<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2000
REGISTRATION NO. 333-41016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ PRE-EFFECTIVE AMENDMENT NO. 2
/ / POST-EFFECTIVE 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)
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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>
(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.
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--------------------------------------------------------------------------------
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
CROSS REFERENCE SHEET
FORM N-2
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN PROSPECTUS
---- ------------------------------------------ ------------------------------------------
<C> <S> <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
PART C--OTHER INFORMATION
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 20, 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.
<PAGE>
PRELIMINARY PROSPECTUS
[BERTHEL GROWTH TRUST II LOGO]
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. We will make venture capital investments, by which we
mean investments in companies that have not yet sold shares in an initial public
offering. These opportunities may include seed stage, development stage and
expansion stage financing.
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 $1.00 per share on the shares you buy.
<TABLE>
<CAPTION>
PRICE MAXIMUM PROCEEDS
TO PUBLIC SALES LOAD(1) TO TRUST(2)
<S> <C> <C> <C>
Per Share (500 share minimum)................. $10 $1 $9
Total Minimum................................. $6,000,000 $600,000 $5,400,000
Total Maximum................................. $25,000,000 $2,500,000 $22,500,000
Total Maximum if Option Exercised(3).......... $30,000,000 $3,000,000 $27,000,000
</TABLE>
(See footnotes on following page)
------------------------
THIS INVESTMENT CARRIES MANY RISKS. YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR FACTORS THAT SHOULD BE
CONSIDERED BEFORE INVESTING IN OUR SHARES. THESE RISKS INCLUDE:
- 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. Even if our
shareholders are able to sell their shares, the sales will probably be
made at a price below the net asset value of the 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 51.
- 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, and involve a high degree of
business and financial risk.
------------------------
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.
EQUITY SECURITIES INVESTMENTS, INC.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 2000.
<PAGE>
(1) 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 OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Fee Table and Expenses Summary.............................. 5
Risk Factors................................................ 6
Forward Looking Statements.................................. 13
Use of Proceeds............................................. 14
Compensation and Fees....................................... 15
The Business................................................ 18
Investment Objective and Policies........................... 18
Management Arrangements..................................... 30
Conflicts of Interest....................................... 38
Distribution and Allocations................................ 42
Plan of Distribution........................................ 44
Terms of the Offering....................................... 46
Investor Suitability Standards.............................. 48
Transferability of Shares................................... 51
Summary of The Declaration of Trust......................... 53
Tax Matters................................................. 59
Regulation.................................................. 76
Legal Matters............................................... 79
Experts..................................................... 79
Additional Information...................................... 80
Reports to Shareholders..................................... 80
Financial Statements........................................ F-1
Exhibit A--Declaration of Trust............................. A-1
Exhibit B--Subscription Documents........................... B-1
Exhibit C--Notice to California Investors................... C-1
</TABLE>
i
<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."
<TABLE>
<S> <C>
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. By this we mean investments in companies
that have not yet sold shares in an initial public
offering. These opportunities may include seed stage,
development stage and expansion stage financing. 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
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
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 a "small business
investment company" ("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.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
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
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 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 of net realized gains from
investments. 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. We will pay organizational and offering
expenses from the proceeds of the offering, which will
not exceed 3.5% of the aggregate purchase price of all
shares sold. In addition, we will incur expenses in
acquiring portfolio assets, which will not exceed 3.5%
of the aggregate purchase price of all shares sold. We
will pay each of our independent 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. 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
amount originally invested by investors. Thereafter, we
will make all distributions other than distributions of
net realized gains from investment 99% to the
shareholders and 1% to Berthel Planning, and will
distribute net realized gains from investment 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 an SBIC as a subsidiary. If
funds are available to do so, we 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.
</TABLE>
4
<PAGE>
FEE TABLE AND EXPENSES SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load (as a percentage of offering price)(1)........... 7.00%
Syndication fee............................................. 1.00%
Underwriting fee............................................ 2.00%
Organizational and Offering Expenses........................ 3.50%
Acquisition Fees and Acquisition Expenses(2)................ 3.50%
</TABLE>
ANNUAL EXPENSES (as a percentage of net assets attributable to shares)(3)
<TABLE>
<S> <C> <C>
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>
------------------------
(1) 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.
(2) These amounts may not exceed 3.50% of offering proceeds. However, we expect
that these amounts will be substantially less than 3.50% of offering
proceeds.
(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. The Trust will also pay incentive distributions to
Berthel Planning equal to 20% of distributions from the Trust of net
realized gains from investment after all shareholders have received
distributions equal to the amount of their original investments.
(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.
5
<PAGE>
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 38.
INVESTMENT RISKS
INVESTING IN OUR SHARES IS HIGHLY SPECULATIVE AND YOU COULD LOSE SOME OR ALL
OF THE AMOUNT YOU INVEST.
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.
6
<PAGE>
OUR PORTFOLIO COMPANIES WILL LIKELY HAVE SIGNIFICANT COMPETITION.
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. In particular, (i) we may
refuse to permit a transfer if the transfer would have adverse regulatory
consequences or it the transfer would violate the Publicly Traded Partnership
provisions of the Internal Revenue Code; (ii) our written approval will be
required for transfers; (iii) as a condition of transfers, a party acquiring
Shares will be required to agree to comply with all the terms of this
Declaration and to assure us in writing that the transfer was made in compliance
with the Declaration of Trust and all applicable laws and regulations including
the rules and regulations restricting that must be followed to prevent the Trust
from being treated as a Publicly Traded Partnership. 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."
