaning of Section 7704 of the Code, and,
consequently, Section 7704 of the Code will not alter our treatment as a
partnership, rather than as an association taxable as a corporation, for federal
income tax purposes.
3. GENERAL PRINCIPLES OF TRUST TAXATION. As set forth in "Partnership Tax
Status", above, under the federal tax law a business trust is not treated as a
taxable entity but rather is treated like a partnership for tax purposes and is
required to file a partnership information tax return each year (Form 1065). As
a shareholder, you will report on your personal income tax return your
distributive share (as determined under the Declaration of Trust) of all items
of our income, including gain, loss, deduction, credit and tax preferences,
whether or not cash is distributed to you. The amount of any loss currently
deductible by you will be limited to your adjusted basis for your shares and the
"at risk" rules. You may be subject to tax if we have income or gain even though
we do not make a cash distribution.
As a general rule, your adjusted tax basis for your shares will be your
capital contribution increased by your share of our income and gain and reduced
by your share of our distributions, expenses, losses and non-deductible
expenditures. You would also be entitled to increase basis by qualifying
nonrecourse liabilities. However, we do not anticipate we will incur qualifying
nonrecourse liabilities, and thus you should assume your basis in your shares
will not be increased by any of our liabilities. Other liabilities (recourse) we
incur will not increase your basis in your shares unless you are personally
liable for the repayment of the liability.
Distributions of cash to you will constitute a return of capital (and not
taxable income) to you to the extent of your adjusted tax basis in the shares. A
return of capital will reduce your adjusted tax basis for your shares. If your
adjusted tax basis for shares should be reduced to zero, your share of any cash
distributions for any year will be taxable to you as though it were a gain on
the sale or exchange of property.
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Non-liquidating distributions of property other than cash to you will
reduce your basis in your shares by an amount equal to our basis in such
property, provided, however, that the adjusted basis cannot be reduced below
zero. Your tax basis in property distributed will be equal to the reduction in
your basis in your shares. A reduction in your share of indebtedness will be
credited as a distribution of cash.
Subject to you satisfying the "at-risk" rules, you will be able to deduct
your share of our expenses and losses only to the extent of your adjusted tax
basis in your shares. Any loss unavailable to you as a current deduction because
of insufficient tax basis in your shares is allowed as a deduction at the end of
the first succeeding taxable year that your tax basis exceeds zero. SEE "At-Risk
Rules" under "Tax Consequences" and "Characterization of the Trust's Activities
as Passive Activities or Arising from Portfolio Investments" under "Tax
Consequences." Further deductions that we incur and pass through to you are
subject to rules limiting the deduction of such as miscellaneous itemized
deductions. SEE "Investment Expenses" under "Tax Consequences."
4. DISTRIBUTION OF STOCK AND STOCK RIGHTS. We expect to receive
distributions in the form of stock dividends or distributions that may be either
common or preferred stock or other types of equities. To the extent that these
distributions are made with respect to common stock we hold and are pro rata by
the distributing corporation to all of its shareholders, including us, the
receipt of such stock by us should be nontaxable under Section 305 of the Code.
However, Section 305 of the Code provides very complex rules that provide that
to the extent the distributions are non-pro rata or we have the right to elect
to receive stock or other property from the corporation, the value of the
distribution will be treated as ordinary income and not as a nontaxable
distribution of stock. Further, Section 305 of the Code provides that the
receipt of preferred stock by some common shareholders and the receipt of common
stock by other common stockholders or the distribution of preferred stock that
is made to take account of a stock dividend or a stock split on a stock into
which the stock is convertible will constitute ordinary income under Section 301
of the Code. In addition, the receipt of convertible preferred stock, unless
shown to the satisfaction of the IRS that the distribution does not result in a
disproportionate distribution to the shareholders of the corporation, will be
treated as ordinary income.
We anticipate that we will receive distributions in the form of stock or
other forms of equity and that in many cases these distributions will be non-pro
rata or will not satisfy the requirements of Section 305 of the Code. The effect
is that we will report ordinary income to our shareholders and we may not have
the cash available to distribute to our shareholders to provide them with cash
necessary to pay the taxes on the value of the distributions received by us.
5. INTEREST INCOME. We will make investments in certain types of
instruments that will result in the receipt of interest income. Interest income
will represent current ordinary income to our shareholders and is subject to tax
at ordinary income tax rates. In some situations we may acquire debt instruments
that have original issue discount (OID). OID exists when the debt instrument is
issued for a price that is less than its stated redemption price at maturity.
The amount of the OID is the difference between the principal amount and the
issue price of the instrument. OID must be reported as it accrues over the life
of the debt instrument and must be reported as income even though no cash
payment is received from the instrument's issuer. The receipt of OID could
result in income recognition by you with no cash being available for
distribution by us.
6. AT-RISK RULES. Section 465 of the Code provides that activities
engaged in as a trade or business or for the production of income are subject to
the risk rules of Section 465 of the Code. Under Section 465(a) of the Code,
your deduction for your share of our expenses or losses for a tax year is
limited to the amount "at risk" for such year. The term "loss" is defined as the
excess of the deductions allowable for the tax year over the income received or
accrued by the taxpayer during the tax year from the entity. Except as discussed
below, you are considered to be at risk on the sum of (i) amounts of money
contributed to us; (ii) the adjusted basis of other property contributed to us,
and
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(iii) amounts borrowed by you or us for use in our activities where the you are
personally liable for repayment. Borrowings by us, whether recourse or
nonrecourse, will not increase your amount of risk. You will be considered to be
at risk on funds borrowed only if and to the extent you are personally liable
for repayment or the borrowings are fully secured by your personal assets (other
than your shares in the trust) and subject to the limitation that the funds are
not borrowed from a person with an interest in us or a person related to such a
person.
Your amount at risk will be reduced by losses allowed as deductions and
cash distributions made by us and increased by your share of our income.
Distributions to you will generally reduce the amount considered at risk. The
"at risk" rules provide that the amount of any distribution received by you or
any other reduction in your amount at risk, after the amount of risk is reduced
to zero, will be treated as ordinary income but only to the extent of losses
previously claimed. Thus, if we make a distribution to you that does not exceed
your adjusted basis in your shares, but does exceed your amount at risk, you
will have ordinary income.
If in a year you have a loss from your investment in your shares, the
effect of Section 465(a) of the Code is to permit deduction of such loss up to
the aggregate amount you have at risk on the last day of the taxable year. If
the amount at risk exceeds the loss, the amount deemed at risk in subsequent
years is reduced under Section 465(b)(5) of the Code by the amount of losses
claimed in previous years and increased by additional at risk amounts
contributed. If the amount of loss exceeds the at risk amount, the excess loss
is held in a suspense account and treated as a deduction in the first succeeding
taxable year that you are at risk. The carryover loss is then added to the
deductions allowable for such year but is limited at the end of such year by the
amount then at risk. Under proposed Regulation Section 1.465-2(b), there is no
limitation on the number of years to which such deductions may be carried.
In addition to the "at risk" rules discussed above, Section 704(d) of the
Code provides that your distributive share of loss is allowed as a deduction
only to the extent of your adjusted basis at the end of the year in which the
loss is incurred. If your distributive share of loss items exceeds your basis,
as adjusted for capital contributions, distributions, your share of any income
items and changes in your share of liabilities, then only a portion of each loss
item is allowed, based upon the portion that each bears to the total of all loss
items. Excess losses that are not currently allowed may be carried forward
indefinitely until you have sufficient basis to permit the deduction.
7. CHARACTERIZATION OF THE TRUST'S ACTIVITIES AS PASSIVE ACTIVITIES OR
ARISING FROM PORTFOLIO INVESTMENTS. Section 469 of the Code limits the
deductibility of losses from "passive activities" that are incurred by
individuals, certain estates and trusts, personal service corporations or
closely held corporations. There is no limitation on the deductibility of losses
from "passive activities" for corporations taxed under Subchapter C that are not
personal service or closely held corporations.
The passive loss rules under Section 469 of the Code generally do not allow
individuals to use losses and credits from "passive activities" to offset income
from nonpassive activities, including wages, salaries, active business income
and portfolio income such as interest, dividends, royalties or gains from
disposition of assets producing "portfolio income" or held for investment.
Passive activities include investments in entities such as business trusts,
partnerships and S corporations if the entity is engaged in the active conduct
of a trade or business and the investor does not materially participate in the
operation or activities of the entity. The general rule is that passive losses
or credits may only offset income from other passive activities unless the
investor disposes of his or her entire investment in the activity at which time
the investor may deduct any suspended passive activity losses against nonpassive
income.
The issue with regard to whether our activities are passive activities is
whether our investment activities constitute a trade or business. If our
activities do not constitute a "trade or business" as
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defined under the Regulations under Section 469 of the Code, our activities will
not be considered "passive activities." Rather, our activities will be
considered as producing portfolio income and any deductions or losses
attributable to such activities will be considered nonpassive activity losses.
Regulation Section 1.469-2T(c)(3)(i) provides that, other than income
derived in the ordinary course of a trade or business, interest, royalties,
dividends on C corporation stock, income from regulated investments and income
produced from the disposition of the type of property described above
constitutes portfolio income. Although we will qualify as a small business
development company, we will not elect to be taxed as a regulated investment
company. Thus, the issue is whether we will be considered engaged in a trade or
business under Section 469 of the Code in determining whether our activities
constitute passive activities.
Based on the provisions of Section 469 of the Code and the Regulations
thereunder and the fact that we intend to hold our investments on a long-term
basis rather than engage in short-swing profit taking, we intend to take the
position on our tax returns that we are not engaged in a trade or business.
Further, it will be our position that any management services rendered to
portfolio companies will be undertaken merely to enhance the investment return
from the investment in the portfolio company rather than to engage in the
providing of management and other services as an income generating activity.
Thus, we intend to take the position that we are not engaged in the active
conduct of a trade or business, that the income generated from the activities
will be considered portfolio income, and that our losses will not constitute
passive activity losses. The result will be that our interest, dividend income
or net capital gains will constitute portfolio income that cannot be offset by
losses from passive activities. Further, any of our deductions will be
characterized as investment expense and as such will be treated as miscellaneous
itemized deductions on your tax return. Miscellaneous itemized deductions may be
deducted only to the extent that the deductions exceed 2% of your adjusted gross
income. Further, any capital losses will be subject to the limitation on capital
losses provided under the Code.
The issue of whether we are or are not engaged in a trade or business is
based on facts and circumstances existing at that time. While we intend to
characterize our activities as nonpassive in nature, the Internal Revenue
Service may recharacterize such activities as a trade or business with the
result that your investment could be considered a passive activity. If the
Service were to recharacterize our activities as passive in nature (i.e., we are
considered to be engaged in a trade or business), you will be subject to the
passive activity rules set forth above, and until you dispose of your entire
investment, you can only claim any losses incurred in the passive activity as a
deduction only to the extent you have income from other passive activities.
8. ALLOCATIONS. Section 704 of the Code provides that a partner's
distributive share of the income, gain, expense, loss, deduction or credit of a
partnership is determined in accordance with the partnership agreement, unless
the allocation set forth therein is without "substantial economic effect." An
allocation will have substantial economic effect only if it may actually affect
the dollar amount of the partners' shares of the total partnership revenue or
costs independently of tax consequences. Allocations which do not affect the
amounts to be distributed from a partnership generally do not have substantial
economic effect. It is necessary that the allocations be reflected in the
partners' capital accounts and that such capital accounts be the basis upon
which distributions are made upon liquidation. The Regulation establishes
relevant factors that will be considered in making a determination as to whether
an allocation will be recognized for federal income tax purposes.
Under Section 704 of the Code, a partner's distributive share of income,
gain, expense, loss, deduction or credit is determined in accordance with the
provisions of the partnership agreement unless the allocation set forth therein
is without "substantial economic effect." Under Regulations issued by the IRS,
an allocation will have substantial economic effect only if it may actually
affect the dollar amount of the partner's share of the total partnership revenue
or costs independently of tax consequences. Allocations that do not affect the
amounts to be distributed from a partnership
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generally do not have substantial economic effect. The Regulations issued set
forth relevant factors that will be considered in determining whether an
allocation will be recognized for federal tax purposes.
These factors include, among others, 1) the presence of a business purpose
for the allocation, 2) whether related items of income, gain, expense, loss,
deduction or credit from the same source are subject to the same allocation, 3)
whether the allocation was made without recognition of normal business factors,
4) whether it was made only after the amount of the specially allocated item
could reasonably be estimated, 5) the duration of the allocation and 6) the
overall tax consequences of the allocation. These factors and possibly others
may be relevant in determining whether an allocation has substantial economic
effect.
The Regulations relating to special allocations of partnership costs and
revenues under Section 704(b) of the Code provide that partnership allocations
have economic effect (and thus would be valid under the Code provided such
effect is substantial) only if they are consistent with the underlying economic
arrangements of the partners. Under Regulation Section 1.704-1(b), an allocation
of income, gain, expense, loss, deduction or credit (or item thereof) to a
partner is considered to have economic effect if, throughout the full term of
the partnership, the agreement between the parties provides:
(1) For the determination and maintenance of the partners' capital
accounts in accordance with the Regulations;
(2) Upon liquidation of the partnership (or any partner's interest in the
partnership), for liquidating distributions in all cases to be made in
accordance with the positive capital account balances of the partners,
as determined after taking into account all capital account
adjustments for the partnership taxable year during which such
liquidation occurs (other than those made pursuant to this requirement
and requirement (3) below), by the end of such taxable year (or, if
later, within 90 days after the date of such liquidation); and
(3) For a "qualified income offset" provision as defined in Regulation
Section 1.704-1(b)(2)(ii)(d) and a "minimum gain chargeback" provision
as defined in Regulation Section 1.704-2(f).
No allocation to a partner will be given effect, however, that would cause
or increase a negative capital account balance for such partner in excess of
that partner's share of the partnership's minimum gain. In general, a
partnership has minimum gain to the extent that nonrecourse liabilities
encumbering partnership properly exceed the adjusted tax basis of such property.
Under the Declaration of Trust, a capital account is to be maintained for
each shareholder to which will be charged each item of income, gain, expense,
loss, deduction and credit in accordance with the rules set forth in the
Regulations. Upon dissolution of the trust, after satisfying all our
liabilities, each shareholder will receive a distribution in accordance with the
shareholder's positive capital account balance. In addition, the Declaration of
Trust contains a "qualified income offset" provision as defined in Regulation
Section 1.704-1(b)(2)(ii)(d) and a "minimum gain chargeback" provision as
defined in Regulation Section 1.704-2(f).
Regulation Section 1.704-1(b)(2)(iii)(a) presently provides that the
economic effect of an allocation is not substantial if, at the time the
allocation becomes part of the partnership agreement, 1) the after-tax economic
consequences of at least one partner may, in present value terms, be enhanced
compared to such consequences if the allocation were not contained in the
partnership agreement, and 2) there is a strong likelihood that the after-tax
economic consequences of no partner will, in present value terms, be
substantially diminished compared to such consequences if the allocation were
not contained in the partnership agreement. In determining the after-tax
economic
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benefit or detriment to a partner, tax consequences that result from the
interaction of the allocation with such partner's tax attributes that are
unrelated to the partnership will be taken into account.
Based on the fact that (i) the Declaration of Trust provides that the
shareholders' capital accounts shall be maintained in accordance with the
Regulations under Section 704 of the Code, (ii) on liquidation of the Trust or a
shareholder's interest in the Trust distributions in all cases are to be made in
accordance with the positive capital account balance of the shareholder and
(iii) qualified income offset and "minimum gain chargeback" provisions are
included in our Declaration of Trust, it is our tax counsel's opinion that the
allocations set forth in the Declaration of Trust will more likely than not have
the requisite substantial economic effect.
If the allocations are not recognized, Section 704(b) of the Code requires
that each shareholder's distributive share be determined in accordance with the
shareholder's interest in the Trust, as determined from all the facts and
circumstances.
Section 706 of the Code and the Regulations thereunder provide generally
that a partner may be allocated items of partnership income and deductions only
for that portion of the partnership's taxable year that the partner is a
partner. Accordingly, we shall allocate such items only to those shareholders
who are already admitted to the Trust at the time such expenses were incurred.
9. DEDUCTION OF MANAGEMENT AND OTHER FEES TO BERTHEL PLANNING. The Trust
will pay fees to Berthel Planning for management, administrative and
organizational services performed for us. Some of these fees and costs will be
payable out of the proceeds of the offering and may be substantial in amount.
The IRS may challenge some or all of the deductions for fees payable to Berthel
Planning or related parties or any other party based upon (i) the payment being
excessive, (ii) a recharacterization of the payment, or (iii) the payment being
to a Trustee or trust advisor in its capacity as a shareholder rather than in
some other capacity. Because such recharacterization depends on various facts
and circumstances that may be viewed subjectively, our counsel can give no
assurance that the IRS may not recharacterize certain fees in whole or in part.
If the IRS were to recharacterize such fees, it could result in all or a portion
of such fees having to be amortized over some longer period or being treated as
a non-deductible capital expenditure.
10. ORGANIZATION, SYNDICATION, AND START-UP COSTS. Legal, accounting and
other similar types of expenses have been incurred in the organization of the
Trust. The costs that are incident to the creation of the Trust, such as legal
and accounting fees for services incident to the organization of the Trust and
filing fees, should be subject to classification as organizational expenses.
Organization expenses will be capitalized and amortized over a sixty-month
period.
Start-up expenditures include amounts paid or incurred in connection with
investigating the creation or acquisition of an actual trade or business or paid
or incurred in connection with any activity engaged in for profit and the
production of income prior to the start of the actual trade or business. Section
195 of the Code provides that no current deduction is allowed for start-up
expenditures. However, Section 195 permits the taxpayer incurring such
expenditures to amortize such expenditure over a period of not less than sixty
months. A substantial amount of the Trust's expenditures may be characterized as
start-up expenditures with the result that we will elect to amortize such
expenses over a sixty-month period.
Syndication expenses are those connected with the issuing and marketing of
shares, including fees paid as commissions to brokers selling the shares and
legal, accounting and printing costs with respect to the offering, including the
preparation of the prospectus. Syndication expenses cannot be deducted, must be
capitalized and are not subject to amortization.
There can be no assurances that the IRS will not contend that some of the
costs characterized by us as organizational and start-up will not be deemed to
be syndication costs by the IRS, thereby
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rendering such costs nonamortizable. Further, there can be no assurance that
certain costs we seek to claim as investment deductions may not be considered
start-up costs, or organizational costs that will have to be amortized over
sixty months.
If we were to acquire certain intangible property, including but not
limited to, goodwill, covenants not to compete, government licenses and permits,
know-how, or contract rights, in connection with the acquisition of a business,
the cost associated with such rights must be amortized over a 15 year period.
The amortization of these intangible properties is subject to the depreciation
recapture rules on our disposition of these rights.
11. SECTION 754 OF THE CODE. Under Sections 734, 743 and 754 of the Code,
a partnership may elect to have the cost basis of its assets adjusted in the
case of a sale by a partner of his interest in the partnership, the death of a
partner, or the distribution of property to a partner. The affect of such an
election is the transferees are treated as if they had acquired an interest in
the partnership assets and upon certain distributions to its partner, the
partnership is treated as though it has newly acquired an interest in the
partnership assets and acquired a new cost basis on the assets. Because of the
additional administrative responsibilities caused by allowing an adjustment in
basis, we do not intend to file an election under Section 754 of the Code to
adjust the basis of the entity's assets in the case of a transfer (including
death of any shareholder) of shares, although Berthel Planning reserves the
right to do so.
12. METHOD OF ACCOUNTING AND TAXABLE YEAR. We will utilize the accrual
method of accounting, and our taxable year will be the appropriate year as
provided in Section 706(b) of the Code. We anticipate that this will be the
calendar year. The accrual method of accounting is an acceptable method of
accounting under Section 446(c) of the Code. The IRS, however, has the authority
under Section 446(b) of the Code to compute a taxpayer's taxable income under
such method as the IRS determines that clearly reflects income, including the
right to disallow any deduction that results in a material distortion of income.
While our counsel is of the opinion that the accrual method of accounting should
be recognized, our counsel cannot express an opinion that the IRS may not
attempt to reallocate deductions based on a material distortion of income test,
which is based on a facts and circumstances approach.
13. INVESTMENT INTEREST. Section 163(d) of the Code limits the
deductibility of interest on funds borrowed to acquire or carry investment
assets. Investment interest incurred by a taxpayer is generally deductible only
to the extent of "net investment income." Investment interest would constitute
interest on debt incurred to acquire an interest in an activity that is not a
passive activity and would only be deductible to the extent the shareholder has
net investment income. Net investment income is defined as the excess of
investment income over investment expenses. Investment income is the sum of
gross income from property held for investment but does not include net gain
from the disposition of property held for investment unless the individual
elects to pay tax on such net capital gain at the shareholder's ordinary income
tax rates. Investment expenses are the allowable deductions that are
attributable to investment property. See "Investment Expenses" under "Tax
Consequences." As a result, interest expense on borrowings to carry an
investment by the Trust should constitute investment interest. Investment
interest that is not allowed for any year can be carried over and deducted in a
subsequent year in which there is investment income. Each shareholder should
consult with their own tax advisor as to the impact, if any, to a shareholder
because of the limitation under Section 163(d) of the Code.
Interest, if any, incurred by a shareholder to acquire or carry shares will
be treated as investment interest and not as a passive activity expense. If the
IRS were to take the position that the investment was a passive activity, any
interest would not be investment interest expenses but rather a passive
declaration that could only be offset against passive income.
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14. INVESTMENT EXPENSES. Under Section 67(a) of the Code, investment
expenses incurred by individuals are deductible as itemized deductions only to
the extent that such expenses, when combined with certain other miscellaneous
expenses deductible under Section 212 of the Code as ordinary and necessary
expenses incurred for the production of income, exceed 2% of such individual's
adjusted gross income. Section 1.67-2T of Temporary Regulations under Section 67
of the Code provides that the provisions of Section 67 of the Code are
applicable to partners as to items of deductions that are defined as
miscellaneous itemized deductions. Under this Temporary Regulation, an
individual shareholder's allocable share of our expenses will be deductible only
to the extent that such expenses, when aggregated with the individual
shareholder's other investment expenses, if any, exceed 2% of the shareholder's
adjusted gross income.
Investment expenses may be subject to further reduction as an itemized
deduction if an individual's income exceeds certain levels. An individual whose
adjusted gross income exceeds a threshold amount is required to reduce the
amount of allowable itemized deductions by 3% of the excess over the threshold
amount. No reduction is required, however, for medical expenses, investment
interest and casualty theft or wagering losses. The threshold amount for 2000 is
estimated at $128,950 ($64,475 for married filed separately) and this amount is
subject to adjustment each year for a cost of living adjustment. However, the
reduction may never be more than 80% of allowable deductions. Our expenses will
be considered investment expenses. Depending upon your individual circumstances
(if the total of miscellaneous deduction do not exceed 2% of your Adjusted Gross
Income), your allocable share of such expenses could be nondeductible. In any
case, such expenses would only provide a current tax benefit to you if you
itemize deductions.
15. INTEREST RELATING TO TAX EXEMPT INCOME. Section 265(a)(2) of the Code
disallows any deduction for interest on indebtedness of a taxpayer or a related
person incurred to purchase or for the purpose of continuing to carry a tax
exempt investment. The IRS announced in Rev. Proc. 72-18 that the prescribed
purpose will be deemed to exist with respect to indebtedness incurred to finance
a "portfolio investment." The revenue procedure also provides that, while a
partnership's purpose in incurring indebtedness will be attributed to its
general partner, a limited partnership interest will be regarded as a "portfolio
investment." Thus, if you own tax exempt obligations, it is possible that the
IRS might take the position that your allocable portion of any of our interest
expense, or any interest expense incurred by you to purchase or carry shares,
should be viewed as incurred to continue carrying tax exempt obligations, and
that you should not be allowed to deduct all or a portion of such interest.
16. TAX PROCEDURES AND PENALTIES. Based on current provisions of the Code,
the tax treatment of items of our income and loss will be determined at the
Trust level and not at the individual level of each shareholder. Our tax return
may be subject to audit, which audit would be conducted at the Trust level.
Adjustments resulting from an audit of the Trust may result in an audit of an
individual shareholder's personal returns and could result in adjustments not
only to the Trust items but also adjustments to non-Trust items. As a
shareholder, you would be liable for any interest on tax deficiencies resulting
from an adjustment to our tax return. Interest due on tax deficiencies is
nondeductible.
A penalty will be assessed for each month or fraction thereof (up to a
maximum of five months) that our partnership return is filed late or incomplete.
The monthly penalty is $50 per shareholder in the Trust. Section 6662 of the
Code imposes a civil penalty of 20% of any portion of an underpayment of tax
that is attributable to 1) negligence or disregard of rules or regulations, 2) a
substantial understatement of income tax, 3) a substantial valuation
overstatement, 4) a substantial overstatement of pension liabilities, and 5) a
substantial estate or gift tax valuation understatement. Interest from the tax
return filing date will accrue on this penalty where it is applied. In
particular, a substantial understatement of income tax will exist if the amount
of the understatement exceeds the greater of 10% of the correct amount of tax or
$5,000 ($10,000 in the case of most corporations). The penalty will not apply to
a substantial understatement with respect to an item if (i) substantial
authority supported the taxpayer's treatment of such item, (ii) the relevant
facts concerning the
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treatment of the item were adequately disclosed on the taxpayer's return, or
(iii) the IRS waives the penalty where there was reasonable cause for the
understatement and the taxpayer acted in good faith. However, in the case of any
item attributable to a "tax shelter," exception (i) above will be available only
if, in addition to meeting the requirements of that exception, the taxpayer
reasonably believed that his treatment was more likely than not the proper
treatment, and exception (ii) is not available at all. The definition of "tax
shelter" for this purpose includes a partnership or other entity or any other
plan or arrangement if a significant purpose is the avoidance or evasion of
federal income tax.
17. CAPITAL GAINS AND LOSSES. Gains or losses, if any, from the sale of
securities we held for investment will be treated as long-term capital gains or
losses, if we held such securities for investment for more than one (1) year.
Long-term capital gains of individuals are currently taxed at a maximum rate of
20% (a 25% rate will apply to certain depreciation claimed on real property and
a 28% rate on collectibles) with corporations currently taxed at the same rates
as ordinary income. Generally, individual taxpayers can deduct capital losses
against their capital gains without any limitation and can deduct, in any tax
year, up to $3,000 of their excess capital losses against their ordinary income.
Although excess capital losses of individual taxpayers cannot be carried back to
preceding tax years, such excess can be carried forward indefinitely. Corporate
taxpayers can deduct their capital losses only against their capital gains;
however, their excess capital losses can be carried back three years and carried
forward for five years. Capital gains derived by a shareholder will constitute
portfolio income which cannot be offset by such shareholder's passive losses, if
any. Further, subject to the holding period set forth above, any gain or loss
realized on the disposition of an investment in the Trust should be a long-term
capital gain or loss.
18. QUALIFIED SMALL BUSINESS STOCK. Special rules apply to the sale or
exchange of equity interests in Portfolio Companies which are Qualified Small
Business Stock ("QSBS"). First, non-corporate taxpayers can exclude 50% of the
gain on the sale of QSBS if the stock was acquired at original issue and held
for at least five years. The remaining 50% of the gain which is not excluded
from income is subject to a 20% maximum rate. In order to qualify as QSBS, the
gross assets of the corporation must not exceed $50 million when the stock was
issued and it must also meet an active trade or business requirement.
Non-corporate taxpayers can defer (rollover) gain from the sale or exchange of
QSBS which was held by the Trust for more than six months where the proceeds are
used for the purchase of other QSBS within 60 days of the sale of the original
QSBS. The replacement QSBS must meet the same active trade or business
requirement for the six-month period following its purchase. There are per
issuer limitations on the amount of eligible gain that can be excluded.
19. ALTERNATIVE MINIMUM TAX. An individual alternative minimum tax is
imposed under the Internal Revenue Code if the alternative minimum tax exceeds
the regular individual tax. Taxpayers pay the greater of the alternative minimum
tax or the regular income tax. Generally, no tax credits (other than the foreign
tax credit) are allowable against the alternative minimum tax. The alternative
minimum tax liability of a non-corporate taxpayer is calculated by 1) adding the
taxpayer's adjusted gross income and the taxpayer's tax preference items, 2)
adding and subtracting certain other specified items, and 3) then subtracting
the applicable exemption.
The impact of the alternative minimum tax must be determined by each
individual shareholder based upon our operations and each shareholder's personal
tax situation. Accordingly, each individual shareholder should consult his or
her own tax advisor to determine the tax consequences of the alternative minimum
tax.
A corporate shareholder's liability for the alternative minimum tax is a
complex computation and depends on its overall tax situation. For a corporate
shareholder with substantial tax preferences, the alternative minimum tax could
materially reduce the after-tax economic benefits of an investment in the Trust.
Corporate shareholders considering an investment in the Trust should consult
with its tax advisor regarding the impact of an investment in the Trust on its
alternative minimum tax situation.
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20. TERMINATION OF THE TRUST. The actual or constructive termination of
the Trust will have important tax consequences to the shareholders. All
shareholders must recognize their distributive shares of Trust income, gain,
expense, loss, deduction or credit accrued during the Trust's tax year up until
the date of termination whether or not any such items are distributed. Also,
shareholders must account for their distributive shares of gains or losses
realized from the sale or other disposition of Trust assets in liquidation of
the Trust.
The Code provides that if 50% or more of the capital and profit interests
in a partnership are sold or exchanged within a single twelve-month period, the
Trust will terminate for tax purposes. If such a termination occurs, the assets
of the Trust will be deemed constructively distributed pro rata to the
shareholders and then recontributed by them to a new (for tax purposes) Trust.
Upon the distribution of Trust assets or termination of the Trust, a
shareholder must recognize gain to the extent that money distributed to the
shareholder plus the pro rata amount, if any, of liabilities discharged exceeds
the adjusted basis of the shareholder's shares immediately before the
distribution. Assuming that a shareholder's interest in the Trust is a capital
asset, such gain will be capital gain unless Section 751 of the Code applies.
Section 751 of the Code provides generally that a partner's gain on
liquidation of a partnership will be treated as ordinary income to the extent
that the partner receives or is deemed to receive less than the partner's pro
rata share of certain ordinary income assets, including unrealized receivables
and potential recapture of depreciation. No loss will be recognized by a
shareholder on the distribution to the shareholder of Trust property upon the
termination of the Trust unless the only such property distributed is money,
unrealized receivables and inventory.
21. DISTRIBUTION OF MARKETABLE SECURITIES. Sections 731(a) and 731(c) of
the Code treat a partnership's distribution of marketable securities to its
partners as if it were a cash distribution. The effect of this provision, unless
an exception applies, would be that the distribution by the Trust of marketable
securities would trigger gain to the shareholder to the extent that the fair
market value of the marketable securities and cash exceeds the shareholder's
adjusted basis in the shareholder's shares. The fair market value of the
marketable securities is determined as of the date of distribution. Marketable
securities means financial instruments (stocks, other equity interests,
evidences of indebtedness, options, forward or future contracts, national
principal contracts, and derivatives) and foreign currencies that are actively
traded. Actively traded means the instrument is traded on an established
financial market which would include a national securities exchange, and an
interdealer quotation system sponsored by a national securities association and
other similar trading systems.
