<PAGE>
As filed with the Securities and Exchange Commission on May 19, 1997
Registration No. 33-89506
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No.
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/ / Post-Effective Amendment No. 2
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BERTHEL GROWTH & INCOME TRUST I
(Exact Name of Registrant as Specified in Charter)
100 Second Street, S.E.
Cedar Rapids, Iowa 52401
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, Including Area Code: (319) 365-2506
Thomas J. Berthel
Berthel Fisher & Company
100 Second Street, S.E.
Cedar Rapids, Iowa 52401
(Name and Address of Agent for Service)
COPIES TO: Michael K. Denney
Bradley & Riley, P.C.
100 First Street, S.W.
Cedar Rapids, Iowa 52404
Approximate Date of Proposed Public Offering: June 21, 1995
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If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box: /X/
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 Unit(1) Offering Price Registration Fee
- ------------------- ------------ -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest in Trust 50,000 Shares(2) $5,000 $50,000,000 $17,241.38
</TABLE>
(1) The minimum required purchase is five (5) Shares (one Unit) or two (2)
shares for individual retirement accounts. The offering price per Share
is $1,000.
(2) This Registration Statement includes 25,000 shares to cover
over-allotments, if any, pursuant to an over-allotment option granted to
the Dealer Manager.
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.
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
Cross Reference Sheet
Form N-2
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Prospectus
- ---- ------------------------------------------- ------------------------------------------------
<S> <C> <C>
PART A - INFORMATION REQUIRED IN A PROSPECTUS
1 Outside Cover Page. . . . . . . . . . . . . Outside Cover Page; Inside Front Cover Page
2 Inside Front and Outside Back Cover Page. . Inside Front Cover
3 Fee Table and Synopsis. . . . . . . . . . . Fee Table and Expenses Summary;
Prospectus Summary; Inside Front Cover
4 Financial Highlights. . . . . . . . . . . . Management's Discussion and Analysis of
Financial Condition and Results of
Operations (Supplement)
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; The Trust; 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; The Trust
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. . . . . . . . . . . . . . . . . The Trust
20 Investment Advisory and Other Services. . . Management Arrangements; Conflicts of
Interest; Compensation and Fees; Terms
of the Offering; Investment Objective and
Policies
21 Brokerage Allocation and Other Practices. . Compensation and Fees; Investment
Objective and Policies
22 Tax Status. . . . . . . . . . . . . . . . . Tax Matters
23 Financial Statements. . . . . . . . . . . . Financial Statements
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
UP TO 25,000 SHARES OF BENEFICIAL INTEREST
BERTHEL GROWTH & INCOME TRUST I (the "Trust") is a Delaware business trust
that has elected to be treated as a business development company under the
Investment Company Act of 1940. The Trust's investment objective is to achieve
long term capital appreciation in the value of its net assets and to achieve
current income principally by making debt, mezzanine and equity investments
through private placements in small and medium sized privately and publicly
owned companies. Securities owned by the Trust will consist primarily of
subordinated debt, preferred stock and related equity securities. There is no
assurance that the Trust's investment objective will be realized. The trust is
not a mutual fund.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK,
INCLUDING THE FOLLOWING (SEE "RISK FACTORS"):
- The Trust is newly organized and has no operating history.
- The Trust's investments will often include a debt feature. Debt securities
acquired by the Trust will be unrated, and may be classified as junk
bonds. Investing in junk bonds involves certain risks. See "Risk Factors."
- The Trust's investments in Portfolio Companies will be speculative and
illiquid and will involve a high degree of business and financial risk.
The Trust may invest in Securities of companies that are in financial
distress or bankruptcy. No specific investments have currently been
identified.
- Investors must rely on the ability of the Trust Advisor to invest in
Portfolio Companies. Investors will not have the opportunity to personally
evaluate the relevant factors that pertain to an investment in a Portfolio
Company.
- The offering involves significant conflicts of interest for the Trust
Advisor.
- The Trust Advisor will receive significant fees and other payments in
connection with the operation of the Trust. See "Fee Table and Expenses
Summary."
- The Trust is authorized to leverage no more than fifty percent of its
total assets; to invest more than fifteen percent of its assets in
restricted securities exclusive of debt securities; in relation to 75
percent of its total assets, to invest more than five percent of such
assets in any one issuer; and to invest more than fifteen percent of its
assets in the securities of issuers that have less than three years
continuous operation.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY
AUTHORITY, NOR HAS THE COMMISSION OR ANY OTHER AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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.
<TABLE>
<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC LOAD(1)(2) TRUST(3)
<S> <C> <C> <C>
Per Share (Five Share minimum) $ 1,000 $ 70 $ 930
Total Minimum $ 1,500,000 $ 105,000 $ 1,395,000
Total Maximum(4) $25,000,000 $ 1,750,000 $23,250,000
Total Maximum if Option Exercised(4) $50,000,000 $ 3,500,000 $46,500,000
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.
June 21, 1995
<PAGE>
(1) Shares of beneficial interests in the Trust are being offered by Berthel
Fisher & Company Financial Services, Inc. (the "Dealer Manager"), an
Affiliate of Berthel Fisher & Company Planning, Inc., (the "Trust Advisor"),
and by other members of the National Association of Securities Dealers, Inc.
("NASD") authorized by the Dealer Manager to act as selling agents
(collectively, the "Selling Agents"). The Dealer Manager will receive a cash
commission of 7.0% to 2.0%, depending upon the number of Shares sold to a
particular Investor. Investors who purchase $500,000 or more will receive a
discount of from 2.0% to 5.0% depending upon the amount purchased. The
Proceeds to the Trust net of commissions will not be affected by discounts
for volume purchases. Commissions will be reallowed to participating Selling
Agents on Shares sold through them. This Table reflects a commission of
7.0%. The Trust may have more than one Closing of the sale of Shares. If
more than one such Closing occurs, the Price to Public after the first
Closing or any subsequent Closing of the sale of Shares may be adjusted to
the market value of Shares based on their net asset value. See "Terms of the
Offering" and "Regulation."
(2) The Sales Load does not reflect the Wholesale Marketing Fee and Investment
Set-up Fee that will be paid by the Trust, and due diligence expenses that
will be reimbursed by the Trust. The Trust has agreed to pay the Dealer
Manager a Wholesale Marketing Fee equal to 2.5% of the aggregate purchase
price of the Shares sold for wholesale marketing services rendered to the
Trust. From the Wholesale Marketing Fee, the Dealer Manager will pay certain
Selling Agents up to a maximum of .5% of the purchase price of Shares sold.
The Trust has also agreed to pay to the Corporate Trustee an Investment
Set-up Fee equal to .5% of the aggregate purchase price of Shares sold for
services in connection with establishing the Trust. Because the Investment
Set-up Fee will be paid to an Affiliate of the Dealer Manager, an Investor
may consider the Investment Set-up Fee to be compensation to the Dealer
Manager. The Trust will reimburse the Dealer Manager and other Selling
Agents for certain expenses incurred in connection with their due diligence
activities with regard to the offering in an amount not to exceed 0.5% of
the aggregate purchase price of Shares sold. The Trust has agreed to
indemnify the Selling Agents (other than the Dealer Manager) against certain
liabilities, including liabilities under the Securities Act of 1933 (the
"Securities Act"), as amended, to the extent permitted under the Investment
Company Act. See "Terms of the Offering" and "Plan of Distribution."
(3) Before deducting Organizational and Offering Expenses payable by the Trust
(excluding selling commissions and discounts discussed in Note 1, above, and
the Wholesale Marketing Fee, the Investment Set-up Fee and due diligence
expense reimbursement discussed in Note 2, above) not to exceed 3.5% of the
aggregate purchase price of the Shares sold, and before deducting
Acquisition Fees and Acquisition Expenses. See "Terms of the Offering." The
Trust Advisor will pay any Organizational and Offering Expenses (excluding
selling commissions and discounts, the Investment Set-up Fee, the Wholesale
Marketing Fee and due diligence expenses) in excess of the maximum amount to
be paid by the Trust. The total of all Front End Fees, which include
Organizational and Offering Expenses, Acquisition Fees and Acquisition
Expenses, will not exceed 18%.
(4) The Trust may offer up to 25,000 Shares in addition to the 25,000 Shares
originally offered. See "Terms of the Offering."
The Trust is a "non-diversified" company as defined in the Investment
Company Act. The Trust will terminate upon the liquidation of all of its
investments, but no later than the later of December 31, 2005 or ten (10) years
from the Final Closing of the sale of Shares offered hereby, subject to possible
extension for up to two (2) additional one-year periods.
Securities in which the Trust will invest will consist primarily of
unsecured subordinated notes or debentures or preferred stock, any of which may
be convertible into common stock or may be accompanied by warrants or options to
purchase common stock. The Trust will concentrate its investment efforts on
small and medium sized companies that, in the view of the Trust Advisor, will
provide opportunities for significant capital appreciation and prudent
diversification of risk, together with the possibility of current income.
Berthel Fisher & Company Planning, Inc., an Iowa corporation (the "Trust
Advisor"), is the Trust's investment advisor and manager. TJB Capital
Management, Inc., a Delaware corporation and an Affiliate of the Trust Advisor
(the "Corporate Trustee"), will provide certain management services necessary
for the conduct of the Trust's business. The Trust Advisor and the Independent
Trustees are collectively
2
<PAGE>
referred to as the "Management Board." See "Management Arrangements." The
Trust's principal office is located at 100 Second Street, S.E., Cedar Rapids,
Iowa 52401, and its telephone number at that address is (319) 365-2506.
The Trust is newly formed. There is no public market for the beneficial
interests in the Trust ("Shares"), and none is expected to develop. See
"Transferability of Shares."
This Prospectus sets forth concisely the information about the Trust that a
prospective Investor should know before investing. Investors are advised to read
this Prospectus and retain it for future reference.
The Securities offered are beneficial interests ("Shares") in a Delaware
business trust. Investors owning Shares shall not be entitled to participate in
the ordinary and routine management of the Trust. Investors shall have only
those voting rights as are set forth in the Declaration of Trust or provided by
law. Such voting rights include the right to vote on certain amendments to the
Declaration of Trust and the right to vote on the removal of the Trust Advisor.
The Trust is offering Shares at $1,000 per Share. The minimum investment is
five (5) Shares, ($5,000), or two (2) Shares, ($2,000) for individual retirement
accounts ("IRAs"). An investment in Shares is not suitable for persons or
entities with a primary objective of obtaining the tax benefits commonly
associated with tax shelter investments.
The offering will terminate twelve months following the effective date of
this Prospectus (the "Termination Date"), provided however, if the minimum
number of Shares is sold and the Trust renews registration with the SEC and with
the various state agencies, the offering period may be extended for up to an
additional year. If subscriptions for 1,500 Shares (excluding Shares that may be
purchased by the Trust's Corporate Trustee or its Affiliates) have not been
received and accepted by the Termination Date, no Shares will be sold. If at any
time during the offering at least 1,500 Shares are properly subscribed for, the
Trust may accept such subscriptions at the Initial Closing and admit the
purchasers of such Shares as shareholders. The Trust may continue to offer for
sale the remaining unsold Shares and accept subscriptions for such Shares from
time to time at subsequent Closings until the earlier of the Termination Date or
the date all the Shares are sold. Until the Initial Closing, funds paid by
subscribers will be deposited in an interest-bearing bank escrow account with
Firstar Bank Cedar Rapids, N.A. If the offering does not close, all subscribers'
funds will be promptly returned in full, together with each subscriber's pro
rata share of any interest earned thereon without deduction for any expenses.
After the Initial Closing, funds paid by subscribers will not be paid to an
escrow account, but instead will be paid directly to the Trust. See "Terms of
the Offering."
AVAILABLE INFORMATION
The Trustee is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act") and in accordance therein files reports
and other information with the Securities and Exchange Commission.
Reports (and where the Trustee is subject to sections 14(a) and (14(c) of
the Exchange Act proxy and information statements) and other information filed
by the Trustee can be inspected and copies at the public reference facilities
maintain by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300 New York, NY 10048, and at 500 West Madison Street, Suite
1400, Chicago, IL 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
The Shares are not currently listed on any market or exchange, and it is not
expected that Shares will be listed in the future. See "Risk Factors" and
"Transferability of Shares."
REPORTS TO SHAREHOLDERS
The Trust 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. The Trust 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."