7
<PAGE>
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 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 INVEST IN A
SINGLE GEOGRAPHIC AREA, WHICH WOULD BE LIKELY TO 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. We will not permit in excess
of 24% of our portfolio to become concentrated in a single narrow industry.
Significant concentration in a limited number of investments or a single
geographic area is likely to increase the risk that we will suffer losses. See
"Portfolio Concentration" under "Investment Objective and Policies."
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;
- 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;
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<PAGE>
- 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 120 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.
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.
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<PAGE>
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,
- 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
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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 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.
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."
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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 "Investment Monitoring and Follow-On
Support" 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 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;
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- 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.
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
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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
---------------------------------------------------
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%
Organization and offering expenses(2)......... $ (210,000) 3.5% $ (875,000) 3.5%
Acquisition fees and expenses(3).............. $ (210,000) 3.5% $ (875,000) 3.5%
Net proceeds available for operation
of the Trust.................................. $4,980,000 83.0% $ 20,750,000 83.0%
</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. Expenses of organization and offering 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 if we sell $25,000,000 of Units, we expect the maximum amount to be
spent on other expenses of organization and offering expenses will be less
than $875,000 if we sell $25,000,000 of Units.
(3) We will not pay expenses in acquiring assets for our portfolio in excess of
3.5% of the gross proceeds. We expect our actual expenses in acquiring
assets for our portfolio to be less than 3.5% of the gross proceeds.
Expenses in acquiring assets for our portfolio in excess of 3.5% of gross
proceeds will be paid by Berthel Planning.
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
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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 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 acquisition 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. The 3.5% of the proceeds of this offering that we may spend on
acquisition fees and expenses is in addition to the 3.5% of the offering
proceeds that we will incur in organizational and offering costs. 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.
ORGANIZATION AND OFFERING PHASE
<TABLE>
<CAPTION>
PERSON
RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
--------------------- ------------------------------------------ ---------------------------------------------
<S> <C> <C>
Berthel Financial Selling commissions for the sale of Selling commissions will vary between 2% and
Services and shares. 7% of the purchase price of all shares sold.
selected sales The amount of commission depends on the
agents number of shares purchased by a particular
investor. Some of the selling commissions
will be paid to selling agents. See "Terms of
the Offering."
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERSON
RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
--------------------- ------------------------------------------ ---------------------------------------------
<S> <C> <C>
Berthel Financial Underwriting fees for facilitating the We will pay an underwriting fee of 2% of the
Services and offering of the shares. purchase price of all shares sold. The fee
selected sales will be $120,000 if 600,000 shares are sold,
agents and $500,000 if 2,500,000 shares are sold.
Berthel Financial Syndication Fee for services in recruiting We will pay Berthel Financial Services a fee
Services the selected sales agents. 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 and Amount of reimbursement shall not exceed 3.5%
offering expenses, including legal and of the aggregate purchase price of all shares
accounting fees and printing and mailing sold. Any organizational and offering
expenses, paid or incurred by Berthel expenses (excluding selling commissions and
Planning in connection with organizing the discounts, the underwriting fee and the
Trust and offering the shares. syndication fee) of the Trust in excess of
this amount will be paid by Berthel Planning.
OPERATING PHASE
Berthel Planning Management Fee for providing management We will pay Berthel Planning an annual
services to the Trust. 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 distributions. After all shareholders have received
distributions equal to the amount of their
original investments, Berthel Planning will
receive incentive distributions equal to 20%
of distributions from the Trust of net
realized gains from investments. See
"Management Arrangements." We do not know
what the actual amount of the incentive
distributions will be because the amount
depends on future operations.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERSON
RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
--------------------- ------------------------------------------ ---------------------------------------------
<S> <C> <C>
Berthel Planning Administration expense reimbursement. We will pay to Berthel Planning and its
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 reimbursement. The Trust will reimburse out-of-pocket 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.
Independent trustees Annual fee, meeting fees and reimbursement We will pay each of the independent trustees
of expenses. 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 fees or
Services 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 expenses. The Trust may pay fees and 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>
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<PAGE>
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
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
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<PAGE>
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 not permit in
excess of 24% of our portfolio to become concentrated in a single industry.
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 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.
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.
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
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<PAGE>
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.
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.
- 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.
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<PAGE>
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 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.
In addition to the foregoing limitations on concentration of our investments
in a limited number of investments, we will not permit in excess of 24% of our
portfolio to become concentrated in a single narrow industry.
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 are not aware that the SEC
has granted exemptive relief of this type in the past, and therefore believe
that it is unlikely we will be able to obtain this type of exemptive relief. We
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<PAGE>
may, nonetheless, 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 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
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<PAGE>
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.
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.
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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.
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 these
costs are not paid by the portfolio 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.
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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
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.
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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
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, and 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.
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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 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." We have not yet determined which of
these two forms of SBIC "leverage" we would seek.
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
SBA financing in the form of "participating securities" 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 that
an SBIC may use
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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 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.
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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 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.
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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.