Three major exceptions to treating marketable securities like cash are
provided under Section 731(c)(3) of the Code, two of which may have application
to the Trust. First, the Code and Regulation Section 1.731-2(d)(1)(iii) provide
for an exception for marketable securities that were not marketable securities
when obtained by the partnership. This exception could be applicable to the
situation where stock is acquired in a private placement and distributed to the
partner after the entity has gone public. Another exception is that Section 731
of the Code and Regulation Section 1.731-2(e) do not apply to marketable
securities distributed to an eligible partner by an investment partnership which
has never engaged in a trade or business. If the partnership owns an interest in
another partnership that engages in a trade or business, under certain
circumstances, the owner partnership may also be treated as engaging in a trade
or business. An eligible partner is a partner whose only contributions to the
partnership prior to the distribution consisted of money, stock in a
corporation, notes, bonds, debentures, or other evidence of indebtedness and
other similar type of investment type assets.
Regulation Section 1.731-2 has been issued by the IRS to provide guidance
in this area. The Regulations provide the following:
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A. The amount of the distribution of marketable securities that is
treated as a distribution of money is reduced (not below zero) by the excess of
the partner's distributive share of the net gain which would be recognized if
all the marketable securities held by the partnership were sold for fair market
value over the partner's distributive share of the net gain which is
attributable to the marketable securities held by the partnership immediately
after the transaction.
B. Section 731 will not apply to the distribution of marketable
securities to the extent that 1) the security was acquired by the partnership in
a nonrecognition transaction in exchange for any property except money or
marketable securities; 2) the value of any marketable securities and money
exchanging is less than 20% of the value of all assets exchanged in the
nonrecognition transaction; and 3) the security is distributed within five years
of either the date on which the security was acquired by the partnership or, if
later, the date on which the security became actively traded.
C. Section 731 will not apply to distributed marketable securities if 1)
the security was not actively traded as of the date acquired by the partnership
and the entity to which the security relates had no outstanding actively traded
securities on that date; 2) the security was held by the partnership for at
least six months before the date the security became actively traded; and 3) the
security was distributed within five years of the date on which the security was
became actively traded.
D. For purposes of the exception for a distribution by an investment
partnership to an eligible partner, a partnership will not be treated as a trade
or business by reason of 1) any activity undertaken as an investor, trader, or
dealer in certain investment assets, including the receipt of commitment fees,
break-up fees, guarantee fees, director's fees or similar fees that are
customary in and incidental to any activities of the partnership as an investor,
trader or dealer in such assets; 2) reasonable and customary management services
provided to an investment partnership in which the partnership holds an
interest; or 3) reasonable and customary services provided by the partnership in
assisting the formation, capitalization, expansion or offering of interests in a
corporation (or other entity) in which the partnership holds or acquires a
significant equity interest (including the provision of advice or consulting
services, bridge loans, guarantees of obligations or service on a company's
board of directors), provided that the anticipated receipt of compensation for
the services, if any, does not represent a significant purpose for the
partnership's investment in the entity and is incidental to the investment in
the entity.
Our holdings may or may not consist of marketable securities. If our
investments in portfolio companies are marketable securities we intend to rely
on one of the above exceptions in the event that we do make a distribution of a
security to our shareholders. However, the IRS may challenge any exception we
with the result that the distribution of the security to shareholders will be
treated as a taxable event with the result that shareholders may have a taxable
event and not have received cash to pay the resulting tax obligation.
22. CHARACTER OF GAIN OR LOSS. The sale or disposition of property by
other partnerships or similar entities in which we own an interest of property
used in that entity's trade or business will create gain or loss equal to the
difference between the amount realized on the sale or disposition and the
adjusted basis in the property. Gain realized on the sale or disposition of
property that is depreciable and was held for more than one year should qualify
as gain from the sale of a Section 1231 asset, except to the extent that any
such gain is attributable to property subject to recapture. Shareholders are
generally entitled to treat their share of Section 1231 gains and losses as
long-term capital gains and losses if their Section 1231 gains exceed their
Section 1231 losses for the year. However, net Section 1231 gains will be
treated as ordinary income to the extent of the shareholder's unrecaptured net
Section 1231 losses for the five (5) most recent prior years. If shareholders
share of Section 1231 losses exceeds their Section 1231 gains for the taxable
year, such losses will be treated as ordinary losses.
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Any gain on the sale or other disposition of equipment by a partnership or
other similar entities in which we hold an interest will be taxed as ordinary
income under Section 1245 of the Code to the extent of all depreciation
deductions previously claimed with respect to such equipment, with any excess
being treated as Section 1231 gain. Similarly, gain on the sale of any buildings
owned by pass through entities in which we hold an interest will, under Section
1250 of the Code, be treated as ordinary income to the extent of any
depreciation taken with respect to such buildings in excess of straight-line
depreciation. If buildings have been held for one year or less, all depreciation
will be recaptured as ordinary income. In the case of a disposition of property
in an installment sale, any ordinary income under these recapture provisions is
to be recognized in the year of the disposition.
Under Section 751 of the Code, recapture rules are applied on a
shareholder's disposition of shares. The result of such treatment is the
shareholder will be required to treat as ordinary income the portion of any gain
realized upon the disposition of the shareholder's shares that is attributable
to property subject to depreciation recapture or certain other property which,
if sold, would give rise to ordinary income. There are exceptions to the
recapture rules for gifts, transfers at death, transfers in certain tax-free
reorganizations, like-kind exchanges and involuntary conversions in certain
circumstances.
23. INVESTMENT BY CERTAIN TYPES OF TAX EXEMPT ENTITIES.
A. GENERAL. The following entities are generally exempt from federal
income taxation:
(i) trusts forming part of a stock bonus, pension, or profit
sharing plan (including a Keogh plan) meeting the requirements of Section
401(a) of the Code;
(ii) trusts meeting the requirements for an Individual Retirement
Account ("IRA") under Section 408(a) of the Code (referred to herein, along
with trusts described in (i), as "Qualified Plans"); and
(iii) organizations described in Section 501(c) and 501(d) of the
Code (collectively "Tax Exempt Entities").
The exemption from income taxes does not apply to taxable income that
Qualified Plans and tax exempt entities derive from the conduct of a trade or
business that is not substantially related to the exempt function of the entity
("unrelated business taxable income"). If an entity is subject to tax on its
"unrelated business taxable income," it may also be subject to the alternative
minimum tax on related tax preference items.
The receipt of any "unrelated business taxable income" during any taxable
year by a charitable remainder trust will cause all income of the charitable
remainder trust from the Trust for that year to be subject to federal income
tax. An investment in the Trust by a charitable remainder trust would not
ordinarily be appropriate.
A tax exempt entity is generally taxable on its unrelated trade or business
taxable income only to the extent that it exceeds $1,000 for the year. If
"unrelated business taxable income" is less than $1,000 per year the tax exempt
entity must still file a federal income tax return to claim the benefit of the
$1,000 per year exemption.
Gains or losses from the sale, exchange or other disposition of property,
interest income and royalty income are generally excluded from the computation
of "unrelated business taxable income." "Unrelated business taxable income"
includes, however, gain or loss from the sale, exchange or other disposition of
property held by a dealer and "debt-financed property."
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To the extent that our income may be considered to be derived from
transactions in the ordinary course of business, tax exempt entities should
expect that their shares of the Trust's income will constitute "unrelated
business taxable income." Many of the potential portfolio companies in which we
will consider investment would, if such portfolio companies have income,
generate "unrelated business taxable income" for a shareholder that is a tax
exempt entity. Thus, it is likely that if we allocate income to the
shareholders, a tax exempt entity that has invested in the Trust will have
"unrelated business taxable income." Accordingly, an investment in the Trust by
a tax exempt entity may not be appropriate. Fiduciaries of tax exempt entities
considering investing in the shares should consult their own tax advisors
concerning the rules governing "unrelated business taxable income."
B. DEBT-FINANCED PROPERTY. As set forth above, even though certain types
of income, such as interest and royalties, generally may be considered passive
and excluded from unrelated business income tax, such income when derived from
an investment in property which is "debt-financed" can still result in income
subject to taxation under Section 514 of the Code. "Debt-financed property" is
defined in Section 514 of the Code as any property which is held to produce
income and with respect to which there is "acquisition indebtedness."
"Acquisition indebtedness" includes indebtedness incurred by a tax exempt entity
to acquire shares and indebtedness incurred by the Trust. Each tax exempt entity
should consult with its own counsel regarding whether it may have incurred
"acquisition indebtedness" to acquire shares.
If we invest in and own property on which there is "acquisition
indebtedness," a portion of each distributive share of our taxable income
(including capital gain) may constitute "unrelated business taxable income."
This portion would be determined in accordance with the provisions of Section
514 of the Code. As a general guide, the portion of the distributive portion
that would be considered unrelated trade or business income to a tax exempt
entity would be approximately equivalent to the ratio of our debt to the basis
of our property. A tax exempt entity that purchases shares may be required to
report such portion of its pro rata portion of the Trust's taxable income as
"unrelated business taxable income." In computing the "unrelated business
taxable income" of a tax exempt entity for this purpose, the deduction for
depreciation is limited to the amount computed under the straight-line method.
If we were to incur "acquisition indebtedness" in our operations which is
allocable to any tax exempt entity, it would result in "unrelated business
taxable income" to such entity.
C. ERISA CONSIDERATIONS. In considering an investment in shares, a
fiduciary of a Qualified Plan should consider (i) whether the investment is in
accordance with the documents and instruments governing the Qualified Plan; (ii)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 ("ERISA"),
if applicable; (iii) the fact that the investment may result in "unrelated
business taxable income" to the Qualified Plan; (iv) whether the investment
provides sufficient liquidity; (v) the need to value the assets of the Qualified
Plan annually; and (vi) whether the investment is prudent.
ERISA generally requires that the assets of Qualified Plans be held in
trust and that the Trustee, or a duly authorized investment manager (within the
meaning of Section 3(38) of ERISA), have exclusive authority and discretion to
manage and control the assets of the plan. ERISA also imposes certain duties on
persons who are fiduciaries of employee benefit plans subject to ERISA and
prohibits certain transactions between an employee benefit plan and the parties
in interest with respect to such plan (including fiduciaries). Under the Code,
similar prohibitions apply to all Qualified Plans, including IRAs and Keogh
plans covering only self-employed individuals which are not subject to ERISA.
Under ERISA and the Code, any person who exercises any authority or control
respecting the management or disposition of the assets of a Qualified Plan is
considered to be a fiduciary of such Qualified Plan.
Furthermore, ERISA and the Code prohibit "parties in interest" (including
fiduciaries) of a Qualified Plan from engaging in various acts of self-dealing
such as dealing with the assets of a
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Qualified Plan for his or her own account or his or her own interest. To prevent
a possible violation of these self-dealing rules, neither Berthel Planning nor
its affiliates will purchase shares with assets of any Qualified Plan (including
a Keogh plan or IRA), if they (i) have investment discretion with respect to
such assets or (ii) regularly give individualized investment advice which serves
as the primary basis for the investment decisions with respect to such assets.
If our assets were deemed to be "plan assets" under ERISA, (i) the prudence
standards and other provisions of Title 1 of ERISA applicable to investments by
Qualified Plans and their fiduciaries would extend (as to all plan fiduciaries)
to investments we make and (ii) certain transactions that we might seek to enter
into might constitute "prohibited transactions" under ERISA and the Code.
The Department of Labor published a final regulation concerning the
definition of what constitutes the assets of a Qualified Plan with respect to
its investment in another entity (the "ERISA Regulation"). Section
2510.3-101(a)(2) of the ERISA Regulation provides as follows:
Generally, when a plan invests in another entity, the plan's assets include
its investment, but do not, solely by reason of such investment, include
any of the underlying assets of the entity. However, in the case of a
plan's investment in an equity interest of an entity that is neither a
publicly-offered security nor a security issued by an investment company
registered under the Investment Company Act of 1940 its assets include both
the equity interest and an undivided interest in each of the underlying
assets of the entity, unless it is established that: (i) The entity is an
operating company; or (ii) Equity participation in the entity by benefit
plan investors is not significant.
Under Section 2510.3-101(f)(1) of the ERISA Regulation, equity
participation in an entity by Qualified Plans is "significant" on any date if,
immediately after the most recent acquisition of any equity interest in an
entity, 25% or more of the value of any class of equity interests in the entity
is held by Qualified Plans.
Unless another exemption under the ERISA Regulation is available, Berthel
Planning will not admit any Qualified Plan as a shareholder or consent to an
assignment of shares if such admission or assignment will cause 25% or more of
the value of all shares to be held by Qualified Plans. Accordingly, the assets
of a Qualified Plan investing in shares should not, solely by reason of such
investment, include any of our underlying assets.
The other exemption under the ERISA Regulation that might become available
is the "venture capital operating company" exemption. Under the ERISA
Regulation, when a Qualified Plan invests in another entity and such entity is a
venture capital operating company, the plan's assets include its investment, but
do not, solely by reason of such investment, include any of the underlying
assets of the entity. If at least 50% of the assets of an entity (excluding
short-term investments pending long-term commitment) are invested in "venture
capital investments," during certain relevant periods, the entity will be
considered a "venture capital operating company". For this purpose, a "venture
capital investment" is an interest or investment in an operating company as to
which the entity has or obtains management rights. Under the ERISA Regulation,
an "operating company" is an entity that is primarily engaged, directly or
through a majority owned subsidiary or subsidiaries, in the production or sale
of a product or service other than the investment of capital. In a recent
advisory opinion, the Department of Labor has taken the position that an entity
may only be a "venture capital operating company" starting on the day it makes
its first "venture capital investment." If this position were to be adopted by
the courts, we would not qualify as a "venture capital operating company" until
50% of our assets (excluding short-term investments pending long-term
commitment) have been used to purchase interests in projects that constitute
"venture capital interests." Consequently, our counsel is unable to conclude
that the assets of a Qualified Plan will not include the assets of the Trust
during any period during which the 50% test is not met.
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Each fiduciary of a Qualified Plan (and any other person subject to ERISA)
should consult his or her tax advisor and counsel regarding the effect of the
plan asset rules on an investment in the Trust by a Qualified Plan.
24. PARTNERSHIP REGISTRATION AS A TAX SHELTER WITH THE INTERNAL REVENUE
SERVICE. The Internal Revenue Service requires the person principally
responsible for organizing certain defined investments (Berthel Planning) to
register such an investment with the Service if, as of the close of any of the
first five taxable years of the investment, such investment (i) satisfies a
certain computed ratio of aggregate deductions and credits to cash invested for
any Investment and (ii) is expected to reduce the then cumulative tax liability
of any investor. Based on the forecasted financial statement projections, the
deductions available from the Trust that will be available to offset Trust
income are not expected to exceed the ratio established for registration as a
tax shelter. Accordingly, Berthel Planning has not applied for a tax shelter
registration number. Should it be subsequently determined based on revised
projections that the ratio of aggregate deductions to a shareholder's investment
exceeds the Internal Revenue Service's established level (2 to 1), application
for a tax shelter registration number will have to be made and will be provided
to shareholders.
We will also retain a list of all of our shareholders pursuant to Internal
Revenue Service Regulation.
25. STATE INCOME TAX CONSEQUENCES. In addition to the federal income tax
consequences described above, prospective shareholders should consider potential
state and local tax consequences of an investment in the Trust. The Trust itself
may be subject to state income taxes in states in which the Trust owns assets or
is engaged in business. Moreover, a shareholder's share of net income or net
loss attributable to the shareholder's investment in the Trust generally will be
required to be included in determining his reportable income for state or local
tax purposes in the jurisdiction in which the shareholder is a resident. In
addition, certain other states in which the Trust owns assets or makes
investments may impose a tax on non-resident shareholders determined with
reference to their pro rata shares of income derived from such state. To the
extent that a nonresident shareholder pays tax to a state by virtue of assets or
business interests owned within that state, the shareholder may be entitled to a
deduction or credit against tax owed to his state of residence with respect to
the same income. In sum, a shareholder may be subject to income, estate or
inheritance tax, or both, and may be required to file tax returns in states and
localities where the Trust's assets are held, as well as in the state or
locality of his residence. It is possible that some states or localities where
the assets or business interests will be located will require that the Trust
withhold state or local taxes on the income allocated (or distributions made) to
Trust. We are authorized to withhold from amounts otherwise distributed to
shareholders such amounts as the Trustees determine is necessary or appropriate
to satisfy the Trust's state or local tax obligations.
Shareholders should consult their own tax advisors as to the state and
local tax consequences of an investment in our shares. No opinion has been or
will be rendered by our counsel on matters of state or local tax law.
26. TAX CONSIDERATIONS FOR NONRESIDENT ALIENS AND FOREIGN CORPORATIONS.
The federal income taxation of nonresident alien individuals and foreign
corporations is a highly complex matter which may be affected by applicable tax
treaties and other considerations. Therefore, nonresident alien individuals or
foreign corporations should consult their tax advisor as to the advisability of
investing in our shares and with respect to the following tax information.
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REGULATION
We have elected to be treated as a business development company under
the Investment Company Act. As a business development company, we will be
subject to certain provisions of the Investment Company Act, and certain of our
proposed operations will be subject to review by the Commission. We may not
withdraw our election without first obtaining the approval of a majority of our
shareholders. Generally, to be eligible to elect business development company
status, we
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must engage in the business of furnishing capital and offering significant
managerial assistance to companies that meet the requirements of the Investment
Company Act.
A business development company is a closed-end company that must (i) be
a domestic company; (ii) have registered a class of its securities or have filed
a registration statement with the Commission pursuant to Section 12 of the
Exchange Act, as amended; (iii) operate for the purpose of investing in the
securities of companies that meet the requirements of the Investment Company
Act; (iv) offer to extend or make available significant managerial assistance to
these companies; (v) have a majority of directors who are not "interested
persons" (as defined in the Investment Company Act); and (vi) file (or, under
certain circumstances, intend to file) a proper notice of election with the
Commission.
The Small Business Investment Incentive Act of 1980 also added
provisions to the Investment Company Act that apply to business development
companies. The following is a brief description of the business development
company provisions of the Investment Company Act, as modified by the Small
Business Investment Incentive Act of 1980, and is qualified in its entirety by
reference to the full text of the Investment Company Act and the rules
thereunder.
Generally, to qualify for our portfolio, a company
- must be organized under the laws of, and have its principal
place of business in, any state or states,
- may not be an investment company (except for wholly owned
small business investment corporations) and
(a) may not have a class of securities registered on
an exchange or included in the Federal Reserve
Board's over-the-counter margin list,
(b) must be "actively controlled" by the business
development company acting either alone or as part of
a group acting together with an affiliate of the
business development company serving as a member of
the company's board of directors, or
(c) meet such other criteria as may be established by
the SEC.
"Control" is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a company.
The Investment Company Act prohibits or restricts us from investing in
certain types of companies. Moreover, the Investment Company Act requires us to
acquire only "qualifying assets" and certain assets necessary for our operations
(such as office furniture, equipment and facilities) if, at the time of the
acquisition of such qualifying assets, less than 70% of the value of our total
assets consists of qualifying assets. Qualifying assets include: (i) privately
acquired securities of companies that meet the requirements of the Investment
Company Act at the time the business development company acquires their
securities; (ii) securities of bankrupt or insolvent companies; (iii) securities
of companies controlled by a business development company; (iv) securities
received in exchange for or distributed in or with respect to any of the
foregoing; and (v) cash items, government securities and high-quality short-term
debt. The Investment Company Act also places restrictions on the nature of the
transactions in which, and the persons from whom, securities can be purchased in
order for the securities to be considered qualifying assets. Such restrictions
include limiting purchases to transactions not involving a public offering and
the requirement that securities be acquired directly from either the company or
its officers, directors or affiliates. We expect that our investments in
companies will be "qualifying assets" under the Investment
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Company Act. We may not purchase any security on margin, except such short-term
credits as are necessary for the clearance of portfolio transactions, or engage
in short sales of securities.
We will be required to "make available significant managerial
assistance" to our portfolio companies. "Making available significant managerial
assistance" is defined under the Investment Company Act to mean (1) any
arrangement whereby a business development company, through its directors,
officers, employees or general partners, offers to provide and, if accepted,
does provide significant guidance and counsel concerning the management,
operations or business objectives or policies of a company, (2) the exercise of
a controlling influence over the management or policies of a company by the
business development company acting individually or as part of a group of which
the business development company is a member acting together which controls such
company, or (3) with respect to SBICs, the making of loans to a company. A
business development company may satisfy the requirements of clause (1) with
respect to any particular company by purchasing securities of such company in
conjunction with one or more other persons acting together, if at least one of
the persons in the group makes available significant managerial assistance to
such company, except that such requirement will not be deemed to be satisfied if
the business development company, in all cases, makes available significant
managerial assistance solely in the manner described in this sentence. A
business development company need only extend significant managerial assistance
with respect to companies that are treated as qualifying assets (as defined
below) for the purpose of satisfying the 70% test discussed above.
The Investment Company Act permits us to invest up to 30% of our assets
in securities that generally are not qualifying assets. Because this is a
provision of the Investment Company Act rather than a policy we have adopted,
this limitation may be changed without shareholder approval.
The provisions of the Investment Company Act set forth above may
prevent us from purchasing investments that are otherwise suitable for
investment but which are not "qualifying assets." We may, together with an
investor group, from time to time choose to seek control of a company to make
the securities of that company qualify for our portfolio. However, we may not be
able to obtain control of certain prospective companies. Our inability to obtain
control reduces the number of potential issuers in which we will be able to
invest and may make it more difficult to find suitable investments. This may
cause us to maintain more assets in cash and cash equivalent investments for a
longer period of time.
Generally, the Investment Company Act of 1940 prohibits any transaction
which will cause us to be a participant in any written or oral plan, contract
authorization or arrangement or any practice or understanding concerning an
enterprise or undertaking whereby we or a company we control and any of our
affiliated persons or Berthel Financial Services or any affiliated person of any
of our affiliates or any affiliated person of Berthel Financial Services have a
joint or a joint and several participation or share in the profits of such
enterprise or undertaking. Even if we were to get an exemptive order from this
prohibition, we are further prohibited from purchasing or retaining the
securities of any company if the trustees or Berthel Planning, or the officers
and directors of any trustee or Berthel Planning, own beneficially more than one
half of one per cent of the securities of that company or together own
beneficially more than five per cent of the securities of the portfolio company.
We will not invest in the securities of investment companies. There are
additional Investment Company Act of 1940 restrictions.
We are permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
shareholders' interests senior to the shares if its asset coverage, as defined
in the Investment Company Act, is at least 200% after the issuance of the debt
or the senior shareholders' interests. In addition, provision must be made to
prohibit any distribution to shareholders or the repurchase of any shares unless
the asset coverage ratio is at least 200% at the time of the distribution or
repurchase.
89
<PAGE>
The Investment Company Act limits our ability to sell shares at a price
less than the then net asset value per share. Our shares will be sold to the
public at a price of $10, less any applicable discount in selling commissions
(such as volume discounts). The price to the public will be adjusted if at any
Closing during the Offering the value of a share, based upon the our net asset
value plus applicable selling commissions, does not closely approximate $10 per
share due to a change in the value of our investments. This prospectus will be
supplemented to reflect any such change in the price to the public. Any sale of
a share at a price that represents proceeds to us other than an amount equal to
or greater than the net asset value of a share may be made only if (i) the
management board (including a majority of the independent trustees) have
determined that such sale would be in our best interests and our shareholders'
best interests and (ii) the management board (including the independent
trustees), in consultation with Berthel Financial Services, have determined in
good faith that the sales price closely approximates the market value of such
shares, less any selling commission or discount. We do not intend to adjust the
purchase price of shares if the net asset value drops below $10 per share.
After the Offering, we may sell our securities at a price that is below
the prevailing net asset value per share only upon the approval of the policy by
shareholders holding a majority of the outstanding shares, including a majority
of shares held by nonaffiliated shareholders.
Certain transactions involving persons closely affiliated with us,
including Berthel Planning, require the prior approval of the SEC. In general
(a) any person who owns, controls or holds with power to vote more than 5% of
the outstanding shares, (b) any director, executive officer or general partner
of such person and (c) any person who directly or indirectly controls, is
controlled by or is under common control with such person, must obtain the prior
approval of a majority of the independent trustees and, in some situations, the
prior approval of the SEC, before engaging in certain transactions involving us
or any company controlled by us. In accordance with the Investment Company Act,
a majority of the trustees must be persons who are not "interested persons" as
defined in such act. See "Independent Trustees" under "Management Arrangements."
Except for certain transactions that must be approved by the independent
trustees, the Investment Company Act generally does not restrict transactions
between us and the portfolio companies.
As a business development company, we will also be subject to the
provisions of the Investment Advisers Act. The Investment Advisors Act generally
prohibits investment advisers from entering into investment advisory contracts
with investment companies that provide for compensation to the investment
advisers on the basis of a share of capital gains upon or capital appreciation
of the funds or any portion of the funds of the investment companies. In 1980,
Congress enacted the Small Business Investment Incentive Act of 1980 which added
provisions to the Investment Advisers Act permitting the payment of compensation
based on capital gains in an investment advisory contract between an investment
adviser and a business development company. Our management agreement with
Berthel Planning provides for incentive compensation based on the capital
appreciation of the our investments.
The Exchange Act and the Investment Company Act impose certain
reporting and other obligations and restrictions on any entity which directly or
indirectly acquires, owns, controls or holds with power to vote certain
specified percentages (generally 5% or more) of the equity or voting securities
of another entity. For purposes of determining whether we indirectly own,
control or hold with power to vote any specified percentage or amount of the
outstanding voting securities of one of the portfolio companies, the amount of
such voting securities we own will, to the extent required by such acts and the
rules and regulations thereunder, be aggregated with the amount of such voting
securities, if any, owned by Berthel Planning and its affiliates.
90
<PAGE>
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for us by
Bradley & Riley PC, Cedar Rapids, Iowa. Bradley & Riley PC also serves as
counsel to Berthel Planning and Berthel Financial Services.
EXPERTS
The statement of assets and liabilities of Berthel Fisher & Company
Planning, Inc. as of December 31, 1999 and the statement of assets and
liabilities of the Trust as of June 22, 2000 appearing in the prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, 222 Third
Avenue, S.E., Cedar Rapids, Iowa, 52401, independent auditors, as set forth
in their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form N-2 with respect to the shares of beneficial
interest in the Trust offered by this prospectus. This prospectus, which is a
part of the registration statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules which are a
part of the registration statement. Additional information concerning us and our
shares is included in the Registration Statement and its exhibits and schedules.
You may read and copy any document we file at the SEC's public reference room in
Washington, DC. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference room. Our SEC filings are also available to the public from
the SEC's website at http://www.sec.gov.
Upon completion of this offering, we will be subject to the information
and periodic reporting requirements of the Securities Exchange Act and will file
periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference room and from the SEC's
website at http:// www.sec.gov.
REPORTS TO SHAREHOLDERS
We will furnish holders of shares with annual reports containing
audited financial statements examined by independent public accountants and
quarterly reports containing unaudited condensed financial statements for the
first three quarters of each year. We also will furnish holders of shares with
certain tax information with seventy-five (75) days after the close of each
year. See "Books and Records; Reports" under "Summary of the Declaration of
Trust."
91
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
OF BERTHEL GROWTH TRUST II AS OF JUNE 22, 2000 (AUDITED)
INDEPENDENT AUDITORS' REPORT
To the Independent Trustees and Shareholders of
Berthel Growth Trust II
We have audited the accompanying statement of assets and liabilities of Berthel
Growth Trust II (the "Trust"), as of June 22, 2000. This financial statement is
the responsibility of the Trust's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement of
assets and liabilities is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of assets and liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of assets and liabilities presentation. We
believe that our audit of the statement of assets and liabilities provides a
reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in all
material respects, the financial position of the Trust as of June 22, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
June 28, 2000
<PAGE>
BERTHEL GROWTH TRUST II
STATEMENT OF ASSETS AND LIABILITIES
JUNE 22, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS: CASH $10,000
=======
NET ASSETS: SHARES OF BENEFICIAL INTEREST,
3,000,000 SHARES AUTHORIZED -- 1,000 SHARES
ISSUED AND OUTSTANDING (EQUIVALENT TO $10 PER
SHARE) $10,000
=======
</TABLE>
SEE NOTES TO STATEMENT OF ASSETS AND LIABILITIES.
--------------------------------------------------------------------------------
2
<PAGE>
BERTHEL GROWTH TRUST II
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
AS OF JUNE 22, 2000
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Berthel Growth Trust II (the "Trust") was formed as a
nondiversified, closed-end management investment company electing
status as a business development company under the Investment Company
Act of 1940, as amended. The Trust was formed on June 15, 2000 under
the laws of the State of Delaware and has been inactive since that date
except for matters relating to its organization and registration under
the Securities Act of 1933.
As a business development company, the Trust's investment objective is
long term capital appreciation from investments in small and medium
size companies. The securities to be purchased typically will be rated
below investment grade, and more frequently, not rated at all. The
securities of these companies will often have significant speculative
characteristics. Many of the investments to be made are commonly
referred to as venture capital investments. The investment objective
does not seek current income.
The Trust will be offering a minimum of 600,000 and a maximum of
3,000,000 shares of beneficial interest ("Shares") at an offering price
of $10.00 per share. Each share carries a sales load of approximately
$.20-$.70 representing the selling agent's commission, a syndication
fee of $.10, and an underwriting fee of $.20; therefore, the Trust will
receive a net cash of approximately $9.00-$9.50 per share.
The Trust will terminate upon the liquidation of all of its
investments, but no later than December 31, 2011 or ten years from the
final closing of the sale of the Shares, if later. However, the
Independent Trustees have the right to extend the term of the Trust for
up to two additional one-year periods if they determine that such
extensions are in the best interest of the Trust and in the best
interest of the shareholders, after which the Trust will liquidate any
remaining investments as soon as practicable but in any event within
three years.
Berthel Fisher & Company Planning, Inc. (the "Trust Advisor") is the
Company's investment advisor and manager. TJB Capital Management, Inc.
is the Corporate Trustee, but will not participate in the management of
the Trust. Shares will be offered by Berthel Fisher & Company Financial
Services, Inc. (the "Dealer Manager"). Each of these three entities is
a
3
<PAGE>
wholly or majority owned subsidiary of Berthel Fisher & Company.
DIRECT OFFERING COSTS -- Offering costs such as selling commissions,
underwriting fees and syndication fees will be incurred by the Trust
and deducted from the proceeds of beneficial interest as a direct
reduction of net assets.