3
<PAGE>
FEE TABLE AND EXPENSES SUMMARY
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)................................ 7.00%
Wholesale Marketing Fee.......................................................... 2.50%
Investment Set-up Fee(2)......................................................... 0.50%
Due Diligence Expenses(2)........................................................ 0.50%
Acquisition Fee and Acquisition Expenses(2)...................................... 3.50%
ANNUAL EXPENSES (as a percentage of net assets attributable to Shares)(3)
Management Fees (4).............................................................. 2.50%
Interest Payments on Borrowed Funds(5)........................................... NONE%
Other expenses
Operating Expenses.................................................. 2.20%
Independent Trustees Fees and Expenses.............................. 0.59%
Total other expenses............................................................. 2.79%
Total Annual Expenses............................................................ 5.29%
</TABLE>
- ------------------------
(1) Assumes that volume discounts are not available to any Investor. Includes
commissions of 7.0% to be paid to Selling Agent.
(2) Because the Investment Set-up Fee will be paid to an Affiliate of the Dealer
Manager, an Investor may consider the Investment Set-up Fee to be
compensation to the Dealer Manager. The Investment Set-up Fee will be paid
from offering proceeds. The Due Diligence Expenses are not true Shareholder
Transaction Expenses, but will be paid from offering proceeds. Acquisition
Fees and Acquisition Expenses are not true Shareholder Transaction Expenses,
but if paid, will be paid from offering proceeds.
(3) All annual expenses assume the sale of the maximum number of Shares and the
payment of the maximum expenses. All percentages shown above are based upon
the estimated first year expenses of the Trust.
(4) Management Fees are computed on the basis of 2.5% per annum of total assets
of the Trust, and include expenses incurred by the Trust in connection with
the research, selection and supervision of investments, but do not include
expenses such as legal and accounting expenses incurred by the Trust in
connection with the acquisition of 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: $ 158 $ 251 $ 343 $ 535
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The example is based on estimates of future expenses that are derived from
an estimate of first year expenses that are assumed to stay the same
throughout the life of the Trust. The example should in no way be considered
representative of future actual expenses. FUTURE ACTUAL EXPENSES MAY BE
GREATER OR LESSER THAN THOSE SHOWN. The example assumes that none of the
annual return is realized capital gain and does not reflect distributions to
the Trust Advisor after Investors have received Payout.
The purpose of the foregoing table is to assist the Investor in
understanding the various costs and expenses that an Investor will bear directly
or indirectly. Management Fees and other expenses are based on estimated amounts
for the Trust's first full fiscal year. The example is based on estimated
amounts and is entirely hypothetical. The example should not be considered a
representation of past or future performance or expense. Actual expenses may be
greater or less than those shown.
4
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
appearing elsewhere herein. Each prospective Investor is urged to read this
Prospectus in its entirety. Unless otherwise noted, the information in this
Prospectus assumes that the Trust consummates the Maximum Offering of 25,000
shares. Investors should carefully consider information set forth under the
heading "Risk Factors."
<TABLE>
<S> <C>
THE TRUST..................... The Trust is a Delaware business trust organized on February
10, 1995. It will seek to achieve capital appreciation and
current income principally by making investments through
private placements in securities of small and medium sized
privately and publicly owned companies. The securities will
consist primarily of subordinated debt or preferred stock
combined with equity participations in common stock or
rights to acquire common stock. The Trust will subsequently
dispose of such investments. Such investments are
speculative and typically are not available to the general
public. The Trust is designed so that Independent Trustees
will provide overall guidance and supervision with respect
to the operation of the Trust. The Independent Trustees will
review all of the Trust's investment decisions. See
"Investment Objective" below and "Investment Objective and
Policies."
The Trust has elected to be treated as a business
development company under the Investment Company Act. See
"Regulation." The Trust is a "non-diversified closed-end"
company as defined under the Investment Company Act.
THE OFFERING.................. The Trust is offering shares of beneficial interest
("Shares") at $1,000 per Share. The minimum investment is
five (5) Shares ($5,000), or two (2) Shares ($2,000) in the
case of investments for IRAs. Until the Initial Closing,
funds paid by subscribers will be deposited in an
interest-bearing bank escrow account with Firstar Bank Cedar
Rapids, N.A. If the offering does not close, all
subscribers' funds will be promptly returned in full,
together with each subscriber's pro rata share of any
interest earned thereon without deduction for any expenses.
After the Initial Closing, funds paid by subscribers will
not be paid to an escrow account, but instead will be paid
directly to the Trust. The purchase price of Shares sold
after the Initial Closing may be increased to reflect a
market price based on the net asset value of the Shares. Any
change in the public offering price of Shares will be set
forth in a supplement to this Prospectus. The purchase price
of Shares will not be reduced if the net asset value of the
Shares drops below $1,000 per Share.
The offering will terminate not later than twelve months
following the effective date of this Prospectus (the
"Termination Date"), provided however, if the minimum number
of Shares is sold and the Trust renews registration with the
SEC and with the various state agencies, the offering period
may be extended for up to an additional year. If
subscriptions for 1,500 Shares have not been received and
accepted by the Termination Date, no Shares will be sold. If
at any time during the offering at least 1,500 Shares are
properly subscribed for, the Trust may accept such
subscriptions at the Initial Closing. The Trust may continue
to offer for sale the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
remaining unsold Shares and accept subscriptions for such
Shares from time to time until the earlier of the
Termination Date, as and if extended, or the date all the
Shares are sold.
RISK FACTORS.................. An investment in the Trust involves a number of significant
risks relating to investments in trusts generally and
relating to the investment objectives of the Trust in
particular. As a result of these risks factors, there is no
assurance that the Trust will be able to carry out its
investment program successfully. The Investor should review
carefully all of the risk factors set forth in "Risk
Factors." Significant risks include the following:
The Trust is newly organized and has no operating
history. The Trust will invest in Enhanced Yield
Investments that will likely consist primarily of
securities of privately held small businesses.
These securities are illiquid, involve a high
degree of business and financial risk and
accordingly are speculative. No specific
investments have currently been identified.
Enhanced Yield Investments are discussed below
under "Investment Objective."
The Trust's ongoing expenses and costs are
expected to be higher than average for closed-end
investment companies, due to the investments the
Trust intends to make and the highly regulated
environment in which the Trust will be operating.
The Trust may invest in only a limited number of
Portfolio Companies. The resulting concentration
will increase the speculative nature of an
investment in the Trust.
Investors must rely on the ability of the Trust
Advisor to invest in Portfolio Companies.
Investors will not have the opportunity to
evaluate personally the relevant factors that
pertain to an investment in a Portfolio Company.
TERM OF THE TRUST............. The Trust will terminate upon the liquidation of all of its
investments, but no later than December 31, 2005, or ten
(10) years from the final Closing of the sale of the Shares
offered hereby (the "Final Closing"), 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)
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 (3) years. See
"Summary of the Declaration of Trust."
INVESTMENT OBJECTIVE.......... The investment objective of the Trust is to provide capital
appreciation potential and current income by investing
primarily in subordinated debt, preferred stock and related
equity securities issued by small and medium sized companies
that are in need of capital and that the Trust Advisor
believes offer the opportunity for growth or appreciation of
equity value while being able, if required to do so, to
service current yield bearing securities. See "Investment
Objective and Policies." The Trust will direct its
investment efforts to small and medium sized companies
which, in the view of the Trust Advisor, will provide
opportunities for significant capital appreciation and
prudent diversification of risk.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
The Trust will seek investments in a variety of companies
and industries. The securities of Portfolio Companies
purchased by the Trust typically will be rated below
investment grade, and more frequently, not rated at all. The
securities of such Portfolio Companies will often have
significant speculative characteristics.
The Trust will invest in Enhanced Yield Investments, which
consist of Mezzanine Investments and Other Investments (as
described below). Pending other applications of funds, the
Trust will make "Temporary Investments" as described below.
MEZZANINE INVESTMENTS. These investments represent the layer
of corporate financing between equity and senior debt.
Senior debt is typically provided by financial institutions
on a secured basis. Mezzanine financing usually takes the
form of subordinated debt or preferred stock with additional
common equity rights. The subordinated debt invested in by
the Trust will normally be subordinate to all other debt of
the issuing company except ordinary trade debt and other
unsecured debt. Mezzanine Investments may be issued by a
company to (i) finance growth or expansion, (ii) finance a
turnaround of operations, (iii) facilitate a leveraged
buyout transaction, (iv) facilitate an acquisition of assets
or another company, or (v) recapitalize or restructure its
balance sheet. Mezzanine financings are often utilized by
companies in conjunction with the issuance of additional
debt instruments or by companies that already have
significant leverage. The total amount of leverage involved
depends upon the nature of the business of the company and
the confidence of investors in the company's ability to
generate sufficient cash to meet debt service obligations in
a timely fashion. As a result of the substantial leverage
often employed, the equity portion of a Mezzanine Investment
offers potential for significant appreciation over time as
debt is repaid, but the risks associated with the investment
may be significant if the business or prospects of the
company decline after the investment.
OTHER INVESTMENTS. These include (1) High Yield Debt
Investments, (2) Venture Investments, (3) Bridge Investments
and (4) Publicly Traded Securities. High Yield Debt
Investments are secured or unsecured debt securities having
a current yield and no associated equity right, equity
investment or Mezzanine Investment. Venture Investments,
which have a greater emphasis on the equity component and
less on the current income component, are investments in
early stage growth companies that have extraordinary
prospects to increase shareholder value and equity
investments in leveraged buyout transactions. Venture
Investments, especially those in early stage companies, have
significant speculative characteristics and high risk of
loss. The Trust Advisor anticipates that Venture Investments
will be the predominate type of Other Investment held by the
Trust. Bridge Investments are 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 preferred stock and other equity rights. The interest
rate on Bridge Investments may be either fixed or floating
and may be escalating. The Trust will only make a
</TABLE>
7
<PAGE>
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Bridge Investment in a Portfolio Company in which it has
made or expects to make an Enhanced Yield Investment or in a
Portfolio Company in which it would be comfortable in making
an Enhanced Yield Investment. The Trust may invest in
Publicly Traded Securities of Portfolio Companies that it
believes are undervalued and present good opportunity for
appreciation of value. It is not anticipated that investing
in Publicly Traded Securities will be a major activity of
the Trust.
TRUST ADVISOR................. Berthel Fisher & Company Planning, Inc., a corporation
organized under the laws of the State of Iowa on March 20,
1989, is the Trust Advisor. The principal office of the
Trust Advisor is located at 100 Second Street, S.E., Cedar
Rapids, Iowa. The Trust Advisor was organized as a
subsidiary of Berthel Fisher & Company ("Berthel Fisher") to
serve as a registered investment advisor. All of the voting
stock of the Trust Advisor is owned by Berthel Fisher.
Berthel Fisher, a financial services holding company, was
formed in 1985 as an Iowa corporation to hold the stock of
Berthel Fisher & Company Financial Services, Inc.
("Financial Services"), a broker-dealer registered with the
National Association of Securities Dealers, Inc. Financial
Services is the Dealer Manager for this offering.
FEES AND EXPENSES............. The Trust has entered into a Management Agreement with the
Trust Advisor that provides for incentive compensation to
the Trust Advisor based on the capital appreciation of the
Trust's investments. In addition, the Trust will pay the
Trust Advisor an annual Management Fee equal to 2.5% of the
value of the assets of the Trust. The Management Fee will be
paid quarterly in arrears. The amount of any quarterly
Management Fee will be determined by reference to the net
value of the assets of the Trust as of the first day of that
quarter. The first quarter's Management Fee will be
determined by reference to the net value of assets of the
Trust following the Initial Closing. The Trust will pay all
expenses associated with the operation of the fund, such as
legal and accounting expenses. Selling commissions paid by
the Trust will vary between 7.0% and 2.0% of the aggregate
purchase price of all Shares sold, depending on the number
of Shares purchased by an Investor. The aggregate selling
commission, assuming no sale qualifies for a quantity
discount and assuming no discounts of the selling
commissions, will be $105,000 if 1,500 Shares are sold and
$1,750,000 if 25,000 Shares are sold. The Trust will pay a
Wholesale Marketing Fee of 2.5% of the public offering price
of all Shares sold. The Wholesale Marketing Fee will be
$37,500 if 1,500 Shares are sold and $625,000 if 25,000
Shares are sold. The Trust will reimburse due diligence
expenses in an amount not to exceed 0.5% of the aggregate
purchase price of Shares sold. The Trust will pay the
Corporate Trustee an Investment Set-up Fee equal to .5% of
the aggregate purchase price of all Shares sold for services
in connection with the organization of the Trust. The fee
will be $7,500 if 1,500 Shares are sold, and $125,000 if
25,000 Shares are sold. Because the Investment Set-up Fee
will be paid to an Affiliate of the Dealer Manager, it may
be considered to be compensation to the Dealer Manager. The
Trust Advisor will receive an incentive
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distribution equal to 20% of distributions from the Trust
after Payout. Actual amounts of the incentive distribution
will depend on future operations and are not currently
determinable. See "Terms of the Offering" and "Compensation
and Fees."