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
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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. Generally, the trust advisor will be allocated one percent (1%) of the
losses for any fiscal period, and will be entitled to one percent (1%) of
distributions until shareholders receive return of the entire amount of their
investments. Thereafter, the trust advisor will receive as incentive
distributions, twenty percent (20%) of all distributions of net realized gains
from investment made by the Trust. 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. We intend that the incentive distributions to the trust
advisor will be treated as distributions of profits, and not as the payment by
the Trust of an expense. Accordingly, we do not expect that the incentive
distributions paid by the Trust will reduce the amount of taxable income
distributed by 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
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
701 Tama Street Chief Executive Officer of Berthel Fisher & Company and
Building B Berthel Planning affiliated 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
Building B Cedar Rapids (merged into
PO Box 609 Firstar Bank of Cedar Rapids,
Marion, IA 52302-0609 N.A. in 1991) from 1983 to
1994. From 1994 to 1997,
President and CEO of River
City Bank, Sacramento,
California. President of
Berthel Planning from 1999.
</TABLE>
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<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH REGISTRANT DURING PAST FIVE YEARS(1)
---------------- --------------- -------------------------
<S> <C> <C>
Von Elbert* Director of Berthel Planning Vice President, Treasurer and
701 Tama Street Chief Financial Officer of
Building B Galt Sand Company from 1988
PO Box 609 to 1996. Director of Future
Marion, IA 52302-0609 Systems, Inc., a full-service
payroll processor,
1991-current.
Ronald O. Brendengen* Treasurer, Chief Operating Chief Operating Officer,
701 Tama Street Officer, Chief Financial Chief Financial Officer and
Building B Officer and Director of Director of Berthel Fisher &
PO Box 609 Berthel Planning Company and related companies
Marion, IA 52302-0609
Leslie D. Smith* Secretary and Director of General Counsel of Berthel
701 Tama Street Berthel Planning Fisher & Company Financial
Building B Services, Inc. and related
PO Box 609 companies, Associate General
Marion, IA 52302-0609 Counsel for Gateway 2000,
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.
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
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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 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
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<PAGE>
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 University of Wisconsin - Platteville with a B.A.
degree. He received his Master of Science from the University of
Wisconsin - Madison and his Ph.D. from the University of Maryland. He also has
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.
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." As the holder of the Management Share,
Berthel Planning will receive an incentive distribution equal to 20% of
distributions of net realized gains from investment from the Trust after all
shareholders have received distributions equal to the amount of their original
investments.
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 negligence or misconduct. To the extent that
the managing person is successful in
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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 misfeasance, bad
faith, 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;
- 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
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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 by or allocated to any controlling person of 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
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. Berthel Planning provides management and administrative
services to Berthel Growth & Income Trust I, similar to the services it will
provide to us.
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. 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. Berthel Growth &
Income Trust I raised $10,541,500 in its public offering of shares. 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.
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On May 4, 1998, a wholly-owned subsidiary of Berthel Growth & Income Trust I
obtained a license from the SBA to operate as an SBIC. This subsidiary--Berthel
SBIC, LLC--has borrowed funds, by issuing debentures guaranteed by the SBA. As
of June 30, 2000 Berthel SBIC had borrowed $7,950,000 by issuing these
debentures.
Through June 30, 2000, Berthel Growth & Income Trust and Berthel SBIC
combined had made total investments of $15,092,312 in 19 separate companies. Of
these investments, seven have been in the areas of communications and software,
four have been in the area of healthcare products and services, three have been
in the area of manufacturing, and five have been in the area of other service
industries.
Through June 30, 2000, for each $1,000 invested in Berthel Growth & Income
Trust I, an investor in Berthel Growth & Income Trust I has received cash
distributions of $199.50. As of June 30, 2000, the total fair market value of
the net assets of Berthel Growth & Income Trust I was $11,234,083, and the net
asset value of a share of Berthel Growth & Income Trust, for which an investor
paid $1000, was $1,065.75. These amounts, however, have been significantly lower
at various times prior to June 30, 2000, and are likely to continue to fluctuate
as the values of the securities held by Berthel Growth & Income Trust I continue
to fluctuate.
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 reasonable 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.
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.
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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
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.
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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 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 regardless of whether an exemptive
order is obtained, 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 and 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:
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i. the terms of the transaction, including the consideration to 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.
- 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
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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 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.
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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.
- 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 net realized gains from investment, 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 net realized gains from investment, invested funds
returned to the Trust, or principal payments received by the Trust in
repayment of loans made by the Trust.
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- When we use the term "net realized gain from investment" we mean realized
capital gains arising from our investments, computed net of all realized
capital losses and unrealized capital depreciation.
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 other than net realized gains
from investment shall be made 99% to the shareholders and 1% 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.
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 NET REALIZED GAINS FROM INVESTMENT. Cash received from
net realized gains from investment 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 net realized gains from investment 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
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(b) 80% to the shareholders, as a class, and 20% to Berthel Planning.
To the extent that making any distribution to Berthel Planning of net
realized gains from investment would violate Section 205(b)(3) of the Investment
Adviser's Act of 1940, or any successor provision thereto, 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 shall be allocated as
follows:
(a) First, to the trust advisor until the profits so allocated to the
trust advisor are equal to the amount of all of the distributions the trust
advisor has received, and is receiving for that year; and
(b) The balance, if any, to the Shareholders.
Profits are allocated in this manner to assure, to the extent possible, that the
trust advisor is allocated taxable income equal to the distributions it
receives.
Generally, losses for any fiscal period shall be allocated ninety-nine
percent (99%) to the shareholders and one percent (1%) to the trust advisor
until all shareholders have received distributions equal to the amount of their
original investments. After all shareholders have received distributions equal
to the amount of their original investments, losses generally will be allocated
eighty percent (80%) to the shareholders and twenty percent (20%) to the trust
advisor. Notwithstanding the foregoing, no allocation will be made to the
shareholders' accounts that will reduce the shareholders' accounts to a negative
amount.