ORGANIZATIONAL AND OFFERING COSTS -- The Trust Advisor incurs the
organizational and offering costs of the Trust, primarily including,
but not limited to, legal and accounting fees, printing and mailing
expenses and travel expenses incurred while engaged in sales activity
of Trust Shares. The Trust will reimburse the Trust Advisor for these
costs, in an amount not to exceed 3.5% of the aggregate purchase price
of all shares sold. Any organizational and offering expenses incurred
by the Trust Advisor in excess of this amount will be paid by the Trust
Advisor and not reimbursed by the Trust.
2. RELATED PARTY AGREEMENTS
MANAGEMENT AGREEMENT -- The Trust has entered into a management
agreement with the Trust Advisor whereby the Trust will pay the Trust
Advisor an annual management fee equal to 2.5% of the value of the
assets of the Trust as of the first day of that quarter. The management
fee is to be paid monthly in arrears.
DEALER MANAGER AGREEMENT -- The Trust has entered into a dealer manager
agreement with the Dealer Manager. As described in Note 1, the Trust
will pay the Dealer Manager a selling commission fee that will vary
between 2% and 7% of the purchase price of all shares sold, an
underwriting fee of 2% of the purchase price of all shares sold and a
syndication fee of 1% of the aggregate purchase price of all shares
sold.
3. INCOME TAXES
The Trust has received an opinion from counsel that it will be treated
as a partnership for federal income tax purposes. As such, under
present income tax laws, no income taxes will be reflected in these
financial statements as taxable income or loss of the Trust is included
in the income tax returns of the investors.
* * * * *
4
<PAGE>
BALANCE SHEET OF BERTHEL FISHER & COMPANY PLANNING, INC.
AS OF DECEMBER 31, 1999 (AUDITED)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Berthel Fisher & Company Planning, Inc.
We have audited the accompanying balance sheet of Berthel Fisher & Company
Planning, Inc. (the "Company"), a wholly owned subsidiary of Berthel Fisher &
Company as of December 31, 1999. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet presents fairly, in all material respects, the
financial position of the Company as of December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the balance sheet, in 1999 the Company adopted
Statement of Position 98-5, which required the Company to change its method of
accounting for offering costs.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
April 24, 2000
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY)
BALANCE SHEET
DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CASH $ 888
RECEIVABLE FROM PARENT UNDER TAX ALLOCATION AGREEMENT 165,000
DUE FROM AFFILIATES (NOTE 2) 88,121
OFFICE FURNITURE AND COMPUTER SOFTWARE, LESS ALLOWANCE
FOR DEPRECIATION OF $150 603
DEFERRED INCOME TAX ASSET (NOTE 3) 120,000
OTHER ASSETS 7,165
-----------
TOTAL $ 381,777
===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 24,515
DUE TO AFFILIATES (NOTE 2) 263,513
NOTE PAYABLE TO BERTHEL FISHER & COMPANY (NOTE 2) 326,952
-----------
TOTAL LIABILITIES 614,980
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 2)
STOCKHOLDER'S DEFICIENCY:
COMMON STOCK, NO PAR VALUE -- AUTHORIZED 10,000 SHARES,
ISSUED AND OUTSTANDING 1,000 SHARES (NOTE 2) 1,431,000
NOTE RECEIVABLE ISSUED FOR COMMON STOCK (NOTE 2) (1,165,000)
ACCUMULATED DEFICIT (499,203)
-----------
TOTAL STOCKHOLDER'S DEFICIT (233,203)
-----------
TOTAL $ 381,777
===========
</TABLE>
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY)
NOTES TO BALANCE SHEET
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Berthel Fisher & Company Planning, Inc. (the "Company") is
a wholly owned subsidiary of Berthel Fisher & Company (the "Parent"). The
Company is a registered investment advisor and manager and serves as a
trust advisor to Berthel Growth & Income Trust I (the "Trust"), a
closed-end management investment company electing status as a business
development company under the Investment Company Act of 1940 which invests
in securities of small and medium sized privately and publicly owned
companies.
USE OF ESTIMATES -- The preparation of a balance sheet in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the balance sheet. Actual results
could differ significantly from those estimates.
DEFERRED OFFERING EXPENSES -- At the conclusion of the Trust's offering
period, sales of shares were not sufficient to provide direct
reimbursement of all organization and offering expenses incurred by the
Company. Such expenses totaling $490,195 were deferred and, through the
year ended December 31, 1998, were amortized using the straight-line
method over the life of the Trust. In April 1998, the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires the costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. This SOP
required the Company to write-off deferred offering costs during the year
ended December 31, 1999.
OFFICE FURNITURE AND COMPUTER SOFTWARE -- Office furniture and computer
software is stated at cost less allowance for depreciation. Depreciation
is computed by the straight-line method over the estimated useful life of
the asset.
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.
NOTE RECEIVABLE ISSUED FOR COMMON STOCK -- On April 19, 1995, Berthel
Fisher and Company issued an uncollateralized note for additional common
stock. This note is treated as a reduction of equity until cash is
received on the note.
<PAGE>
2. RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENTS -- The Company has entered into a management
agreement with the Trust that provides for incentive compensation from the
Trust based on the capital appreciation of the Trust's investments. The
Trust pays the Company an annual management fee equal to 2.5% of the
combined temporary investment in money market securities and loans and
investments of the Trust. The management fee is paid quarterly, in
arrears, and is determined by reference to the net value of the assets of
the Trust as of the first day of that quarter.
In addition, during the year ended December 31, 1999, the Trust paid the
Company a fee for administration of shareholder accounts and other
administrative services.
The Company has an unwritten, month-to-month agreement in which the
Company's Parent provided management services at a monthly rate of $7,000
in 1999.
FINANCING ARRANGEMENTS -- The Company also entered into a financing
arrangement with its Parent primarily for purposes of short-term
financing. The uncollateralized 10% note payable to its Parent is due on
demand.
DUE TO AFFILIATES -- Due to affiliates consisted of the following at
December 31, 1999:
<TABLE>
<S> <C>
INTERCOMPANY INTEREST PAYABLE TO BERTHEL FISHER & COMPANY $261,450
INTERCOMPANY ACCOUNTS PAYABLE 2,063
--------
$263,513
========
</TABLE>
DUE FROM AFFILIATES -- Due from affiliates consisted of the following at
December 31, 1999:
<TABLE>
<S> <C>
MANAGEMENT FEE RECEIVABLE FROM
BERTHEL GROWTH AND INCOME TRUST I $24,731
MANAGEMENT FEE RECEIVABLE FROM
BERTHEL SBIC, LLC 60,190
MISCELLANEOUS EXPENSE REIMBURSEMENT FROM
BERTHEL GROWTH AND INCOME TRUST I 3,200
-------
$88,121
=======
</TABLE>
OTHER TRANSACTIONS -- On April 19, 1995, the Parent issued an
uncollateralized note for $1,165,000 to the Company as additional equity
pursuant to its common stock investment. The note receivable is due on
demand and bears interest at 10%. In addition, the Company also earned
interest on the receivable from Parent under the tax allocation agreement.
<PAGE>
3. INCOME TAXES
The results of the Company's operations are included in the consolidated
federal and state tax returns of Berthel Fisher & Company. The entities
included in the consolidated returns have adopted the policy of allocating
income tax expense or benefit based upon the pro rata contribution by the
entity to the consolidated taxable operating income or loss. Generally,
this allocation results in profitable entities recognizing a tax provision
as if the individual company filed a separate return, and loss companies
recognizing tax benefits to the extent that their losses contribute to
reduce consolidated taxes.
Deferred income taxes are established by each member of the consolidated
group based upon the temporary differences within the entity. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax asset at December 31, 1999 related to net
operating losses. At December 31, 1999, the Company's net operating loss
carryforward aggregated $300,000 and expires through 2014.
4. SUBSEQUENT EVENT (UNAUDITED)
During June 2000, the Parent issued an uncollateralized note receivable
totaling $500,000 in exchange for additional common stock of Planning.
This note is treated as a reduction of equity until cash is received on
the note.
* * * * *
<PAGE>
BALANCE SHEET OF BERTHEL FISHER & COMPANY PLANNING, INC.
AS OF JUNE 30, 2000 (UNAUDITED)
92
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 2000
=================
<S> <C>
ASSETS
Cash $ 31,704
Receivable from Parent under tax allocation agreement 165,000
Due from affiliates 58,646
Reimbursable offering expenses 185,667
Office furniture and computer software, less allowance
for depreciation of $204 and $150 548
Deferred income tax asset 139,914
Other assets 3,527
=================
TOTAL $ 585,006
=================
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
LIABILITIES:
Accounts payable and accrued expenses $ 205,860
Due to affiliates 308,207
Note payable to Berthel Fisher & Company 336,634
=================
Total liabilities 850,701
=================
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Common stock, no par value-authorized 10,000 shares,
issued and outstanding 1,500 shares and 1,000 shares 1,931,000
Note receivable issued for common stock (1,665,000)
Accumulated deficit (531,695)
=================
Total stockholder's deficiency (265,695)
=================
TOTAL $ 585,006
=================
</TABLE>
EXHIBIT A
93
<PAGE>
DECLARATION OF TRUST
94
<PAGE>
DECLARATION OF TRUST
OF
BERTHEL GROWTH TRUST II
This Declaration of Trust provides for arbitration of certain matters.
This DECLARATION OF TRUST (the "Declaration") is made as of
June 15, 2000, by TJB CAPITAL MANAGEMENT, INC., a Delaware corporation, who,
with its successors as trustees under this Declaration, is referred to as the
"Corporate Trustee," for the benefit of those persons who shall become holders
of shares of beneficial interest under this Declaration.
WHEREAS, the Corporate Trustee wishes to organize the BERTHEL
GROWTH TRUST II (the "Trust") as a business trust under the Delaware Business
Trust Act, to provide for the management of the Trust by a Trust Advisor, and to
provide for the sale of beneficial interests in the Trust, the operation of the
Trust and the rights of (i) the Corporate Trustee, (ii) other persons acting as
trustees (together with the Corporate Trustee, the "Trustees") and (iii) owners
of beneficial interests; and
WHEREAS, a Certificate of Trust (the "Certificate") was filed
with the Secretary of State of Delaware, on June 15, 2000, to evidence the
existence of the Trust;
NOW, THEREFORE, the Corporate Trustee declares that it
constitutes and appoints itself Trustee of the sum of $10 owned by it, together
with all other property that it acquires under this Declaration as Trustee,
together with the proceeds thereof, to hold, IN TRUST, to manage and dispose of
for the benefit of the holders, from time to time, of beneficial interests in
the Trust, subject to the provisions of this Declaration as follows:
ARTICLE I
ORGANIZATION AND POWERS
1.1 TRUST ESTATE; NAME. The Trust, comprised of the trust
estate created under this Declaration and the business conducted hereunder,
shall be designated as "Berthel Growth Trust II" which name shall refer to
the trust estate and to the Corporate Trustee in its capacity as trustee of
the trust estate but not in any other capacity and which shall not refer to
the officers, agents, other trustees or beneficial owners of the Trust. To
the extent possible, the Trustees shall conduct all business and execute all
documents relating to the Trust in the name of the Trust and not as Trustees.
The Trustees may conduct the business of the Trust or hold its property under
other names as necessary to comply with law or to further the affairs of the
Trust as it deems advisable in their sole discretion. This Declaration, the
Certificate and any other documents, and any amendments of any of the
foregoing, required by law or appropriate, shall be recorded in all offices
or jurisdictions where the Trust shall determine such recording to be
necessary or advisable for the conduct of the business of the Trust.
1.2 PURPOSE. (a) The purpose of Trust is to achieve long
term capital appreciation from investments in small and medium size
companies. The Trust shall have the power to perform any and all acts and
activities with respect to this general purpose that are customary or
incidental thereto. Pending the commitment of Trust funds to investments of
the type specified, distribution of Trust funds or application of reserve
funds to their purposes, the Trust shall have full authority and discretion
to utilize Trust funds as provided in Section 10.5.
<PAGE>
(b) The Trust may acquire, own, hold, manage, operate and
dispose of stock in corporations, limited partnership interests, partnership
interests, limited liability company interests and other ownership interests
in any such firm, either as principal, agent, partner, syndicate member,
associate, joint venturer or otherwise, may loan funds to any such firm, may
invest funds in any such firm, and may do any and all things necessary or
incidental to the conduct of any such activities. Without limiting the
foregoing, we may guarantee debt, supply security for such debt or for the
issuance of letters of credit, enter into lease transactions, and acquire
goods and services for the furtherance of the purpose of the Trust.
(c) The Trust is authorized and empowered to elect to be
a business development company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and to operate as such, and to form a
wholly-owned subsidiary licensed as a Small Business Investment Company
("SBIC"), by the United States Small Business Administration ("SBA").
(d) Any proceeds of the offering not invested or
committed for investment in Portfolio Companies or set aside as reserves for
follow-on investment before the expiration of the Interim Investment Period
and not otherwise returned to Shareholders as part of distributions of Cash
Revenues, will be distributed pro rata to the Shareholders as a return of
capital without deduction of Front End Fees.
1.3 RELATIONSHIP AMONG SHAREHOLDERS; NO PARTNERSHIP. As
among the Trust, the Trustees, the Trust Advisor, the shareholders and the
officers and agents of the Trust, a trust and not a partnership is created by
this Declaration irrespective of whether any different status may be held to
exist as far as others are concerned or for tax purposes or in any other
respect. The Shareholders hold only the relationship of trust beneficiaries
to the Trustees with only such rights as are conferred on them by this
Declaration.
1.4 ORGANIZATION CERTIFICATES. The parties hereto shall
cause to be executed and filed (a) the Certificate, (b) such certificates as
may be required by so-called "assumed name" laws in each jurisdiction in
which the Trust has a place of business, (c) all such other certificates,
notices, statements or other instruments required by law or appropriate for
the formation and operation of a Delaware business trust in all jurisdictions
where the Trust may elect to do business, and (d) any amendments of any of
the foregoing required by law or appropriate.
1.5 PRINCIPAL PLACE OF BUSINESS. The principal place of
business of the Trust shall be 701 Tama Street, Building B, PO Box 609,
Marion, Iowa 52302-0609 or such other place as the Trust may from time to
time designate by notice to all Shareholders. The Trust's office in the State
of Delaware is 1105 N. Market Street, Suite 1300, Wilmington, Delaware 19801,
or such other place as the Trust may designate from time to time by notice to
all Shareholders. The Trust may maintain such other offices at such other
places as the Trust may determine to be in the best interests of the Trust.
1.6 ADMISSION OF INVESTORS. (a) The Trust shall have the
unrestricted right at all times prior to the Termination Date (as defined in
Article 2) to admit to the Trust such Investors as it may deem advisable,
provided the aggregate subscriptions received for Capital Contributions (as
defined in Article 2) of the Investors and accepted by the Trust do not
exceed $30,000,000 (3,000,000 Shares) immediately following the admission of
such Investors. Shares are offered only in Units of 100 Shares. No partial
Units will be sold.
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(b) Each Investor shall execute a Subscription Agreement
(as defined in Article 2) and make such Capital Contributions to the Trust as
subscribed by the Investor. Subject to the acceptance thereof by the Trust,
each Investor who executes a Subscription Agreement shall be admitted to the
Trust as a Shareholder. Subscriptions shall be accepted or rejected by the
program within thirty (30) days of their receipt; if rejected, all
subscription monies should be returned to the subscriber immediately. All
funds received from such subscriptions will be deposited in the Trust's name
in an interest-bearing escrow account at a commercial bank until the Escrow
Date (as defined in Article 2). Investors who subscribe prior to the Initial
Closing shall be admitted as Shareholders as of the Initial Closing. After
the Initial Closing, Investors shall be admitted as Shareholders on the date
the Investor's subscription is accepted by the Trust.
(c) If, by the close of business on the Termination Date,
Shares representing Capital Contributions in the aggregate amount of at least
$6,000,000 (600,000 Shares) have not been sold or if the Trust withdraws the
offering of Shares in accordance with the terms of this Declaration, the
Trust shall be immediately dissolved at the expense of the Trust Advisor and
all subscription funds shall be forthwith returned to the respective
subscribers together with any interest earned thereon. As soon after the
Termination Date as practicable, the Trust shall advise each Investor of the
Termination Date and the aggregate amount of Capital Contributions made by
all Investors.
(d) Mandatory assessments are prohibited. Assessments are
additional amounts of capital paid by a Shareholder beyond the Shareholder's
subscription commitment.
1.7 TERM OF THE TRUST. For all purposes, this Declaration
shall be effective on and after the date hereof and the Trust shall continue
in existence until the later of December 31, 2011, or ten years from the
Final Closing, which date may be extended for two one-year periods at the
discretion of the Independent Trustees, at which time the Trust shall
terminate unless sooner terminated under any other provision of this
Declaration.
1.8 POWERS OF THE TRUST. Without limiting any powers
granted to the Trust under this Declaration or applicable law, the Trust
shall have the following additional powers, subject to applicable law:
(a) To borrow money or to loan money and to pledge or
mortgage any and all Trust Property and to execute conveyances, mortgages,
security agreements, assignments and any other contract or agreement deemed
proper and in furtherance of the Trust's purposes and affecting it or any
Trust Property (including without limitation the Management Agreement (as
defined in Article 2)); provided, however, that the Trust shall not loan
money to the Trust Advisor, the Trustees or any other Managing Person;
(b) To pay all indebtedness, taxes and assessments due or
to be due with regard to Trust Property and to give or receive notices,
reports or other communications arising out of or in connection with the
Trust's business or Trust Property;
(c) To collect all monies due the Trust;
(d) To establish, maintain and supervise the deposit of
funds or Trust Property into, and the withdrawals of the same from, Trust
bank accounts or securities accounts;
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(e) To employ accountants to prepare required tax returns
and provide other professional services and to pay their fees as a Trust
expense;
(f) To make any election relating to adjustments in basis
on behalf of the Trust or the holders of beneficial interests that is or may
be permitted under the Code, particularly with respect to Sections 734, 743
and 754 of the Code;
(g) To employ legal counsel for Trust purposes and to pay
their fees and expenses as a Trust expense;
(h) To conduct the affairs of the Trust with the general
objective of achieving the purpose as described in Section 1.2(a); and
(i) To do business as a "business development company" as
defined by the Investment Company Act.
(j) To form a subsidiary limited liability company or
limited partnership to obtain a license to operate as an SBIC and to
contribute all or substantially all, or any lesser amount, of its capital to
the SBIC, the equity interest of which is owned not less than 99% by the
Trust.
(k) To enter into a Dealer Manager Agreement with the
Dealer Manager, or another underwriter, for the sale of the Shares, provided
such Dealer Manager Agreement is approved in accordance with Section 12.5
hereof.
1.9 CLASSIFICATION AS PARTNERSHIP. No ruling has been
requested from the Internal Revenue Service (the "IRS") on whether the Trust
will be classified as a partnership for tax purposes. The Trust is relying
upon the opinion of Bradley & Riley P C ("Counsel"), 2007 First Avenue S.E.,
Cedar Rapids, Iowa, that the Trust will be treated as a partnership for tax
purposes.
1.10 REFUND OF INVESTMENT. All prospective investors
shall have the right to receive a refund of their investments for a period of
five business days after the date the prospective investor receives a final
Prospectus. A request for a refund may be made in any fashion but, if made
other than in an originally signed and written communication, must be
confirmed with such a communication within 15 business days after the date a
final prospectus is received.
ARTICLE II
DEFINITIONS
The following terms, whenever used herein, shall have the
meanings assigned to them in this Article 2 unless the context indicates
otherwise. References to sections and articles without further qualification
denote sections and articles of this Declaration. The singular shall include the
plural and the masculine gender shall include the feminine, and vice versa, as
the context requires, and the terms "person" and "he" and their derivations
whenever used herein shall include natural persons and entities, including,
without limitation, corporations, partnerships and trusts, unless the context
indicates otherwise.
"ACQUISITION EXPENSES" - Acquisition Expenses are expenses,
including but not limited to legal fees and expenses, travel and communication
expenses, costs of appraisals, non-
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refundable option payments on assets not acquired, accounting fees and expenses,
and miscellaneous expenses relating to the purchase or acquisition of assets,
whether or not acquired.
"ACQUISITION FEES" - The total of all fees and commissions
paid by any party in connection with the initial purchase or acquisition of
assets by the Trust. Included in the computation of such fees or commissions
shall be any commission, finders fee, selection fee, supervision fee, financing
fee, non-recurring management fee or any fee of a similar nature, however
designated.
"ACT" - The Securities Act of 1933, as amended, and any rules
and regulations promulgated thereunder.
"ADJUSTED CAPITAL ACCOUNT" - The Capital Account at any time
of the holder of a beneficial interest (determined before any allocations for
the current fiscal period) (a) increased by (i) the amount of such holder's
share of partnership minimum gain (as defined in Regulation Section 1.704-2(d))
at such time, (ii) the amount of such holder's share of the minimum gain
attributable to a partner's nonrecourse debt (as defined in Regulation Section
1.704-2(b)(4)) and (iii) the amount of the deficit balance in such holder's
Capital Account which such holder is obligated to restore under Regulation
Section 1.704-1(b)(2)(ii)(c), if any, and (b) decreased by reasonably expected
adjustments, allocations and distributions described in Regulation Sections
1.704-1 (b)(2)(ii)(d)(4), (5) and (6) (taking into account the adjustments
required by Regulation Sections 1.704-2(g)(ii) and 1.704-2(i)(5)).
"AFFILIATE" - An Affiliate of any person includes any
of the following:
(a) any person directly or indirectly owning,
controlling, or holding with power to vote ten
percent (10%) or more of the outstanding voting
securities of such person;
(b) any person ten percent (10%) or more of whose
outstanding voting securities are directly or
indirectly owned, controlled, or held, with power to
vote, by such other person;
(c) any person directly or indirectly controlling,
controlled by, or under common control with such
other person;
(d) any executive officer, director, trustee or partner
of such other person;
(e) any legal entity on which such person acts as an
executive officer, director, trustee, or partner;
(f) if such other person is an investment company, any
investment adviser thereof or any member of an
advisory board thereof; or
(g) if such other person is an unincorporated investment
company not having a board of directors, the
depositor thereof.
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"AVAILABLE CAPITAL" - Gross proceeds from the sale of Shares
less all Organizational and Offering Expenses and compensation paid out of such
proceeds together with funds available to the Trust from other sources that are
available to the Trust to make investments.
"BOARD" OR "MANAGEMENT BOARD" - The Trust Advisor and the
Independent Trustees, acting together in accordance with the terms hereof.
"BRIDGE INVESTMENTS" - Interim debt investments that generally
have an expected maturity of twelve months or less. Bridge Investments may
include secured debt, senior debt, subordinated debt and other types of debt
instruments, and may also include preferred stock and other equity rights to
enhance yield.
"CAPITAL ACCOUNT" - The amount representing a Shareholder's
capital interest in the Trust, as determined under Article 6 hereof.
"CAPITAL CONTRIBUTIONS" - The aggregate capital contributions
of the Investors accepted by the Trust in payment of the purchase price of one
or more Shares (inclusive of the amount of any discount or any fee or other
compensation waived by the Trust, the Trust Advisor or the Dealer Manager) plus
any amounts contributed by the Trust Advisor pursuant to Section 14.7.
"CASH AVAILABLE FOR DISTRIBUTION" - Cash Flow plus cash funds
available for distribution from reserves less amounts set aside for restoration
or creation of reserves. Cash Available For Distribution shall not include
realized gains from Portfolio Companies or other investments of the Trust,
invested funds returned to the Trust, or principal payments received by the
Trust in repayment of loans made by the Trust.
"CASH FLOW" - Cash funds provided from operations, without
deduction for depreciation, but after deducting cash funds used to pay all other
expenses, debt payments, capital improvements and replacements. Cash withdrawn
from reserves is not Cash Flow.
"CASH REVENUES" - Gross cash funds provided from operation of
the Trust, including, without limitation, the following: all interest earned and
paid to the Trust; all cash dividends earned and paid to the Trust; and all fees
earned and paid to the Trust. Cash Revenues shall not include realized gains
from portfolio companies or other investments of the Trust, invested funds
returned to the Trust, or principal payments received by the Trust in repayment
of loans made by the Trust.
"CERTIFICATE" - The Certificate of Trust of the Trust, as
amended from time to time.
"CODE" - The Internal Revenue Code of 1986, as amended from
time to time, and any rules and regulations promulgated thereunder.
"CONTROL" - the same meaning given the term "control" in
Section 2(a)(9) of the Investment Company Act of 1940.
"CONTROLLING PERSON" - Includes, but is not limited to, all
persons, whatever their titles, who perform functions for the Sponsor similar to
those of: (a) chairman or member of the board of directors; (b) executive
officers; and (c) those holding ten percent (10%) or more equity interest in the
Sponsor or a person having the power to direct or cause the direction of the
Sponsor, whether through the ownership of voting securities, by contract, or
otherwise.
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"CORPORATE TRUSTEE" - TJB Capital Management, Inc., or its
successors as Corporate Trustee. The Corporate Trustee acts as legal title
holder of the Trust Property, subject to the terms of this Declaration.
"DEALER MANAGER" - Berthel Fisher & Company Financial
Services, Inc., an Iowa corporation, with its principal place of business at 701
Tama Street, Building B, PO Box 609, Marion, Iowa 52302-0609.
"DECLARATION" - This Declaration of Trust, as amended from
time to time.
"DELAWARE ACT" - The Delaware Business Trust Act, as amended
from time to time (currently codified as title 12, chapter 38 of the Delaware
Code).
"ESCROW DATE" - The latest to occur of the dates on which the
Trust (i) accepts the subscription that causes Capital Contributions in the
offering to Investors to be at least Six Million Dollars ($6,0000,000), (ii)
deposits at least Six Million Dollars ($6,000,000) in collected funds in escrow
under Section 1.6(b) and (iii) qualifies as a "business development company"
under the Investment Company Act, provided however, the Escrow Date shall not be
later than the Termination Date.
"FINAL CLOSING" - The last Closing of the sale of the Shares.
"FRONT END FEES" - Fees and expenses paid by any party for any
services rendered to organize the Trust and to acquire assets for the Trust,
including Organizational and Offering Expenses, Acquisition Fees, Acquisition
Expenses, and any other similar fees, however designated by the Sponsor.
"INDEPENDENT EXPERT" - A person with no material current or
prior business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Trust, and who is qualified to perform such work.
"INDEPENDENT TRUSTEE" - Any individual who is not an
"interested person" of the Trust, as defined in the Investment Company Act, who
becomes an Independent Trustee or a successor or additional Independent Trustee
under the terms of this Declaration. The initial Independent Trustees are Thomas
R. Gibson and Tom Davis.
"INITIAL CLOSING" - The Closing held when subscriptions for
the minimum number (600,000) of Shares have been received and accepted, and the
proceeds of such subscriptions have been received by the Trust.
"INTERIM INVESTMENT PERIOD" - The period ending with the later
of two years from the date of effectiveness of this Prospectus or one year from
termination of the offering.
"INVESTMENT COMPANY ACT" - The federal Investment Company Act
of 1940, as amended, and any rules and regulations promulgated thereunder.
"INVESTMENT IN TRUST ASSETS" - The amount of Capital
Contributions actually paid or allocated to the purchase or development of
assets acquired by the Trust (including working capital
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reserves allocable thereto, except that working capital reserves in excess of
three percent (3%) shall not be included) and other cash payments such as
interest and taxes, but excluding Front-End Fees.
"INVESTOR" - A purchaser of Shares (which will include the
Trust Advisor to the extent it acquires Shares) whose subscription is accepted
by the Trust.
"LOSSES" - Defined at "Profits or Losses."
"MAJORITY" - Unless otherwise specified herein, when used with
respect to any consent to be given or decision to be made or action to be taken
by the Investors or group of Investors, or by the Shareholders or group of
Shareholders, a majority in interest of all the then current Investors,
Shareholders or members of the group, as the case may be. Such Majority, or any
lesser or greater interest prescribed herein, shall be calculated based upon the
number of Shares owned by each Investor or Shareholder.
"MANAGED COMPANIES" - Portfolio companies to which the
Management Board, the Trust Advisor, an Affiliate of the Management Board or
Trust Advisor, or a member of a group investing in such a company in a
transaction in which the Trust also participates as an investor in the group,
will offer to provide, and if accepted, will provide significant managerial
assistance after the consummation of the acquisition.
"MANAGEMENT AGREEMENT" - The management agreement between the
Trust and the Trust Advisor, as described in the Prospectus and Registration
Statement, and adopted by the Independent Trustees, or as modified or approved
by the Independent Trustees or the Shareholders as required by the Investment
Company Act.
"MANAGEMENT BOARD" OR "BOARD" - The Trust Advisor and the
Independent Trustees, acting together in accordance with the terms hereof.
"MANAGEMENT SHARE" - The interest in the Trust that represents
the beneficial interests and management rights of the Trust Advisor in its
capacity as, Trust Advisor, but excluding the Trust Advisor's interest, if any,
attributable to Shares acquired by it.
"MANAGING PERSON" - Any of the following: (a) Trust officers,
agents, or Affiliates, the Trust Advisor, the Trustees, or Affiliates of the
Trust Advisor or a Trustee and (b) any directors, officers or agents of any
organizations named in (a) above when acting for a Trustee, the Trust Advisor or
any of their Affiliates on behalf of the Trust.
"ORGANIZATIONAL AND OFFERING EXPENSES" - All expenses incurred
by and to be paid from the assets of the Trust in connection with and in
preparing the Trust for registration and subsequently offering and distributing
it to the public including, but not limited to, total underwriting and brokerage
discounts and commissions (but not including fees of the underwriter's
attorneys), expenses for printing, engraving, mailing, salaries of employees
while engaged in sales activity, charges of transfer agents, registrars,
trustees, escrow holders, depositories, experts, expenses of qualification of
the sale of its securities under Federal and State laws, including taxes and
fees, accountants' and attorneys' fees.
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"PAYOUT" - The point at which total cumulative distributions
to all Shareholders from the Trust equals 100% of all of the original investment
(without regard to or reduction for discounts) of all Investors.
"PORTFOLIO COMPANIES" - Companies the securities of which are
acquired by the Trust as investments.
"PROFITS OR LOSSES" - For a given fiscal period, an amount
equal to the Trust's taxable income or loss for such period, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, expense, loss, deduction or credit required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
(a) Any income of the Trust that is exempt from federal
income tax and not otherwise taken into account in computing Profits
or Losses pursuant to this definition and any income and gain
described in Regulation Section 1.704-1(b)(2)(iv)(g) shall be added
to such taxable income or loss;
(b) Any expenditures of the Trust described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulation Section 1.704-1 (b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this
definition shall be subtracted from such taxable income or loss;
(c) In the event of a distribution in kind under Section
8.5, the amount of any unrealized gain or loss deemed to have been
realized on the property distributed shall be added or subtracted
from such taxable income or loss; and
(d) Notwithstanding any other provision of this definition,
any items which are specially allocated pursuant to Sections 4.5, 4.6,
4.7 and 7.4 shall not be taken into account in computing Profits or
Losses.