DISTRIBUTIONS................. During the offering period, each Investor shall earn an
Underwriting Return computed on a daily basis for each
Investor. The Underwriting Return shall be an amount equal
to the interest, if any, actually earned by the Trust on the
Investors' funds held in escrow through the Initial Closing,
plus 10% simple annual interest, computed on a daily basis
from the Initial Closing through the Final Closing. At the
Final Closing, the Trust will distribute the lesser of all
of the cash earnings of the Trust earned during the offering
period or the Underwriting Return. There is no guarantee
that the full Underwriting Return will be paid at the Final
Closing. If the Underwriting Return is not fully paid at the
Final Closing, the unpaid balance of the Underwriting Return
shall be paid as set forth in the following paragraph.
After the Final Closing, unless a majority of the
Independent Trustees determine that a distribution is not in
the best interest of the Trust and the Shareholders, the
Trust will make quarterly distributions of all Cash Revenues
to the extent that the Trust has cash available for such
distributions. All distributions will be made 99% to the
Shareholders and 1% to the Trust Advisor until the
Shareholders have received Payout, and thereafter, all
distributions shall be allocated 80% to the Shareholders and
20% to the Trust Advisor. All distributions to Shareholders
shall be allocated in the following priority: (i) to a
Priority Return of 8% per annum simple annual interest
(non-compounded) computed, from Final Closing, on the
declining balance of each Shareholder's Capital
Contribution, (ii) to pay any unpaid Priority Return accrued
in prior years, (iii) to reduction of Shareholders' Capital
Contributions, and (iv) to the payment of any Underwriting
Return that has not previously been paid. Payout occurs when
each Shareholder has received distributions equaling 100% of
all of their original investment plus the Priority Return
plus the Underwriting Return. The Trust does not intend to
make distributions of the Priority Return on a current
basis, and there is no assurance that the Priority Return
will be paid on a current basis.
The Trust Advisor does not presently intend to distribute
capital during the first five years following the Final
Closing except such capital that may be returned as part of
the distributions of Cash Revenues as discussed above.
However, the Trust Advisor, with the approval of the
Independent Trustees, may distribute capital if in its
opinion there are insufficient investment opportunities
available to the Trust, or if in the opinion of the Trust
Advisor, with the approval of the Independent Trustees, such
distribution is warranted for the benefit of the
Shareholders. After the first five year period, the Trust
may distribute any capital that the Trust Advisor, with the
approval of the Independent Trustees, believes is not
necessary for the operation of the Trust. See "Distribution
and Allocations."
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LEVERAGE...................... In order to make investments in Portfolio Companies, the
Trust may seek to borrow from banks, insurance companies and
other institutions up to the maximum extent permitted by the
Investment Company Act. The Trust will not borrow funds to
make distributions or to pay expenses. See "Investment
Objective and Policies." Although the Trust Advisor does not
presently intend to do so, the Trust may organize and invest
not less than $2,500,000 of the proceeds in a Small Business
Investment Company ("SBIC") subsidiary. See "Investment
Objective and Policies."
REGULATION.................... The Trust has elected to be treated as a business
development company under the Investment Company Act. The
Investment Company Act imposes restrictions on the
activities of the Trust, including restrictions on the
nature of its investments, the use of borrowed funds for
Trust purposes and its issuance of securities, options,
warrants or other rights, and requires that a majority of
the Trustees of the Trust be individuals who are not
"interested persons" of the Trust as defined in the
Investment Company Act. Such restrictions may prohibit the
purchase of certain Enhanced Yield Investments that would
otherwise be suitable for investment by the Trust or render
such purchases inadvisable. See "Regulation."
As a business development company, the Trust will also be
subject to the provisions of the Investment Advisers Act
(the "Advisors 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."
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PLAN OF DISTRIBUTION
The Shares are being offered by Berthel Fisher & Company Financial Services,
Inc., as Dealer Manager, and by other broker-dealers selected by the Dealer
Manager, as additional Selling Agents, all of whom shall be members of the NASD.
The principal address of the Dealer Manager is 100 Second Street, S.E., Cedar
Rapids, Iowa 52401 and its telephone number at such address is (319) 365-2506.
There is no firm commitment on the part of the Dealer Manager or any other
Selling Agent, and they are under no obligation to take down or pay for any of
the Shares.
The Dealer Manager may terminate the offering if, among other things, (i)
certain specified actions, usually associated with extremely adverse economic
and market conditions, have been taken by the principal national securities
exchanges or by governmental authorities or (ii) other events have occurred or
are pending or threatened which, in the judgment of the Dealer Manager,
materially impair the investment quality of the Shares.
At each Closing, the Trust will pay to the Dealer Manager selling
commissions ranging from 7.0% to 2.0% of the aggregate purchase price of the
Shares sold and accepted by the Trust at such Closing, which will be reallowed
to Selling Agents for Shares sold through them. At each Closing, the Trust will
also pay the Dealer Manager a Wholesale Marketing Fee in the amount of 2.5% of
the aggregate purchase price of Shares sold at such Closing. The Trust will also
pay to the Corporate Trustee an Investment Set-up Fee of .5% of the aggregate
purchase price of the Shares sold for services related to establishing the
Trust. See "Terms of the Offering." Because the Investment Set-up Fee will be
paid to an Affiliate of the Dealer Manager, the Investment Set-up Fee may be
considered to be compensation to the Dealer Manager.
In addition to the reallowance of selling commissions, the Dealer Manager
may reallow a portion of its Wholesale Marketing Fee to any Selling Agent who
sells an aggregate of 500 Shares ($500,000) or more. Such reallowance will be in
an amount not to exceed .5% of the gross sales price of Shares sold by such
Selling Agent. The Trust will reimburse the Dealer Manager for due diligence
expenses in an amount not to exceed 0.5% of the aggregate purchase price of
Shares sold. If the minimum number of Shares is sold, the due diligence expenses
reimbursed would not exceed $7,500, and if the maximum number of Shares is sold,
the due diligence expenses reimbursed would not exceed $125,000.
Investors who purchase more than $500,000 of Shares will receive a discount
of from 2.0% to 5.0% depending upon the amount purchased by the Investor. The
Proceeds to the Trust net of commissions will not be affected by these discounts
for volume purchases. See "Terms of the Offering."
To promote the sale of Shares, the Dealer Manager may pay to registered
representatives non-cash awards that, when aggregated with other non-cash awards
paid in that year by Affiliates of the Trust, do not exceed the maximum allowed
by the NASD under the Rules of Fair Practice. Such awards shall be paid for by
the Dealer Manager from its share of selling commissions. The aggregate value of
such awards will not exceed $5,000.
Total payments made to the Dealer Manager and all Selling Agents in
connection with the offering of Shares, including sales commissions paid to the
Dealer Manager and to unaffiliated Selling Agents, payments made in connection
with wholesaling efforts (including the aggregate value of all non-cash awards
paid directly to registered representatives), payment of due diligence expenses
and payments to the Corporate Trustee, will not in the aggregate exceed 10.5% of
the gross proceeds of the offering. Due diligence expenses incurred by the
Dealer Manager and Selling Agents in connection with activities associated with
investigation of the offering will not exceed .5% of the gross proceeds of the
offering.
The Trust has agreed to indemnify the Dealer Manager and the Selling Agents,
and the Trust Advisor has agreed to indemnify the Dealer Manager and the other
Selling Agents against certain liabilities, including liabilities under the
Securities Act. The Trust may not indemnify the Dealer Manager or a Selling
Agent against any liability arising out of the Dealer Manager's or such Selling
Agent's willful misfeasance, bad faith, gross negligence or reckless disregard
of its duties. The Dealer Manager and each Selling Agent may be deemed to be
"underwriters" for purposes of the Securities Act in connection with
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the offering and sale of the Shares. Notwithstanding the foregoing, the Trust
Advisor and any person acting as broker-dealer shall not 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.
All items of compensation to be paid to the Dealer Manager and all Selling
Agents in connection with the distribution of this offering, regardless of the
source, including, but not limited to the Investment Set-up Fee, the Wholesale
Marketing Fee, the Dealer Manager's counsel legal fees (none of which will be
paid by the Trust), any marketing fees, any sales incentives, and sales
commissions and discounts will not exceed 10% and 0.5% for due diligence. The
Dealer Manager 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. However, in connection with the operation of the
Trust, the Trust Advisor will receive compensation as described in "Management
Agreement" under "Management Arrangements."
The Shares will be sold to the public for $1,000 per Share, with a minimum
purchase of five (5) Shares, or two (2) Shares for Individual Retirement
Accounts. The Trust may adjust the price of Shares following the Initial Closing
or subsequent Closings to the market value of Shares based on their net asset
value, but the price will not be reduced below $1,000. Neither the Dealer
Manager nor the Selling Agents shall execute a transaction in the Shares in a
discretionary account without prior written approval of the transaction by the
Investor.
The Shares are not being listed on a national securities exchange and
neither the Dealer Manager nor any of the Selling Agents intends to act as a
market maker with respect to the Shares.
THE TRUST
The registrant is 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. The Trust was formed under the laws of
the State of Delaware on February 10, 1995, and has no operating history. The
Trust's principal office is located at 100 First Street, S.E., Cedar Rapids,
Iowa 52401, and its telephone number is (319) 365-2506.
As of the date of this Prospectus, the Trust has issued five Shares each to
Thomas J. Berthel and Von Elbert for an aggregate of $10,000 cash. Thomas J.
Berthel and Von Elbert 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 Von Elbert may be deemed to
control the Trust at the date of this Prospectus. As of the Initial Closing,
such control will terminate.
RISK FACTORS
AN INVESTMENT IN THE TRUST INVOLVES A NUMBER OF SIGNIFICANT RISKS AND WILL
BE AFFECTED BY OTHER IMPORTANT FACTORS RELATING TO INVESTMENTS IN TRUSTS
GENERALLY, AND RELATING TO THE STRUCTURE AND INVESTMENT OBJECTIVES OF THE TRUST
IN PARTICULAR. AS A RESULT OF THESE RISKS AND FACTORS, THERE IS NO ASSURANCE
THAT THE TRUST WILL BE ABLE TO CARRY OUT ITS INVESTMENT PROGRAM SUCCESSFULLY. IN
ADDITION TO THE FACTORS HEREUNDER, PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER
THE INFORMATION SET FORTH UNDER "CONFLICTS OF INTEREST."
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A. GENERAL RISKS OF INVESTMENTS IN THE TRUST
1. NO OPERATING HISTORY.
The Trust is newly organized for the purpose of raising capital and
investing such capital to implement its investment objective. The Trust has no
operating history. The Trust is a closed-end investment company designed
primarily as a long-term investment and not as a trading vehicle. There can be
no assurance that the Trust will be able to locate or invest in Portfolio
Companies that will provide any return. See "The Trust."
2. GENERAL NATURE OF INVESTMENTS
See "Investment Objective and Policies" for a detailed discussion of the
Trust's investment policies. While investments in highly leveraged companies
offer the opportunity for current income and capital appreciation, such
investments involve a high degree of business and financial risk and can result
in loss of all of the invested principal. Furthermore, Portfolio Companies may
be created for the purpose of undertaking a specific transactions and may have
no operating histories. The Trust Advisor anticipates that most of the Portfolio
Companies will be highly leveraged as a result of (i) the Trust's investment,
and (ii) debt instruments issued to other securities holders of such Portfolio
Companies. If a Portfolio Company cannot generate adequate cash flow to meet
debt service, all or part of the principal of such company's debt may not be
repaid and, in such event, the value of the Trust's subordinated debt or equity
participation could be reduced or eliminated.
In addition, high leverage and other general business risks (such as labor
problems, casualty losses, increases in operating expenses, disputes with
suppliers or customers and other problems that require additional company
resources) may have a magnified effect on Portfolio Companies. The effects of a
deterioration of the general economy may have a more pronounced effect on the
profitability of such highly leveraged companies as well. In addition, such
companies may be less diversified than other companies and, therefore, are more
negatively impacted by business cycles.
The interest rate that the Trust charges on debt investments will be subject
to the usury laws of the states in which it conducts its business. Such laws may
limit the amount of interest that the Trust may legally charge. Whether an
equity participation is or is not considered interest may not be clearly
established in some states. There can be no assurance that some of the equity
received by the Trust will not be valued in a way that causes the Trust to
exceed a state's usury limitations, subjecting the Trust to severe penalties,
including loss of interest, treble damages and forfeiture of principal.