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. Equity Securities Investments, Inc. will act as one of the selling
agents. The
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principal address of Berthel Financial Services is 701 Tama 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:
- 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
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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.
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 (500 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 least
five units ($5,000) for each tenant in common or joint tenant. Any partnership,
corporation, trust or other entity that has
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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
- 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
organizational and offering expenses. We will not pay organizational and
offering expenses in excess of 13.5% of the
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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 AND TEXAS. Prospective investors in the States of California
and Texas 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, KANSAS AND ARIZONA. Prospective investors in Iowa, Kansas 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 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.
MISSOURI. Prospective investors in Missouri 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
least $75,000 and have had a minimum, gross annual income of $75,000 for
each of the last two tax years, and reasonably expect to have a minimum
gross annual income of $75,000 for the
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current tax year or (ii) have a net worth (exclusive of homes, home
furnishings and automobiles) of at least $250,000.
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
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.
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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 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.
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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."
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
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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 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 ("PTP") taxable as a corporation.
See "Publicly Traded Partnerships" 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
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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 we 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 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.
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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
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.
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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
(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
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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;
- 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.
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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.
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
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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.
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 PC, 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.
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
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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 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
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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 Sections 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 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
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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.
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
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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
(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
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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 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.
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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 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.
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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 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
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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 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.
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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.
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
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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 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
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"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.
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
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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:
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.
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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 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.
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
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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."
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."
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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 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.
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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.
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
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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.
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 must
engage in the business of furnishing capital and offering significant managerial
assistance to companies that meet the requirements of the Investment Company
Act.
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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
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
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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.
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
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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.
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 balance sheet of Berthel Fisher & Company Planning, Inc. as of
December 31, 1999 and the financial statements of the Trust for the period
June 15, 2000 (date of inception) to August 31, 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
79
<PAGE>
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 (202) 942-8090 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."
80
<PAGE>
FINANCIAL STATEMENTS OF BERTHEL GROWTH TRUST II
FOR THE PERIOD JUNE 15, 2000 (DATE OF INCEPTION)
TO AUGUST 31, 2000 (AUDITED)
BALANCE SHEET OF BERTHEL FISHER & COMPANY PLANNING, INC.
AS OF DECEMBER 31, 1999 (AUDITED)
BALANCE SHEET OF BERTHEL FISHER & COMPANY PLANNING, INC.
AS OF JUNE 30, 2000 (UNAUDITED)
F-1
<PAGE>
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 August 31, 2000, and the related
statements of operations, changes in net assets, and cash flows for the period
June 15, 2000 (date of inception) to August 31, 2000. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at August 31, 2000 and the results
of its operations and its cash flows for the period June 15, 2000 (date of
inception) to August 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
September 13, 2000
F-2
<PAGE>
BERTHEL GROWTH TRUST II
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2000
<TABLE>
<S> <C>
ASSETS:
Cash...................................................... $ 9,998
Deferred offering costs................................... 172,778
--------
Total assets............................................ 182,776
LIABILITIES--Due to affiliate (Note 4)...................... 174,778
--------
NET ASSETS (equivalent to $8.00 per share).................. $ 7,998
========
Net assets consist of:
Shares of beneficial interest, 3,000,000 shares
authorized--
1,000 shares issued and outstanding..................... $ 10,000
Undistributed net investment loss......................... (2,002)
--------
$ 7,998
========
</TABLE>
See notes to financial statements
F-3
<PAGE>
BERTHEL GROWTH TRUST II
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 15, 2000 (DATE OF INCEPTION)
TO AUGUST 31, 2000
<TABLE>
<S> <C>
EXPENSES:
Organizational costs...................................... $ 2,000
Miscellaneous expenses.................................... 2
-------
Total expenses.......................................... 2,002
-------
NET DECREASE IN NET ASSETS.................................. $(2,002)
=======
PER BENEFICIAL SHARE DATA:
NET DECREASE IN NET ASSETS................................ $ (2)
=======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
BERTHEL GROWTH TRUST II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 15, 2000 (DATE OF INCEPTION)
TO AUGUST 31, 2000
<TABLE>
<S> <C>
NET ASSETS AT JUNE 15, 2000................................. $ --
Proceeds from sale of shares of beneficial interest
(initial capitalization)................................ 10,000
Net decrease in net assets................................ (2,002)
-------
NET ASSETS AT AUGUST 31, 2000............................... $ 7,998
=======
PER BENEFICIAL SHARE DATA:
NET ASSETS AT JUNE 15, 2000............................... $ --
Proceeds from sale of shares of beneficial interest
(initial capitalization)............................... 10
Net decrease in net assets.............................. (2)
-------
NET ASSETS AT AUGUST 31, 2000............................. $ 8
=======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
BERTHEL GROWTH TRUST II
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 15, 2000 (DATE OF INCEPTION)
TO AUGUST 31, 2000
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets................................ $ (2,002)
Adjustments to reconcile net decrease in net assets to net
cash flows from operating activities:
Changes in due to affiliate............................. 174,778
Changes in deferred offering costs...................... (172,778)
---------
Net cash flows from operating activities.............. (2)
CASH FLOWS FROM FINANCING ACTIVITIES--Proceeds from sale of
shares of beneficial interest............................. 10,000
---------
NET DECREASE IN CASH........................................ 9,998
CASH AT BEGINNING OF PERIOD................................. --
---------
CASH AT END OF PERIOD....................................... $ 9,998
=========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
BERTHEL GROWTH TRUST II
NOTES TO FINANCIAL STATEMENTS
AS OF AUGUST 31, 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 initial capitalization of $10,000 was contributed by
two members of Berthel Fisher & Company Planning, Inc.'s management.