"PROSPECTUS" - The Prospectus of the Trust, as the same may be
amended or supplemented from time to time.
"PUBLICLY TRADED SECURITIES" - Securities that are traded on a
public market.
"REGISTRATION STATEMENT" - The Registration Statement of the
Trust filed with the Securities Exchange Commission pursuant to the Act, as the
same may be amended or supplemented from time to time.
"REGULATION" - A final or temporary Treasury regulation
promulgated under the Code.
"ROLL-UP" - A transaction involving the acquisition, merger,
conversion or consolidation, either directly or indirectly, of the Trust and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(a) a transaction involving securities of the Trust that
have been for at least twelve (12) months listed on a
national exchange or that are traded through
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the National Association of Securities Dealers
Automated Quotation -- National Market System; or
(b) a transaction involving the reorganization to
corporate, trust or association form of only the
Trust if, as a consequence of the proposed
reorganization, there will be no significant adverse
change in any of the following:
(i) Shareholder's voting rights;
(ii) the term of existence of the Trust;
(iii) Sponsor compensation; or
(iv) the Trust's investment objectives.
"ROLL-UP ENTITY" - A partnership, trust, corporation or other
entity that would be created or survive after the successful completion of a
proposed Roll-Up transaction.
"SHARE" - Beneficial interests in the Trust subscribed for by
Investors, representing an initial Capital Contribution of Ten Dollars ($10). An
Investor must purchase a minimum of five (5) Shares, except an Investor that is
an Individual Retirement Account must purchase a minimum of two (2) Shares.
"SHAREHOLDER" - An Investor, or an assignee of the Share(s) of
an Investor, provided such shares were assigned in compliance with Section 13
hereof.
"SPONSOR" - Any person directly or indirectly instrumental in
organizing the Trust, wholly or in part, or any person who will control, manage
or participate in the management of the Trust, and any Affiliate of such person.
Not included is any person whose only relation with the Trust is that of an
independent manager of a portion of the Trust assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accounts, and underwriters whose only compensation is
for professional services rendered in connection with the offering of Shares. A
person may also be deemed a Sponsor of the Trust by:
(a) taking the initiative, directly or indirectly, in
founding or organizing the business or enterprise of
the Trust, either alone or in conjunction with one or
more other persons;
(b) receiving a material participation in the Trust in
connection with the founding or organization of the
business of the Trust, in consideration of services
or property, or both services and property;
(c) having a substantial number of relationships and
contacts with the Trust;
(d) possessing significant rights to control Trust
properties;
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(e) receiving fees for providing services to the
Trust which are paid on a basis
that is not customary in the industry; or
(f) providing goods or services to the Trust on a basis
which was not negotiated at arm's length with the
Trust.
"SUBSCRIPTION AGREEMENT" - The form of subscription agreement
that each prospective Investor must execute in order to subscribe for an
interest in the Trust.
"TERMINATION DATE" - Ninety days after the date of the
Prospectus, or an earlier or later date determined by the Trust and the Dealer
Manager in their discretion as follows:
(a) The Trust and the Dealer Manager may designate any date
prior to the end of the ninety day period as the Termination Date if
the Escrow Date has occurred prior to such date;
(b) the Termination Date may be extended for up to two
periods of ninety days each, thus extending the offering period; and
(c) If the Trust and the Dealer Manager elect to withdraw
the offering of Shares under this Declaration, the Termination Date is
the date of that election.
"TRUST" - Berthel Growth Trust II, a Delaware business trust.
"TRUST ADVISOR" - Any entity named by the Trust to act as an
investment adviser, and any substitute or different Trust Advisor as may
subsequently be named under the terms of this Declaration. Initially, the Trust
Advisor is Berthel Fisher & Company Planning, Inc.
"TRUSTEE" - A person serving as a Corporate Trustee or an
Independent Trustee under this Declaration.
"TRUST PROPERTY" - All property owned or acquired by the
Corporate Trustee or the Trust as part of the trust estate under this
Declaration.
"UNIT" - 100 Shares. No partial Units will be sold.
ARTICLE III
LIABILITIES
3.1 LIABILITY AND OBLIGATIONS OF CORPORATE TRUSTEE. (a)
To the fullest extent permitted by the Delaware Act, the Corporate Trustee in
its capacity as a Trustee of the Trust shall not be personally liable to any
person other than the Trust and its Shareholders for any act or omission of
the Trustees or the Trust, or any obligation of the Trust or the Trustees.
The trust estate shall be directly liable for the payment or satisfaction of
all obligations and liabilities of the Trust incurred by the Trustees and the
officers and agents of the Trust within their authority.
(b) The Corporate Trustee shall negotiate an investment
advisory contract with Berthel Fisher & Company Planning, Inc. to act as the
Trust Advisor and shall take such steps as
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are necessary to register the Shares of the Trust by the filing of a
Registration Statement with the Securities Exchange Commission and the various
states in which the Shares will be offered for sale. The Corporate Trustee shall
negotiate a Dealer Manager Agreement with Berthel Fisher & Company Financial
Services, Inc. to act as Dealer Manager. The investment advisory contract and
the Dealer Manager Agreement shall be approved by the Shareholders and by a
majority of the Independent Trustees, all in accordance with the Investment
Company Act and the Investment Advisers Act.
(c) The Corporate Trustee shall not exercise any
management or administrative powers in respect of the Trust except on the
direction of the Trust Advisor or the Trust Advisor and the Independent
Trustees acting as the Management Board, as the case may be.
(d) The Corporate Trustee, as trustee, may be made party
to any action, suit or proceeding to enforce an obligation, liability or
right of the Trust, but it shall not solely on account thereof be liable
separate from the Trust and it shall be a party in that case only insofar as
may be necessary to enable such obligation or liability to be enforced
against the trust estate.
3.2 LIABILITY AND OBLIGATIONS OF INDEPENDENT TRUSTEES.
(a) As permitted by Section 3808 of the Delaware Act, the Independent
Trustees shall not hold title to or have any legal or possessory interest in
any Trust Property. It shall not be necessary or effective for any
Independent Trustee to be made a party to any action, suit or proceeding to
enforce an obligation, liability or right of the Trust.
(b) In performing their responsibilities under this
Declaration, the Independent Trustees shall be under a fiduciary duty and
obligation to act in the best interests of the Trust, including the
safekeeping and use of all Trust funds and assets for which they are
responsible under this Declaration. In interpreting the scope of this
obligation, the Independent Trustees will have the responsibilities of and
will be entitled to the defenses of directors of a Delaware corporation.
3.3 LIABILITY OF TRUST ADVISOR TO THIRD PARTIES. (a) The
Trust Advisor shall be liable for any wrongful act or omission of the
Corporate Trustee, the Independent Trustees or the Trust, taken in the
ordinary course of the Trust's business or with the authority of the
Independent Trustees or the Trust Advisor, that causes loss or injury to any
person who is not a Shareholder or that incurs any penalty.
(b) The Trust Advisor shall be liable for losses
resulting from (i) the misapplication by the Trust Advisor of money or
property received from a person who is not a Shareholder by the Trust Advisor
within the scope of the Trust Advisor's apparent authority or (ii) the
misapplication of money or property received by the Trust in the course of
its business from a person who is not a Shareholder while the money or
property is in the custody of the Trust.
(c) Subject to the remaining provisions of this Article
3, the Trust Advisor shall be liable for all other debts and obligations of
the Trust.
3.4 LIABILITY OF INVESTORS OR SHAREHOLDERS IN GENERAL. No
Investor in his capacity as an Investor shall have any liability for the
debts and obligations of the Trust in any amount beyond the unpaid amount, if
any, of the Capital Contributions subscribed for by such Investor. Each
Investor and Shareholder shall have the same limitation on liability for the
Trust's debts and obligations as a stockholder of a Delaware corporation has
for debts and obligations of the corporation.
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3.5 LIABILITY OF INVESTORS TO TRUSTEES, TRUST AND
SHAREHOLDERS. No Investor in his capacity as an Investor shall be liable,
responsible or accountable in damages or otherwise to any other Investor,
Shareholder, the Trustees or the Trust for any claim, demand, liability,
cost, damage and cause of action of any nature whatsoever that arises out of
or that is incidental to the management of the Trust's affairs.
3.6 LIABILITY OF MANAGING PERSONS TO TRUST AND
SHAREHOLDERS. (a) No Managing Person shall have liability to the Trust or to
any other Shareholder for any loss suffered by the Trust that arises out of
any action or inaction of the Managing Person if the Managing Person, in good
faith, determined that such course of conduct was in the Trust's best
interest, the Managing Person was acting on behalf of or performing services
for the Trust, such course of conduct was within the scope of this
Declaration, and such loss was not the result of gross negligence or willful
misconduct of the Managing Person.
(b) No act of the Trust shall be affected or invalidated
by the fact that a Managing Person may be a party to or has an interest in
any contract or transaction of the Trust if the interest of the Managing
Person has been disclosed or is known to the Shareholders or such contract or
transaction is at prevailing rates or is on terms at least as favorable to
the Trust as those available from persons who are not Managing Persons,
provided that the requirements of the Investment Company Act are met.
3.7 INDEMNIFICATION OF MANAGING PERSONS. (a) Each
Managing Person shall be indemnified from the Trust Property against any
losses, liabilities, judgments, expenses and amounts paid in settlement of
any claims sustained by such Managing Person in connection with the Trust or
claims by the Trust, in right of the Trust or by or in right of any
Shareholders, if the Managing Person would not be liable under the standards
of Section 3.6 and, in the case of Managing Persons other than the Trustees
and the Trust Advisor, the indemnitees were acting within the scope of
authority validly delegated to them by the Trustees or the Trust Advisor. The
termination of any action, suit or proceeding by judgment, order or
settlement shall not, of itself, create a presumption that the Managing
Person charged did not act in good faith and in a manner that he reasonably
believed was in the Trust's best interests. To the extent that any Managing
Person is successful on the merits or otherwise in defense of any action,
suit or proceeding or in defense of any claim, issue or matter therein, the
Trust shall indemnify that Managing Person against the expenses, including
attorneys' fees, actually and reasonably incurred by him in connection
therewith. Any indemnification is recoverable only out of Trust net assets
and not from Shareholders.
(b) Notwithstanding the foregoing, no Managing Person or
any broker-dealer shall be indemnified, nor shall expenses be advanced on its
behalf, for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws, unless (i) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee, or (ii) those
claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee or (iii) a court of
competent jurisdiction approves a settlement of the claims against the
particular indemnitee. In any claim for federal or state securities law
violations, the party seeking indemnification shall place before the court
the positions of the Securities and Exchange Commission and state securities
administrators to the extent required by them with respect to the issue of
indemnification for securities law violations.
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(c) The Trust shall not incur the cost of that portion of
any insurance, other than public liability insurance, that insures any person
against any liability for which indemnification hereunder is prohibited. The
Trust may incur the cost of other liability insurance.
3.8 GENERAL PROVISIONS. The following provisions shall
apply to all rights of indemnification and advances of expenses under this
Declaration and all liabilities described in this Article 3:
(a) Expenses, including attorneys' fees, incurred by a
Managing Person in defending any action, suit or proceeding may be paid by
the Trust in advance of the final disposition of the action, suit or
proceeding upon receipt of an undertaking by the recipient to repay such
amount if it shall ultimately be determined that the Managing Person is not
entitled to be indemnified by the Trust under this Declaration or otherwise
and if at least one of the following conditions is satisfied: (i) the
Managing Person provides appropriate security for the undertaking; (ii) the
Managing Person and the Trust are insured against losses or expenses of
defense or settlement so that the advances may be recovered; or (iii) either
a majority of the Independent Trustees who are not parties to the action,
suit or proceeding or independent legal counsel in a written opinion
determines, based upon a review of the then readily available facts, that
there is reason to believe that the Managing Person will be found to be
entitled to indemnification under Section 3.7. In so doing, it shall not be
necessary to employ hearing or trial-like procedures. Notwithstanding the
foregoing, the advancement of Trust funds to a Sponsor or its Affiliates for
legal expenses and other costs incurred as result of any legal action for
which indemnification is being sought is permissible only if all of the
following conditions are satisfied: (a) The legal action relates to acts or
omissions with respect to the performance of duties or services on behalf of
the Trust; (b) The legal action is initiated by a third party who is not a
Shareholder, or the legal action is initiated by a Shareholder and a court of
competent jurisdiction specifically approves such advancement; (c) The
Sponsor or its Affiliates undertake to repay the advanced funds to the Trust,
together with the applicable legal rate of interest thereon, in cases in
which such person is found not to be entitled to indemnification.
(b) Rights to indemnification and advances of expenses
under this Declaration are not exclusive of any other rights to
indemnification or advances to which a Managing Person or Shareholder may be
entitled, both as to action in a representative capacity or as to action in
another capacity taken while representing another.
(c) Each Managing Person shall be entitled to rely upon
the opinion or advice of or any statement or computation by any counsel,
engineer, accountant, investment banker or other person retained by such
Managing Person or the Trust which he believes to be within such person's
professional or expert competence. In so doing, he will be deemed to be
acting in good faith and with the requisite degree of care unless he has
actual knowledge concerning the matter in question that would cause such
reliance to be unwarranted.
3.9 DEALINGS WITH TRUST. With regard to all rights of the
Trust and all actions to be taken on its behalf, the Trust (and not the
Trustees, the Trust Advisor, the Trust's officers and agents, or the
Investors or Shareholders) shall be the principal, and the Trust shall be
entitled as such to the extent permitted by law to enforce the same, collect
damages and take all other action. All agreements, obligations and actions of
the Trust shall be executed or taken in the name of the Trust, by an
appropriate nominee, or by the Corporate Trustee as trustee but not in its
individual capacity. Money may be paid and property delivered to any duly
authorized officer or agent of the Trust who may receipt therefor in the name
of the Trust and no person dealing in good faith
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thereby shall be bound to see to the application of any moneys so paid or
property so delivered. No entity whose securities are held by the Trust shall be
affected by notice of such fact or be bound to see to the execution of the Trust
or to ascertain whether any transfer of its securities by or to the Trust or the
Corporate Trustee is authorized.
3.10 LIABILITY INSURANCE. The Trust may not incur the cost
of that portion of liability insurance which insures the Sponsor for any
liability as to which the Sponsor is prohibited from being indemnified.
ARTICLE IV
ALLOCATION OF PROFIT AND LOSS
4.1 PROFITS. Profits for any fiscal period shall be
allocated among the Shareholders and the Trust Advisor as follows:
(a) First, One Hundred Percent (100%) to the Trust
Advisor until the Profits so allocated to the Trust Advisor plus the
cumulative Profits allocated to the Trust Advisor for prior fiscal periods
during which a Profit was earned by the Trust equal the cumulative amounts
distributable to the Trust Advisor under Article 8 hereof for the current and
prior periods; and
(b) The balance, if any, to the Shareholders.
4.2 LOSSES. Losses for any fiscal period shall be
allocated Ninety Nine Percent (99%) to the Shareholders and One Percent (1%)
to the Trust Advisor until Payout. After Payout, Losses shall be allocated
Eighty Percent (80%) to the Shareholders and Twenty Percent (20%) to the
Trust Advisor; provided, however, (i) to the extent an allocation pursuant to
this sentence would result in the Trust Advisor having a negative capital
account, One Percent (1%) shall be allocated to the Trust Advisor and Ninety
Nine Percent (99%) shall be allocated to the Shareholders until the
Shareholders' accounts have been reduced to zero, and (ii) after the
Shareholders' accounts have been reduced to zero, and thereafter until the
Shareholders' accounts are positive, Losses shall be allocated pursuant to
this sentence to the Trust Advisor. Notwithstanding the foregoing, Losses
shall not be allocated pursuant to this Section 4.2 to the extent that such
allocation would cause any Shareholder to have a negative amount in the
Shareholder's Adjusted Capital Account.
4.3 GENERAL ALLOCATION PROVISIONS. (a) Except as
otherwise provided in this Declaration, all items of Trust income, gain,
expense, loss, deduction and credit for a particular fiscal period and any
other allocations not otherwise provided for shall be divided among the
Shareholders and the Trust Advisor in the same proportions as they share
Profits or Losses, as the case may be, for the fiscal period.
(b) The Shareholders shall be bound by the provisions of
this Declaration in reporting their shares of Trust income and loss for
income tax purposes.
(c) The Trust may use any permissible method under Code
Section 7O6(d) and the Regulation thereunder to determine Profits, Losses and
other items on a daily, monthly or other basis for any fiscal period in which
there is a change in a Shareholder's interest in the Trust.
(d) The definition of "Capital Account" and certain other
provisions of this Declaration are intended to comply with Regulations
Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied in a
manner consistent with such Regulations. These Regulations contain
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additional rules governing maintenance of Capital Accounts that may not have
been provided for in this Declaration because, in part, these rules may relate
to transactions that are not expected to occur and in some instances are
prohibited by this Declaration. If the Trust after consultation with its regular
accountants or tax counsel determines that it is prudent to modify the manner in
which the Capital Accounts, or any debits or credits thereto, are computed in
order to comply with such Regulations, or to avoid the effects of unanticipated
events that might otherwise cause this Declaration not to comply with such
Regulations, the Trust shall make such modification without the need of prior
notice to or consent of any Shareholder; provided, that such modification is not
likely to have a material effect on the amounts distributable to any
Shareholder.
4.4 AMONG SHAREHOLDERS. Each Shareholder shall be
allocated that percentage of the aggregate amounts allocated to all
Shareholders, as the case may be, as the number of Shares owned by the
Shareholder bears to the aggregate number of Shares owned by all Shareholders.
4.5 MINIMUM ALLOCATION. Notwithstanding anything to the
contrary in this Declaration, in no event shall the Trust Advisor's allocable
share of each material item of Trust income, gain, expense, loss, deduction
or credit be less than One Percent (1%) of such item.
4.6 TAX ALLOCATION. Notwithstanding anything to the
contrary in this Declaration, to the extent that the Trust Advisor is treated
for federal income tax purposes as having received an interest in the Trust
as compensation for services which constitutes income to the Trust Advisor
under Code Section 61, any amount allowed as a deduction for federal income
tax purposes to the Trust (whether as an ordinary and necessary business
expense or as a depreciation or amortization deduction) as a result of such
characterization shall be allocated solely for federal income tax purposes to
the Trust Advisor.
4.7 ALLOCATION OF GAINS FROM DISPOSITIONS. In addition to
the allocation of Profits under Section 4.1, all gains derived by the Trust
during any fiscal period from any sale, transfer, injury, destruction or
other disposition of Trust Property or an interest therein, other than in the
ordinary course of operation of Trust Property (including, without
limitation, proceeds from insurance, refinancing or condemnation) shall be
allocated to the Trust Advisor to the extent that the Capital Account of the
Trust Advisor would have otherwise been negative as of the end of such fiscal
period. Gain or loss allocable to each Shareholder will be adjusted
accordingly.
ARTICLE V
CAPITAL CONTRIBUTIONS OF SHAREHOLDERS
5.1 CAPITAL CONTRIBUTIONS. The Capital Contributions of
the Investors shall aggregate not less than Six Million Dollars ($6,000,000),
nor more than Thirty Million Dollars ($30,000,000) and shall be made by the
Investors in exchange for Shares represented by $10 each.
5.2 PAYMENT OF CAPITAL CONTRIBUTIONS. The aggregate
Capital Contributions of the Investors made with respect to the offering of
Shares shall be payable in cash on or before the Termination Date.
5.3 ADDITIONAL CAPITAL CONTRIBUTIONS. After the Final
Closing, there shall be no additional Capital Contributions by the Investors
or Shareholders.
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5.4 TRUST ADVISOR'S CAPITAL CONTRIBUTIONS. The Trust
Advisor in its capacity as Trust Advisor shall make Capital Contributions in
accordance with Section 14.7.
ARTICLE VI
CAPITAL ACCOUNTS
6.1 CAPITAL ACCOUNTS. Capital Accounts shall be
established and maintained for each Shareholder and for the Trust Advisor and
shall be adjusted as follows:
(a) The Capital Account of each Shareholder and the Trust
Advisor shall be increased by:
(1) The amount of such Shareholder's or the Trust
Advisor's Capital Contributions to the Trust;
(2) The amount of Profits allocated to such
Shareholder and the Trust Advisor pursuant
to Articles 4 and 7;
(3) The fair market value of property contributed
by the Shareholder and the Trust Advisor to the
Trust (net of liabilities secured by the
contributed property that the Trust under Code
Section 752 is considered to have assumed or
taken subject to); and
(4) Any items in the nature of revenues, income or
gain that are specially allocated to such
Shareholder or the Trust Advisor or adjusted
pursuant to Sections 4.5, 4.6, 4.7 and 7.4.
(b) The Capital Account of each Shareholder and the Trust
Advisor shall be decreased by:
(1) The amount of Losses allocated to such
Shareholder or the Trust Advisor pursuant to
Articles 4 and 7;
(2) All amounts of money and the fair market
value of property paid or distributed to
such Shareholder or the Trust Advisor
pursuant to the terms hereof (other than
payments made with respect to loans made by
such Shareholder or the Trust Advisor to the
Trust), net of liabilities secured by that
property that the Shareholder or the Trust
Advisor under Code Section 752 is considered
to have assumed or taken subject to; and
(3) Any items in the nature of expenses or losses
that are specially allocated to such
Shareholder or the Trust Advisor pursuant to
Sections 4.5, 4.6, 4.7 and 7.4.
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6.2 CALCULATION OF CAPITAL ACCOUNT. Whenever it is
necessary to determine the Capital Account of any Shareholder or the Trust
Advisor, the Capital Account of such Shareholder or the Trust Advisor shall
be determined in accordance with the rules of Regulation Sections 1.704-
1(b)(2)(iv) and 1.704-2 (as amended from time to time). If necessary to
comply with the Code, an Adjusted Capital Account may be employed.
6.3 EFFECT OF LOANS. Loans by any Shareholder or the
Trust Advisor to the Trust shall not be considered contributions to the
capital of the Trust.
6.4 WITHDRAWAL OF CAPITAL. Neither the Trust Advisor nor
any Shareholder shall be entitled to withdraw any part of such Shareholder's
or the Trust Advisor's Capital Account or to receive any distribution from
the Trust, except as specifically provided herein.
6.5 CAPITAL ACCOUNTS OF NEW SHAREHOLDERS. Any person who
shall acquire Shares in accordance with the terms and conditions of Article
13 of this Declaration shall have the Capital Account of such person's
transferor after adjustments reflecting the transfer, if any, except as
specifically provided herein.
6.6 LIMITATION. Neither the Trustees, the Trust Advisor
nor any other Managing Person shall be required or shall have any personal
liability to fund any or all of any negative Capital Account of any
Shareholder, including without limitation Capital Contributions.
ARTICLE VII
INTEREST OF SHAREHOLDERS IN INCOME AND LOSSES
7.1 DETERMINATION OF INCOME AND LOSS. At the end of each
Trust fiscal year, and at such other times as the Trust shall deem necessary
or appropriate, each item of Trust income, gain, expense, loss, deduction and
credit shall be determined for the period then ending and shall be allocated
to the Capital Account of each Shareholder and the Trust Advisor in
accordance with the provisions hereof. With respect to the admission of
Shareholders, the Trust will use the "interim closing date" method of
accounting as permitted by the Regulations.
7.2 DETERMINATION OF INCOME AND LOSS IN THE EVENT OF
TRANSFER. If a Shareholder transfers such Shareholder's interest in the Trust
in accordance with the terms of this Declaration, the determination and
allocation described in Section 7.1 shall be made as of the date of such
transfer and thereafter all such allocations shall be made to the account of
the transferee of such interest; provided, however, that the Trust may agree
that such determination and allocation shall be pro rata to the Shareholders
based upon the actual number of days in such fiscal year that each such
Shareholder held an interest in the Trust. In the event of a pro rata
determination and allocation, the foregoing provisions of this Section
relating to a pro rata determination and allocation will not be applicable to
the distributive shares, with respect to the Shares transferred, of items of
Trust income, gain, expense, loss, deduction and credit arising out of (a)
the sale or other disposition of all or substantially all Trust Property, or
(b) other extraordinary nonrecurring items, all of which will be allocated to
the holder of such Trust interest on the date such items of Trust income,
gain, expense, loss, deduction and credit are earned or incurred.
7.3 ALLOCATION OF NET INCOME AND NET LOSSES. All items of
income, gain, expense, loss, deduction and credit of the Trust from
operations and in the ordinary course of operation of Trust Property shall be
allocated among the Shareholders and the Trust Advisor in accordance with
Article 4.
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7.4 QUALIFIED INCOME OFFSET AND OTHER ALLOCATION
PROVISIONS. (a) If there is a net decrease in "partnership minimum gain"
(within the meaning of Regulation Section 1.704-2(d)) during a fiscal period,
then there shall be allocated to each Shareholder and the Trust Advisor items
of income and gain for such fiscal period (and, if necessary, subsequent
fiscal periods) in proportion to, and to the extent of, an amount equal to
the portion of such Shareholder's or the Trust Advisor's share of the net
decrease in "partnership minimum gain" during such fiscal period that is
allocable to the disposition of Trust Property subject to one or more
nonrecourse liabilities of the Trust. However, such allocation shall be
reduced to the extent (i) the Shareholder or the Trust Advisor contributes
capital to the Trust that is used to repay the nonrecourse liability and (ii)
the Shareholder's or the Trust Advisor's share of the net decrease in
"partnership minimum gain" is caused by the repayment. The foregoing is
intended to be a "minimum gain chargeback" provision as described in
Regulation Section 1.704-2(f), and shall be interpreted and applied in all
respects in accordance with such Regulation. If there is a net decrease in
the minimum gain attributable to a "partner nonrecourse debt" (as defined in
Regulation Section 1.704-2(b)(4)) for a fiscal period, then, in addition to
the amounts, if any, allocated pursuant to the first sentence of this
Subsection 7.4(a), there shall be allocated to each Shareholder or the Trust
Advisor with a share of such minimum gain attributable to a "partner
nonrecourse debt" items of income and gain for such fiscal period (and, if
necessary, subsequent fiscal periods) in proportion to, and to the extent of,
an amount equal to the portion of such Shareholder's or Trust Advisor's share
of the net decrease in the minimum gain attributable to a "partner
nonrecourse debt" during such fiscal period that is allocable to the
disposition of Trust Property subject to one or more nonrecourse liabilities
of the Trust. However, such amount shall be reduced to the extent (i) the
Shareholder or the Trust Advisor contributes capital to the Trust that is
used to repay the nonrecourse liability and (ii) the Shareholder's or the
Trust Advisor's share of the net decrease in the minimum gain attributable to
a "partner nonrecourse debt" is caused by the repayment.
(b) If during any fiscal period of the Trust a
Shareholder or the Trust Advisor unexpectedly receives an adjustment,
allocation or distribution described in Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases a deficit
balance in the Shareholder's or the Trust Advisor's Adjusted Capital Account,
there shall be allocated to the Shareholder or the Trust Advisor's items of
income and gain (consisting of a pro rata portion of each item of Trust
income, including gross income, and gain for such period) in an amount and
manner sufficient to eliminate such deficit balance as quickly as possible.
The foregoing is intended to be a "qualified income offset" provision as
described in Regulation Section 1.704-1(b)(2)(ii)(d), and shall be
interpreted and applied in all respects in accordance with such Regulation.
(c) Notwithstanding anything to the contrary in Article 4
or this Article 7, any item of deduction, loss or Code Section 705(a)(2)(B)
expenditure that is attributable to "partner nonrecourse debt" shall be
allocated in accordance with the manner in which the Shareholders or the
Trust Advisor bear the economic risk of loss for such debt (determined in
accordance with Regulation Section 1.704-2(i)).
(d) Solely for federal, state and local income and
franchise tax purposes and not for book or Capital Account purposes, income,
gain, loss and deduction with respect to property carried on the Trust's
books at a value other than its tax basis shall be allocated (i) in the case
of property contributed in kind, in accordance with the requirement of Code
Section 704(c) and such Regulations as may be promulgated thereunder from
time to time, and (ii) in the case of other property, in accordance with the
principles of Code Section 704(c) and the Regulations thereunder, in each
case, as incorporated among the requirements of the relevant provisions of
the Regulations under Code Section 704(b).
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(e) All or a portion of the remaining items of Trust
income or gain for the fiscal period, if any, shall be specially allocated to
the Shareholders in proportion to the cumulative distributions each has
received pursuant to Section 8.1(e) from the commencement of the Trust, until
the aggregate amounts allocated to each Shareholder pursuant to this Section
7.4(e) for such period and all prior periods equal the cumulative amount of
such distributions to such Shareholder.
7.5 CURATIVE ALLOCATION. The allocations set forth in
Section 7.4 hereof (the "Regulatory Allocations") are intended to comply with
certain requirements of the Regulations. It is the intent of the Shareholders
and Fund Advisor that, to the extent possible, all Regulatory Allocations
will be offset either with other Regulatory Allocations or with special
allocations of other items of Trust income, gain, loss, or deduction pursuant
to this Section 7.5. Therefore, notwithstanding any other provision of this
Section 7 (other than the Regulatory Allocations), the Fund Advisor shall
make such offsetting special allocations in whatever manner it determines
appropriate so that, after such offset allocations are made, each partner's
Capital Account balance is, to the extent possible, equal to the Capital
Account balance such partner would have had if the Regulatory Allocations
were not part of the Agreement and all Trust items were allocated pursuant to
Section 7.3.
ARTICLE VIII
INTEREST OF SHAREHOLDERS IN CASH DISTRIBUTIONS
8.1 DISTRIBUTION OF CASH REVENUES. Subject to the terms
of this Declaration, the Trust shall make distributions of Cash Revenues out
of the Trust's funds in the following manner:
(a) INDEBTEDNESS TO SHAREHOLDER OR TRUST ADVISOR. First,
to the extent that payments of principal or interest are due, Cash Revenues
shall be applied pro rata (in accordance with the percentage of total loans
that are owing to each Shareholder and the Trust Advisor) to the payment to
the Shareholders and the Trust Advisor of interest and principal, in that
order, on loans, if any, made by the Shareholders or the Trust Advisor to the
Trust.
(b) SPECIAL PROVISIONS. Distributions made in connection
with the dissolution and termination of the Trust under Section 14.1 are
governed by Section 8.3, and shall be excluded from consideration under
Sections 8.1 and 8.2.
(c) DISTRIBUTIONS OF CASH REVENUES AFTER THE FINAL
CLOSING AND BEFORE PAYOUT. After the Final Closing and until Payout, the
Trust will make quarterly distributions of all Cash Revenues that the Trust
receives to the extent that the Trust has Cash Available for Distributions.
The first such quarterly distribution shall be made within sixty (60) days of
the last day of the first calendar quarter ending after the Final Closing.