Enhanced Yield Investments consist of Mezzanine Investments and Other
Investments. Mezzanine Investments are investments that are designed to yield a
projected return over the life of the investment that is higher than secured
debt financing, but lower than equity financing. Mezzanine Investments represent
a layer of corporate financing between equity and senior debt. Senior debt is
debt typically provided by financial institutions on a secured basis. Other
Investments include all securities invested in by the Trust that are not
Mezzanine Investments, including High Yield Debt Investments (commonly referred
to as "junk bonds"), Venture Investments, Bridge Investments and Publicly Traded
Securities. Enhanced Yield Investments may include investments in financially
troubled companies, including companies undergoing workouts or whose outstanding
debts have been restructured. The sensitivity of such companies to general
economic conditions, such as recessions or changes in interest or inflation
rates, fluctuations in local or general business conditions, increases in
operating expenses, work stoppages or other labor disputes or disputes with
suppliers or customers, will be heightened due to such financial troubles.
Furthermore, since the Trust generally will invest in less than investment
grade or in unrated securities, the financial risks associated with its
investments will be very high. The Trust's investments generally will be made in
unrated securities purchased in private placements.
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3. BRIDGE INVESTMENTS
The Trust may be the sole lender in a Bridge Investment, in which case the
Trust's exposure with respect to a Portfolio Company would be substantial. The
interest rate on Bridge Investments is expected to be either fixed or floating,
or may increase according to a fixed schedule over time. See "Other Investments"
under "Investment Objective and Policies." No assurance can be given that a
Bridge Investment will be retired by permanent financing upon such investment's
maturity. In instances where the Trust makes a Bridge Investment in a Portfolio
Company that is not retired by permanent financing, the increasing interest rate
that may be charged on such Bridge Investment may adversely affect the company's
ability to pay its debts.
Even if the Trust has not made a Bridge Investment in a leveraged
transaction, the existence of bridge or interim financing in a transaction in
which the Trust has made an Enhanced Yield Investment will subject the Enhanced
Yield Investment to certain risks. If the bridge financing cannot be retired by
permanent financing, the increasing interest rate that may be charged may
adversely affect the company's ability to pay its debts, including the debt
component of such Enhanced Yield Investment and may affect the future value of
any equity component of such Enhanced Yield Investment.
4. EFFECT OF INTEREST RATE SENSITIVITY ON SENIOR DEBT
Fluctuations in interest rates may have an adverse impact on the Trust
indirectly through the effect of interest rate fluctuations on Portfolio
Companies. Many of the Trust's investments will be Enhanced Yield Investments
consisting primarily of subordinated debt and equity securities issued by
Portfolio Companies that have also issued senior debt. The payment of any
amounts due on the Trust's investment will, therefore, generally be subject to
the payments due, if any, on debt senior to the Trust's investment. Furthermore,
since senior debt typically bears interest at a floating rate, while other debt
typically does not, increased interest rates may shift more of a company's
available funds to the senior lenders. If a Portfolio Company cannot generate
sufficient cash flow to meet such increased interest payments the shift of funds
to senior lenders could decrease or eliminate the amount realized on the Trust's
investment. See "Investment Objective and Policies."
5. TIME REQUIRED TO MATURITY OF INVESTMENTS; LIMITATIONS ON CURRENT
DISTRIBUTIONS; LIQUIDITY OF INVESTMENTS
Although the Trust will seek to invest funds as promptly as possible, it is
anticipated that there may be a significant period of time before the Trust has
completed the initial selection of its Enhanced Yield Investments in Portfolio
Companies. Such investments may typically take from three (3) to seven (7) years
from the date of initial investment to reach a state of maturity such that
realization on any equity component of the Trust's investments can be achieved.
Transaction structures will typically not provide for repayment of the principal
portion or liquidation of Enhanced Yield Investments for several years following
the date of investment. In light of the foregoing, it is likely that no
significant distributions of proceeds from the disposition of investments will
occur until four (4) to seven (7) years from the date of the Final Closing.
Furthermore, current distributions on the Shares may also be affected by the
purchase of Enhanced Yield Investments that may include zero coupon or other
obligations having an original issue discount. The receipt of all or a portion
of the interest income accruing on such obligations is deferred, often until
maturity. Enhanced Yield Investments may also include securities that pay
interest or dividends in kind (i.e., in securities) for a period of time.
Securities received as dividends in kind will become portfolio securities of the
Trust and will be treated in the same manner as an Enhanced Yield Investment.
For federal income tax purposes, amortization of original issue discount will be
attributable to Shareholders as interest income even though the Trust does not
realize any Cash Flow as a result of such amortization. Further, receipt of
dividends or interest in kind will be treated as income even though the Trust
does not realize any Cash Flow as a result of such receipt. To the extent the
Trust purchases securities having an original issue discount or paying interest
or dividends in kind, cash distributions may be less than the aggregate income
accruing on the Trust's portfolio investments for federal income tax purposes.
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It is anticipated that a substantial portion of the Trust's Enhanced Yield
Investments will consist of securities that are subject to restrictions on sale
by the Trust because they were acquired from the issuer in "private placement"
transactions or because the Trust is deemed to be an Affiliate of the issuer.
Generally, the Trust will not be able to sell these securities publicly without
the expense and time required to register the securities under the Securities
Act, or to sell the securities under Rule 144 under the Securities Act, which
permits only limited sales under specified conditions. When restricted
securities are sold to the public, the Trust may be deemed an "underwriter," or
possibly a controlling person, with respect thereto for the purpose of the
Securities Act and be subject to liability as such under that Act.
In addition, contractual or practical limitations may restrict the Trust's
ability to liquidate its investments in the Portfolio Companies since in most
cases the securities of Portfolio Companies will be privately held and the Trust
may own a relatively large percentage of the Portfolio Company's outstanding
securities. Sales may also be limited by securities market conditions, which may
be unfavorable for sales of securities of particular companies or companies in
particular industries. Furthermore, since all of the Trust's investments,
including its Enhanced Yield Investments and certain Temporary Investments, will
be unrated, certain potential buyers who are restricted to making investments in
rated securities may not be available to purchase any such investment. The above
limitations on liquidity could prevent or delay a successful sale of Enhanced
Yield Investments, or could reduce the amount of proceeds that might otherwise
be realized. See "Valuation" under "Investment Objective and Policies."
The Trust may make distributions in kind of the Trust's Enhanced Yield
Investments if the Independent Trustees, upon the recommendation of the Trust
Advisor, (i) determine that it would not be in the best interest of the
Shareholders to liquidate such securities and distribute the proceeds thereof,
and (ii), if necessary, receive a no-action letter or exemptive order from the
SEC. Distributions of securities in kind will be made only of marketable
securities and to the extent permitted under applicable federal and state
securities laws and under the specific provisions of the Declaration of Trust.
Distributions of in-kind property that does not consist of marketable securities
shall be made only if (a) the Trust advises each Shareholder of the risks
associated with direct ownership of the property; (b) the Trust offers each
Shareholder the election of receiving in-kind property distributions; and (c)
the Trust distributes in-kind property only to those Shareholders who accept the
Trust's offer. The sale of any securities distributed in kind to Shareholders
may be subject to the same legal, contractual and practical limitations
described above that apply to the Trust. Transfer of such securities may be
legally restricted, there may be no public market for such securities, each
Shareholder will hold a relatively small percentage of such securities, and each
Shareholder will bear the brokerage and other expenses involved in disposing of
such securities. See "Investment Objective and Policies."
6. IMPACT OF HIGHER INTEREST RATES ON LIQUIDATION OF INVESTMENTS
The Trust will terminate upon the liquidation of all of its investments, but
no later than the later of December 31, 2005 or ten (10) years from the Final
Closing, provided 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. After termination, the Trust
will liquidate any remaining investments as soon as practicable but in any event
within three (3) years from the date of termination. If the Trust's debt
investments do not mature prior to the end of the Trust's term, or if the Trust
is not otherwise able to liquidate such investments in the normal course of
business prior to the expiration of its term, the Trust could incur substantial
capital losses resulting from the liquidation of debt securities prior to their
maturity if interest rates at the time of liquidation are higher than the
interest rates earned by such debt securities. The Trust Advisor will seek to
negotiate maturities of investments within the stated term of the Trust. If the
Trust is unable to sell or liquidate its equity interests or other securities
before the end of the Trust's term and the Trust is forced to liquidate in a
short period of time, there will be a substantial discount taken in order to
sell the security. See "Liquidating Investments" under "Investment Objective and
Policies."
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7. FOLLOW-ON INVESTMENTS
Following its initial investment, the Trust may make additional debt and
equity investments in Portfolio Companies ("Follow-On Investments") to increase
its investment in a Portfolio Company, to convert convertible securities that
were acquired in the original financing, to exercise warrants and options, to
preserve the Trust's proportionate ownership when a subsequent financing is
pursued or made or to protect the Trust's initial investment when a Portfolio
Company's performance does not meet expectations. The Trust will have the
discretion to make any Follow-On Investments as its determines, subject to the
availability of Available Capital. The failure to make such Follow-On
Investments may, in certain circumstances, jeopardize the continued viability of
a Portfolio Company and the Trust's initial investment. The necessity of making
Follow-On Investments and the level of the minimum number of Shares that may be
sold may limit the number of companies in which the Trust has the ability to
invest. There can be no assurance that the Trust will have sufficient funds to
make necessary Follow-On Investments or that, following a Follow-On Investment,
the Trust will not lose the entire amount of its initial and Follow-On
Investment. In deciding whether to make a Follow-On Investment, the Trust
Advisor will exercise its business judgment and apply similar criteria as it
does with initial investments. See "Follow-On Investments" under "Investment
Objective and Policies."
8. TIMING AND AMOUNT OF DISTRIBUTIONS
The Trust will distribute all of its Cash Revenues on a quarterly basis.
Such distribution may not be sufficient to enable Shareholders to pay income
taxes on their allocable share of Trust profits. The Trust will not borrow funds
to make distributions. There can be no assurance that the cumulative cash
distributions to Shareholders will equal or exceed their investment in the
Trust, or that the Trust will make any distributions. See "Distributions and
Allocations."
9. LEVERAGE
The Trust may borrow funds in order to make investments in Portfolio
Companies and for operational purposes. The use of leverage will magnify
increases or decreases in the Trust's net asset value. Although the use of
leverage could permit greater diversification and spreading of risks, it also
increases the sensitivity of the Trust to adverse developments in the general
economy or in the Portfolio Companies in which the Trust invests. Because the
Trust's investments generally will pay interest at fixed rates, if interest
rates were to rise the Trust's debt service on any floating or variable rate
debt incurred by the Trust would rise without a concomitant rise in the interest
rates received from Portfolio Companies. This could decrease the amount the
Trust has available to pay dividends. Furthermore, if a Portfolio Company
defaults on its obligation to the Trust, the loss would be magnified by the
existence of leverage. See "Miscellaneous" under "Investment Objective and
Policies."
10.COMPETITION FOR INVESTMENTS
The Trust expects to encounter competition from other persons or entities
having similar investment objectives. Competitors include other business
development companies, investment partnerships and corporations, small business
investment companies, and large industrial and financial companies investing
directly or through Affiliates and individuals. Many of these competitors have
more experience with Enhanced Yield Investments, greater financial resources and
more personnel than the Trust and/or the Trust Advisor and may be subject to
different and frequently less stringent regulations. There is no assurance that
acceptable investments will be available. To the extent competition for
investments increases or the number of investment opportunities decrease, the
yield available to the Trust may decrease. Furthermore, if the Independent
Trustees, upon the recommendation of the Trust Advisor, determine that available
net offering proceeds cannot be invested in accordance with the Trust's
investment objective and policies and are, therefore, returned to Investors, the
yield to Investors would be reduced since the return of capital would not be
accompanied by a refund of any offering and organization expenses paid by the
Trust. See "Investment Objective and Policies" and "Conflicts of Interest."
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11. INTEREST RATE AND STOCK MARKET FLUCTUATIONS
The Trust anticipates that Enhanced Yield Investments generally will pay
interest at fixed rates. Therefore, if interest rates generally rise while such
investments are outstanding, Investors in the Trust may receive interest income
at lower rates than are then prevailing in the market place.
General fluctuations in the prices of securities on the stock markets may
affect the value of the investments held by the Trust. Moreover, the business
plans of certain Portfolio Companies may include the sale of segments of their
business. Stock market fluctuations may affect the amount Portfolio Companies
can receive from the sale of certain segments of their businesses, which will
affect the value of the Trust's investment in those Portfolio Companies.