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 wholly or majority owned
subsidiary of Berthel Fisher & Company.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates.
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
F-7
<PAGE>
BERTHEL GROWTH TRUST II
NOTES TO FINANCIAL STATEMENTS
AS OF AUGUST 31, 2000 (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Offering costs incurred by the Trust Advisor for the period June 15, 2000
(date of inception) to August 31, 2000 totaled $172,778. These costs have been
reported as an asset and will be deducted upon the receipt of proceeds from the
subsequent sale of shares by the Trust beyond the initial $10,000
capitalization. Organizational costs incurred by the Trust Advisor for the
period June 15, 2000 (date of inception) to August 31, 2000 totaled $2,000 and
have been treated as an expense by the Trust.
NET DECREASE IN NET ASSETS PER BENEFICIAL SHARE--Net decrease in net assets
per beneficial share is based on the weighted average of shares outstanding.
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. These Fees will be assessed on all shares sold beyond
the initial capitalization of $10,000.
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. DUE TO AFFILIATE
Due to affiliate represents offering and organizational costs incurred by
the Trust Advisor, which are reimbursable to the Trust Advisor in an amount not
to exceed 3.5% of the aggregate purchase price of all shares sold.
* * * * *
F-8
<PAGE>
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
F-9
<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 deficiency.......................... (233,203)
-----------
TOTAL....................................................... $ 381,777
===========
</TABLE>
See notes to balance sheet.
F-10
<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.
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
F-11
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY)
NOTES TO BALANCE SHEET
AS OF DECEMBER 31, 1999
2. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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.
F-12
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY)
NOTES TO BALANCE SHEET
AS OF DECEMBER 31, 1999
3. INCOME TAXES (CONTINUED)
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.
* * * * *
F-13
<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.............................. 105,667
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....................................................... $ 505,006
===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
LIABILITIES:
Accounts payable and accrued expenses....................... $ 205,860
Due to affiliates........................................... 228,207
Note payable to Berthel Fisher & Company 336,634
-----------
Total liabilities........................................... 770,701
-----------
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....................................................... $ 505,006
===========
</TABLE>
F-14
<PAGE>
EXHIBIT A
DECLARATION OF TRUST
<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.
(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
A-1
<PAGE>
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.
(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
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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;
(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.
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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-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;
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(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.
"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 Net Realized Gains
from Investments, 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 Net Realized Gains from
Investment, 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 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
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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.
"NET REALIZED GAINS FROM INVESTMENT"--Realized capital gains arising from
Investments of the Trust, computed net of all realized capital losses and
unrealized capital depreciation.
"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.
"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;
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(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 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
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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;
(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.
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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 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
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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.
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
negligence or 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 (i) the
requirements of the Investment Company Act are met, (ii) the transaction is not
otherwise prohibited by law or the terms of this Declaration; and (iii) the
approval of the Independent Trustees, if required by the terms of this
Declaration, has been granted.
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. The Trust may incur
the cost of other liability insurance.
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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 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.
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ARTICLE IV
ALLOCATION OF PROFIT AND LOSS
4.1 PROFITS. After giving effect to the special allocations set forth in
Article VII, Profits for any fiscal period shall be allocated in the following
order and priority:
(a) First, to the Trust Advisor until the Profits so allocated to the Trust
Advisor for the current period 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 distributed and distributable to the Trust
Advisor under Article VIII hereof for the current and prior periods; and
(b) The balance, if any, to the Shareholders.
4.2 LOSSES. After giving effect to the special allocations set forth in
Article VII, Losses for any fiscal period shall be allocated as set forth in
Section 4.2(a), subject to the limitation in Section 4.2(b).
(a) Losses for any Fiscal Year shall be allocated in the following order and
priority:
(i) First, ninety-nine percent (99%) to the Shareholders and one percent
(1%) to the Trust Advisor until payout; and
(ii) After payout, Losses shall be allocated eighty percent (80%) to the
Shareholders and twenty percent (20%) to the Trust Advisor.
(b) Notwithstanding Section 4.2(a) above, if an allocation pursuant to
Section 4.2(a) above 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 Investors until the Investors
accounts have been reduced to zero, and (ii) after the Investors' accounts have
been reduced to zero, and thereafter until the Investors' 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 Investor to have
a negative amount in the Investor'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 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
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any Shareholder; provided, that such modification is not likely to have a
material effect on the amounts distributable to any Shareholder.
4.4 AMONG INVESTORS. Each Investor shall be allocated that percentage of
the aggregate amounts allocated to all Investors, as the case may be, as the
number of Shares owned by the Investor bears to the aggregate number of Shares
owned by all Investors.
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.
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.
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.
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(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.
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 Trustees of 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,
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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. Subject to the provisions of
7.4 and 7.5, 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 IV.