Subsequent quarterly distributions shall be made within sixty (60) days of
the end of each quarter thereafter. The Trust will not make a distribution if
a majority of the Independent Trustees determine that such distribution would
not be in the best interest of the Trust and the Shareholders.
All quarterly distributions of Cash Revenue will be made
99% to the Shareholders and 1% to the Trust Advisor until the Shareholders
have received Payout.
(d) DISTRIBUTIONS OF CASH REVENUES -- AFTER-PAYOUT. After
Payout is achieved, Eighty Percent (80%) of all distributions of Cash
Revenues made in any calendar year or portion
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thereof after the application of Sections 8.1(a) and (b) shall be made to the
Shareholders and the remaining Twenty Percent (20%) shall be made to the
Trust Advisor.
8.2 DISTRIBUTIONS OF CASH AVAILABLE FROM REALIZED GAINS
ON INVESTMENTS AND ALL SOURCES OTHER THAN CASH REVENUES. In the discretion of
the Trust Advisor, and subject to review by the Independent Trustees, cash
received from realized gains on Investments and cash available from all
sources other than Cash Revenues may be distributed or reserved for general
Trust purposes or for future Investments. Reinvestment of proceeds resulting
from the sale or refinancing of Trust assets may take place if sufficient
cash will be distributed to pay state and federal income tax, if any, created
by the sale or refinancing of such assets. Cash available from Investments
that is not applied to future Investments or reserved for any other Trust
purpose will be distributed quarterly by the Trust, within 60 days after the
end of the calendar quarter in the following priority:
(a) 99% to the Shareholders, as a class, and 1% to
the Trust Advisor, until Payout and
(b) 80% to the Shareholders, as a class, and 20% to
the Trust Advisor after Payout.
To the extent that making any distribution to the Trust
Advisor would result in the Trust Advisor's receiving cumulative
distributions in excess of that permitted by the Investment Advisers Act, the
amount of such distribution will instead be deferred until the payment of
such amount does not violate the terms of the Investment Advisers Act, and
if, at termination of the Trust, such distribution cannot be made without
violating such Act, then the amount that cannot be distributed to the Trust
Advisor will be distributed to the Shareholders.
8.3 DISTRIBUTIONS UPON DISSOLUTION. Upon dissolution and
termination of the Trust under Section 14.1, the proceeds of the sale or
other disposition of the Trust Property shall be paid or distributed in the
following order of priority:
(a) First, there shall be paid to the Trust's
creditors, other than Shareholders and the Trust Advisor,
funds, to the extent available, sufficient to extinguish
current Trust liabilities and obligations, including costs
and expenses of liquidation (or provision for payment shall
be made, which provision may include a distribution of
assets subject to the obligations in question);
(b) Second, any debts owed by the trust to the
Shareholders or the Trust Advisor shall be paid in
proportion thereto;
(c) Third, to the Shareholders and the Trust
Advisor in proportion to, and to the extent of the excess,
if any, of (i) the cumulative distributions to which the
Shareholders and the Trust Advisor are entitled under
Sections 8.1(d) and 8.2 from the inception of the Trust
until the date on which the liquidating distribution is
made over (ii) the sum of all prior distributions made to
the Shareholders and the Trust Advisor under Sections
8.1(d) and 8.2, provided, however, that no distribution
shall be made under this Section 8.3(c) that creates or
increases a negative amount in a Shareholder's or the Trust
Advisor's Adjusted Capital Account at the end of this
fiscal period. This proviso shall be determined as follows:
distributions shall be first determined tentatively
pursuant to this Section 8.3(c) without regard to the
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Shareholders' and the Trust Advisor's Capital Accounts and
then the allocation provisions of Article 4 shall be
applied tentatively as if such tentative distributions had
been made. If any Shareholder or the Trust Advisor shall
thereby have a negative amount in the Shareholder's or the
Trust Advisor's Adjusted Capital Account, the actual
distribution to the Shareholder or the Trust Advisor under
this Section 8.3(c) shall be equal to the tentative
distribution to the Shareholder or the Trust Advisor less
the negative amount in the Adjusted Capital Account after
application of the tentative allocation; and
(d) Fourth, the balance, if any, to the
Shareholders and the Trust Advisor in accordance with their
Capital Accounts, after giving effect to all adjustments to
Capital Accounts for all fiscal periods through and
including the fiscal period in which dissolution occurs.
8.4 LIMITATION. Notwithstanding any other provision of
this Declaration, no distribution may be made selectively to one Shareholder
or group of Shareholders but must be made ratably to all Shareholders
entitled to that type of distribution at that time, subject to the provisions
of Section 12.11(b).
8.5 DISTRIBUTION IN KIND. The Trust may elect to make
distribution in kind of any of the assets of the Trust that consist of
readily marketable securities. If the Trust elects to make distribution in
kind of any of the assets of the Trust other than readily marketable
securities, it shall give notice of its election to each Shareholder,
specifying the nature and value of all such assets to be distributed in kind,
the risks associated with the direct ownership of the assets, the deadline
for giving notice of refusal to accept a distribution in kind and to the
extent advisable, the estimated time necessary for the Trust to liquidate
assets if those assets are not distributed and other information as required.
In making such election, the Trust shall not arbitrarily value assets to be
distributed in kind nor shall it specify assets to be distributed in kind in
such a manner as to unreasonably advantage or disadvantage any Shareholder. A
Shareholder may refuse to accept a distribution in kind by giving written
notice to the Trust not later than thirty (30) days after the effective date
of the Trust's notice of distribution. If a Shareholder refuses distribution
in kind, the Trust shall retain in the Trust's name the portion of the assets
that were to be distributed in kind and that were to be allocated to the
refusing Shareholder (the "Retained Assets") and shall liquidate the Retained
Assets in accordance with this Declaration. Upon liquidation of the Retained
Assets, the sum realized shall be distributed to the Shareholder refusing
distribution in kind in full discharge of the Trust's obligation to
distribute the Retained Assets. In determining the Capital Accounts, a
distribution of assets in kind shall be considered a sale of the property
distributed so that any unrealized gain or loss with respect to such property
shall be deemed to have been realized and allocated in accordance with
Article 4.
8.6 AMOUNTS WITHHELD. All amounts withheld pursuant to
the Code or any provision of any state or local tax law with respect to any
payment or distribution to the Trust, the Shareholders, or the Trust Advisor
shall be treated as amounts distributed pursuant to this Article 8 for all
purposes under this Declaration. The Trust may allocate any such amounts
among the Shareholders and the Trust Advisor in any manner that is in
accordance with applicable law.
8.7 LIMITATION. Distributions to Shareholders shall not
be made to the extent they are prohibited by restrictions contained in the
Investment Company Act, the Delaware Act or other provisions of this
Declaration.
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ARTICLE IX
FEES AND EXPENSES
9.1 ORGANIZATIONAL AND OFFERING EXPENSES. The Trust shall
pay out of Trust Property all Organizational and Offering Expenses. If the
Organizational and Offering Expenses (excluding sales commissions and
discounts, the Syndication Fee and the Underwriting Fee) exceed Three and
One-half Percent (3.5%) of the aggregate Capital Contributions, the Trust
Advisor shall pay such excess.
9.2 MARKETING COSTS. The Trust may pay commissions to the
Dealer Manager, and reimburse the expenses of the Dealer Manager in
connection with the offering of the Shares, provided such payments and
reimbursements are made pursuant to the terms of a written agreement,
approved by the Independent Trustees.
9.3 REIMBURSEMENT OF EXPENSES OF CORPORATE TRUSTEE. The
Trust shall reimburse the Corporate Trustee for all actual and necessary
direct expenses paid or incurred in connection with the operation of the
Trust.
9.4 MANAGEMENT AGREEMENT. As compensation for the Trust
Advisor's performance under the Management Agreement, the Trust shall pay the
Trust Advisor a management fee, pay expenses of the Trust and reimburse the
Trust Advisor for Trust expenses paid by the Trust Advisor, all in accordance
with the terms of the Management Agreement.
9.5 PORTFOLIO TRANSACTION EXPENSES. In respect of the
acquisition or disposition of all or a portion of the investments that the
Trust may make, the Trust may be required to or may find it most advantageous
to engage a broker or similar adviser and to pay a brokerage fee to the
broker or other persons responsible for bringing the acquisition or
disposition opportunity to the Trust's attention or for investigating,
evaluating or negotiating the acquisition or disposition of the Trust's
interest therein. Where permitted, if an Affiliate of the Trust Advisor
performs those services in respect of an investment acquisition or
disposition opportunity for the Trust, the Affiliate of the Trust Advisor so
providing those services shall be entitled to receive a brokerage fee from
the Trust not exceeding the amount permitted by Section 57 of the Investment
Company Act. The Trust may pay Acquisition Fees and Acquisition Expenses that
do not exceed 3.5% of the proceeds of the offering. All brokerage fees,
Acquisition Fees and Acquisition Expenses must be at competitive rates. Other
services provided by a Sponsor cannot be considered in charging a brokerage
fee higher than the competitive rate for brokerage services only.
ARTICLE X
ACCOUNTING
10.1 ELECTIONS. The Trust shall elect the calendar year as
its fiscal year. The Trust shall adopt the accrual method of accounting or
such other method of accounting as the Trust shall determine. The Trust shall
elect to be taxed only as a partnership. The Trust shall not be required to
make an election under Section 754 of the Code or corresponding state
taxation laws.
10.2 BOOKS AND RECORDS. The Trust's books and records
shall be kept at the principal place of business of the Trust and shall be
maintained on the basis utilized in preparing the Trust's federal income tax
return with such adjustments in accounting as are required by this
Declaration or as the Trust determines would be in the best interests of the
Trust.
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10.3 REPORTS. (a) The Trust will keep each Shareholder
currently advised as to activities of the Trust by reports furnished at least
quarterly. Each quarterly report will contain a condensed statement of "Cash
Flow From Operations" for the year to date, as determined by the Trust
Advisor in conformity with generally accepted accounting principles, on a
basis consistent with that of the annual and quarterly financial statements,
and showing its derivation from net income. An independent certified public
accounting firm selected by the Trust will prepare the Trust's federal income
tax return as soon as practicable after the conclusion of each year and each
Shareholder will be furnished, at that time, with the necessary accounting
information for each Shareholder to take into account and report separately
such Shareholder's distributive share of the income and deductions of the
Trust. The Trust will use its reasonable best efforts to obtain the
information necessary for the accounting firm as soon as practicable and to
transmit the resulting accounting and tax information to the Shareholders as
soon as possible after receipt from the accounting firm. The Trust shall
furnish each Shareholder as soon as practicable after the conclusion of each
year annual financial statements of the Trust that have been audited by the
Trust's independent certified public accounting firm. The annual financial
statements will include in the notes thereto a reconciliation of net income
as reported therein to the annual reported cash flow from operations and to
net income for tax purposes.
(b) In amplification of the requirements of (a) above,
the Sponsor shall cause to be prepared and distributed to Shareholders during
each year the following reports:
(1) Within sixty (60) days after the end of
each quarter of the Trust, a report
containing the same financial information
contained in the Trust's Quarterly Report
on Form 10-Q filed by the Trust under the
Securities Exchange Act of 1934.
(2) Within sixty (60) days of the end of the
first six (6) months of each fiscal year,
a report, prepared on the same accounting
basis to be utilized in the annual
reports, containing:
(i) a balance sheet, which may be
unaudited;
(ii) a statement of income for the period
then ended, which may be unaudited;
(iii) a statement of Shareholders' equity for
the period then ended, which may be
unaudited;
(iv) a statement of Cash Flow for the period
then ended, which may be unaudited; and
(v) other pertinent material regarding the
Trust and its activities during the
period covered by the report.
(3) Within one hundred twenty (120) days after the
end of the Trust's fiscal year, an annual
report containing:
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(i) a balance sheet as of the end of
each fiscal year and statements of
income, Shareholders' equity, and
Cash Flow, for the year then ended,
all of which shall be prepared in
accordance with generally accepted
accounting principles and
accompanied by an auditor's report
containing an opinion of an
independent certified public
accountant; and
(ii) a report of the activities of the
Trust during the period covered by
the report; and
(iii) a report setting forth distributions
to Shareholder for the period
covered thereby and separately
identifying distributions from:
(A) Cash Flow from operations
during the period;
(B) Cash Flow from operations
during a prior period which
have been held as reserves;
(C) proceeds from disposition of
Trust assets; and
(D) reserves from the gross
proceeds of the offering
originally obtained from the
Shareholders.
(4) Within seventy-five (75) days after the end of
the Trust's fiscal year, all information
necessary for the preparation of the
Shareholders' federal income tax returns.
(c) The annual report to Shareholders shall contain a
breakdown of the costs reimbursed to the Sponsor. Within the scope of the
annual audit of the Trust Advisor's and Corporate Trustee's financial
statements, the independent certified public accountants must issue a special
report on the allocation of such costs to the Trust. The special report shall
be in accordance with the American Institute of Certified Public Accountants
United States Auditing Standards relating to special reports.
(d) Within 180 days after the end of each year following
the first anniversary of the Termination Date, the Trust shall provide the
Shareholders with an estimated valuation per Share based, if possible, upon a
generally accepted method or methods of valuation of the Trust Property.
10.4 BANK ACCOUNTS. The Trust shall maintain separate
segregated accounts in its name at one or more commercial banks, and the cash
funds of the Trust shall be kept in any of those accounts as determined by
the Trust.
10.5 TEMPORARY INVESTMENTS. Pending investment in
Portfolio Companies, to the extent the Trust's funds are not otherwise
committed to transactions or required for other purposes, the Trust will
invest its available funds in interest-bearing bank accounts, bank money
market accounts (not money market mutual funds), Treasury securities and/or
certificates of
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deposit with maturities of less than one year (collectively, "Temporary
Investments"). Temporary Investments may also include commercial paper (rated
or unrated) and other short-term securities. Temporary Investments
constituting cash, cash items, securities issued or guaranteed by the United
States Treasury or United States government agencies and high quality debt
securities (commercial paper rated in the two highest rating categories by
Moody's Investor Services, Inc. or Standard & Poor's Corporation, or if not
rated, issued by a company having an outstanding debt issue so rated, or
corporate bonds rated at least A) with maturities of less than one year at
the time of investment will qualify for determining whether the Trust has 70%
of its total assets invested in Managed Companies or in qualified Temporary
Investments for purposes of the business development company provisions of
the Investment Company Act.
ARTICLE XI
RIGHTS AND OBLIGATIONS OF SHAREHOLDERS
11.1 PARTICIPATION IN MANAGEMENT. No Shareholder (other
than the Trust Advisor acting in its capacity as such) shall have the right,
power, authority or responsibility to participate in the ordinary and routine
management of the Trust's affairs or to bind the Trust in any manner.
11.2 RIGHTS TO ENGAGE IN OTHER VENTURES. No Shareholder or
any officer, director, shareholder or other person holding a legal or
beneficial interest in any Shareholder shall, by virtue of his ownership of a
direct or indirect interest in the Trust, be in any way prohibited from or
restricted in engaging in, or possessing an interest in, any other business
venture of a like or similar nature.
11.3 LIMITATIONS ON TRANSFERABILITY. The interest of a
Shareholder shall not be transferable except under the conditions set forth
in Article 13 hereof.
11.4 INFORMATION. (a) Each Shareholder's rights to obtain
information from the Trust from time to time are set forth in this Section.
Every Shareholder shall at all times have access to the records of the Trust
and may inspect and copy any of them. In addition to information provided
under Section 10.3, each Shareholder shall be provided on request with the
following:
(1) True and full information regarding the status
of the Trust's business and financial
condition;
(2) Promptly after becoming available, a copy of
the Trust's federal, state and local income
tax returns or information returns for the
preceding year and prior years to the extent
reasonably available;
(3) A copy of the Certificate and this
Declaration and all amendments thereto;
(4) True and full information regarding the amount
of cash and a description and statement of the
agreed value of any other property or services
contributed by each Shareholder and which any
Shareholder has agreed to contribute in the
future, and the date on which each current
Shareholder acquired his Shares; and
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(5) Such other information regarding the Trust's
affairs as is just and reasonable.
(b) An alphabetical list of the names, addresses and
business telephone numbers of the Shareholders of the Trust along with the
number of Shares held by each of them (the "Shareholder list") shall be
maintained as a part of the books and records of the Trust and shall be
available for inspection by any Shareholder or its designated agent at the
home office of the Trust upon the request of the Shareholder. With respect to
the Shareholder list:
(1) The Shareholder list shall be updated at
least quarterly to reflect changes in the
information contained therein.
(2) A copy of the Shareholder list shall be
mailed to any Shareholder requesting the
Shareholder list within ten (10) days of the
request. The copy of the Shareholder list
shall be printed in alphabetical order, on
white paper, and in a readily readable type
size (in no event smaller than 10-point
type). A reasonable charge for copy work may
be charged by the Trust.
(3) The purposes for which a Shareholder may
request a copy of the Shareholder list
include, without limitation, matters
relating to Shareholders' voting rights
under the Declaration of Trust and the
exercise of Shareholders' rights under
federal proxy laws.
(4) If the Sponsor of the Trust neglects or
refuses to exhibit, produce, or mail a copy
of the Shareholder list as requested, the
Sponsor shall be liable to any Shareholder
requesting the list for the costs, including
attorneys' fees, incurred by that
Shareholder for compelling the production of
the Shareholder list, and for actual damages
suffered by any Shareholder by reason of
such refusal or neglect. It shall be a
defense that the actual purpose and reason
for the requests for inspection or for a
copy of the Shareholder list is to secure
such list of Shareholders or other
information for the purpose of selling such
list or copies thereof, or of using the same
for a commercial purpose other than in the
interest of the applicant as a Shareholder
relative to the affairs of the Trust. The
Sponsor may require the Shareholder
requesting the Shareholder list to represent
that the list is not requested for a
commercial purpose unrelated to the
Shareholder's interest in the Trust. The
remedies provided hereunder to Shareholders
requesting copies of the Shareholder list
are in addition to, and shall not in any way
limit, other remedies available to
Shareholders under federal law, or the laws
of any state.
(c) The Trust shall establish reasonable standards
governing, without limitation, the information and documents to be furnished
and the time and the location, if appropriate, of furnishing that information
and documents. Costs of providing information and documents shall be borne by
the requesting Shareholder except for DE MINIMIS amounts consistent with the
Trust's ordinary practices. The Trust shall be entitled to reimbursement for
its direct, out-of-pocket
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expenses incurred in declining and resisting unreasonable requests (in whole
or in part) for information.
(d) The Trust may keep confidential from Shareholders for
such period of time as it deems reasonable any information that it reasonably
believes to be in the nature of trade secrets or other information that the
Trust in good faith believes would not be in the best interests of the Trust
to disclose or that could damage the Trust or its business or that the Trust
is required by law or by agreement with a third party to keep confidential.
(e) The Trust may keep its records in other than written
form if capable of conversion into written form within a reasonable time.
(f) All demands or requests for information under this
Section shall be solely for a purpose reasonably related to the Shareholder's
interest in the Trust. All requests or demands for information under this
Section shall be in writing and shall state the purpose of the demand; the
Trust's acceptance or oral requests shall not waive or limit the scope of
this provision. Any action to enforce rights under this Section may be
brought in the Delaware Court of Chancery, subject to Section 15.4.
11.5 SALE OF ASSETS. A Majority of the Shareholders may
cause the sale, exchange, lease, mortgage, pledge or transfer of all or
substantially all of the Trust's assets not in the ordinary course of
operation of Trust Property.
ARTICLE XII
POWERS, DUTIES AND LIMITATIONS OF TRUST
ADVISOR AND INDEPENDENT TRUSTEES
12.1 MANAGEMENT OF THE TRUST. The Trust Advisor shall
have full, exclusive and complete discretion in the management and control of
the Trust, except as otherwise provided herein. The Trust Advisor agrees to
manage and control the affairs of the Trust to the best of its ability and to
conduct the operations contemplated under this Declaration in a careful and
prudent manner and in accordance with good industry practice. The Trust
Advisor may bind the Trust.
12.2 ACCEPTANCE OF SUBSCRIPTIONS. The Trust Advisor shall
not cause the Trust to accept any subscription for Shares except as provided
in Article I.
12.3 SPECIFIC LIMITATIONS. (a) The Trust Advisor shall
not take any of the following actions without the approval of a Majority of
Shareholders:
(1) Any act in contravention of this Declaration
or the Certificate;
(2) Any act that would make it impossible to
carry on the Trust's ordinary business;
(3) Effecting a confession of judgment against
the Trust in an amount exceeding Ten Percent
(10%) of the aggregate Capital Contributions;
(4) Causing the dissolution or termination of
the Trust prior to the expiration of its
term, except as provided under Article 14;
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(5) Possessing Trust Property or assigning rights
in specific Trust Property for other than a
Trust purpose; or
(6) Constituting any other person as a Trust
Advisor, except as provided in Article 14.
(b) The Trust Advisor shall not sell, exchange, lease,
mortgage, pledge or transfer all or substantially all of the Trust's assets
if not in the ordinary course of operation of Trust Property or amend this
Declaration without the approval of a Majority of the Shareholders except as
specified in this Declaration.
(c) The Trustees, the Trust or the Trust's agents shall
not take any action that is prohibited to the Trust Advisor by this or any
other provision of this Declaration and shall take all actions necessary or
advisable to carry out actions specified in this Section that are approved as
specified herein.
(d) The Trust Advisor shall not cause the merger or other
reorganization of the Trust without the approval of a Majority of the
Shareholders.
(e) A Sponsor shall not acquire assets from the Trust.
(f) The Trust may not lease assets to the Sponsor. The
Trust shall not purchase or lease assets from the Sponsor. Notwithstanding
the foregoing, the Sponsor may purchase (but not from an affiliated program)
assets in its own name (and assume loans in connection therewith) and
temporarily hold title thereto, for the purposes of facilitating the
acquisition of the assets, the borrowing of money, obtaining financing for
the Trust, provided that all of the following conditions are met: (i) The
assets are purchased by the Trust for a price no greater than the cost of the
assets to the Sponsor. (ii) All income generated by, and expenses associated
with, the assets so acquired shall be treated as belonging to the Trust.
(iii) There are no other benefits arising out of such transaction to the
Sponsor apart from compensation otherwise permitted in this Declaration.
(g) No loans may be made by the Trust to the Sponsor.
(h) The Trust may not acquire assets in exchange for
Shares.
(i) The Trust shall not give the Sponsor an exclusive
right to sell or exclusive employment to sell assets for the Trust.
(j) The Trust shall not pay, directly or indirectly, a
commission or fee to a Sponsor, except as part of a Front End Fee, in
connection with the reinvestment of Cash Available For Distribution or of the
proceeds of the resale, exchange, or refinancing of Trust assets.
(k) No rebates or give-ups may be received by the Sponsor
nor may the Sponsor participate in any reciprocal business arrangements which
would circumvent the provisions of this Declaration, or which would
circumvent the restrictions against dealing with Affiliates or promoters.
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(l) No Sponsor shall directly or indirectly pay or award
any commissions or other compensation to any person engaged to sell Shares or
give investment advice to a potential Shareholder, provided, however, that
this clause shall not prohibit the payment to a registered broker-dealer or
other properly licensed person of normal sales commissions and expense
reimbursements in connection with the sale of the Shares.
(m) The funds of the Trust shall not be commingled with
the funds of any other persons.
(n) Investment in Other Programs. (i) The Trust shall be
permitted to invest in general partnerships or joint ventures with
non-Affiliates that own and operate specific assets, if the Trust, alone or
together with any publicly registered Affiliate of the Trust, acquires a
controlling interest in such a general partnership or joint venture, but in
no event shall duplicate fees be permitted. For purposes of this section,
"controlling interest" means an equity interest possessing the power to
direct or cause the direction of the management and policies of the general
partnership or joint venture, including the authority to:
(A) review all contracts
entered into by the general
partnership or joint
venture that will have a
material effect on its
business or assets;
(B) cause a sale or refinancing
of the assets or its
interest therein subject,
in certain cases where
required by the partnership
or joint venture agreement,
to limits as to time,
minimum amounts and/or a
right of first refusal by
the joint venture partner;
(C) approve budgets and major
capital expenditures,
subject to a stated minimum
amount;
(D) veto any sale or
refinancing of the assets,
or alternatively, to
receive a specified
preference on sale or
refinancing proceeds; and
(E) exercise a right of first
refusal on any desired sale
or refinancing by the joint
venture partner of its
interest in the assets,
except for transfer to an
Affiliate of the joint
venture partner.
(ii) The Trust shall be permitted to invest in
general partnerships or joint ventures with
other publicly registered Affiliates of the
Trust if all of the following conditions are
met:
(A) The Trust and such Affiliate
have substantially identical
investment objectives.
(B) There are no duplicate fees.
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(C) The compensation payable by
the general partnership or
joint venture to the Sponsors
in each program that invests
in such partnership or joint
venture is substantially
identical.
(D) Each program has a right of
first refusal to buy if the
other program wishes to sell
assets held in the joint
venture.
(E) The investment of each program
is on substantially the same
terms and conditions.
(F) The Prospectus discloses the
potential risk of impasse
on joint venture decisions
since no program controls, and
the potential risk that while
a program may have the right
to buy the assets from the
partnership or joint venture,
it may not have the resources
to do so.
(G) The transaction is otherwise
in compliance with the
Investment Company Act of
1940.
(iii) The Trust shall be permitted to invest in
general partnerships or joint ventures with
Affiliates other than publicly registered
Affiliates of the Trust only if all of the
following conditions are met.
(A) The investment is necessary
to relieve the Sponsor from
any commitment to purchase
the assets entered into in
compliance with Section
12.3(f) prior to the
closing of the offering
period of the program.
(B) There are no duplicate fees.
(C) The investment of each entity
is on substantially the same
terms and conditions.
(D) The program has a right of
first refusal to buy if the
Sponsor wishes to sell assets
held in the joint venture.
(E) The Prospectus discloses
the potential risk of impasse
on joint venture decisions.
(F) The transaction is otherwise
in compliance with the
Investment Company Act of
1940.
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(iv) Programs structured to conduct operations
through separate single-purpose entities
managed by the Sponsor (multi-tier
arrangements) shall be permitted provided
that the terms of any such arrangements do
not result in the circumvention of any of
the requirements or prohibitions contained
in this Declaration. In particular, all such
program agreements shall accompany the
Prospectus, if available, and shall contain
provisions which assure that all of the
following restrictions will be present:
(A) There will be no
duplication or increase in
Organizational and Offering
Expenses, Sponsor's
compensation, program
expenses or other fees and
costs.
(B) There will be no
substantive alteration in
the fiduciary and
contractual relationship
between the Sponsor and the
Shareholders.
(C) There will no diminishment
in the voting rights of
Shareholders.
(v) Other than as specifically permitted in
Subsections ii), (iii) and (iv) above, the
Trust shall not be permitted to invest in
general partnerships or joint ventures with
Affiliates.
(vi) The Trust shall be permitted to invest in
general partnership interests of limited
partnerships only if the Trust, alone or
together with any publicly registered
Affiliate of the Trust meeting the
requirements of Subsection (ii) above,
acquires a "controlling interest" as defined
in Subsection (i), no duplicate fees are
permitted, and no additional compensation is
paid to the Sponsor.
(o) On financing made available to the Trust by the
Sponsor, the Sponsor may not receive interest in excess of the lesser of the
Sponsor's cost of funds or the amounts which would be charged by unrelated
lending institutions on comparable loans for the same purpose. The Sponsor
shall not impose a prepayment charge or penalty in connection with such
financing and the Sponsor shall not receive points or other financing
charges. The Sponsor shall be prohibited from providing permanent financing
for the Trust. For purposes of this Section, "permanent financing" shall mean
any financing with a term in excess of twelve (12) months.
12.4 SPECIFIC POWERS. In addition to the powers and duties
otherwise provided for in this Declaration, the Trust Advisor has the
following powers and duties, subject to the supervision and review of the
Board under Section 12.5:
(a) To direct or supervise the Corporate Trustee, the
Trust and the Trust's agents in the exercise of any action relating to the
Trust's affairs, including without limitation the powers described in Section
1.8;
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(b) To take the actions specified in Section 12.3
permitted upon requisite approvals, provided the approvals specified therein
are obtained;
(c) To amend this Declaration as specified in Section
15.8(a) or as otherwise specifically permitted by the provisions of this
Declaration;
(d) To lend money to the Trust (without being obligated
to do so) if such loan bears interest at a reasonable rate not exceeding the
Trust Advisor's interest cost or the amount that would be charged to the
Trust by an unrelated lender on a comparable loan for the same purpose
(without reference to the financial abilities or guarantees of the Trust
Advisor). The Trust Advisor may not receive points or other financing charges
or fees regardless of the amount loaned to the Trust. Before making any loans
to the Trust, a Trust Advisor will attempt to obtain a loan from an unrelated
lender secured, if at all, only by Trust Property;
(e) To approve in its sole discretion any transfer of
Shares;
(f) To terminate the offering of Shares at any time prior
to the Termination Date, provided that the Escrow Date has occurred;
(g) To withdraw the offering of Shares at any time as
provided in Section 1.6;
(h) To take any action in its discretion that may be
necessary, advisable or appropriate to maintain the Trust's status as a
business development company under the Investment Company Act, without any
requirement to give notice to or to obtain the prior or subsequent consent of
any Shareholder;
(i) To acquire such assets or properties, real or
personal, as the Trust Advisor in its sole discretion deems necessary or
appropriate for the conduct of the Trust's business and to sell, exchange,
distribute to Shareholders in kind or otherwise dispose of any part of the
Trust Property in the ordinary course of the operation of the Trust Property;
(j) To waive any fees or compensation payable to it and
to credit such waived amount in its discretion against any obligations it may
have to contribute capital under Section 14.7;
(k) To defer any fees or compensation payable to it;
(l) To provide, or arrange for the provision of,
managerial assistance to those persons in which the Trust invests; and
(m) To establish valuation principles and to periodically
apply such principles to the Trust's investment portfolio.
(n) To modify any provision of this Declaration, if, in
the opinion of counsel to the Trust and the Trust Advisor, such modification
is necessary to cause the allocations contained in this Declaration to have
substantial economic effect in accordance with the final regulations relating
to Section 704 of the Code or any other statutory provision or regulation
relating to such allocations.
12.5 INDEPENDENT TRUSTEES. (a) There shall be at least two
Independent Trustees at all times. The number of Independent Trustees may be
increased (but to not more than eight) or
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decreased (but to not fewer than two) from time to time by action of a majority
of the Trust Advisor and the Independent Trustees, acting together
(collectively, the "Board'). At all times a majority of the members of the Board
shall be Independent Trustees who are not "interested persons" of the Trust as
defined by Section 2(a)(19) of the Investment Company Act. If at any time Fifty
Percent (50%) or more of the members of the Board are "interested persons," the
Trust will take action under Section 12.5(b) within 90 days to correct that
condition. The Independent Trustees shall have terms of indefinite duration,
subject only to removal, incapacity or resignation under this Section 12.5.