12. LIMITED NUMBER OF INVESTMENTS AND INDUSTRY CONCENTRATION
The Trust will be limited in the amount of Available Capital it may invest
in any one Portfolio Company. Generally, the Trust may not initially invest more
than the greater of $2,500,000 or 10% of its Available Capital in a single
Portfolio Company. In the initial stages of the Investment Period and
particularly after the Initial Closing and before subsequent Closings, with the
approval of the Independent Trustees, the Trust may make an investment in one
Portfolio Company utilizing all of its Available Capital. Because the minimum
number of Shares that will be sold is 1,500, it is more likely than not that the
Trust will invest in one or two Portfolio Companies if only the minimum number
of Shares is sold. While the Trust Advisor intends to limit the exposure of the
Trust's capital in any single investment, the Trust's capital will be invested
in a limited number of Portfolio Companies, and financial difficulty on the part
of any single Portfolio Company will expose it to a greater risk of loss than
would be the case if it were a "diversified" company holding numerous
investments. It is possible that the Trust will invest as much as sixty percent
(60%) of its funds in as few as two Portfolio Companies. See "Quantitative
Factors -- Portfolio Concentration" under "Investment Objective and Policies."
If the Trust invests substantially all of its assets in two Portfolio Companies,
the risk that the Trust will lose a substantial portion of its assets is much
greater than if the Trust diversifies its investments in a greater number of
Portfolio Companies.
The Trust intends to spread its investments among several Portfolio
Companies and industries. Although the Trust Advisor does not intend to
concentrate in a single or a few industries, the Trust Advisor and its
Affiliates have experience in the telecommunications industry, and the Trust
Advisor may encounter more investment opportunities in that industry than in
other industries. If the most attractive Enhanced Yield Investments available to
the Trust Advisor and the Trust are concentrated in a small number of Portfolio
Companies or industries, the Trust's portfolio may become concentrated in those
Portfolio Companies or industries. In such event, the Trust would be exposed to
the risk of adverse developments in or affecting any single Portfolio Company or
industry to a greater extent than if its investments were dispersed over a
greater variety of Portfolio Companies or industries. See "Quantitative Factors"
under "Investment Objective and Policies."
B. FEDERAL INCOME TAX RISKS
13. TAXATION OF THE TRUST AS A CORPORATION
The anticipated tax consequences to Shareholders of an investment in the
Trust, such as the pass-through of income, gain, losses and other deductions,
depends upon the classification of the Trust as a partnership, rather than an
association taxable as a corporation, for federal income tax purposes. The Trust
has not requested an advance ruling from the Internal Revenue Service (the
"IRS") that it be treated as a partnership for federal income tax purposes. The
IRS would likely deny any such request since the Trust will not satisfy all of
the requirements contained in published IRS Procedures for obtaining such an
advance ruling. Instead, Bradley & Riley, P.C., counsel to the Trust, will
deliver its opinion that, provided the Trust is not a publicly traded Trust, the
Trust will be classified is a partnership for federal income tax purposes.
Unlike a tax ruling, an opinion of counsel has no binding effect on the IRS and
there can be no assurance that the IRS will not challenge the classification of
the Trust as a partnership for federal income tax purposes. Moreover, continued
eligibility of the Trust for classification as a partnership will depend on no
adverse changes of law and the Trust's not becoming a publicly
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traded partnership as described below. Since the Trust will not be eligible for
the tax treatment available to investment companies registered as such under the
Investment Company Act, the Trust would be required to pay income tax at
corporate tax rates on its net income if it were classified as an association
taxable as a corporation.
In recent years, the Treasury Department and members of Congress have on
multiple occasions proposed to classify trusts and limited partnerships with
interests which are widely held, such as the Trust, as corporations rather than
partnerships for federal income tax purposes. In December 1987, the Internal
Revenue Code of 1986 (the "Code") was amended to provide that certain "publicly
traded partnerships" will be classified as corporations for federal income tax
purposes. The Declaration of Trust provides for the Trust to satisfy one of
certain safe harbors for avoiding classification as a publicly traded
partnership contained in an IRS Advance Notice and proposed Regulations recently
issued by the IRS. Accordingly, it is not anticipated that the Trust will be a
publicly traded partnership. However, there can be no assurance that regulations
will not be promulgated or legislation will not be passed at some future date
that would cause the Trust to be classified as a corporation or a publicly
traded partnership. In addition, if necessary to avoid conflict with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Trust
may amend its Declaration of Trust in ways that will increase its risk of
classification as a publicly traded partnership. The Declaration of Trust
provides that if it appears likely that the Trust will be classified as a
corporation or a publicly traded partnership for federal income tax purposes,
the Trust Advisor may take such steps as it deems necessary to minimize the
adverse tax consequences of such classification. Such steps could include the
amendment of the Declaration of Trust, reorganization of the Trust as a
regulated investment company pursuant to section 851 of the Code, liquidation of
the Trust or such other steps as may be deemed appropriate to the Trust Advisor
and the Independent Trustees at such time. See "Tax Consequences" under "Tax
Matters."
14. TAX CONSIDERATIONS FOR FOREIGN INVESTORS
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. See "Tax Considerations for
Nonresident Aliens and Foreign Corporations" under "Tax Matters." Foreign
Investors should consult their tax advisers with respect to the possible
federal, state, local and foreign tax consequences of an investment in the
Trust.
C. TRUST AND CONTRACTUAL RISKS
15. RELIANCE ON THE TRUST ADVISOR
Pursuant to the Management Agreement between the Trust and the Trust
Advisor, the Trust will only make Enhanced Yield Investments recommended by the
Trust Advisor. Accordingly, an Investor in the Shares must rely upon the ability
of the Trust Advisor in identifying, structuring and making Enhanced Yield
Investments consistent with the Trust's investment objectives and Policies. See
"Investment Objective and Policies." There are no employment agreements between
the Trust Advisor and its key management personnel. No assurances can be given
as to the continuing availability of such management services during the life of
the Trust. Such management services could cease to be available to the Trust
under various circumstances, including a change in the control of the Trust
Advisor. See "Trust Advisor" under "Management Arrangements." Furthermore,
management will not be evaluated by the Shareholders.
16. TRUST ADVISOR'S BROAD DISCRETION OVER THE USE OF PROCEEDS
All decisions with respect to the management of the Trust will be made
exclusively by the Independent Trustees and the Trust Advisor. See "Management
Arrangements." Shareholders have no right or power to take part in the
management of the Trust. Accordingly, no person should purchase Shares unless
such person is willing to entrust the management of the Trust to the Trust
Advisor, subject to overall supervision of the Independent Trustees.
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17. SHAREHOLDERS' INABILITY TO EVALUATE OR REVIEW FINANCIAL STATEMENTS OF
PORTFOLIO COMPANIES
An Investor will not have the opportunity to evaluate personally the
relevant economic, financial and other information that will be utilized by the
Trust Advisor in its selection, structuring, monitoring and disposition of
investments and will not receive the detailed financial information prepared by
Portfolio Companies that is available to the Trust Advisor.
18. NO MARKET FOR SHARES; SHARES ARE ILLIQUID SECURITIES
The Shares will only be transferable in accordance with certain restrictions
in the Declaration of Trust and may be affected by restrictions on resales
imposed by the laws of some states. A Shareholder may not transfer a Share
unless the Shareholder represents and provides documentation satisfactory in
form and substance to the Trust Advisor that such 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, the Trust Advisor 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. A transferor will not be required to make the representations
described above if he represents that the transfer is effected through an agent
whose procedures have been approved by the Trust Advisor as consistent with the
requirements for avoiding classification as a publicly traded partnership. The
Declaration of Trust also prohibits the transfer of Shares to certain
transferees. See "Transferability of Shares." There is presently no public
market for the Shares, and there are restrictions contained in the Declaration
of Trust that are intended to prevent the development of a public market.
Consequently, Shareholders may not be able to liquidate their investment in the
event of emergency or for any other reason. Such factors may also affect the
price which a Shareholder would be able to obtain for Shares.
19. REGULATION
The Trust has elected to be treated as a business development company under
the Investment Company Act. Such Act imposes restrictions on the activities of
the Trust, including restrictions on the nature of its investments, the use of
borrowed funds for Trust purposes and its issuance of securities, options,
warrants or other rights, and requires that a majority of the Trustees of the
Trust be individuals who are not "interested persons" of the Trust as defined in
the Investment Company Act. Such restrictions may prohibit the purchase of
certain Enhanced Yield Investments that would otherwise be suitable for
investment by the Trust or render such purchases inadvisable. See "Regulation."
Because there are no judicial and few administrative interpretations of
portions of the legislation applicable to the Trust, there is no assurance that
the legislation will be interpreted or administratively implemented in a manner
consistent with the Trust's objectives and intended manner of operation. If the
Trust Advisor, with the approval of the Trustees of the Trust, determines that
the Trust cannot operate effectively under the Investment Company Act, the Trust
Advisor, with the approval of the Trustees, may at some future date decide to
withdraw the Trust's election as a business development company and transform it
into an operating company not subject to regulation under the Investment Company
Act or cause it to liquidate. Such changes may not be effected without the
approval of the Shareholders holding a majority of the outstanding Shares of the
Trust.
20. CONFLICTS OF INTEREST
The Trust Advisor, the Corporate Trustee and their Affiliates, including the
Dealer Manager and its parent, Berthel Fisher & Company, may be subject to
various conflicts of interest in connection with their relationships and
transactions with the Trust. The contractual and other arrangements between the
Trust and the Trust Advisor, the Corporate Trustee and their Affiliates,
including the Dealer Manager, have not been established by arm's length
negotiations. Such conflicts of interest may include the following: transactions
with the Trust and Portfolio Companies; conflicts as to investment
opportunities; timing of disposition of trust investments; allocation of the
Trust Advisor's time and services; other relationships with Portfolio Companies;
participation by an Affiliate as Dealer Manager; and lack of separate
representation. See "Conflicts of Interest."
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USE OF PROCEEDS
The following table sets forth the Trust's best estimate of the use of
proceeds from the sale of 1,500 Shares and 25,000 Shares.
<TABLE>
<CAPTION>
ESTIMATED USE OF GROSS OFFERING PROCEEDS
---------------------------------------------------------
MINIMUM OFFERING MAXIMUM OFFERING
--------------------------- ----------------------------
AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Gross Proceeds........................................... $ 1,500,000 100.0% $ 25,000,000 100.0%
Selling Commissions...................................... (105,000) 7.0 (1,750,000) 7.0
Wholesale Marketing Fee.................................. (37,500) 2.5% (625,000) 2.5%
Due Diligence Expenses................................... (7,500) .5 (125,000) .5
Investment Set-up Fee.................................... (7,500) .5 (125,000) .5
Other Organizational and Offering Expenses(2)............ (60,000) 4.0 (1,000,000) 4.0
Acquisition Fees and Acquisition Expenses................ (52,500) 3.5 (875,000) 3.5
------------- ----- -------------- -----
Net Proceeds Available for Operation of the Trust........ $ 1,230,000 82.0% $ 20,500,000 82.0%
</TABLE>
- ------------------------
(1) All percentages shown in the table above are percentages of gross proceeds.
(2) The different amounts of expenses at the minimum and maximum levels reflect
that certain expenses incurred by the Trust at the minimum level will not be
paid by the Trust. Although the table shows that other Organizational and
Offering Expenses will be a maximum of $1,000,000 at the Maximum Offering,
the Trust Advisor expects that the maximum amount to be spent on other
Organizational and Offering Expenses will be less than $1,000,000.
The net proceeds of this offering, after payment of Organizational and
Offering Expenses of the Trust, are estimated to be $1,282,500 if 1,500 Shares
are sold or $21,375,000 if 25,000 Shares are sold. If the Trust elects to
exercise its option to sell an additional 25,000 Shares for a maximum of 50,000
Shares, the net proceeds are estimated to be $42,750,000. No portion of the net
proceeds of this offering has been allocated to any particular investment. The
proceeds will be utilized in a manner consistent with the Investment Company Act
and in accordance with the Trust's investment objective and policies.
The net proceeds will be used to invest in Portfolio Companies and to make
Temporary Investments. The Trust intends to invest or commit for Investment in
Trust Assets within the later of two years from the date of effectiveness of the
offering or one year from the Final Closing all of the net proceeds of this
offering in Enhanced Yield Investments issued by Portfolio Companies. Pending
investments in Portfolio Companies, the Trust will make temporary investments
permissible for a business development company under the Investment Company Act,
which include investments in cash, cash items of banks, government securities,
and high quality debt securities maturing in one year or less from the time of
investment in such securities. See "Temporary Investments" under "Investment
Objective and Policies." Any proceeds of the offering not committed for
investment in Portfolio Companies within the later of two years from the date of
effectiveness of the offering or one year from the Final Closing will be
distributed pro rata to the Shareholders as a return of capital without
deduction of Front End Fees.