7.4 SPECIAL ALLOCATIONS. The following special allocations shall be made
in the following order:
(a) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Section 1.704-2(f) of the Regulations, notwithstanding any other provision of
this Article VII, if there is a net decrease in Partnership Minimum Gain during
any fiscal period, the Trust Advisor and Shareholders shall be specially
allocated items of Trust income and gain for such fiscal period (and, if
necessary, subsequent fiscal periods) in an amount equal to such person's share
of the net decrease in Partnership Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated
to each Trust Advisor and Shareholder pursuant thereto. The items to be so
allocated shall be determined in accordance with Sections 1.704-2(f)(6) and
1.704-2(j)(2) of the Regulations. This Section 7.4(a) is intended to comply with
the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations
and shall be interpreted consistently therewith.
(b) PARTNER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of
this Article VII, if there is a net decrease in the Trust Advisor or a
Shareholder's Nonrecourse Debt Minimum Gain attributable to a Trust Nonrecourse
Debt during any fiscal year, each person who has a share of the Trust
Nonrecourse Debt Minimum Gain attributable to such Trust Advisor or
Shareholder's Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of
Trust income and gain for such fiscal year (and, if necessary, subsequent fiscal
years) in an amount equal to such person's share of the net decrease in
Nonrecourse Debt Minimum Gain attributable to such person's Nonrecourse Debt,
determined in accordance with Regulations Section 1.704-2(i)(4). Allocations
pursuant to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Trust Advisor and Shareholder pursuant
thereto. The items to be so allocated shall be determined in accordance with
Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This
Section 7.4(b) is intended to comply with the minimum gain chargeback
requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted
consistently therewith.
(c) QUALIFIED INCOME OFFSET. In the event any Shareholder unexpectedly
receives any adjustments, allocations, or distributions described in
Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5) or
Section 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Trust income and
gain shall be specially allocated to each such Shareholder in an amount and
manner sufficient to eliminate, to the extent required by the Regulations, the
Adjusted Capital Account Deficit of such Shareholder as quickly as possible,
provided that an allocation pursuant to this Section 7.4(c) shall be made only
if and to the extent that such Shareholder would have an Adjusted Capital
Account Deficit after all other allocations provided for in this Article VII
have been tentatively made as if this Section 7.4(c) were not in the Agreement.
(d) GROSS INCOME ALLOCATION. In the event any Shareholder has a deficit
Capital Account at the end of any fiscal year which is in excess of the sum of
(i) the amount such Shareholder is obligated to restore pursuant to any
provision of this Agreement, and (ii) the amount such Shareholder is deemed to
be obligated to restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Shareholder shall be
specially allocated items of Trust income and gain in
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the amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section 7.4(d) shall be made only if and to the extent that
such Shareholder would have a deficit Capital Account in excess of such sum
after all other allocations provided for in this Article VII have been made as
if Section 7.4(c) and this Section 7.4(d) were not in the Agreement.
(e) TRUST NONRECOURSE DEDUCTIONS. Any Trust Nonrecourse Deductions for any
fiscal year shall be specially allocated to the Trust Advisor or Shareholder who
bears the economic risk of loss with respect to the Trust Nonrecourse Debt to
which such Trust Nonrecourse Deductions are attributable in accordance with
Regulations Section 1.704-2(i)(1). "Trust Nonrecourse Deductions" has the same
meaning as the term "Partner Nonrecourse Deductions" set forth in Sections
1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.
(f) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any fiscal year
shall be specially allocated one percent (1%) to the Trust Advisor and
ninety-nine percent (99%) to the Shareholders. "Nonrecourse Deductions" has the
meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Regulations.
7.5 CURATIVE ALLOCATIONS. The allocations set forth in Sections 4.2(b),
7.4(a), 7.4(b), 7.4(c), 7.4(d), 7.4(e), and 7.4(f) (the "Regulatory
Allocations") are intended to comply with certain requirements of the
Regulations. It is the intent of the Trust Advisor and the Shareholders that, to
the extent possible, all Regulatory Allocations shall 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 Article VII (other than the
Regulatory Allocations), the Trustees shall make such offsetting special
allocations of Trust income, gain, loss or deduction in whatever manner it
[they] determine[s] appropriate so that, after such offsetting allocations are
made, the Trust Advisor's and Shareholders' Capital Account balance is, to the
extent possible, equal to the Capital Account balance such Trust Advisor or
Shareholders would have had if the Regulatory Allocations were not part of the
Agreement and all Trust items were allocated pursuant to Sections 4.1 and
4.2(a). In exercising its discretion under this Section 7.5, the Trustees shall
take into account future Regulatory Allocations under Sections 7.4(a) and 7.4(b)
that, although not yet made, are likely to offset other Regulatory Allocations
previously made under Sections 7.4(e) and 7.4(f).
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. The Trust will make quarterly
distributions of all Cash Revenues that the Trust receives to the extent that
the Trust has cash available for such 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 borrow funds in order to make a distribution
under this section. The Trust will not make a distribution if a majority of the
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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.
8.2 DISTRIBUTIONS OF CASH AVAILABLE FROM NET REALIZED GAINS FROM
INVESTMENT. In the discretion of the Trust Advisor, and subject to review by
the Independent Trustees, cash received from Net Realized Gains from Investment
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 Net Realized Gains from Investment 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) thereafter, 80% to the Shareholders, as a class, and 20% to the
Trust Advisor.
To the extent that a distribution to the Trust Advisor under this Section
8.2 would violate Section 205(b)(3) of the Investment Advisers Act, or any
successor provision thereto, the amount of such distribution will instead be
deferred until the payment of such amount would 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 OF CASH AVAILABLE FOR DISTRIBUTION FROM ALL SOURCES OTHER
THAN CASH REVENUES AND CASH AVAILABLE FROM NET REALIZED GAINS ON INVESTMENT. In
the discretion of the Trust Advisor, and subject to review by the Independent
Trustees, Cash Available for Distribution from all sources other than Cash
Revenues or from Net Realized Gains from Investment may be distributed or
reserved for general trust purposes or for future Investments. If such Cash
Available for Distribution shall be distributed, such distribution shall be made
99% to the Shareholders and 1% to the Trust Advisor.