(b) Vacancies, however caused, in the authorized number
of Independent Trustees shall be filled by a majority of the remaining Board
members. If no Independent Trustee remains, the Trust Advisor shall call a
special meeting of Shareholders for the purpose of electing Independent
Trustees within 90 days after the last vacancy results. At the inception of
this Trust, the Independent Trustees may be appointed by the Corporate
Trustee or by the action of the Shareholders.
(c) The Trust shall not take any of the following actions
except after either a meeting of the Board at which at least a majority of
the Board and a majority of the Independent Trustees approve the action (if
there are only two Independent Trustees, both shall be required to approve);
or approval by a Majority of the Shareholders and by a majority of the
Independent Trustees at a meeting (if there are only two Independent
Trustees, both shall be required to approve):
(1) Execution of and renewal of a Management
Agreement between the Trust and the Trust
Advisor or any other agreement under which a
person is to act as an investment adviser
for the Trust (the initial execution of a
Management Agreement or investment adviser
agreement shall also require the approval of
a Majority of the Shareholders);
(2) Execution and renewal of a Dealer Manger
Agreement with the Dealer Manager, or of any
agreement with a person who undertakes
regularly to serve or act as principal
underwriter for the Trust; and
(3) Appointment of independent certified public
accountants for the Trust.
(d) The Trust shall not effect any sale of Shares below
the then current net asset value (as defined in the Investment Company Act)
unless at a meeting of the Board at least a majority of the Board and a
majority of the Independent Trustees approve the action (if there are only
two Independent Trustees, both shall be required to approve).
(e) The Board shall also supervise and review the actions
of the Trust Advisor in managing the Trust and shall have the right to
require action by the Trust Advisor to the extent necessary to carry out the
fiduciary duties of the Board's members. The Board shall also perform all
other duties imposed on directors of business development companies by the
Investment Company Act. Except as expressly authorized by this Declaration or
the Investment Company Act, the Independent Trustees shall not have any
management or administrative powers over the Trust
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or the Trust Property. The Independent Trustees shall not take any action except
at a meeting of the Board or by unanimous written consent of the Independent
Trustees and the Trust Advisor.
(f) The Board shall meet at least quarterly on the call
of the Trust Advisor and at such other times as determined by the Board.
Except to the extent conflicting with the Delaware Act, the Investment
Company Act or this Declaration, the law of Delaware governing meetings of
directors of corporations shall govern meetings, voting and consents by the
members of the Board. The Trust Advisor may be represented for any purpose by
any of its officers.
(g) As compensation for services rendered to the Trust,
each Independent Trustee who is not an "interested director" as defined by
the Investment Company Act shall be paid by the Trust the sum of (i) $12,000
annually, plus (ii) $1,000 per meeting of the Board attended up to a maximum
of $24,000 in meeting fees per year, for a total maximum of $36,000 annually.
The Trust shall reimburse the Independent Trustees for all reasonable
out-of-pocket expenses relating to attendance at meetings or otherwise
performing his duties hereunder. The Board may review the compensation
payable to the Independent Trustees annually and may increase or decrease it
as the Board sees reasonable. No compensation shall be payable by the Trust
to the Independent Trustees or to any other Managing Persons for their
services except as specified by this Declaration, under a management or
underwriting agreement approved under this Section 12.5 or indirectly as an
officer, director, stockholder or employee of the Trust Advisor or other
Managing Person otherwise entitled to receive compensation hereunder.
(h) Any Independent Trustee may resign if he or she gives
notice to the Trust of his or her intent to resign and cooperates fully with
any successor Independent Trustee appointed under Section 2.5(b), effective
on the designation of the successor Independent Trustee.
(i) Any Independent Trustee may be removed, either for
cause by the action of at least two-thirds of the remaining members of the
Board; or by action of a Majority of the Shareholders. Removal of an
Independent Trustee shall not affect the validity of any actions taken prior
to the date of removal.
12.6 OFFICERS OF TRUST. (a) The Trust Advisor may appoint
a President, one or more Vice Presidents as designated by the Trust Advisor,
a Secretary and such other officers and agents as the Trust Advisor may from
time to time consider appropriate, none of whom need be a Shareholder. Except
as otherwise prescribed by the Trust Advisor or in this Declaration, each
officer shall have the powers and duties usually appertaining to a similar
officer of a Delaware corporation under the direction of the Trust Advisor
and shall hold office at the pleasure of the Trust Advisor. Any two or more
offices may be held by the same person. Any officer may resign by delivering
a written resignation to the Trust Advisor and such resignation shall take
effect upon delivery or as specified therein.
(b) All conveyances of real property or any interest
therein by the Trust may be made by the Corporate Trustee, which shall
execute on behalf of the Trust any instruments necessary to effect the
conveyance. A certificate of the Secretary of the Trust stating compliance
with this Section 12.6(b) shall be conclusive in favor of any person relying
thereon.
(c) All other documents, agreements, instruments and
certificates that are to be made, executed or endorsed on behalf of the Trust
shall be made, executed or endorsed by such officers or persons as the Trust
Advisor shall from time to time authorize and such authority may be general
or confined to specific instances. In the absence of other provisions, the
President, any Vice President, the Chief Financial Officer or the Chief
Operating Officer of the Trust Advisor are
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authorized to execute any document, to take any action on behalf of the Trust
Advisor, acting on behalf of the Trust within this Section 12.6(c).
12.7 PRESUMPTION OF POWER. The execution by the Corporate
Trustee, the Trust Advisor or the officers of either on behalf of the Trust
of leases, assignments, conveyances, contracts or agreements of any kind
whatsoever shall be sufficient to bind the Trust. No person dealing with the
Trust Advisor or its officers, acting on behalf of the Trust, shall be
required to determine their authority to make or execute any undertaking on
behalf of the Trust, nor to determine any fact or circumstances bearing upon
the existence of their authority nor to see the application or distribution
of revenues or proceeds derived therefrom, unless and until such person has
received written notice to the contrary.
12.8 OBLIGATIONS NOT EXCLUSIVE. The Trust Advisor and the
Trustees shall be required to devote only such part of their time as is
reasonably needed to manage the business of the Trust, it being understood
that the Trust Advisor and the Trustees have and shall have other business
interests and therefore shall not be required to devote their time
exclusively to the Trust. The Trust Advisor and the Trustees shall in no way
be prohibited from or restricted in engaging in, or possessing an interest
in, any other business venture of a like or similar nature. Nothing in this
Section 12.8 shall relieve the Trust Advisor of other fiduciary obligations
to the Shareholders, except as limited in Article 3. Notwithstanding anything
to the contrary contained in this Article or elsewhere in this Declaration,
the Trust Advisor shall have no duty to take any affirmative action with
respect to management of the Trust business or the Trust Property which might
require the expenditure of monies by the Trust or the Trust Advisor unless
the Trust then has such monies available for the proposed expenditure. Under
no circumstances shall the Trust Advisor be required to expend its own funds
in connection with the day to day operation of Trust business.
12.9 RIGHT TO DEAL WITH AFFILIATES. No act of the Trust
shall be affected or invalidated by the fact that a Managing Person may be a
party to or have an interest in any contract or transaction of the Trust,
provided that the act is otherwise in compliance with the Investment Company
Act and that the fact of the Managing Person's interest shall be disclosed or
shall have been known to the Shareholders or the contract or transaction is
at prevailing rates or on terms at least as favorable to the Trust as those
available from persons who are not Managing Persons, except that no Managing
Person shall acquire assets from the Trust and the Trust shall not acquire
any asset from a Managing Person except to the extent permitted by the
Investment Company Act.
12.10 MANAGEMENT SHARE. The Trust Advisor shall be
credited with a Management Share which shall have no voting rights and shall
be deemed to have attached to it the rights appertaining to the Trust Advisor
under this Declaration. No Management Share shall be held by or transferred
to a person who is not a Trust Advisor except as provided by Section 13.1.
12.11 REMOVAL OF TRUST ADVISOR. (a) The holders of at
least Ten Percent (10%) of the Shares may propose the removal of a Trust
Advisor, either by calling a meeting or soliciting consents in accordance
with the terms of this Declaration. On the affirmative vote of a Majority of
the Shareholders (excluding Shares held by the Trust Advisor that is the
subject of the vote or by its Affiliates), such Trust Advisor shall be
removed. A majority of the Independent Trustees may also remove the Trust
Advisor.
(b) In the event of any such removal or other incapacity
(other than voluntary resignation without cause) of a Trust Advisor as
enumerated in Section 14.1(c), the former Trust
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Advisor may elect in its sole discretion to take and to cause the Trust to take
one of the following courses of action:
(1) The former Trust Advisor may elect to
exchange its Management Share for a series
of cash payments from the Trust to the
former Trust Advisor in amounts equal to the
amounts of distributions to which the former
Trust Advisor would otherwise have been
entitled under this Declaration in respect
of investments made by the Trust prior to
the date of the removal or other incapacity.
Such payments shall be payable out of the
Trust's available cash before any distribu
tions are made to the Shareholders pursuant
to this Declaration. For purposes of this
Section 12.11(b)(1), from and after the date
of any such removal or other incapacity: the
former Trust Advisor's interest in the Trust
attributable to its Management Share shall
be terminated and its Capital Account shall
be reduced by the amount which is
attributable to its Management Share and
(ii) the former Trust Advisor shall continue
to receive its pro rata share of all
allocations to Shareholders provided in this
Declaration that are attributable to Shares
acquired by the former Trust Advisor.
(2) In the alternative, subject to the Trust's
obtaining an exemptive order from the
Securities and Exchange Commission, if
required, the former Trust Advisor may elect
to engage a qualified independent appraiser
and cause the Trust to engage a separate
qualified independent appraiser (at the
Trust's expense in each case), who shall
value the Trust Property as of the date of
such removal or other incapacity as if the
Trust Property had been sold at its fair
market value so as to include all
unrecognized gains or losses. If the two
appraisers cannot agree on a value, they
shall appoint a third independent appraiser
(whose cost shall be borne by the Trust)
whose determination, made on the same basis,
shall be final and binding. Based on the
appraisal, the Trust shall make allocations
to the former Trust Advisor's Capital
Account of Profits, Losses and other items
resulting from the appraisal as of the date
of such removal or other incapacity as if
the Trust's fiscal year had ended solely for
the purpose of determining the former Trust
Advisor's Capital Account. If the former
Trust Advisor has a positive Capital Account
after such allocation, the Trust shall
deliver a promissory note of the Trust to
the former Trust Advisor, with a principal
amount equal to the former Trust Advisor's
Capital Account and which shall bear
interest at a rate per annum equal to the
prime rate in effect on the date of removal
or other incapacity, as set forth on such
date in the Money Rates section of the Wall
Street Journal (or if not published on such
date, then on the first date immediately
preceding such date that it is published)
with interest payable annually and principal
payable only from Twenty Percent (20%) of
any available cash before any distributions
thereof are made to the Shareholders under
this Declaration. If the Capital Account of
the former Trust Advisor has a negative
balance after such allocation, the former
Trust Advisor shall contribute to the
capital of the Trust in its discretion
either cash in an amount equal to the
negative
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balance in its Capital Account or a
promissory note to the Trust in such
principal amount maturing five years after
the date of such removal or other
incapacity, bearing interest at the rate
specified above. For purposes of this
Section 12.11(b)(2), from and after the date
of any such removal or other incapacity, the
former Trust Advisor's interest in the Trust
shall be terminated and the former Trust
Advisor shall no longer have any interest in
the Trust other than the right to receive
the promissory note and payments thereunder
as provided above. The former Trust Advisor
shall continue to receive its pro rata share
of all allocations to Shareholders provided
in this Declaration that are attributable to
Shares acquired by the former Trust Advisor.
(3) If the Trust and the Trust Advisor cannot
agree upon the amount to be paid to the
Trust Advisor pursuant to this section, the
Trust may require that such amount be
determined by arbitration in accordance with
the then current rules of the American
Arbitration Association. The expense of
arbitration shall be borne equally by the
terminated Trust Advisor and the Trust.
(c) In the event that a Trust Advisor is removed or no
longer serves as a Trust Advisor due to an incapacity enumerated in Section
14.1(c), the former Trust Advisor shall not be entitled to any uncollected
fees specified in Article 9 to the extent not accrued before the date of such
removal or other incapacity.
12.12 INDEMNIFICATION OF DEALER MANAGER. Notwithstanding
anything to the contrary contained in this Declaration, no person acting as an
underwriter for the Shares shall be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of federal or state
securities laws unless one or more of the following conditions are met: (a)
There has been a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee; (b) Such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee; (c) A court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made, and the court of law considering the request for indemnification has been
advised of the position of the Securities and Exchange Commission and the
published position of any state securities regulatory authority in which Shares
were offered or sold as to indemnification for violations of securities laws.
12.13 CONTRIBUTION. Each of the initial Trust Advisor and
subsequent Trust Advisors agrees that it shall remain jointly or jointly and
severally liable as required by law for any obligation or recourse liability of
the Trust incurred during the period in which it is a Trust Advisor. However,
the existing and subsequent Trust Advisors hereby agree among themselves to
contribute to each other the amount of funds necessary to effectuate a sharing
of Trust obligations and recourse liabilities in proportion to each Trust
Advisor's share of such obligations and liabilities as they accrue.
12.14 LIMITATION ON VOTING OF SHARES. With respect to any
Shares owned by the Sponsor, the Sponsor may not vote or consent on matters
submitted to the Shareholders regarding the removal of the Sponsor or regarding
any transaction between the Trust and the Sponsor. In determining the existence
of the requisite percentage in interest of Shareholder's necessary to
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approve a matter on which the Sponsor may not vote or consent, any Shares owned
by the Sponsor shall not be included.
12.15 CODE OF ETHICS. The Trust hereby adopts the Code of
Ethics attached hereto as Exhibit A. The Code of Ethics may be amended by the
Trust Advisor as necessary to comply with law or in any other manner not
providing for diminution of the protections afforded Shareholders by the Code of
Ethics as adopted hereby.
ARTICLE XIII
TRANSFERS OF SHARES
13.1 TRANSFER OR RESIGNATION BY TRUST ADVISOR. The Trust
Advisor shall not sell, assign or otherwise transfer its Management Share or
resign without cause (which cause shall not include the fact or the
determination that continued service would be unprofitable to the Trust
Advisor) without first obtaining the consent of a Majority of the
Shareholders, except that (i) the Trust Advisor may pledge its Management
Share for a loan to the Trust Advisor provided that such pledge does not
reduce the cash flow of the Trust distributable to other Shareholders and
(ii) the Trust Advisor may waive, defer or assign compensation or fees
payable to it. Without concurrence of a Majority in interest of the
Shareholders, the Trust Advisor may not voluntarily withdraw from the Trust
without one hundred twenty (120) days prior written notice to the
Shareholders, unless such withdrawal would not affect the tax status of the
Trust and would not materially adversely affect the Shareholders. If the
Shareholders elect to continue the Trust, the withdrawing Trust Advisor shall
pay all expenses incurred as a result of its withdrawal.
13.2 TRANSFERS BY SHAREHOLDERS. A Shareholder may sell,
exchange or transfer his Shares except as restricted by and upon compliance
with all applicable laws and all of the following provisions of this Section
13.2:
(a) Shares may not be transferred to any person or entity
if, as determined by the Trust, such assignment would have adverse regulatory
consequences to the Trust or any Trust Property. The Trust shall have no
obligation to transfer shares on the books and records of the Trust if such
transfer would violate the Publicly Traded Partnership provisions as
determined in the sole and absolute discretion of the Trustees.
(b) The written approval of the Trust Advisor must be
obtained, the granting or denial of which shall be within its sole and
absolute discretion.
(c) The transferor and transferee must deliver a dated
notice in writing signed by each, confirming that (i) the transferee accepts
and agrees to comply with all the terms of this Declaration and (ii) the
transfer was made in compliance with this Declaration and all applicable laws
and regulations including the Rules and Regulations restricting transfers as
may be adopted by the Trust Advisor from time to time to prevent the Trust
from being treated as a Publicly Traded Partnership.
(d) The transferor, transferee and the Trust must execute
all other certificates, instruments and documents and take all such
additional action as the Trust may deem appropriate.
(e) The Trust may require as a condition to any transfer
that may create a future interest that an opinion of counsel acceptable to
the Trust be delivered to the Trust
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confirming that the proposed transfer does not have adverse effects on the Trust
under the rule against perpetuities or similar provisions of law.
Transfers shall be effective and recognized upon fulfillment
of the requirements of clauses (a) through (e) above, and the transferee shall
become a Shareholder owning Shares with the same rights as appertained to the
transferor. Any purported sale or transfer consummated without first complying
with this Section 13.2 shall be void and the Trust shall have no obligation to
recognize the ownership right of any transferee of Shares.
13.3 ASSIGNMENTS BY OPERATION OF LAW. If any Shareholder
shall die, with or without leaving a will, or become incompetent, bankrupt or
insolvent, or if a corporation, partnership or trust investor dissolves
during the Trust term or if any other involuntary transfer of a Shareholder's
Shares is made, the legal representatives, heirs and legatees (and spouse, if
the Shares have been community property of such Shareholder and his or her
spouse), bankruptcy assignees, successors, assigns and corporate, partnership
or trust distributees or such other involuntary transferees shall not become
transferees but shall have (subject to the other terms and provisions hereof)
such rights as are provided with respect to such persons under the law;
provided, however, that such legal representatives, heirs and legatees,
spouse, bankruptcy assignees, successors, assigns and corporate, partnership
or trust distributees or involuntary transferees may become transferees in
accordance with the provisions of Section 13.2.
13.4 EXPENSES OF TRANSFER. In the sole discretion of the
Trust, the person acquiring Shares pursuant to any of the provisions of this
Article 13 may be required to bear all costs and expenses necessary to effect
a transfer of such Shares including, without limitation, reasonable
attorney's fees incurred in preparing any required amendments to this
Declaration and the Certificate to reflect such transfer or acquisition and
the cost of filing such amendments with the appropriate governmental
officials.
13.5 SURVIVAL OF LIABILITIES. No sale or assignment of
Shares shall release the transferor from those liabilities to the Trust which
survive such assignment or sale as a matter of law or that are imposed under
Section 3.4.
13.6 NO ACCOUNTING. No transfer of Shares, whether
voluntary, involuntary or by operation of law, shall entitle the transferor
or transferee to demand or obtain immediate valuation, accounting or payment
of the transferred Shares.
ARTICLE XIV
DISSOLUTION, TERMINATION AND LIQUIDATION
14.1 DISSOLUTION. Unless the provisions of Section 14.2
are elected, the Trust shall be dissolved and its business shall be wound up
upon the decision of the Trust Advisor to withdraw the offering of Shares
described in the Prospectus in accordance with Section 12.4(g) or on the
earliest to occur of:
(a) The later of December 31, 2011, or ten years from the
Termination Date, except the Independent Trustees have the right to extend
the term of the Trust for up to two (2) additional one-year periods if the
Independent Trustees determine that such extensions are in the best interest
of the Trust and the best interest of the Shareholders;
(b) The sale of all or substantially all of the Trust
Property;
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(c) The death, removal, dissolution, resignation,
insolvency, bankruptcy or other legal incapacity of the Trust Advisor or any
other event which would legally disqualify the Trust Advisor from acting
hereunder;
(d) The decision of a Majority of Shareholders; or
(e) The occurrence of any other event which, by law,
would require the Trust to be dissolved.
14.2 CONTINUATION OF THE TRUST. Upon the occurrence of any
event of dissolution described in Sections 14.1(a) through (e), inclusive,
the Trust shall be dissolved and wound up unless (i) the Trust Advisor and a
Majority of the Shareholders (calculated without regard to Shares owned by
the Trust Advisor or its Affiliates) within 90 days after the occurrence of
any such event of dissolution elect to continue the Trust or, (ii) if there
is no remaining Trust Advisor, within 90 days after the occurrence of any
such event of dissolution, a Majority of the Shareholders shall elect, in
writing, that the Trust shall be continued on the terms and conditions herein
contained and shall designate one or more persons willing to be substituted
as a Trust Advisor or Trust Advisors. In the event there is no remaining
Trust Advisor and a Majority of the Shareholders elect to continue the Trust,
it shall be continued with the new Trust Advisor or Trust Advisors who shall
succeed to and assume all of the powers, privileges and obligations of the
previous Trust Advisor or Trust Advisors hereunder except as specified in
Section 12.11. In the event of a dissolution under this Section 14.2, the
former Trust Advisor or Trust Advisors shall have the rights specified in
Section 12.11.
14.3 OBLIGATIONS ON DISSOLUTION. The dissolution of the
Trust shall not release any of the parties hereto from their contractual
obligations under this Declaration.
14.4 LIQUIDATION PROCEDURE. Upon dissolution of the Trust
for any reason:
(a) A reasonable time shall be allowed for the orderly
liquidation of the assets of the Trust and the discharge of liabilities to
creditors so as to enable the Trust to minimize the losses normally attendant
to a liquidation, provided the Trust will, in any event, liquidate any
remaining investments within three (3) years from the occurrence of the event
of dissolution;
(b) The Shareholders and the Trust Advisor shall continue
to share Profits and Losses for all tax and other purposes during the period
of liquidation; and
(c) The Trust Advisor shall act as liquidating Trust
Advisor and shall proceed to liquidate the Trust Properties to the extent
that they have not already been reduced to cash unless the liquidating Trust
Advisor elects to make distributions in kind to the extent and in the manner
herein provided and such cash, if any, and property in kind, shall be applied
and distributed in accordance with Article 8.
14.5 LIQUIDATING TRUSTEE. (a) If the dissolution of the
Trust is caused by circumstances under which no Trust Advisor shall be acting
as a Trust Advisor or if all liquidating Trust Advisors are unable or refuse
to act, a Majority of the Shareholders shall appoint a liquidating trustee
who shall proceed to wind up the business affairs of the Trust. The
liquidating trustee shall have no liability to the Trust or to any
Shareholder for any loss suffered by the Trust which arises out of any action
or inaction of the liquidating trustee if the liquidating trustee, in good
faith,
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determined that such course of conduct was in the best interests of the
Shareholders and such course of conduct did not constitute negligence or
misconduct of the liquidating trustee. The liquidating trustee shall be
indemnified by the Trust against any losses, judgments, liabilities, expenses
and amounts paid in settlement of any claims sustained by it in connection with
the Trust, provided that the same were not the result of negligence or
misconduct of the liquidating trustee.
(b) Notwithstanding the above, the liquidating trustee
shall not be indemnified and no expenses shall be advanced on its behalf for
any losses, liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws, unless (1) there has been a
successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee, or (2) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee.
(c) In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall place
before the court the position of the Securities and Exchange Commission and
the Massachusetts Securities Division (if applicable), or other applicable
securities administrators if required, with respect to the issue of
indemnification for securities law violations.
(d) The Trust shall not incur the cost of that portion of
any insurance, other than public liability insurance, which insures any party
against any liability the indemnification of which is herein prohibited.
14.6 DEATH, INSANITY, DISSOLUTION OR INSOLVENCY OF A
SHAREHOLDER OR TRUSTEE. The death, insanity, dissolution, winding up,
insolvency, bankruptcy, receivership or other legal termination of a Trustee
or a Shareholder who is not a Trust Advisor shall have no effect on the life
of the Trust and the Trust shall not be dissolved thereby.
14.7 TRUST ADVISOR'S CAPITAL CONTRIBUTIONS. Upon or prior
to the first distribution in liquidation, the Trust Advisor shall contribute
to the capital of the Trust an amount equal to any deficit in the Capital
Account of such Trust Advisor calculated just prior to the date of such
distribution, to the extent not previously contributed.
14.8 WITHDRAWAL OF OFFERING. Dissolution of the Trust
resulting from withdrawal of the offering of Shares is governed by Section
1.6(c) and Section 12.4(g).
ARTICLE XV
MISCELLANEOUS
15.1 NOTICES. Notices or instruments of any kind that may
be or are required to be given hereunder by any person to another shall be in
writing and deposited in the United States Mail, certified or registered,
postage prepaid, addressed to the respective person at the address appearing
in the records of the Trust. Any Shareholder may change his address by giving
notice in writing, stating his new address, to the Trust. Any notice shall be
deemed to have been given effective as of seventy-two (72) hours, excluding
Saturdays, Sundays and holidays, after the depositing of such notice in an
official United States Mail receptacle. Notice to the Trust may be addressed
to its principal office.
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15.2 MEETINGS OF SHAREHOLDERS.
(a) MEETINGS. The Trust Advisor may call meetings of the
Shareholders, the Investors or any subgroup thereof concerning any matter on
which they may vote as provided by this Declaration or by law or to receive
and act upon a report of the Trust Advisor on matters pertaining to the
Trust's business and activities. Shareholders holding Ten Percent (10%) or
more of the outstanding securities or Shares entitled to vote on the matter
may also call meetings by giving notice to the Trust demanding a meeting and
stating the purposes therefor. After calling a meeting or within ten (10)
days after receipt of a written request or requests meeting the requirements
of the preceding sentence, the Trust shall mail to all Shareholders entitled
to vote on the matter written notice of the place and purposes of the
meeting, which shall be held on a date not less than fifteen (15) days nor
more than sixty (60) days after the Trust mails the notice of meeting to the
Shareholders at a time and place specified in the request, or if none is
specified, at a time and place convenient to Shareholders. Any Shareholder or
Investor entitled to vote on the matter may appear and vote or consent at a
meeting by proxy, provided that such authority is granted by a writing signed
by the Shareholder or Investor and delivered to the Trust at or prior to the
meeting.
(b) CONSENTS. Any consent required by this Declaration or
any vote or action by the Shareholders, the Investors or any subgroup thereof
may be effected without a meeting by a consent or consents in writing signed
by the persons required to give such consent, to vote or to take action. The
Trust Advisor may solicit consents or Shareholders holding Ten Percent (10%)
or more of the outstanding securities or Shares entitled to vote on the
matter may demand a solicitation of consents by giving notice to the Trust
stating the purpose of the consent and including a form of consent. The Trust
shall effect a solicitation of consents by giving those Shareholders or the
Investors, as the case may be, a notice of solicitation stating the purpose
of the consent, a form of consent and the date on which the consents are to
be tabulated, which shall be not less than fifteen (15) days nor more than
forty-five (45) days after the Trust transmits the notice of solicitation for
consents. If Shareholders holding Ten Percent (10%) or more of the
outstanding securities or Shares entitled to vote on the matter demand a
solicitation, the Trust shall transmit the notice of solicitation not later
than twenty (20) days after receipt of the demand.
(c) GENERAL. To the extent not inconsistent with this
Declaration, Delaware law governing stockholders' meetings, proxies and
consents for corporations shall apply as to the procedure, validity and use
of meetings, proxies and consents. Any Shareholder may waive notice of or
attendance at any meeting or notice of any consent, whether before or after
any action is taken. The date on which the Trust transmits the notice of
meeting or notice soliciting consents shall be the record date for
determining the right to vote or consent. A list of the names, addresses and
shareholdings of all Shareholders shall be maintained as part of the Trust's
books and records.
15.3 LOAN TO TRUST BY SHAREHOLDER. If any Shareholder or
the Trust Advisor shall, in addition to his Capital Contribution to the
Trust, lend any monies to the Trust, the amount of any such loan shall not
increase such Shareholder's or the Trust Advisor's Capital Account and it
shall not entitle such Shareholder or the Trust Advisor to any increase in
such Shareholder's share of the distributions of the Trust, but the amount of
any such loan shall be an obligation on the part of the Trust to such
Shareholder or the Trust Advisor and shall be repaid to the Shareholder or
the Trust Advisor on the terms and at the interest rate negotiated at the
time of the loan, and the loan shall be evidenced by a promissory note
executed by the Trust except that no Shareholder shall be personally
obligated to repay the loan, which shall be payable and collectible only out
of the assets of the Trust.
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15.4 DELAWARE LAWS GOVERN. This Declaration shall be
governed and construed in accordance with the laws of the State of Delaware,
and venue for any litigation between or against any of the parties hereto may
be maintained in New Castle County, Delaware; provided, however, that
Shareholders may, at their option, maintain any such litigation in their
state of residence.
15.5 POWER OF ATTORNEY. Each Shareholder irrevocably
constitutes and appoints the Trust Advisor as his true and lawful
attorney-in-fact and agent to effectuate and to act in his name, place and
stead, in effectuating the purposes of the Trust including the execution,
verification, acknowledgment, delivery, filing and recording of this
Declaration as well as all authorized amendments thereto and hereto, all
assumed name and doing business certificates, documents, bills of sale,
assignments and other instruments of conveyances, leases, contracts, loan
documents and counterparts thereof, and all other documents which may be
required to effect a continuation of the Trust and which the Trust deems
necessary or reasonably appropriate, including documents required to be
executed in order to correct typographical errors in documents previously
executed by such Shareholder and all conveyances and other instruments or
other certificates necessary or appropriate to effect an authorized
dissolution and liquidation of the Trust. The power of attorney granted
herein shall be deemed to be coupled with an interest, shall be irrevocable
and shall survive the death, incompetency or legal disability of a
Shareholder.
15.6 DISCLAIMER. Shares in the Trust are highly
speculative, and neither the Trust nor the Trust Advisor nor any Trustee nor
any other Managing Person makes any guaranty or representation to any
Investor or Shareholder as to the probability or amount of gain or loss from
the conduct of Trust business.
15.7 CORPORATE TRUSTEE RESIGNATION AND REPLACEMENT. The
Trust Advisor may increase or decrease the number of Corporate Trustees so
long as there is at least one Corporate Trustee which meets the requirements
of Section 3807 of the Delaware Act. A Corporate Trustee may resign by
delivering a written resignation to the Trust Advisor not less than 60 days
prior to the effective date of the resignation. The Trust Advisor may remove
a Corporate Trustee at any time, provided that if there is no incumbent, at
least one new Corporate Trustee is concurrently appointed. In the event of
the absence, death, resignation, removal, dissolution, insolvency, bankruptcy
or legal incapacity of a Corporate Trustee or if an additional Corporate
Trustee is to be appointed, the Trust Advisor shall appoint the Corporate
Trustee in writing and shall subsequently give notice to the Shareholders,
although such notice is not necessary to the validity of the appointment. A
Corporate Trustee so appointed shall qualify by filing his written acceptance
at the Trust's principal place of business. If there are multiple Corporate
Trustees, each is vested with an undivided interest in the trust estate and
may exercise all powers vested in the Corporate Trustee as directed by the
Trust Advisor.
15.8 AMENDMENT AND CONSTRUCTION OF DECLARATION. (a) This
Declaration may be amended by the Trust Advisor, without notice to or the
approval of the Shareholders, from time to time for the following purposes:
(1) to cure any ambiguity, formal defect or omission or to correct or
supplement any provision herein that may be inconsistent with any other
provision contained herein or in the Prospectus or Registration Statement, or
to effect any amendment without notice to or approval by Shareholders as
specified in other provisions of this Declaration; (2) to make such other
changes or provisions in regard to matters or questions arising under this
Declaration that will not materially and adversely affect the interest of any
Shareholder; (3) to otherwise equitably resolve issues arising under the
Prospectus or this Declaration so long as similarly situated Shareholders are
not treated materially differently; (4) to maintain the federal tax status of
the
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<PAGE>
Trust and any of its Shareholders (so long as no Shareholder's liability is
materially increased without his consent) or as provided in Section 4.3(d); and
(5) to comply with law.