Organizational and Offering Expenses will be paid from the proceeds of this
offering. If 1,500 Shares are sold, such expenses to be paid from proceeds are
estimated to be $217,500. If 25,000 Shares are sold, such expenses to be paid
from proceeds will not exceed $3,625,000. If the Trust elects to exercise its
option to sell an additional 25,000 Shares for a maximum of 50,000 Shares, such
expenses to be paid from proceeds will not exceed $7,250,000. A portion of the
Trust's Organizational and Offering Expenses has been advanced or will be
advanced by the Trust Advisor and will be reimbursed by the Trust upon closing
of this offering. The Trust Advisor will pay all Organizational and Offering
Expenses (excluding the Wholesale Marketing Fee, sales commissions and
discounts, Investment Set-up Fee and due diligence expenses) that exceed 4% of
the purchase price of Shares sold in the offering. Not more than 10% of the
proceeds of this offering will be paid, in the aggregate, to NASD members, or to
persons who are affiliated with, associated with or related to NASD members.
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Acquisition Fees and Acquisition Expenses will be paid from the proceeds of
this offering. Such fees and expenses are not determinable at this time, but the
total of all Acquisition Expenses and Acquisition Fees will not exceed 3.5% of
the proceeds of this offering. If 1,500 Shares are sold, such fees and expenses
will not exceed $52,500. If 25,000 Shares are sold, such fees and expenses will
not exceed $875,000. If the Trust elects to exercise its option to sell an
additional 25,000 Shares for a maximum of 50,000 Shares, such fees and expenses
will not exceed $1,750,000.
TERMS OF THE OFFERING
The Trust is offering an aggregate of 25,000 Shares. The Trust has the right
to engage the Dealer Manager to find subscribers for up to an additional 25,000
Shares, for a total maximum offering of 50,000 Shares. The offering will
terminate twelve months following the effective date of this Prospectus,
provided however, if the minimum number of Shares is sold and the Trust renews
registration with the SEC and with the various state agencies, the offering
period may be extended for up to an additional year.
If subscriptions for 1,500 Shares have not been received by the Termination
Date, the offering will be terminated and any subscription amounts received will
be promptly refunded with interest, if any, actually earned thereon. If at any
time during the offering subscriptions from suitable Investors acceptable to the
Trust for at least 1,500 Shares have been received and accepted and all other
conditions to closing have been met, the Trust may (i) accept such subscriptions
at the Initial Closing (the "Initial Closing") and issue Shares to such
Investors and (ii) continue to offer for sale the remaining Shares until the
earlier of the Termination Date or the date all Shares are purchased. After the
Initial Closing and until the Termination Date, subscriptions may be accepted by
the Trust and funds received at additional Closings (any such additional Closing
and the Initial Closing being herein referred to as a "Closing") held at such
time or times as the Trust Advisor and the Dealer Manager shall deem advisable.
Organizational and Offering Expenses paid by the Trust will not exceed 14.5%
of the aggregate purchase price of Shares sold. 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 including, but not
limited to, total underwriting and brokerage discounts and commissions (but not
including fees of the underwriter's attorneys, which will be paid independently
by the Dealer Manager), the Wholesale Marketing Fee, the Investment Set-up Fee,
expenses for printing, engraving, mailing, salaries of employees of the Dealer
Manager 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. Front End Fees paid by the Trust will
not exceed 18%. Front End Fees are 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 and any other
similar fees.
The Dealer Manager will receive a selling commission ranging from 7.0% to
2.0% of the aggregate purchase price of Shares sold, which may be reallowed to
participating Selling Agents on Shares sold through them. Selling commissions
will vary depending on the number of Shares purchased by an Investor. The
selling commissions will be paid at each Closing, computed on the aggregate
purchase price of the Shares sold and accepted by the Trust at each Closing. For
sales to Investors who purchase less than $500,000 of Shares, the commissions
will be 7.0%. For sales to Investors who purchase $500,000 or more but less than
$1,000,000 of Shares, the commissions will be 5.0%. For sales to Investors who
purchase $1,000,000 or more but less than $1,500,000 of Shares, the commissions
will be 4.0%. For sales to Investors who purchase $1,500,000 or more but less
than $2,000,000 of Shares, the commissions will be 3.0%. For sales to Investors
who purchase $2,000,000 or more of Shares, the commissions will be 2.0%. For
purposes of Trust allocations, 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 gross investment.
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The difference between 7.0% and the applicable commission will be reimbursed
to an Investor at the Closing of the sale of the Shares. Investors who purchase
$500,000 or more but less than $1,000,000 of Shares will receive a discount of
2.0%. Investors who purchase $1,000,000 or more but less than $1,500,000 of
Shares will receive a discount of 3.0%. Investors who purchase $1,500,000 or
more but less than $2,000,000 of Shares will receive a discount of 4.0%.
Investors who purchase $2,000,000 or more of Shares will receive a discount of
5.0%. Any discounts in commissions will reduce the purchase price payable by an
Investor. The Proceeds to the Trust net of commissions will not be affected by
these discounts for volume purchases.
In addition, the Trust will pay the Dealer Manager a Wholesale Marketing Fee
equal to 2.5% of the aggregate purchase price of Shares sold for wholesale
marketing services rendered in connection with organizing the sales and
marketing efforts with respect to the offering of Shares. The Dealer Manager may
reallow a portion of its Wholesale Marketing Fee to any Selling Agent who sells
an aggregate of 500 Shares ($500,000) or more of the Trust. Such reallowance
will be in an amount not to exceed 0.5% of the purchase price of Shares sold by
such Selling Agent. Additionally, the Dealer Manager may in the future identify
employees of the Dealer Manager who will perform wholesaling services. Such
employees of the Dealer Manager will be registered persons with the NASD and
will be compensated out of the Dealer Manager's Wholesale Marketing Fee. The
Dealer Manager will also reallow a portion of the Wholesale Marketing Fee to Mr.
Donald Ferrari. Mr. Ferrari is a registered principal with the NASD as a
principal of First San Francisco Equities, Inc. From the Dealer Manager's
Wholesale Marketing Fee Mr. Ferrari will be paid a commission of .25% of the
aggregate purchase price of all shares sold, except those shares sold by the
Dealer Manager; a commission of 1.25% of the aggregate purchase price of all
shares sold by Selected Sales Agents that Mr. Ferrari has solicited to enter
into Soliciting Dealer Agreements for the sale of Shares; and will be reimbursed
his actual expenses up to a limit agreed upon by the Dealer Manager. In addition
to its engagement with Mr. Ferrari, the Dealer Manager may, during the offering
period, engage other registered persons to whom the Dealer Manager may reallow a
portion of its Wholesale Marketing Fee on terms similar to, but not in excess
of, the terms pursuant to which Mr. Ferrari is engaged. The Trust will reimburse
the Dealer Manager for due diligence expenses in an amount not to exceed 0.5% of
the aggregate purchase price of Shares sold.
For services in connection with establishing the Trust the Trust will pay
the Corporate Trustee an Investment Set-up Fee of .5% of the Shares sold.
Because the Investment Set-up Fee will be paid to an Affiliate of the Dealer
Manager, the Investment Set-up Fee may be considered to be compensation to the
Dealer Manager.
The Trust will pay or reimburse the Trust Advisor for Organizational and
Offering Expenses incurred in connection with the organization of the Trust and
the offering and sale of Shares, including, printing expenses, filing fees, and
legal and accounting expenses. The Trust Advisor will pay any Organizational and
Offering Expenses (excluding selling commissions and discounts, the Investment
Set-up Fee, the Wholesale Marketing Fee and due diligence expenses) that in the
aggregate exceed 4% of the aggregate purchase price of Shares sold.
Shares are offered at $1,000 each. The minimum subscription is five (5)
Shares ($5,000) or two (2) Shares ($2,000) for IRAs. Subscriptions for
fractional Shares will not be accepted.
Tenants in common and joint tenants (other than a husband and wife)
purchasing Shares must purchase at least five Shares ($5,000) for each tenant in
common or joint tenant. Any partnership, corporation, trust or other entity that
has been formed for the specific purpose of purchasing Shares must purchase at
least five (5) Shares ($5,000) for each beneficial owner of such entity.
The Dealer Manager and Trust Advisor and their Affiliates may, but are not
obligated to, purchase up to 10% of the Shares and, to the extent of such
purchases, will share in the Trust's profits, losses and distributions on the
same basis as other Shareholders. Purchases of Shares by the Dealer Manager,
Trust Advisor and their Affiliates shall not be counted toward the minimum
number of Shares necessary to have the Initial Closing. Shares purchased by the
Dealer Manager, the Trust Advisor, or their Affiliates will be purchased for
investment purposes only. Independent Trustees may not acquire Shares.
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To the extent Shares are sold to the Trustees, the Dealer Manager, the Trust
Advisor, the Selling Agents and their Affiliates and employees, the number of
Shares available for purchase by the general public will be reduced.
The Dealer Manager will pay attorneys fees or disbursements it incurs in
connection with the offering and sale of Shares from its share of selling
commissions.
INVESTOR SUITABILITY STANDARDS
AN INVESTMENT IN THE SHARES IS A SPECULATIVE INVESTMENT. AN INVESTMENT IN
THE TRUST INVOLVES SIGNIFICANT RISKS AND IS NOT A SUITABLE INVESTMENT FOR ALL
POTENTIAL INVESTORS. See "Risk Factors."
It is the responsibility of the Sponsor and each person selling Shares on
behalf of the Sponsor or Trust to make every reasonable effort to determine that
the purchase of Shares is a suitable and appropriate investment for each
Shareholder, based on information provided by the Shareholder regarding the
Shareholder's financial situation and investment objectives.
Except as provided below, a prospective Investor will be required to
represent that the Investor (i) has a net worth (exclusive of homes, 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 homes, home
furnishings and automobiles) of at least $150,000.
Prospective Investors in the State of California will be required to
represent that 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.
Prospective Investors in the States of Iowa, Arizona, Arkansas and New
Jersey will be required to represent that the Investor (i) has a net worth
(exclusive of homes, home furnishings and automobiles) of at least $60,000 and
has had a minimum, gross annual income of $60,000 for each of the last two tax
years, and reasonably expects to have a minimum gross annual income of $60,000
for the current tax year or (ii) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $225,000, and (iii) the investment in
the Trust represents not more than ten percent (10%) of the Investor's net
worth.
Prospective Investors in the State of Michigan will be required to represent
that the Investor (i) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $60,000 in excess of the purchase price of Shares
subscribed for and expects to have during the current and next three (3) years
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 $225,000 in excess of the
purchase price of Shares subscribed for, and (iii) the investment in the Trust
represents not more than ten percent (10%) of the Investor's net worth.
In the case of an Investor that is a partnership, the net worth standards
are applicable to the partnership, and the income standard is applicable to each
of its partners. 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), the net worth
standards are applicable to the entity providing the funds for the investment,
and the annual income standard is applicable to the beneficiaries who will
receive any income generated by the investment; provided, however, that if the
trustee is the donor who supplied the funds for investment to such entity, the
suitability standards will apply to such trustee. In the case of an Investor
purchasing Shares as custodian for a minor, the net worth and income standards
are applicable to the person providing the funds for the investment. In the case
of a husband and wife purchasing Shares jointly, the net worth standards will be
applied to their combined net worth, and the annual income standard will be
applied to their combined income. Any other persons jointly purchasing Shares
must meet the applicable suitability standards without regard to other joint
purchasers.
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In the case of a Keogh plan covering only a self-employed individual or of
an IRA, the net worth and annual income standards are applicable 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.
In the case of an Investor who is a trustee of a qualified pension,
profit-sharing or stock bonus plan, including a Keogh plan (collectively
"Qualified Plans"), the net worth and the annual gross income standards are
applicable to the qualified trust forming part of such plan. In addition to such
standards, Investors who are fiduciaries of Qualified Plans or who are
purchasing on behalf of an IRA should also consider that some Trust income may
be considered unrelated business income and may therefore be subject to federal
income taxation to the extent that a Qualified Plan's or IRA's share of the
Trust's income exceeds $1,000. See "Investment by Certain Types of Tax Exempt
Entities" under "Tax Matters." In addition, any such Investor should consider
the discussion relating to other issues arising under ERISA and the Code in
connection with the purchase of Shares described under "Investment by Certain
Types of Tax Exempt Entities" under "Tax Matters."
It is anticipated that, at the request of Investors, certain Selling Agents
may serve as custodians for various IRAs or Keogh plans which may be established
to acquire Shares. Such Selling Agents are expected 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 also elect to make their own arrangements for IRA or Keogh trustees. The
Trust Advisor and its Affiliates will not allow the purchase of Shares during
the offering with assets of any Qualified Plan (including Keogh plans) or IRA if
the Trust Advisor, 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.
Shares also may not be purchased by 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
Code. See "Investment by Certain Types of Tax Exempt Entities" under "Tax
Matters."