8.4 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 loans 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 (e) 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 (e) 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 an Investor'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 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
Investor or the Trust Advisor shall thereby have a negative amount in the
Investor's or the Trust Advisor's Adjusted Capital
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Account, the actual distribution to the Investor or the Trust Advisor under
this Section 8.3(c) shall be equal to the tentative distribution to the
Investor 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 positive Capital Accounts in compliance
with 1.704-1(b)(2)(b)(2), after giving effect to all adjustments to Capital
Accounts for all fiscal periods through and including the fiscal period in
which dissolution occurs.
8.5 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).
8.6 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
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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.
8.7 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.
8.8 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.
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.
9.6 REIMBURSEMENT OF TRUST MANAGEMENT EXPENSES. The Trust will pay all
operating expenses paid or incurred in connection with the operation of the
Trust and not specifically required to be paid by the Trust Advisor or not paid
or reimbursed by a Portfolio Company. These operating expenses are in addition
to the Management Fee paid to the Trust Advisor.
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The operating expenses that the Trust will pay include, but are not limited
to, the following:
- the Trust's 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 the Trust Advisor in carrying out its responsibilities under this
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;
- 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 the Trust Advisor 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.
The Trust Advisor 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 the Trust
Advisor 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 the
Trust Advisor or any of its Affiliates for rent or depreciation, utilities,
capital equipment, other administrative items of the Trust Advisor or salaries,
fringe benefits, travel expenses or other administrative items incurred by or
allocated to any Controlling Person of the Trust Advisor.
The Trust Advisor will provide the Trust, at its expense, with the office
space, facilities, equipment and certain personnel (whose salaries and benefits
will be paid by the Trust Advisor) 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.
ARTICLE X
ACCOUNTING AND RECORDKEEPING
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.
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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.
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:
(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;
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(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 pursuant to this Agreement. The special report shall be
in accordance with the American Institute of Certified Public Accountants United
States Auditing Standards relating to special reports. The additional costs of
this special report shall be itemized by the independent certified public
accountants on a program by program basis, and may be reimbursed to the Sponsor
by the Trust in accordance with this Agreement, provided the cost for such
services does not exceed the costs permitted elsewhere in this Agreement. The
report shall at minimum provide: (i) a review of the time records of
individuals, the costs of whose services were reimbursed; and (ii) a review of
the specific nature of the work performed by each such employee.
(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 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.
10.6 SUITABILITY RECORDS. For a period of six years following the
acceptance by the Trust of the subscription of each Shareholder for the purchase
of Units, the Trust shall retain records of the information used to determine
that an investment in the Trust was a suitable and appropriate investment for
such Shareholder.
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.
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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
(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
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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
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.
(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
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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.
(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.
(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
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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;
(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;
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(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 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.
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(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 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
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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 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
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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 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 distributions 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 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.
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(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 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
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twenty (120) days prior written notice to 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 income tax or federal or state
securities law consequences to the Trust, or any Trust Property or the
Shareholders. 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, provided it shall be based on the factors set forth in
Section 13.2(a), 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 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.
The Trust Advisor shall, not less than each calendar quarter, amend its records
for the purpose of recognizing any sales, transfers or assignments pursuant to
this Section 13.2, or Section 13.3, with respect to which transfers or
assignments all of the applicable requirements have been satisfied. Such
assignments shall be recognized not later than the last day of the calendar
month following fulfillment of the applicable requirements. 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
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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;
(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;
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(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, 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,
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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.
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
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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.
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 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.
A-38
<PAGE>
(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 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
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<PAGE>
(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.
IN WITNESS WHEREOF, the undersigned have signed this Declaration as of the
date first above written.
<TABLE>
<S> <C> <C>
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
</TABLE>
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<PAGE>
EXHIBIT A
TO
DECLARATION OF TRUST
CODE OF ETHICS
A-41
<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.
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.
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<PAGE>
(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.
(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.
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<PAGE>
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 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 and
several participation or share in the profits of such enterprise or
undertaking.
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<PAGE>
(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;
(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.
A-45
<PAGE>
EXHIBIT B
SUBSCRIPTION DOCUMENTS
<PAGE>
BERTHEL GROWTH TRUST II
SUBSCRIPTION AGREEMENT
RIGHT TO CANCEL SUBSCRIPTION: THE INVESTOR SHALL HAVE THE RIGHT TO RECEIVE A
REFUND OF THE INVESTOR'S INVESTMENT FOR A PERIOD OF FIVE BUSINESS DAYS AFTER THE
DATE THE 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.
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:
<TABLE>
<S> <C>
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.
</TABLE>
If the Investor is a resident of CALIFORNIA OR TEXAS, 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, KANSAS 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
B-1
<PAGE>
(iii) the investment in the Trust represents not more than ten percent (10%)
of the Investor's net worth.
If the Investor is a resident of MISSOURI, the Investor (i) has a net
worth (exclusive of homes, home furnishings and automobiles) of at least
$75,000 and have had a minimum, gross annual income of $75,000 for each of
the last two tax years, and reasonably expect to have a minimum gross annual
income of $75,000 for the current tax year or (ii) has a net worth
(exclusive of homes, home furnishings and automobiles) of at least $250,000,
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:
<TABLE>
<S> <C>
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.