(b) Other amendments to this Declaration may be proposed
by either the Trust Advisor or Shareholders owning Ten Percent (10%) or more
of the outstanding Shares, in each case by calling a meeting of Shareholders
or requesting consents under Section 15.2 and specifying the text of the
amendment and the reasons therefor. No amendment under this Section 15.8(b)
that increases any Shareholder's liability, changes the Capital Contributions
required of him or his rights in interest in the Profits, Losses, deductions,
credits, revenues or distributions of the Trust in more than a de minimis
manner, his rights on dissolution, or any voting or management rights set
forth in this Declaration shall become effective as to that Shareholder
without his written approval thereof. Unless otherwise provided herein, all
other amendments must be approved by the holders of a majority of the
outstanding Shares (calculated without regard to Shares owned by the Trust
Advisor and its Affiliates), and, if the terms of a series of Shares or
securities so require, by the vote of the holders of such class, series or
group specified therein.
(c) The Trust Advisor has power to construe this
Declaration and to act upon any such construction. Its construction of the
same and any action taken pursuant thereto by the Trust or a Managing Person
in good faith shall be final and conclusive.
15.9 BONDS AND ACCOUNTING. The Trustees and other Managing
Persons shall not be required to give bond or otherwise post security for the
performance of their duties and the Trust waives all provisions of law
requiring or permitting the same. No person shall be entitled at any time to
require the Trustees, the Trust or any Shareholder to submit to a judicial or
other accounting or otherwise elect any judicial, administrative or executive
supervisory proceeding applicable to non-business trusts.
15.10 BINDING EFFECT. This Declaration shall be binding
upon and shall inure to the benefit of the Shareholders (and their spouses if
the Shares of such Shareholders shall be community property) as well as their
respective heirs, legal representatives, successors and assigns. This
Declaration constitutes the entire agreement among the Trust, the Trustees
and the Shareholders with respect to the formation and operation of the
Trust, other than the Subscription Agreement entered into between the Trust
and each Investor and the Management Agreement.
15.11 HEADINGS. Headings of Articles and Sections used
herein are for descriptive purposes only and shall not control or alter the
meaning of this Declaration as set forth in the text.
15.12 TAX MATTERS PARTNER. The Trust Advisor or its
designee shall be designated the tax matters partner of the Trust pursuant to
Code Section 6221.
15.13 ROLL-UP TRANSACTIONS. (a) In connection with a
proposed Roll-Up, an appraisal of all Trust assets shall be obtained from a
competent Independent Expert. If the appraisal will be included in a
prospectus used to offer the securities of a Roll-Up Entity, the appraisal
shall be filed with the Securities and Exchange Commission and the
Administrator as an Exhibit to the Registration Statement for the offering.
Accordingly, an issuer using the appraisal shall be subject to liability for
violation of Section 11 of the Act and comparable provisions under State law
for any material misrepresentations or material omissions in the appraisal.
Trust assets shall be appraised on a consistent basis. The appraisal shall be
based on all relevant information and shall indicate the value of the Trust's
assets as of a date immediately prior to the announcement of the proposed
Roll-Up. The appraisal shall assume an orderly liquidation over a
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<PAGE>
twelve (12) month period. The terms of the agreement of the Independent Expert
shall clearly state that the engagement is the benefit of the Trust and its
Shareholders. A summary of the independent appraisal, indicating all material
assumptions underlying the appraisal, shall be included in a report to the
Shareholders in connection with a proposed Roll-Up.
(b) In connection with a proposed Roll-Up, the person
sponsoring the Roll-Up shall offer to Shareholders who vote "no" on the
proposal the choice of:
(i) accepting the securities of the Roll-Up Entity
offered in the proposed Roll-Up; or
(ii) one of the following:
(A) remaining as Shareholders in the Trust and
preserving their interests therein on the
same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the
Shareholders' pro rata share of the
appraised value of the net assets of the
Trust.
(c) The Trust shall not participate in any proposed
Roll-Up which, if approved, would result in Shareholders having democracy
rights in the Roll-Up Entity which are less than those provided for under
this Declaration. If the Roll-Up Entity is a corporation, the democracy
rights of Shareholders shall correspond to the democracy rights provided for
in this Declaration to greatest extent possible.
(d) The Trust shall not participate in any proposed
Roll-Up which includes provisions which would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the securities of
the Roll-Up Entity (except to the minimum extent necessary to preserve the
tax status of the Roll-Up Entity). The Trust shall not participate in any
proposed Roll-Up which would limit the ability of a Shareholder to exercise
the voting rights of its securities of the Roll-Up Entity on the basis of the
number of Shares held by that Shareholder.
(e) The Trust shall not participate in any proposed
Roll-Up in which Shareholders' rights of access to the records of the Roll-Up
Entity will be less than those provided for under Article X and Section 11.4
of this Declaration.
(f) The Trust shall not participate in any proposed
Roll-Up in which any of the costs of the transaction would be borne by the
Trust if the Roll-Up is not approved by the Shareholders.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this
Declaration as of the date first above written.
BERTHEL FISHER & COMPANY PLANNING, INC.
By /s/ Henry Royer
-------------------------------
Henry Royer, President
TJB CAPITAL MANAGEMENT, INC.
By /s/ Thomas J. Berthel
-------------------------------
Thomas J. Berthel, President
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<PAGE>
EXHIBIT A
TO
DECLARATION OF TRUST
CODE OF ETHICS
<PAGE>
BERTHEL GROWTH TRUST II
CODE OF ETHICS
1. Preamble. This Code of Ethics is adopted for Berthel
Growth Trust II (the "Trust"), TJB Capital Management Inc. (the "Corporate
Trustee"), Berthel Fisher & Company Planning, Inc. (the "Trust Advisor") and
Berthel Fisher & Company Financial Services, Inc. (the "Dealer Manager") in
compliance with the requirements of Rule 17j-1 (the "Rule") adopted by the
United States Securities and Exchange Commission under the Investment Company
Act of 1940 (the "1940 Act") to effectuate the purposes and objectives of
that Rule. The Rule makes it unlawful for certain persons, including any
officer or trustee of the Trust, the Dealer Manager, the Trust Advisor or the
Corporate Trustee, in connection with the purchase or sale by such person of
a security held or to be acquired by any portfolio series of the Trust:
(a) to employ a device, scheme or artifice to
defraud the Trust;
(b) to make to the Trust any untrue statement of
a material fact, or omit to state to the
Fund a material fact, necessary in order to
make the statements made, in light of the
circumstances in which they are made, not
misleading;
(c) to engage in any act, practice or course of
business which operates, or would operate,
as a fraud or deception upon the Trust; or
(d) to engage in a manipulative practice with
respect to the Trust.
This Rule also requires that the Trust, the Corporate Trustee, the Trust Advisor
and the Dealer Manager adopt a written code of ethics containing provisions
reasonably necessary to prevent persons from engaging in acts in violation of
the above standard and shall use reasonable diligence, and institute procedures
reasonably necessary, to prevent violation of the code. Capitalized terms not
defined herein shall have the meanings given to such terms in the Declaration of
Trust.
2. Code of Ethics. Set forth below is the Code of Ethics
for the Trust, approved by the Management Board, and for the Corporate
Trustee, the Trust Advisor and the Dealer Manager, approved by the Boards of
Directors of the said corporations, in compliance with the Rule. This Code of
Ethics is based upon the principle that the Trustees and officers of the
Trust, and the directors and officers of the Corporate Trustee, the Trust
Advisor and the Dealer Manager, owe a fiduciary duty to, among others, the
shareholders of the Trust, to conduct their affairs, including their personal
securities transactions, in such manner as to avoid (i) serving their own
personal interests ahead of investment clients; (ii) taking inappropriate
advantage of their position with the Trust; and (iii) any actual or potential
conflicts of interest or any abuse of their position of trust and
responsibility.
<PAGE>
3. Definitions
(a) "Access Person" means any director, officer
or Advisory Person of the Trust Advisor, the
Dealer Manager or the Trust.
(b) "Advisory Person" means (i) any employee of
the Trust Advisor, the Dealer Manager or the
Trust (or any person or entity in a control
relationship with the foregoing) who, in
connection with his regular functions or
duties, makes, participates in, or obtains
information regarding, the purchase or sale
of a security by the Trust or whose
functions relate to the making of any
recommendation with respect to such
purchases or sales; or (ii) any natural
person in a Control relationship to the
Trust Advisor, the Dealer Manager or the
Trust, who regularly obtains current
information concerning recommendations made
with regard to the purchase or sale of a
security for the Trust.
(c) "Affiliate" of any person includes any of the
following:
(i) any person directly or indirectly
owning, controlling, or holding with
power to vote ten percent (10%) or
more of the outstanding voting
securities of such person;
(ii) any person ten percent (10%) or more
of whose outstanding voting securities
are directly or indirectly owned,
controlled, or held, with power to
vote, by such other person;
(iii) any person directly or indirectly
controlling, controlled by, or under
common control with such other
person;
(iv) any executive officer, director,
trustee or partner of such other
person;
(v) any legal entity on which such
person acts as an executive officer,
director, trustee, or partner;
(vi) if such other person is an investment
company, any investment adviser thereof
or any member of an advisory board
thereof; or
(vii) if such other person is an
unincorporated investment company
not having a board of directors, the
depositor thereof.
(d) A security is "being considered for purchase
or sale" or is "being purchased or sold"
when a recommendation to purchase or sell
the security has been made to the Board and
communicated to the trading desk, which
includes when the Trust has a pending "buy"
or "sell" order with respect to a security,
and, a recommendation includes when a
security is under consideration by the
investment committee of the Trust Adviser as
a candidate for purchase or sale.
<PAGE>
(e). "Beneficial ownership" is defined in, and
interpreted in the same manner as it would
be in determining whether a person is
subject to the provisions of Section 16 of
the Securities Exchange Act of 1934 and the
rules and regulations thereunder which,
generally speaking, encompass those
situations where the beneficial owner has
the right to enjoy some economic benefit
from the ownership of the security. A person
is normally regarded as the beneficial owner
of securities held in the name of his or her
spouse or minor children living in his or
her household.
(f) "Control" shall have the same meaning as that
set forth in Section 2(a)(9) of the Act.
(g). "Purchase or sale of a security" includes the
writing of an option to purchase or sell a
security.
(h) "Security" shall have the meaning set forth
in Section (a)(36) of the Act, except that
it shall not include securities issued by
the government of the United States or by
federal agencies and which are direct
obligations of the United States, banker's
acceptances, bank certificates of deposit,
commercial paper and shares of registered
open-end investment companies.
(i) "Supervisory Person" means a person
designated or approved by the Independent
Trustees of the Trust, and having the
responsibilities set forth herein.
(j) "Disinterested Trustee" means a Trustee of
the Trust who is not an "interested person"
of the Trust within the meaning of Section
2(a)(19) of the Act.
(k) "Actual Knowledge" means knowledge that an
individual possesses or knowledge that an
individual may reasonably be expected to
acquire in the performance of their duties.
4. Prohibited Transactions
(a) Transactions by Access Persons in Portfolio
Company Securities. No Access Person shall
purchase or sell, directly or indirectly,
any security in which he has, or by reason
of such transaction acquires, any direct or
indirect Beneficial Ownership and which to
his actual knowledge at the time of such
purchase or sale is being considered for
purchase or sale by the Trust or is being
purchased or sold by the Trust; provided,
however, that these prohibitions shall not
apply to: (i) purchases or sales affected in
an account over which the Access Person has
no direct or indirect influence or control;
(ii) purchases or sales of securities that
are not eligible for purchase or sale by the
Trust; (iii) purchases or sales that are
non-volitional on the part of either the
Access Person or the Trust; (iv) purchases
or sales that are part of an automatic
dividend reinvestment plan; (v) purchases
effected upon the
<PAGE>
exercise of rights issued by an issuer to
all holders of a class of its securities, to
the extent such rights were acquired from
such issuer, and sales of such rights so
acquired; and (vi) purchases or sales that
receive the prior approval of the
Independent Trustees or a Supervisory Person
(who can have no personal interest in such
purchases or sales) because such purchases
or sales are not likely to have any economic
impact on the Trust or on its ability to
purchase or sell securities of the same type
or other securities of the same issuer. No
Access Person shall purchase, directly or
indirectly, a security that is within the
Trust's Investment Objective, and is the
subject of (i) an initial public offering or
(ii) a private offering, unless the prior
written consent of the Supervisory Person
has been obtained, taking into account the
factors listed above, and other factors
including whether the investment opportunity
should be reserved for the Trust, and
whether the opportunity is being offered to
the Access Person by virtue of his or her
position with the Trust. Access Persons who
have been authorized to acquire securities
in a private placement must disclose that
investment when they play a part in the
Trust's subsequent consideration of an
investment in the issuer of such securities.
In such circumstances the Trust's decision
to purchase securities of the issuer shall
be subject to independent review by
investment personnel with no personal
interest in the issuer. Notwithstanding the
foregoing, any such transaction by an Access
Person must be in compliance with Rule
17d.-1 promulgated pursuant to the
Investment Company Act.
(b) Transactions between Affiliates and
Portfolio Companies. An Affiliate of the
Trust Advisor may render services to a
Portfolio Company only pursuant to a written
agreement setting forth all material terms
of the engagement, including a description
of the consideration to be paid by the
Portfolio Company, and the services to be
provided by the Affiliate of the Trust
Advisor. Within sixty (60) days after the
execution of such an agreement by an
Affiliate of the Trust Advisor, the Trust
Advisor must present the agreement to the
Independent Trustees for approval. The
Independent Trustees may approve the
agreement so long as they find that the
consideration to be paid to the Affiliate of
the Trust Advisor for services rendered to
Portfolio Companies is competitive with
prices charged by parties not affiliated
with the Trust Advisor for similar services
in the same geographic area.
(c) Violation of Rule 17j-1. No Access Person
shall engage in any act, practice or course
of conduct, which would violate the
provisions of Rule 17j-1 set forth above.
(d) Violation of Rule 17d-1. Unless the
Commission shall have issued an exemptive
order permitting the transaction, no
Affiliate shall engage in any transaction
which will cause the Trust to be a
participant in any written or oral plan,
contract authorization or arrangement or any
practice or understanding concerning an
enterprise or undertaking whereby the Trust
or a company under the control of the Trust
and any affiliated persons (as such term is
defined in the Act) or the Dealer Manager or
any affiliated person of any of affiliated
person of the Trust or any affiliated person
of the Dealer Manager have a joint or a joint
<PAGE>
and several participation or share in the
profits of such enterprise or undertaking.
(e) Other Prohibited Transactions. No Access
Person shall:
(i) purchase or sell, directly or
indirectly, any security in which he
or she has, or by reason of such
transaction acquires, any direct or
indirect beneficial ownership and
which to his or her actual knowledge
at the time of such purchase or
sale, such security was being
considered for purchase or sale or
was purchased or sold by the Trust
during the seven calendar days prior
to or after the transaction of the
Access Person.
(ii) seek or accept anything of value,
either directly or indirectly, from
broker-dealers or other persons
providing services to the Trust
because of such person's association
with the Trust. For the purposes of
this provision, the following gifts
from broker-dealers or other persons
providing services to the Trust will
not be considered to be in violation
of this section:
(i) an occasional meal;
(ii) an occasional ticket to a
sporting event, the theater
or comparable entertainment;
(iii) a holiday gift of fruit or
other foods or beverages.
(iii) purchase any securities in a private
placement without prior approval of
the Compliance Officer or other
officer designated by the Board of
Trustees. Any person authorized to
purchase securities in a private
placement shall disclose that
investment when they play a part in
any subsequent consideration by the
Trust of an investment in the
issuer. In such circumstances, the
Trust's decision to purchase
securities of the issuer shall be
subject to independent review by the
Trust's officers with no personal
interest in the issuer.
(iv) serve on the board of directors of
any publicly traded company without
prior authorization of the Chairman
and/or President of the Trust
Advisor. Any such authorization
shall be based upon a determination
that the board service would be
consistent with the interest of the
Trust and its shareholders.
5. Exempted Transactions. The prohibitions of Section 4
shall not apply to:
(a) purchases or sales effected in any account
over which the employee has no direct or
indirect influence or control;
(b) purchases or sales which are non-volitional
on the part of the Access Person;
<PAGE>
(c) purchases which are part of an automatic
dividend reinvestment plan; and
(d) purchases effected upon the exercise of
rights issued by an issuer pro rata to all
holders of a class of its securities, to the
extent such rights were acquired from such
issuer, and sales of such rights so
acquired.
6. SANCTIONS
Upon discovering a violation of this Code, the Board of Trustees may
impose such sanctions as they deem appropriate, including, among other
things, a letter of censure or suspension or termination of the
employment of the violator.
7. RETENTION OF RECORDS
This Code of Ethics, a copy of each report made by an Access Person
hereunder, and a record of any violation hereof and any action taken as
a result of such violation, shall be maintained by the Trust and the
Trust Advisor as required under Rule 17j-1.
<PAGE>
EXHIBIT B
SUBSCRIPTION DOCUMENTS
<PAGE>
BERTHEL GROWTH TRUST II SUBSCRIPTION AGREEMENT
--------------------------------------------------------------------------------
1. APPLICATION FOR SHARES. The investor or investors named below (the
"Investor") hereby subscribes for the issuance and sale to the Investor of the
number of shares ("Shares") indicated below of beneficial interest in Berthel
Growth Trust II (the "Trust"), at $10 per Share. In accordance with the
instructions set forth in the Trust's prospectus (the Prospectus") relating to
the offer and sale of the Shares under the caption "Terms of the Offering How to
Subscribe," will make funds available for the purchase of such Shares in the
amount indicated below.
2. RECEIPT OF PROSPECTUS. By subscribing and paying for Shares, the
Investor acknowledges receipt of the Prospectus and the Declaration of Trust.
The Prospectus describes the terms and conditions of the offering of the Shares
and the special risks in purchasing them. The Investor hereby specifically
accepts and adopts each and every provision of the Declaration of Trust, as
amended from time to time, and agrees to be bound thereby.
3. MINIMUM PURCHASE. The minimum purchase for individual retirement
accounts is two Units (200 Shares; $2,000) and all other Investors is five Units
(500 Shares; $5,000).
4. REPRESENTATIONS AND WARRANTIES OF INVESTOR. EACH INVESTOR MUST INITIAL
EACH OF THE REPRESENTATIONS AND WARRANTIES SET FORTH BELOW. By subscribing for
Shares, the Investor represents and warrants to the Trust, the trust advisor,
the Independent Trustees of the Trust, and the Dealer Manager and other selling
agents (collectively, the "Selling Agents") that:
Initial:_____ (i) The Investor is purchasing the Shares for the
Investor's own account and unless disclosed herein is
not acting in a fiduciary capacity or for any person
who directly or indirectly supplied the funds for the
purchase.
Initial:_____ (ii) The Investor recognizes that a public market
for the Shares does not exist and that no market for
the Shares is expected to develop. The assignability
and transferability of the Shares will be governed
by the Declaration of Trust and all applicable
federal and state securities laws. (Minnesota
Investors need not make this representation.)
Initial:_____ (iii) Except as noted below, the Investor (i) has a
net worth (exclusive of home, home furnishings and
automobiles) of at least $60,000 and has an annual
gross income of at least $60,000 or (ii) has a net
worth (exclusive of home, home furnishings and
automobiles) of at least $150,000.
If the Investor is a resident of CALIFORNIA, the Investor (i) has a net
worth (exclusive of homes, home furnishings and automobiles) of at least
$60,000 and an annual gross income of at least $60,000 or (ii) has a net
worth (exclusive of homes, home furnishings and automobiles) of at least
$250,000.
If the Investor is a resident of IOWA OR ARIZONA, the Investor
(i) has a net worth (exclusive of homes, home furnishings and automobiles)
of at least $60,000 and has had a minimum, gross annual income of
$60,000 for each of the last two tax years, and reasonably expects to
have a minimum gross annual income of $60,000 for the current tax year
or (ii) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $225,000, and (iii) the investment in the Trust
represents not more than ten percent (10%) of the Investor's net worth.
5. REPRESENTATIONS AND WARRANTIES OF PLAN. EACH INVESTOR MUST INITIAL EACH
OF THE REPRESENTATIONS AND WARRANTIES SET FORTH BELOW. If the Investor is a
pension, profit sharing or similar plan (including an IRA or Keogh plan) (a
"Plan"), the undersigned individual, employer or trustee with discretion over
the assets of the Plan (the Investment Director") represents and warrants that:
Initial:_____ (i) None of the trust advisor, the independent
trustees, the Corporate Trustee, the Selling Agents
or any of their employees, affiliates or account
executives or financial consultants manages any part
of the Plan's investment portfolio on a discretionary
basis;
Initial:_____ (ii) The Investment Director understands the Trust's
investment objective and policies and has concluded
that the decision to invest in the Trust is
consistent with the provisions of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), regarding fiduciary responsibilities and
requiring diversification of Plan assets (Minnesota
Investors need not make this representation);
Initial:_____ (iii) If the Plan is an IRA or Keogh plan of which a
Selling Agent is the custodian, the Investment
Director directs such Selling Agent, as custodian of
such plan, to subscribe for Shares. In addition, the
Investment Director represents and confirms that all
of the information in the Subscription Agreement
relating to the individual or entity for whose
benefit the Plan is maintained is complete and
accurate; and
Initial:_____ (iv) To the best of the knowledge of the Investment
Director, neither the trust advisor nor any of the
trust advisor's Affiliates is a "party in interest"
or "disqualified person" as defined in Section 3(14)
of ERISA and in Section 4975(e)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), with
respect to the Plan.
6. REPRESENTATIONS AND WARRANTIES OF AGENTS AND FIDUCIARIES. Any person
subscribing for Shares on behalf of the Investor specifically warrants and
represents that such person has authority to subscribe for Shares and thereby
legally to bind the person of which such person is trustee, legal representative
or authorized agent; and agrees fully to indemnify and hold the Trust, the trust
advisor, the Corporate Trustee, the Independent Trustees, their affiliates and
their employees harmless from any and all claims, actions and causes of action
whatsoever which may result from a breach or alleged breach of the
representation contained in this paragraph. Any such agent, trustee or
representative has reasonable grounds to believe that the Investor meets the
suitability standards set forth herein and in the Prospectus, including without
limitation the standards required by the Investor's state of residency.
7. TAXPAYER INFORMATION. By subscribing the Shares, the Investor
certifies under penalties of perjury that:
(a)(i) the Investor is not a "foreign person" ("foreign person"
includes any individual who is neither a citizen nor resident of the United
States and any entity organized under foreign law such as a foreign
corporation, foreign partnership, foreign trust or foreign estate);
(ii) the Investor's mailing address provided to the Trust is correct;
(iii) the Investor's tax year ends on December 31 unless the Investor
has otherwise advised the Trust in writing;
(iv) the Investor's taxpayer identification number provided to the
Trust is correct ; and
(v) the Investor is not subject to backup withholding, either because
the Investor has not been notified that the Investor is subject to backup
withholding as a result of failure to report all interest or dividends or
because the Internal Revenue Service has notified the Investor that the
Investor is no longer subject to backup withholding under Section
3406(a)(1)(C) of the Code; and
the Investor understands that this information may be furnished to the Internal
Revenue Service by the Trust and that any false statement could be punished by
fine, imprisonment, or both; or
(b) the Investor is a foreign investor, and the Investor understands
that distributions may be subject to withholding and that the Investor may
be subject to certain reporting requirements.
8. CONDITIONS TO SUBSCRIPTIONS. This subscription is made subject to the
following terms and conditions:
(1) Any sale or transfer of Shares in California or involving a California
resident requires the prior written consent of the Commissioner of Corporations
of the State of California, except as provided in the Commissioner's
rules. Additionally, all the statements or certificates representing Shares will
bear the following legend:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
Any sale or transfer of the Shares outside California and not involving a
California resident does not require the prior written consent of the
Commissioner of Corporations of the State of California.
(2) If the Investor is neither a United States citizen nor a resident of
the United States, then the Investor agrees (i) to supply the Trust with any and
all information necessary so that the Trust may satisfy any and all United
States legal reporting requirements and (ii) to indemnify the Trust, the trust
advisor, the independent trustees and the Corporate Trustee against any
liability incurred by the Trust as a result of the Trust's failure to withhold
any taxes or comply with any reporting requirements because the foreign investor
did not provide the
<PAGE>
necessary information to the Trust to enable it to withhold the necessary taxes
or fully to comply with such requirements. Furthermore, if the Investor is a
foreign Investor who fails to file timely Internal Revenue Service Form 4224
with the Trust (the first such form must be filed in a duplicate with the Trust
prior to the acceptance of such Investor's subscription), such Investor agrees,
pursuant to the power of attorney to be granted by such foreign Investor to the
trust advisor to sell such Investor's Shares in the event such foreign investor
fails to file timely Form 4224 with the Trust, to surrender to the Trust, at the
request of the trust advisor, such Investor's certificates, if any, representing
the Shares and to execute any and all documents and instruments requested by the
trust advisor in order to consummate such sale or disposition.
(3) The Investor is advised that the Investor is not entitled to cancel,
terminate or revoke this subscription or any agreements of the Investor
hereunder, except as otherwise required under applicable law, and that such
subscription and agreements shall survive the death or disability of the
Investor.
(4) This Subscription Agreement and all rights hereunder shall be governed
by, and interpreted in accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the undersigned agrees to be bound by this Subscription
Agreement by executing the reverse side hereof on the date therein
indicated.
BERTHEL GROWTH TRUST II SUBSCRIPTION QUALIFICATION
AND SIGNATURE PAGE
NUMBER OF SHARES ($10 PER SHARE) (MINIMUM PURCHASE--200 SHARES FOR AN IRA;
500 SHARES FOR ALL OTHER INVESTORS). . . . . . . . . . . . ._________________
TOTAL PRICE ($10 TIMES THE NUMBER OF SHARES). (BEFORE INITIAL CLOSING, MAKE
CHECKS PAYABLE TO FIRSTAR BANK, N.A.--ESCROW AGENT; AFTER INITIAL CLOSING, MAKE
CHECKS PAYABLE TO BERTHEL GROWTH TRUST II) . . . . . . . . . $________________
The Investor or Investors named below, by payment of the purchase price,
subscribes for the purchase of the number of Shares indicated above of Berthel
Growth Trust II at a purchase price of $10 per Share.
By such payment, the Investor further acknowledges receipt of the
Trust's Prospectus, including the Declaration of Trust set forth as Exhibit A
thereto, and the Subscription Agreement set forth as Exhibit B thereto, the
terms of which govern the investment in the Shares being subscribed for. The
Investor further agrees to be bound by the terms of the Declaration of Trust and
the Subscription Agreement, including the power of attorney set forth therein.
By signing below, if the Investor is neither a United States citizen nor a
resident of the United States the Investor irrevocably constitutes and appoints
the trust advisor the true and lawful attorney-in-fact of the Investor with full
power and authority in the name, place and stead of the Investor to sell or
otherwise dispose of (in the sole discretion of the trust advisor and for the
benefit of the Investor) all Shares then held by the Investor if the Investor
fails timely to file with the Trust, fully completed in duplicate, United States
Internal Revenue Service Form 4224 (or successor form thereto) for each taxable
year of the Trust in which the Investor holds Shares. The power of attorney
hereby granted shall be deemed to be coupled with an interest, shall be
irrevocable and shall survive and not be affected by the subsequent death,
incapacity, disability, insolvency, dissolution or termination of the Investor
or any delivery by the Investor of an assignment in whole or in part of the
Investor's interest in the Trust.
REGISTRATION AND ADDRESS DATA (ALL INFORMATION MUST BE
PROVIDED - PLEASE TYPE OR PRINT)
REGISTRATION:
PLEASE PRINT NAME(S) IN WHICH _________________________________________________
Shares ARE TO BE REGISTERED:___________________________________________________
FIRST NAME INITIAL LAST NAME
TAXPAYER I.D. NO. OR SOCIAL SECURITY NUMBER:___________________________________
NAME OF CUSTODIAL FIRM OR INSTITUTION:_________________________________________
TAXPAYER I.D. NO. OF FIDUCIARY:________________________________________________
CHECK IF APPLICABLE: / / Exempt from / / A non-resident alien
federal income tax or foreign
corporation, trust or
estate.
<TABLE>
<CAPTION>
<S> <C> <C>
MANNER IN WHICH TITLE IS TO BE HELD (PLEASE CHECK ONE)
1 / / INDIVIDUAL OWNERSHIP (ONE 4 / / JOINT TENANTS WITH RIGHT OF 8 / / ESTATE
SIGNATURE REQUIRED) SURVIVORSHIP (BOTH 9 / / IRA**
SIGNATURES REQUIRED) 10 / / SEP**
2 / / COMMUNITY PROPERTY 11 / / KEOGH (profit sharing or ______
(BOTH SIGNATURES REQUIRED 5 / / CORPORATION purchase)**
IF BOTH NAMES ARE TO APPEAR 12 / / TRUST (profit sharing, pension,
AS OWNERS OF THE Shares 6 / / PARTNERSHIP living, revocable or other)**
13 / / OTHER ________________________
3 / / TENANTS IN COMMON (BOTH 7 / / AS CUSTODIAN FOR ___________
SIGNATURES REQUIRED) UNDER THE UNIFORM GIFT TO
MINORS ACT OF THE STATE
OF ___________________________*
</TABLE>
* Arizona minors must meet Arizona investor
suitable standards.
** Custodial firm or institution must be specified for Trusts, IRAs,
Keoghs and SEPs.
<TABLE>
<CAPTION>
<S> <C>
MAILING NAME ________________________________________________________________________________________________
(CUSTODIAN, IF APPLICABLE) ACCOUNT NUMBER
________________________________________________________________________________________________
INVESTOR FIRST NAME INITIAL LAST NAME
________________________________________________________________________________________________
ACCT. NO/PAYEE NAME
MAILING ADDRESS FOR CHECKS
(Acct. No./Payee Name, if Applicable)_______________________________________________________________________________________________
________________________________________________________________________________________________
(Custodial Address, if Applicable) STREET ADDRESS
________________________________________________________________________________________________
CITY STATE ZIP CODE
INVESTOR RESIDENCE AND
CORRESPONDENCE ADDRESS ________________________________________________________________________________________________
STREET ADDRESS
________________________________________________________________________________________________
CITY STATE ZIP CODE
INVESTOR TELEPHONE NUMBER - - - -
__________________ __________________
HOME OFFICE
</TABLE>
INVESTOR SIGNATURE (ALL INVESTORS MUST SIGN MANUALLY)
Under penalties of perjury, I certify that (1) the number shown on this form is
my correct taxpayer identification number and (2) I am not subject to backup
withholding either because I have not been notified that I am subject to backup
withholding as a result of failure to report all interest or dividends, or the
Internal Revenue Service has notified me that I am no longer subject to backup
withholding under section 3406(a)(1)(C).
IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE PRESENTLY SUBJECT TO BACKUP
WITHHOLDING, STRIKE OUT THE LANGUAGE UNDER (2) ABOVE BEFORE SIGNING.
<PAGE>
________________________ _______________ _____________________
INVESTOR SIGNATURE DATE INVESTOR SIGNATURE DATE
_______________________________________________________________________________
TITLE OR CAPACITY OF SIGNING PARTY IF THE SUBSCRIBER IS A PARTNERSHIP,
CORPORATION, TRUST OR OTHER NON-INDIVIDUAL ENTITY
ACCOUNT EXECUTIVE ACKNOWLEDGMENT
I am familiar with the standards of suitability set forth in the
Conduct Rules of the NASD, and have made a good faith effort to confirm
that the representations made by the Investor in this Subscription
Agreement regarding the suitability of this program for the Investor,
including representations regarding a financial position appropriate to
enable the Investor to realize to a significant extent the benefits
described in the Prospectus and regarding a fair market net worth
sufficient to sustain the risks inherent in the program, are accurate. I
have informed the Investor of all pertinent facts relating to the liquidity
and marketability of the Shares.
_______________________ __________ ________________________ __________
SIGNATURE OF ACCOUNT DATE SIGNATURE OF DATE
EXECUTIVE BRANCH MANAGER
_______________________________________________________________________________
FOR Trust advisor USE ONLY
<TABLE>
<CAPTION>
<S> <C>
Berthel Fisher & Company Planning, Inc. ACCEPTED BY THE Trust advisor ON:______________________________________
701 Tama Street, Building B (DATE)
PO Box 609 ACCEPTED BY:___________________________________________________________
Marion, Iowa 52302-0609 (NAME)
</TABLE>
<PAGE>
EXHIBIT C
NOTICE TO CALIFORNIA INVESTORS
<PAGE>
NOTICE TO CALIFORNIA INVESTORS
SECTION 260.141.11. RESTRICTION ON TRANSFER
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.141.10 or 260.534 shall cause a copy of
this section to be delivered to each issuee or transferee of such security at
the time the certificate evidencing the security is delivered to the issuee
or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant
to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien given
by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113, or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation,
or by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or 25113
of the Code, provided that no order under Section 25140 or subdivision (a) of
Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section 25110
of the Code but exempt from that qualification requirement by subdivision (1)
of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall
contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
C-2
<PAGE>
INVESTMENT OBJECTIVES
Our investment objective is long term capital appreciation from
investments in small and medium size companies. Current income is not one of
our objectives. To accomplish our objective, we will seek investments in a
variety of companies and industries that may be in various stages of
development, from early stage to mature.
We may invest in debt securities or equity securities or a
combination of both. We may also provide short-term debt financing to
portfolio companies. When debt instruments are purchased, we will often also
purchase options to buy equity securities.
Our investment objectives are discussed in detail in "Investment
Objective and Policies" at page 22.
RISKS
An investment in the Trust involves a number of significant risks.
As a result of these risks, we may not be able to achieve our investment
objective. You should review carefully all of the risk factors set forth in
"Risk Factors." Significant risks include the following:
- Investing in our shares is highly speculative and you could
lose some or all of the amount you invest. Because of our
focus on small and medium sized companies, market
conditions will likely affect the value of our shares.
General economic conditions, and general conditions in
industries in which our portfolio companies do business
will also affect the value of our shares.
- There is currently no secondary market for our shares and
we intend to take steps to prevent such a market from ever
developing. An investment in our shares will be illiquid.
Additionally, we will not redeem our shares on an ongoing
basis and our shareholders cannot exchange their shares for
shares of any other fund.
- We will primarily acquire securities of privately held
small and medium sized businesses in what are commonly
referred to as venture capital investments. These
securities are illiquid, involve a high degree of business
and financial risk and accordingly, are speculative.
- We may borrow funds in order to make investments in
portfolio companies and for operational purposes. In
addition, we intend to form an SBIC that will use leverage
by issuing debentures or senior securities. By using
leverage in either of these two ways, we will magnify gains
or losses in our portfolio value. Leverage will increase
our vulnerability to adverse developments in the general
economy or in our portfolio companies.
<PAGE>
INVESTMENT PROCESS
--------------------------------------------
BERTHEL GROWTH TRUST II
Berthel Growth Trust II is a non-diversified
closed-end investment company organized as a
Delaware Business Trust.
--------------------------------------------
^
|
--------------------------------------------
INDEPENDENT TRUSTEES
The Trust's Independent Trustees must
unanimously approve all investments made by
the Trust.
--------------------------------------------
^
|
--------------------------------------------
BERTHEL PLANNING
Berthel Planning, a registered investment
advisor, recommends investments for approval
by the Trustees.
--------------------------------------------
<PAGE>
NO PERSON IS AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION OTHER THAN AS
CONTAINED IN THIS PROSPECTUS, AND IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE BERTHEL
TRUST, THE CORPORATE TRUSTEE, THE TRUST
DEALER MANAGER, OR THE OTHER SELLING TRUST II
AGENTS. THIS PROSPECTUS IS NOT AN
OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY OF THE
SECURITIES COVERED BY THIS
PROSPECTUS, BY ANY PERSONS IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL
FOR SUCH PERSON TO MAKE SUCH AN OFFER
OR SOLICITATION.
-----------------------
HOW TO INVEST IN BERTHEL GROWTH BERTHEL FISHER & COMPANY
TRUST II FINANCIAL SERVICES, INC.
1. COMPLETE THE SUBSCRIPTION AGREEMENT
2. MAIL CHECK AND SUBSCRIPTION AGREEMENT TO
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
701 Tama Street, Building B
PO Box 609
Marion, Iowa 52302-0609
FOR ADDITIONAL INFORMATION
1-319-447-5700
UNTIL _______ (NINETY (90)
DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS THAT EFFECT
TRANSACTIONS IN THE SHARES, WHETHER
OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
Items 14 through 23 are contained in the Prospectus. Please see Cross Reference
Sheet, p.2.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statement of the Registrant is included in the
Prospectus.
2. Exhibits
<TABLE>
<S> <C>
2.a Certificate of Trust
2.b Not Applicable
2.c Not Applicable
2.d Form of Declaration of Trust (included
as Exhibit A to the Prospectus)
2.e Not Applicable
2.f Not Applicable
2.g Form of Management Agreement
2.h-1 Form of Dealer Manager Agreement
2.h-2 Form of Selected Sales Agent Agreement
2.i Not Applicable
2.j Form of Safekeeping Agreement
2.k Form of Escrow Agreement
2.l Opinion and Consent of
Bradley & Riley, P.C.
2.m Not Applicable
2.n-1 Consent of Independent Auditors
2.n-2 Tax Opinion and Consent of
Bradley & Riley, P.C.*
2.o Not Applicable
2.p Not Applicable
2.q Not Applicable
2.r Not Applicable
2.s Powers of Attorney
27 Financial Data Schedule
</TABLE>
-----------------------
* To be filed by amendment.
Item 25. Marketing Arrangements
There are no items to report.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
<TABLE>
<S> <C>
SEC Registration Fees $ 7,920.00
National Association of Securities Dealers, Inc. fees $ 3,500.00
Transfer Agents' Fees $ None
-2-
<PAGE>
Printing and related delivery expenses $ 125,000.00*
Fees and expenses of qualification under state
securities laws $ 65,000.00*
Legal fees and expenses $ 160,000.00*
Accounting fees and expenses $ 50,000.00*
------------------
Total $ 411,420.00*
</TABLE>
----------------------
* Estimated.
Item 27. Persons Controlled by or Under Common Control
Upon the conclusion of the public offering of Shares, it is
anticipated that no person will be controlled by or under common control with
the Registrant.
Item 28. Number of Holders of Securities (as of the effective date
of this Registration Statement)
Title of Class Number of Record Holders
-----------------------------------------------------------
Beneficial Interest in Trust ("Shares") Two (2)
Item 29. Indemnification
The Registrant's Declaration of Trust contains the following
provisions regarding indemnification:
3.7 INDEMNIFICATION OF MANAGING PERSONS. (a) Each Managing
Person shall be indemnified from the Trust Property against any
losses, liabilities, judgments, expenses and amounts paid in
settlement of any claims sustained by such Managing Person in
connection with the Trust or claims by the Trust, in right of the
Trust or by or in right of any Shareholders, if the Managing Person
would not be liable under the standards of Section 3.6 and, in the
case of Managing Persons other than the Trustees and the Trust
Advisor, the indemnitees were acting within the scope of authority
validly delegated to them by the Trustees or the Trust Advisor. The
termination of any action, suit or proceeding by judgment, order or
settlement shall not, of itself, create a presumption that the
Managing Person charged did not act in good faith and in a manner
that he reasonably believed was in the Trust's best interests. To
the extent that any Managing Person is successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense
of any claim, issue or matter therein, the Trust shall indemnify
that Managing Person against the expenses, including attorneys'
fees, actually and reasonably incurred by him in connection
therewith. Any indemnification is recoverable only out of Trust net
assets and not from Shareholders.
(b) Notwithstanding the foregoing, no Managing Person or
any broker-dealer shall be indemnified, nor shall expenses be
advanced on its behalf, for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state
securities laws, unless (i) there has been a successful adjudication
on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) those claims
have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee or (iii) a
court of competent jurisdiction approves a settlement of the claims
against the particular indemnitee. In any claim for federal or state
securities law violations, the party seeking indemnification shall
place before the court the positions of the Securities and Exchange
Commission and state securities administrators to the extent
required by them with respect to the issue of indemnification for
securities law violations.
(c) The Trust shall not incur the cost of that portion of
any insurance, other than public liability insurance, that insures
any person against any liability for which indemnification hereunder
is prohibited.
-3-
<PAGE>
3.8 GENERAL PROVISIONS. The following provisions shall
apply to all rights of indemnification and advances of expenses
under this Declaration and all liabilities described in this Article
3:
(a) Expenses, including attorneys' fees, incurred by a
Managing Person in defending any action, suit or proceeding may be
paid by the Trust in advance of the final disposition of the action,
suit or proceeding upon receipt of an undertaking by the recipient
to repay such amount if it shall ultimately be determined that the
Managing Person is not entitled to be indemnified by the Trust under
this Declaration or otherwise and if at least one of the following
conditions is satisfied: (i) the Managing Person provides
appropriate security for the undertaking; (ii) the Managing Person
and the Trust are insured against losses or expenses of defense or
settlement so that the advances may be recovered; or (iii) either a
majority of the Independent Trustees who are not parties to the
action, suit or proceeding or independent legal counsel in a written
opinion determines, based upon a review of the then readily
available facts, that there is reason to believe that the Managing
Person will be found to be entitled to indemnification under Section
3.7. In so doing, it shall not be necessary to employ hearing or
trial-like procedures. Notwithstanding the foregoing, the
advancement of Trust funds to a Sponsor or its Affiliates for legal
expenses and other costs incurred as result of any legal action for
which indemnification is being sought is permissible only if all of
the following conditions are satisfied: (a) The legal action relates
to acts or omissions with respect to the performance of duties or
services on behalf of the Trust; (b) The legal action is initiated
by a third party who is not a Shareholder, or the legal action is
initiated by a Shareholder and a court of competent jurisdiction
specifically approves such advancement; (c) The Sponsor or its
Affiliates undertake to repay the advanced funds to the Trust,
together with the applicable legal rate of interest thereon, in
cases in which such person is found not to be entitled to
indemnification.
(b) Rights to indemnification and advances of expenses
under this Declaration are not exclusive of any other rights to
indemnification or advances to which a Managing Person or Investor
may be entitled, both as to action in a representative capacity or
as to action in another capacity taken while representing another.
(c) Each Managing Person shall be entitled to rely upon the
opinion or advice of or any statement or computation by any counsel,
engineer, accountant, investment banker or other person retained by
such Managing Person or the Trust which he believes to be within
such person's professional or expert competence. In so doing, he
will be deemed to be acting in good faith and with the requisite
degree of care unless he has actual knowledge concerning the matter
in question that would cause such reliance to be unwarranted.
3.10 LIABILITY INSURANCE. The Trust may not incur the cost
of that portion of liability insurance which insures the Sponsor for
any liability as to which the Sponsor is prohibited from being
indemnified.
12.12 INDEMNIFICATION OF DEALER MANAGER. Notwithstanding
anything to the contrary contained in this Declaration, no person
acting as an underwriter for the Shares shall be indemnified for any
losses, liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless one or more of
the following conditions are met: (a) There has been a successful
adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee; (b) Such
claims have been dismissed with prejudice on the merits by a court
of competent jurisdiction as to the particular indemnitee; (c) A
court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee and finds that indemnification of
the settlement and related costs should be made, and the court of
law considering the request for indemnification has been advised of
the position of the Securities and Exchange Commission and the
published position of any state securities regulatory authority in
which Shares were offered or sold as to indemnification for
violations of securities laws.
-4-
<PAGE>
14.5 LIQUIDATING TRUSTEE. (a) If the dissolution of the
Trust is caused by circumstances under which no Trust Advisor shall
be acting as a Trust Advisor or if all liquidating Trust Advisors
are unable or refuse to act, a Majority of the Shareholders shall
appoint a liquidating trustee who shall proceed to wind up the
business affairs of the Trust. The liquidating trustee shall have no
liability to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of the
liquidating trustee if the liquidating trustee, in good faith,
determined that such course of conduct was in the best interests of
the Shareholders and such course of conduct did not constitute
negligence or misconduct of the liquidating trustee. The liquidating
trustee shall be indemnified by the Trust against any losses,
judgments, liabilities, expenses and amounts paid in settlement of
any claims sustained by it in connection with the Trust, provided
that the same were not the result of negligence or misconduct of the
liquidating trustee.
(b) Notwithstanding the above, the liquidating trustee
shall not be indemnified and no expenses shall be advanced on its
behalf for any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws, unless
(1) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular indemnitee, or (2) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to
the particular indemnitee, or (3) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee.
(c) In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall
place before the court the position of the Securities and Exchange
Commission and the Massachusetts Securities Division (if
applicable), or other applicable securities administrators if
required, with respect to the issue of indemnification for
securities law violations.
(d) The Trust shall not incur the cost of that portion of
any insurance, other than public liability insurance, which insures
any party against any liability the indemnification of which is
herein prohibited.
The Dealer Manager Agreement between the Dealer Manager and the
Trust contains the following provisions regarding indemnification:
6. INDEMNIFICATION AND CONTRIBUTION. (a) The Trust and the
Trust Advisor agree to indemnify and hold harmless you and each
person, if any, who controls you within the meaning of the 1933 Act,
and each Soliciting Dealer and each person, if any, who controls a
Soliciting Dealer within the meaning of the 1933 Act, and the Trust
and the Trust Advisor agree to indemnify and hold harmless you and
each person, if any, who controls you within the meaning of the 1933
Act against any losses, claims, damages, liabilities, or expenses
(including the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the 1933 Act,
or any other statute or at common law, on the ground or alleged
ground that any Preliminary Prospectus, the Registration Statement,
the Prospectus (or any Preliminary Prospectus, the Registration
Statement, the Prospectus, or any Summary Prospectus as from time to
time amended or supplemented), or any supplemental sales material
supplied or approved in writing by the Trust or the Trust Advisor
(whether written or otherwise), provided that such supplemental
sales material is accompanied with or preceded by a Prospectus, (i)
includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (ii)
violates Section 206(4) of the Advisers Act or Rule 206(4)-1
promulgated thereunder, unless in either case such statement or
omission was made in reliance upon, and in conformity with, written
information furnished to the Trust or the Trust Advisor by you or a
Soliciting Dealer specifically for use in the preparation thereof;
provided that in no case is the Trust or the Trust Advisor, as the
case may be, to be liable with respect to any claims made against
you, any Soliciting Dealer or any such controlling person unless
you, such Soliciting Dealer or such controlling person shall have
notified the Trust or the Trust Advisor, as the
-5-
<PAGE>
case may be, in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the
claim shall have been served upon you, such Soliciting Dealer or
such controlling person, but failure to notify the Trust or the
Trust Advisor, as the case may be, of any such claim shall not
relieve it from any liability which it may have to you, such
Soliciting Dealer or such controlling person otherwise than on
account of the indemnity agreement contained in this Section. The
Trust or the Trust Advisor, as the case may be, shall be entitled to
participate at its own expense in the defense, or, if it so elects,
to assume the defense of any suit brought to enforce any such
liability, but, if the Trust or the Trust Advisor elects to assume
the defense, such defense shall be conducted by counsel chosen by
it. If the Trust or the Trust Advisor elects to assume the defense
of any such suit and retain such counsel, you, such Soliciting
Dealer or such controlling person or persons, defendant or
defendants in the suit, may retain additional counsel but shall bear
the fees and expenses of such counsel unless (i) the Trust or Trust
Advisor, as the case may be, shall have specifically authorized the
retaining of such counsel or (ii) the parties to such suit include
you, such Soliciting Dealer or such controlling person or persons,
and the Trust or the Trust Advisor, as the case may be, and you,
such Soliciting Dealer or such controlling person or persons have
been advised by counsel that one or more legal defenses may be
available to you or to them which may not be available to the Trust
or the Trust Advisor, as the case may be, in which case the Trust or
the Trust Advisor, as the case may be, shall not be entitled to
assume the defense of such suit notwithstanding its obligation to
bear the fees and expenses of such counsel. This indemnity agreement
shall be in addition to any liability which the Trust or the Trust
Advisor might otherwise have. Any indemnification is recoverable
only out of Trust net assets and not from Shareholders.
(b) You and each Soliciting Dealer agree, severally and not
jointly, to indemnify and hold harmless the Trust, each Trustee, the
Trust Advisor, each of the Trust Advisor's directors, each of the
Corporate Trustee's or Trust Advisor's officers who have signed the
Registration Statement and each person, if any, who controls the
Trust or the Trust Advisor within the meaning of the 1933 Act
against any losses, claims, damages, liabilities or expenses
(including, unless you elect to assume the defense, the reasonable
cost of investigating and defending against any claims therefor and
counsel fees incurred in connection therewith), joint or several,
which may be based upon the 1933 Act, or any other statute or at
common law, on the ground or alleged ground that any Preliminary
Prospectus, the Registration Statement, or the Prospectus (or any
Preliminary Prospectus, the Registration Statement, or the
Prospectus, as from time to time amended and supplemented) includes
an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, but only insofar as any such
statement or omission was made in reliance upon, and in conformity
with, written information furnished to the Trust or the Trust
Advisor by you or such Soliciting Dealer specifically for use in the
preparation thereof; provided, however, that in no case are you or a
Soliciting Dealer to be liable with respect to any claims made
against the Trust, a Trustee, or a person against whom the action is
brought unless the Trust, such Trustee, or such person shall have
notified you or such Soliciting Dealer in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served
upon the Trust, such Trustee, or such person, but failure to notify
you or such Soliciting Dealer of such claim shall not relieve you or
such Soliciting Dealer from any liability that you or such
Soliciting Dealer may have to the Trust, such Trustee, or such
person otherwise than on account of the indemnity agreement
contained in this Section. You and each Soliciting Dealer shall be
entitled to participate at your and his expense, respectively, in
the defense, or if you or he so elect(s) , to assume the defense of
any suit brought to enforce any such liability, but, if you or he
elect(s) to assume the defense, such defense shall be conducted by
counsel chosen by you or him. If you or such Soliciting Dealer
elect(s) to assume the defense of any such suit and retain such
counsel, the Trust, the Trustees, said officers and directors, and
any controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel so
retained. You or such Soliciting Dealer shall not be liable to
indemnify any person for any settlement of any such claim effected
without your or his consent. This indemnity agreement shall be in
addition to any liability that you or such Soliciting Dealer might
otherwise have.
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<PAGE>
(c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party
under subsection (a) above in respect of any losses, claims,
damages, liabilities, or expenses (or actions in respect thereof)
referred to herein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages, liabilities, or expenses (or actions
in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Trust and the Trust Advisor on
the one hand and the Soliciting Dealers on the other or the Trust
Advisor on the one hand and you on the other, as the case may be,
from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Trust and the Trust
Advisor on the one hand and the Soliciting Dealers on the other or
the Trust Advisor on one hand and you on the other, as the case may
be, in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses (or actions in
respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Trust and the
Trust Advisor on the one hand and the Soliciting Dealers on the
other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by
the Trust and the Trust Advisor bear to the total selling
commissions received by the Soliciting Dealers. The relative
benefits received by the Trust Advisor on the one hand and you on
the other shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received
by the Trust and the Trust Advisor bear the total selling
commissions received by you. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Trust, the Trust Advisor, you or the Soliciting Dealers and the
parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission. The
Trust, the Trust Advisor, you and the Soliciting Dealers agree that
it would not be just and equitable if contribution were determined
by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to
above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities, or expenses (or
actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such claim. Notwithstanding the provisions of this subsection (c),
neither you nor a Soliciting Dealer shall be required to contribute
any amount in excess of the amount by which the total price at which
the Shares distributed to the public by you or such Soliciting
Dealer exceeds the amount of any damages that you or such Soliciting
Dealer have otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation.
(d) Notwithstanding any other provision of this Agreement:
(i) No provision of this Agreement
(including, without limitation, subsections (a)
and (c) of this Section 6) shall allow
indemnification to you, a Soliciting Dealer or any
person who controls you or a Soliciting Dealer
within the meaning of the 1933 Act against any
liability, whether or not there has been an
adjudication of liability, to the Trust or its
partners to which you, a Soliciting Dealer or any
such controlling person would otherwise be subject
by reason of (A) willful misfeasance, (B) bad
faith, or (C) gross negligence, in the performance
of your or any such person's respective duties
under this Agreement, or by reason of (D) reckless
disregard of your or such person's respective
obligations and duties under this Agreement (any
of (A) through (D) being herein referred to as
"Disabling Conduct"). Further, the advancement of
Trust funds to a Sponsor or its Affiliates for
legal expenses and other costs incurred as result
of any legal action for which indemnification is
being sought is permissible only if at least one
of the following
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<PAGE>
conditions is satisfied: (i) the Indemnitee
provides appropriate security for the undertaking;
(ii) the Trust is insured against losses or
expenses of defense or settlement so that the
advances may be recovered; or (iii) either a
majority of the Independent Trustees who are not
parties to the action, suit or proceeding or
independent legal counsel in a written opinion
determines, based upon a review of the then
readily available facts, that there is reason to
believe that the Indemnitee will be found to be
entitled to indemnification under this agreement.
In so doing, it shall not be necessary to employ
hearing or trial-like procedures. Notwithstanding
the foregoing, the advancement of Trust funds to
an Indemnitee for legal expenses and other costs
incurred as a result of any legal action for which
indemnification is being sought is permissible
only if all of the following conditions are
satisfied: (a) the legal action relates to acts or
omissions with respect to the performance of
duties or services on behalf of the Trust; (b) the
legal action is initiated by a third party who is
not a Shareholder, or the legal action is
initiated by a Shareholder and a court of
competent jurisdiction specifically approves such
advancement; and (c) the Sponsor or its Affiliates
undertake to repay the advanced funds to the
Trust, together with the applicable legal rate of
interest thereon, in cases in which such person is
found not to be entitled to indemnification.
(ii) No indemnification shall be allowed
to you, a Soliciting Dealer or any such
controlling person under this Agreement unless one
or more of the following conditions are met: (A) a
court or other body before which the proceeding
was brought has reached a final decision on the
merits that the person to be indemnified (the
"Indemnitee") was not liable by reason of
Disabling Conduct; (B) in the absence of such a
decision, there has been a reasonable
determination, based upon a review of the facts,
that the Indemnitee was not liable by reason of
Disabling Conduct, by (1) the vote of a majority
of the Independent Trustees of the Trust who are
not parties to the proceeding or (2) independent
legal counsel in a written opinion; (C) there has
been a successful adjudication on the merits of
each count involving alleged securities law
violations as to the particular indemnitee; (D)
such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as
to the particular indemnitee; or (E) a court of
competent jurisdiction approves a settlement of
the claims against a particular indemnitee and
finds that indemnification of the settlement and
related costs should be made, and the court of law
considering the request for indemnification has
been advised of the position of the Securities and
Exchange Commission and the published position of
any state securities regulatory authority in which
Shares were offered or sold as to indemnification
for violations of securities laws.
The Selected Sales Agent Agreement between the Dealer Manager and
Selected Sales Agents contains the following provisions regarding
indemnification:
9. INDEMNIFICATION.
a. The Agent shall indemnify, defend and hold harmless the
Dealer Manager, its officers, directors, employees and agents
against all losses, claims, demands, liabilities and expenses,
including reasonable legal and other expenses incurred in defending
such claims or liabilities, whether or not resulting in any
liability to the Dealer Manager, its officers, directors, employees
or agents, which they or any of them may incur, arising out of the
offer or sale by the Agent of any Shares, pursuant to this
Agreement, or arising out of the breach by the Agent of any of the
terms and conditions of this Agreement, including but not limited to
alleged violations of the Securities Act and/or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), OTHER THAN
any claim, demand or liability arising from any untrue statement or
alleged untrue statement of a material fact contained in the
Prospectus or the Registration Statement, as filed and in effect
with the SEC, or any amendment or supplement thereto, or in any
application prepared by
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<PAGE>
the Trust Advisor and filed with any state regulatory agency in
order to register or qualify the Shares under the securities laws
thereof (the "blue sky applications"), or in any supplemental sales
material which is prepared by the Trust Advisor for distribution to
prospective investors, or which shall arise out of or be based upon
any omission or alleged omission to state therein a material fact
required to be stated in the Prospectus or the Registration
Statement or any of the blue sky applications or such supplemental
sales material necessary to make the statements therein not
misleading. This indemnity provision shall survive the termination
of this Agreement.
b. The Dealer Manager shall indemnify, defend and hold
harmless the Agent, its officers, directors, employees and agents
against all losses, claims, demands, liabilities and expenses,
including reasonable legal and other expenses incurred in defending
such claims or liabilities, whether or not resulting in any
liability to the Agent, its officers, directors, employees or
agents, which they or any of them may incur, including but not
limited to alleged violations of the Securities Act and/or the
Exchange Act, BUT ONLY to the extent that such losses, claims,
demands, liabilities and expenses shall arise or be based upon any
untrue statement or alleged untrue statement of a material fact
contained in the Prospectus or the Registration Statement, as filed
and in effect with the SEC, or any amendment or supplement thereto,
or in any of the blue sky applications, or in any supplemental sales
material which is prepared by the Trust Advisor for distribution to
prospective investors, or which shall arise out of or be based upon
any omission or alleged omission to state therein a material fact
required to be stated in the Prospectus or the Registration
Statement or the blue sky applications or such supplemental sales
material necessary to make the statements made therein not
misleading. This indemnity provision shall survive the termination
of this Agreement.
The Registrant will comply with the indemnification requirements of
Investment Company Act Release No. 7221 (June 9, 1972) and Investment Company
Act Release No. 11330 (September 2, 1980).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of
such issue.
Item 30. Business and Other Connections of Investment Advisor
Please see "Management Arrangements" for a description of the
relationship among the Trust, the trust advisor, and executive officers of
the trust advisor.
Item 31. Location of Accounts and Records.
Mr. Henry Royer, President of the trust advisor, maintains physical
possession of each account, book or other document required to be maintained
by Section 30(a) of the Investment Company Act of 1940 and the rules
thereunder at the Registrant's headquarters, 701 Tama Street, Building B,
Marion, Iowa.
Item 32. Management Services
There are no items to report.
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Item 33. Undertakings
The Registrant undertakes to do the following:
1. Suspend the offering of Shares until the Prospectus is amended if
(a) subsequent to the effective date of its registration statement, the net
asset value declines more than ten percent (10%) from its net asset value as
of the effective date of the Registration Statement or (b) the net asset
value increases to an amount greater than its net proceeds as stated in the
Prospectus;
2. File a post-effective amendment with certified financial
statements showing the initial capital received before accepting
subscriptions for more than twenty-five (25) persons, if the Registrant
proposes to raise its initial capital under Section 14(a)(3) of the 1940 Act;
3. If the securities are being registered in reliance on
Rule 415 under the 1933 Act:
a. To file, during any period in which offers or sales are
being made, a post-effective amendment to the Registration
Statement:
i. to include any prospectus required by Section
10(a)(3) of the 1933 Act;
ii. to reflect in the prospectus any facts or
events after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement; and
iii. to include any material information with
respect to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement;
b. for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial
bona fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
4. If the Registrant is filing a Registration Statement
permitted by Rule 430A under the 1933 Act:
a. for the purpose of determining any liability under the
1933 Act, information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed
by the Registrant under Rule 497(h) under the 1933 Act
shall be deemed to be part of this Registration Statement
as of the time it was declared effective; and
b. for the purpose of determining any liability under the
1933 Act, each post-effective amendment that contains a
form of Prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Marion, and State of Iowa, on the 7th day of July,
2000.
BERTHEL GROWTH TRUST II
By: Berthel Fisher & Company Planning, Inc., its
Trust Advisor
By /s/ Thomas J. Berthel
-------------------------------------
THOMAS J. BERTHEL, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Thomas J. Berthel July 7, 2000
------------------------------------------------------
THOMAS J. BERTHEL, Chief Executive
Officer, and Chairman of the Board of
Berthel Fisher & Company Planning,
Inc. (principal executive officer);
president of TJB Capital Management Inc.
/s/ Henry Royer July 7, 2000
------------------------------------------------------
HENRY ROYER, President of the
Berthel Fisher & Company Planning, Inc.
/s/ Ronald O. Brendengen July 7, 2000
------------------------------------------------------
RONALD O. BRENDENGEN, Director, Chief
Financial Officer and Treasurer of
Berthel Fisher & Company Planning,
Inc. (principal financial and
accounting officer)
/s/ Leslie D. Smith July 7, 2000
------------------------------------------------------
LESLIE D. SMITH, Secretary and Director of
Berthel Fisher & Company Planning,
Inc.
/s/ Von Elbert July 7, 2000
------------------------------------------------------
VON ELBERT, Director of Berthel Fisher &
Company Planning, Inc.
</TABLE>
---------------------
*Pursuant to Power of Appointment
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<S> <C>
2.a Certificate of Trust
2.d Form of Declaration of Trust (included
as Exhibit A to the Prospectus)
2.g Form of Management Agreement
2.h-1 Form of Dealer Manager Agreement
2.h-2 Form of Selected Sales Agent Agreement
2.j Form of Safekeeping Agreement
2.k Form of Escrow Agreement
2.l Opinion and Consent of
Bradley & Riley, P.C.
2.n-1 Consent of Independent Auditors
2.s Powers of Attorney
27 Financial Data Schedule
</TABLE>
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