HOW TO SUBSCRIBE
Investors may subscribe to purchase Shares by completing, executing and
delivering a Subscription Agreement attached to this Prospectus as Exhibit B.
Prior to the Initial Closing, an Investor must deliver to his Selling Agent
a check payable to the order of "Firstar Bank Cedar Rapids, N. A. -- Escrow
Agent." After the Initial Closing, an Investor must (i) deliver to his Selling
Agent a check payable to the order of the Trust or (ii) for Investors who
subscribe after the Initial Closing for more than $500,000, assure that such
Investor's account with the Investor's Selling Agent (other than the Dealer
Manager) contains or will contain cash or other good funds on the specified
settlement date, in each case in the amount of $1,000 for each Share that the
Investor desires to purchase. Each Investor who is permitted to authorize and
who authorizes his Selling Agent to debit his customer account will be notified
by the Investor's Selling Agent of the settlement date for the purchase of such
Shares. Each such Investor must have funds to cover his subscription payment in
his account on the specified settlement date and his account will be debited on
the settlement date.
Prior to the Initial Closing, all checks received by the Selling Agents and
the funds debited from an Investor's account will be deposited promptly with
Firstar Bank Cedar Rapids, N. A., as escrow agent, and invested in securities
issued or guaranteed by the United States government, fully insured certificates
of deposit or fully insured interest-bearing accounts with national banks.
Except as otherwise required under applicable law, amounts deposited in the
escrow account may not be withdrawn by Investors. After the Initial Closing, the
Dealer Manager will forward all checks and copies of Subscription Agreements
directly to the Trust. A subscriber's payment will be returned promptly in full,
together with such subscriber's pro rata share of any interest earned and
received thereon, if such subscription is not accepted by the Trust.
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All prospective investors shall have the right to receive a refund of their
investment 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.
The Trust Advisor may, in its sole discretion, accept or reject
subscriptions in whole or in part.
Not more than thirty (30) days after the Trust receives a subscription, the
Trust Advisor will notify a prospective Investor if such Investor's subscription
has been rejected. Amounts paid by a prospective Investor whose subscription is
rejected will be promptly returned with interest, if any, earned thereon as
provided below. Any subscription not so rejected will be accepted, subject to
the satisfaction of the conditions referred to below. Purchasers subscribing
prior to the Initial Closing shall be admitted as Shareholders as of the Initial
Closing. After the Initial Closing, a subscriber's funds will be paid directly
to the Trust, and, subject only to the subscriber's right to a refund as
described above, the subscriber shall be admitted as a Shareholder when such
subscriber's subscription agreement is accepted.
If the offering and sale of Shares is not consummated, all subscription
amounts will be promptly returned to subscribers.
Each Shareholder will be entitled to the distributive share of profits,
losses and distributions allocable to the Shares issued to him at a particular
Closing, as provided in the Declaration of Trust, including distribution of the
Underwriting Return and distributions after the Final Closing. See "Distribution
and Allocations."
FOREIGN INVESTORS
Shares may be purchased by nonresident alien individuals, foreign
corporations, foreign partnerships and other nonresident foreign Investors.
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 of purchasing Shares.
A foreign Investor must execute a Subscription Agreement. By doing so, a
foreign Investor agrees to supply the Trust with certain information, including
any information that may be necessary for the Trust to satisfy any legal
reporting requirements. The Subscription Agreement also contains an
indemnification by the foreign Investor for any liability incurred by the Trust
as a result of its failure to withhold any taxes or to comply with any reporting
requirements because the foreign Investor did not provide the information
necessary to enable the Trust to so withhold or so comply. In addition, the
Subscription Agreement contains a power of attorney permitting the sale of the
foreign Investor's Shares in the event that the foreign Investor does not
provide the Trust with a completed Internal Revenue Service Form 4224 each year.
Foreign Investors should carefully review with their 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
A Closing with respect to the offering and sale of the Shares will occur and
the Trust will be entitled to receive Investors' funds if the following
conditions, among others, have been satisfied:
(i) On the date of the Initial Closing subscriptions for a minimum
of 1,500 Shares have been received and accepted;
(ii) On the date of each Closing, the escrow agent (in the case of
the Initial Closing) or the Trust (in the case of subsequent Closings) has
received full payment of the purchase price for the Shares being sold at
such Closing; and
(iii) On the date of each Closing, Bradley & Riley, P.C. has
delivered or reaffirmed as of such date its opinion, referred to under "Tax
Matters," to the effect that the Trust will be treated as a partnership for
federal income tax purposes.
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COMPENSATION AND FEES
The amounts and kinds of compensation and fees to be paid to the Trust
Advisor and its Affiliates and the Independent Trustees during the various
phases of the organization and operation of the Trust are summarized in the
table below. The table discloses all compensation that the Sponsor or its
Affiliates can receive either directly or indirectly. The table also shows
Acquisition Fees and Acquisition Expenses even though such fees and expenses
will not be paid to the Sponsor or its Affiliates.
<TABLE>
<CAPTION>
ORGANIZATION AND OFFERING PHASE
PERSON RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
- ------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C>
Dealer Manager Selling commissions and a Wholesale Selling commissions will vary between 7.0%
Marketing Fee for acting as Dealer Manager and 2.0% of the aggregate purchase price
in connection with the offering of Shares of all Shares sold, depending on the
and reimbursement of due diligence number of Shares purchased by an Investor.
expenses. See "Terms of the Offering." The aggregate
selling commission, assuming no discounts
of the selling commissions, will be
$105,000 if 1,500 Shares are sold and
$1,750,000 if 25,000 Shares are sold. The
Dealer Manager will reallow selling
commissions to Selling Agents as dealer
concessions. The Wholesale Marketing Fee
is 2.5% of the public offering price of
all Shares sold. The Wholesale Marketing
Fee will be $37,500 if 1,500 Shares are
sold and $625,000 if 25,000 Shares are
sold. Reimbursement of due diligence
expenses may not exceed 0.5% of the
aggregate purchase price of Shares sold.
See "Terms of the Offering."
Trust Advisor Reimbursement of Organizational and Amount of reimbursement may not exceed 4%
Offering Expenses, including legal and of the aggregate purchase price of all
accounting fees and printing and mailing Shares sold. Any Organizational and
expenses, paid or incurred by the Trust Offering Expenses (excluding Investment
Advisor in connection with organizing the Set-up Fee, due diligence expenses,
Trust and offering the Shares. selling commissions and discounts and
Wholesale Marketing Fee) of the Trust in
excess of this amount will be paid by the
Trust Advisor.
Corporate Trustee Investment Set-up Fee. The Trust will pay the Corporate Trustee a
fee equal to .5% of the aggregate purchase
price of all Shares sold for services in
connection with the organization of the
Trust. The fee will be $7,500 if 1,500
Shares are sold, and $125,000 if 25,000
Shares are sold. Because the Corporate
Trustee is an Affiliate of the Dealer
Manager, the Investment Set-up Fee may be
considered to be compensation to the
Dealer Manager.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OPERATIONAL PHASE
PERSON RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
- ------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C>
Trust Advisor Management Fee and incentive distri- The Trust will pay the Trust Advisor an
butions for providing management services annual Management Fee equal to 2.5% of the
to the Trust, including the total assets of the Trust. After the
identification, evaluation, structuring, Initial Closing, the Management Fee will
monitoring and disposition of the Trust's be paid quarterly in arrears, with the
investments, and providing managerial first payment being due at the end of the
assistance to Portfolio Companies. quarter in which the Initial Closing
occurs. Thereafter the Management Fee will
be paid at the end of each quarter. Actual
amounts will depend on future operations
and are not currently determinable.
Trust Advisor Incentive distribution. The Trust Advisor will receive an
incentive distribution equal to 20% of
distributions from the Trust after Payout.
See "Management Arrangements." Actual
amounts will depend on future operations
and are not currently determinable.
Trust Advisor Expenses incurred for administering The Trust will pay to the Trust Advisor
Shareholder accounts and providing other and its Affiliates the administrative ex-
administrative services. penses associated with the administration
of the Trust. Expenses paid to the Trust
Advisor and its Affiliates will not exceed
the lesser of the actual cost of providing
such services or the amount that is
competitive with that charged for
comparable administrative services in the
same geographic area by unrelated third
parties. Actual amounts will depend on the
number of Shareholders and are not
currently determinable. The Trust Advisor,
at its expense, will provide the Trust
with office space, equipment and certain
personnel necessary for the Trust to
conduct business. No expenses shall be
paid for salaries, fringe benefits, travel
expenses and other administrative items
incurred or allocated to any Controlling
Person of the Sponsor.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERSON RECEIVING ESTIMATED AMOUNT OF
COMPENSATION TYPE OF COMPENSATION COMPENSATION
- ------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C>
Trust Advisor Reimbursement of costs and expenses The Trust will reimburse costs and ex-
directly allocable and identifiable to the penses that are directly allocable and
Trust or its business or investments, identifiable to the Trust or its business
including direct costs of investments; or investments, including direct costs of
expenses of portfolio transactions; investments and acquisition of Portfolio
printing and mailing reports and legal and Companies; expenses of portfolio
accounting expenses. transactions; printing and mailing reports
and legal and accounting expenses. Actual
amounts will depend on future operations
and are not currently determinable.
Independent Trustees Annual fee, meeting fees and reim- Annual fee of $12,000 plus a fee of $1,000
bursement of expenses. for each meeting of the Trustees attended
up to an annual limit of twenty-four
meetings ($24,000) and reimbursement of
certain out-of-pocket expenses relating to
attendance at such meetings.
Dealer Manager Portfolio Transactions. Underwriting fees, finders fees or broker
commissions associated with transactions
in securities of Portfolio Companies, as
limited by Section 57 of the Investment
Company Act. Not currently determinable.
Non-affiliated Third Acquisition Fees and Acquisition Expenses. The Trust may pay Acquisition Fees and
Parties Acquisition Expenses 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 $52,500 if 1,500 Shares are
sold and up to $875,000 if 25,000 Shares
are sold. These fees and expenses will be
paid to non-affiliated third parties and
will not be paid to the Sponsor or its
Affiliates.
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Trust is to provide capital appreciation
potential and current income by investing primarily in private placements of
subordinated debt, preferred stock and related equity securities in small to
medium sized private and publicly owned companies. The Trust will invest in
"Enhanced Yield Investments," which will be classified in two major categories,
Mezzanine Investments and Other Investments.
Mezzanine Investments are investments that are designed to yield a projected
return over the life of the investment that is higher than secured debt
financing, but lower than equity financing. Mezzanine Investments generally take
the form of subordinated debt or preferred stock with additional rights to own
common equity. Rights to own common equity may be in the form of warrants,
conversion rights or some other vehicle that allows the Trust to own common
equity or a proxy thereof in a Portfolio Company. Current yields are important
in Mezzanine Investments. The subordinated debt portion of Mezzanine Investments
will generally have a current yield greater than the preferred stock portion of
Mezzanine Investments. The security issued as part of a Mezzanine Investment
will often provide for the return of principle at the end of a fixed term
together with additional equity. See "Mezzanine Investments" below.
Common types of transactions that may result in some type of Mezzanine
Investment being made include (a) expansion and growth financings, (b) leveraged
buy-out transactions, (c) asset or company acquisitions, (d) recapitalizations
and capital restructurings, and (e) financings for companies that have
financially troubled histories.
In addition to Mezzanine Investments, the other major category of
investments for the Trust is referred to herein as Other Investments. Other
Investments include (a) high yield debt, (b) venture or equity financing (c)
bridge financing and (d) investments in public stocks that the Trust believes
are greatly undervalued. The Trust Advisor expects the structure of investments
in this category to vary from secured debt to straight common equity. The
details of Other Investments are discussed hereinafter. See "Other Investments"
below.
Follow-On Investments are additional investments that "follow" the initial
investment in a Portfolio Company, whether the initial investment was a
Mezzanine Investment or an Other Investment. A Follow-On Investment may be
classified either as a Mezzanine Investment or as an Other Investment. A
Follow-On Investment in a particular Portfolio Company will not necessarily be
or remain classified in the same category that the initial investments in that
Portfolio Company were classified. Follow-On investments and their parameters
are discussed in greater detail below. See "Follow-On Investments" below.
The Trust may borrow funds to make its investments, and the Trust may,
subject to the investment limitations described below, commit to invest funds in
a Portfolio Company beyond its initial investment, or guarantee the obligations
of a Portfolio Company. The Trust may also form a Small Business Investment
Company ("SBIC"), which would allow the Trust to have access to loans from the
Small Business Administration. There is no assurance the Small Business
Administration will have funds available to make loans or preferred stock
investments in SBIC's.