</TABLE>
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;
B-2
<PAGE>
(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:
(a) 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.
(b) 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 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.
(c) Other than as expressly permitted by this Agreement, the Investor is
advised that the Investor is not otherwise 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.
(d) 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.
B-3
<PAGE>
BERTHEL GROWTH TRUST II
SUBSCRIPTION QUALIFICATION AND SIGNATURE PAGE
<TABLE>
<S> <C>
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)....................... $
-------
</TABLE>
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 federal income tax
/ / A non-resident alien or foreign corporation,
trust or estate.
B-4
<PAGE>
MANNER IN WHICH TITLE IS TO BE HELD (PLEASE CHECK ONE)
<TABLE>
<C> <S> <C>
1 / / INDIVIDUAL OWNERSHIP (ONE
SIGNATURE REQUIRED)
2 / / COMMUNITY PROPERTY
(BOTH SIGNATURES REQUIRED
IF BOTH NAMES ARE TO APPEAR
AS OWNERS OF THE Shares
3 / / TENANTS IN COMMON (BOTH
SIGNATURES REQUIRED)
4 / / JOINT TENANTS WITH RIGHT OF
SURVIVORSHIP (BOTH
SIGNATURES REQUIRED)
5 / / CORPORATION
6 / / PARTNERSHIP
7 / / AS CUSTODIAN FOR
UNDER THE UNIFORM GIFT TO
MINORS ACT OF THE STATE OF
*
8 / / ESTATE
9 / / IRA**
10 / / SEP**
11 / / KEOGH (profit sharing or
purchase)**
12 / / TRUST (profit sharing,
pension, living, revocable
or other)**
13 / / OTHER
</TABLE>
* Arizona minors must meet Arizona investor suitable standards.
** Custodial firm or institution must be specified for Trusts, IRAs, Keoghs and
SEPs.
<TABLE>
<S> <C> <C> <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.
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
B-5
<PAGE>
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.
<TABLE>
<S> <C> <C> <C>
SIGNATURE OF ACCOUNT EXECUTIVE DATE SIGNATURE OF BRANCH MANAGER DATE
FOR Trust advisor USE ONLY
</TABLE>
<TABLE>
<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>
B-6
<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
C-1
<PAGE>
(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."
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.
C-2
<PAGE>
- 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.
C-3
<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
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
THE TRUST'S INDEPENDENT TRUSTEES MUST UNANIMOUSLY APPROVE ALL INVESTMENTS MADE
BY THE TRUST.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
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 TRUST, THE CORPORATE TRUSTEE, THE
DEALER MANAGER, OR THE OTHER SELLING 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 TRUST II
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.
[BERTHEL GROWTH TRUST II LOGO]
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
EQUITY SECURITIES
INVESTMENTS, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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
Form of Declaration of Trust (included as Exhibit A to the
2.d 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 PC**
2.m Not Applicable
2.n-1 Consent of Independent Auditors
2.n-2 Tax Opinion and Consent of Bradley & Riley PC
2.o Not Applicable
2.p Not Applicable
2.q Not Applicable
2.r Not Applicable
2.s Powers of Attorney**
</TABLE>
------------------------
* To be filed by amendment.
** Previously filed
ITEM 25. MARKETING ARRANGEMENTS
There are no items to report.
II-1
<PAGE>
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
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................................ $ 60,000.00*
-----------
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)
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Beneficial Interest in Trust ("Shares")............... Two (2)
</TABLE>
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
II-2
<PAGE>
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.
3.8 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
II-3
<PAGE>
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.
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
II-4
<PAGE>
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 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
II-5
<PAGE>
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.
(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
II-6
<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 19th day of
December, 2000.
<TABLE>
<S> <C> <C>
BERTHEL GROWTH TRUST II
By: Berthel Fisher & Company Planning, Inc.,
its Trust Advisor
By: /s/ THOMAS J. BERTHEL
-----------------------------------------
Thomas J. Berthel,
CHIEF EXECUTIVE OFFICER
</TABLE>
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>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chief Executive Officer,
and Chairman of the Board
of Berthel Fisher &
/s/ THOMAS J. BERTHEL Company Planning, Inc.
------------------------------------------- (principal executive December 19, 2000
Thomas J. Berthel officer); president of
TJB Capital
Management Inc.
/s/ HENRY ROYER* President of the Berthel
------------------------------------------- Fisher & Company December 19, 2000
Henry Royer Planning, Inc.
Director, Chief Financial
Officer and Treasurer of
/s/ RONALD O. BRENDENGEN Berthel Fisher & Company
------------------------------------------- Planning, Inc. (principal December 19, 2000
Ronald O. Brendengen financial and accounting
officer)
/s/ LESLIE D. SMITH Secretary and Director of
------------------------------------------- Berthel Fisher & Company December 19, 2000
Leslie D. Smith Planning, Inc.
/s/ VON ELBERT* Director of Berthel
------------------------------------------- Fisher & Company December 19, 2000
Von Elbert Planning, Inc.
</TABLE>
------------------------
* Pursuant to Power of Appointment
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
---------------------
<S> <C>
2.d Form of Declaration of Trust (included as Exhibit A to the
Prospectus)
2.n-1 Consent of Independent Auditors
2.n-2 Tax Opinion and Consent of Bradley & Riley PC
</TABLE>
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