The Trust has elected to be treated as a business development company under
the Investment Company Act. The Trust will not withdraw such election or change
its objective of seeking capital appreciation and current income unless, in
either case, such action is authorized by the vote of a majority in interest of
the Shareholders.
The Trust may make its investments as a sole investor, with other
professional investors or with other persons. The Trust ordinarily will not be
the sole investor in a Portfolio Company. Other investors may include the
management of the Portfolio Company, other business development companies, small
business investment companies, other institutional investors and venture capital
groups. The investment
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<PAGE>
position of the Trust and its co-investors, if any, in Portfolio Companies will
typically involve a substantial ownership interest, and in some cases may
constitute a controlling ownership interest in such companies.
The securities of Portfolio Companies purchased by the Trust typically will
be rated below investment grade, and more frequently, not rated at all. The
securities of such Portfolio Companies will often have significant speculative
characteristics.
There is no assurance that the investment objective of the Trust will be
attained.
MEZZANINE INVESTMENTS
Mezzanine financing represents the layer of corporate financing between
equity and senior debt, which is typically provided by financial institutions on
a secured basis. The term "mezzanine" as used to define this type of financing
is descriptive and was actually derived from the more common use of the term to
designate a partial story or floor of a building that exists between two main
floors or stories. Mezzanine financing usually takes the form of subordinated
debt or preferred stock with additional common equity rights. Investments in
these types of securities and held by the Trust are referred herein as
"Mezzanine Investments."
Mezzanine financing may be issued by a company to (i) finance growth or
expansion, (ii) finance a turnaround of operations, (iii) facilitate a leveraged
buyout transaction, (iv) facilitate an acquisition of assets or another company,
or (v) recapitalize or restructure its balance sheet. Growth and expansion
financings are financings used by companies to further grow and expand
operations. These financings normally occur in later staged companies that have
significant operations but are not large enough or for other reasons do not have
access to the public equity market. Mezzanine financings in turnaround
operations sometimes occur where a company has experienced or is experiencing
financial difficulties but has significant operations and prospects. These
companies may be raising incremental financing or they may be undergoing a
restructuring outside of or inside of bankruptcy proceedings. A leveraged buyout
is the acquisition of an existing business through a transaction that is funded
primarily with borrowings secured by the assets of the company being acquired.
An acquisition of assets or the shares of another company may also involve
borrowings, but these situations are distinguished from a leveraged buyout
because the borrowings may be secured by the assets of the acquiring company in
addition to the assets being acquired, or because the borrowings are supported
by the borrowing capacity of the acquiring company. A recapitalization typically
involves the issuance of new debt and often equity securities by a company (1)
to finance the repurchase of all or a portion of the company's common equity
equivalents from the holders thereof, (2) to refinance current high cost
obligations with a lower cost capital structure, or (3) to refinance current
obligations that the company's current or projected operations are not or may
not be able to support. A less typical type of recapitalization occurs when
increased leverage is incurred as a defensive strategy against unwanted
takeovers.
Mezzanine financings are often utilized by companies in conjunction with the
issuance of additional debt instruments or by companies that already have
significant leverage. The total amount of leverage involved depends upon the
nature of the business of the company and the confidence of investors in the
company's ability to generate sufficient cash to meet debt service obligations
in a timely fashion. As a result of the substantial leverage often employed, the
equity portion of a mezzanine investment offers potential for significant
appreciation over time as debt is repaid, but the risks associated with the
investment may be significant if the business or prospects of the company
decline after the investment.
Mezzanine Investments consist principally of subordinated debt or preferred
stock, combined in most instances with a contingent interest component or an
equity participation that offers the potential for capital appreciation. Usually
the securities issued in mezzanine financings will provide either for the return
of principal in the case of debt securities or for redemption in the case of
preferred stock. The return or principal or redemption will generally occur at
the end of a specified investment term. A contingent interest component may be
included as a feature of Mezzanine Investments where equity participation is not
available or not attractive. Contingent interest components may take the form of
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<PAGE>
success fees, royalties, redemption or put premiums, increasing interest or
dividend rates or any other type of participating right that is not specifically
equity ownership or related thereto. An equity participation may take the form
of common stock, conversion or exchange privileges, options, warrants, stock
appreciation rights or any economic right that is tied to common equity values
or any other right that results or may result in the actual ownership of common
equity. In certain instances a Mezzanine Investment may also include a senior
debt component.
To facilitate the acquisition of a Mezzanine Investment, the Trust may
purchase senior debt or senior subordinated debt that the Trust Advisor does not
intend to hold as part of a permanent Mezzanine Investment. An investment in
senior or senior subordinated debt by the Trust will tend both to lower the risk
of the Trust's overall portfolio and to lower the Trust's return to Investors.
Any investment in such senior or senior subordinated debt will be classified as
a Mezzanine Investment.
There is a high level of risk associated with Mezzanine Investments, and
many Mezzanine Investments will perform at lower than expected levels or will
fail altogether. Accordingly, possible returns from Mezzanine Investments are
usually higher than those expected from secured debt but usually lower than
those from straight equity investments.
A portion of the Trust's investment in a Portfolio Company may take the form
of a commitment by the Trust to invest funds in such Portfolio Company beyond
the Trust's initial investment or a guarantee by the Trust of the obligations of
a Portfolio Company. Such commitments or guarantees will be made only to or for
Portfolio Companies in which the Trust has a current or prior investment or
Portfolio Companies in which the Trust would be comfortable in making a
permanent Mezzanine Investment. On the date that the Trust enters into any such
commitment or guarantee, the Trust (1) will have in place adequate borrowing
capacity and will reserve such capacity in the amount of the commitment or
guarantee for the time that such is outstanding or (2) will reserve as a
Temporary Investment an amount equal to the amount of the Trust's commitment or
guarantee. See "Temporary Investments" below.
OTHER INVESTMENTS
The Trust will invest in securities that are not Mezzanine Investments. Such
investments are referred to herein as "Other Investments" and will include (1)
High Yield Debt Investments, (2) Venture Investments, (3) Bridge Investments and
(4) Publicly Traded Securities.
HIGH YIELD DEBT
The Trust will consider investing in High Yield Debt Investments, which are
secured or unsecured debt securities having no associated equity rights, equity
investment or Mezzanine Investment. The Trust Advisor does not anticipate that
the Trust will make many High Yield Debt Investments. However, the Trust may
consider these investments where the Trust Advisor is comfortable with the
credit worthiness of the borrower and when cash flow from the investment is
important to the Trust and its objectives.
VENTURE INVESTMENTS
Venture Investments are investments in early stage growth companies that
have extraordinary prospects to increase shareholder value and equity
investments in leveraged buyout transactions. Venture Investments, especially
those in early stage companies, have significant speculative characteristics and
high risk of loss. The securities involved in a Venture Investment generally
have the same structure as Mezzanine Investments, but sometimes will consist
only of common stock. Venture Investments sought by the Trust will be in the
form of both debt and equity, but the Trust will place greater emphasis on the
equity component and less on the current income component of its Venture
Investments. Because of the higher risk and emphasis on equity, the possible
return from such investments are very high.
Venture Investments often involve a much greater commitment to the
management of the Portfolio Company, especially Venture Investments in Portfolio
Companies in early stages. In addition, Venture Investments will often include
rights that will permit the Trust to increase its control over the activities of
a
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<PAGE>
Portfolio Company when the Portfolio Company does not perform satisfactorily. If
such rights are exercised, the time commitment to such Portfolio Company
normally increases and there may also be an increase in liability for actions
taken in such circumstances.
The Trust Advisor anticipates that Venture Investments will be the
predominate type of Other Investment held by the Trust.
BRIDGE INVESTMENTS
The Trust may also make Bridge Investments in Portfolio Companies. Bridge
Investments are interim debt investments that generally have an expected
maturity of twelve (12) months or less. Bridge Investments may include secured
debt, senior debt, subordinated debt and other types of debt instruments. Bridge
Investments may also include preferred stock and other equity rights to enhance
yield. The interest rate on Bridge Investments may be either fixed or floating
and may be escalating. The Trust will only make a Bridge Investment in a
Portfolio Company in which it has made or expects to make an Enhanced Yield
Investment or in a Portfolio Company in which it would be comfortable in making
an Enhanced Yield Investment. The Portfolio Company issuing a Bridge Investment
may not, however, be under an obligation to issue a related Enhanced Yield
Investment to the Trust. Part or all of a Bridge Investment may be replaced by
an Enhanced Yield Investment, but the Trust may make Bridge Investments that it
does not expect to be refinanced, in whole or in part, by an Enhanced Yield
Investment. The Trust Advisor anticipates that any portion of a Bridge
Investment, other than securities or rights that were negotiated to enhance
yield, that is not refinanced by an Enhanced Yield Investment will be refinanced
or purchased by unaffiliated third parties.
PUBLICLY TRADED SECURITIES
The Trust may invest in Publicly Traded Securities of Portfolio Companies
that it believes are undervalued and present good opportunity for appreciation
of value. Publicly Traded Securities held by the Trust may not exceed the limit
set by regulations with which the Trust must comply to remain classified as a
business development company. Generally, Publicly Traded Securities may not
exceed 30% of the Trust's total investments in Portfolio Companies, plus any
cash and Temporary Investments. It is not anticipated that investing in Publicly
Traded Securities will be a major activity of the Trust.
FOLLOW-ON INVESTMENTS
The Trust may make Follow-On Investments in Portfolio Companies. Follow-On
Investments are investments in Portfolio Companies that occur after the initial
investment and that are not specifically committed to at the time of the initial
investment. Follow-On Investments must be classified as either Mezzanine
Investments or Other Investments but may not retain the same classification as
the initial investment. Follow-On Investments will be considered much like an
initial investment and must conform to the Guidelines established for either a
Mezzanine Investment or an Other Investment. Follow-On Investments will be
subject to the same approval process as Enhanced Yield Investments.
INVESTMENT CRITERIA
The Trust has established investment criteria, referred to herein as
"Guidelines," that will govern the investments it will seek and acquire. The
Guidelines consist of many qualitative and quantitative factors that the Trust
Advisor will consider and review in each case. The Guidelines have been designed
based on professional fund management practices and the current and overall
returns historically sought by the Trust Advisor and other investment
professionals in structuring and purchasing investments similar to Enhanced
Yield Investments. However these Guidelines may not always be responsive to all
market changes. To that end, Management may from time to time reevaluate and
modify the Guidelines for Mezzanine Investments or Other Investments, but only
upon the affirmative vote of a majority of the Independent Trustees. The
Guidelines will be used by the Trust to structure the types of investments
sought by the Trust, but potential Investors should understand that the
Guidelines will be used by the Trust only as guidelines. The Guidelines are not
projections of the return to be expected from Enhanced Yield Investments or from
an investment in Shares.
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QUALITATIVE FACTORS
The major qualitative factors included in the Guidelines are the Portfolio
Company's management, market opportunity, current operations, and projected
operations, the Trust's rights as an investor and the pricing of the investment.
MANAGEMENT. The management of a Portfolio Company is one of the most
crucial factors impacting an investment's success. The Trust Advisor will seek
Portfolio Companies having management teams with integrity that possess the
experience and skill required to accomplish the Portfolio Company's near term
objectives. The management team's commitment to a Portfolio Company is also
critical to success. The Trust Advisor will expect that a Portfolio Company's
management team will own or have the right to acquire a significant ownership
position in the Portfolio Company. In a Venture Investment the Trust Advisor
will further expect that the management team has or will commit personal
financial resources to the Portfolio Company that is significant to that
management team. Finally, management of a Portfolio Company must have objectives
compatible with those of the Trust. For example, in situations where an
investment has an equity component, Portfolio Company management must have the
objective of increasing shareholder value and ultimately generating liquidity
for shareholders.
MARKET OPPORTUNITY. Market opportunity for a Portfolio Company is also
important to the success of an investment. A Portfolio Company should have
substantial opportunity to grow its revenues through (1) favorable growth
characteristics of the markets it serves, (2) expanding into new markets or (3)
growing its revenues through capturing greater market share within a particular
market. In certain more mature situations a Portfolio Company may not have a
substantial opportunity to grow revenues, and in those cases the Portfolio
Company must have a substantial and defensible position in the market it serves.
CURRENT OPERATIONS. Historic and current operating performance will be
important when considering an investment for the Trust. Portfolio Companies in
which the Trust acquires yield bearing securities must have adequate positive
cash flow to service these securities. The Trust Advisor anticipates that in
most cases, except some Mezzanine Investments in turnaround situations and
Venture Investments, Portfolio Companies will have significant revenues and
positive cash flow from operations and will be profitable or nearing
profitability.
PROJECTED OPERATIONS. A Portfolio Company's projected performance will be
analyzed and reviewed for reasonableness. A Portfolio Company's ability to meet
the requirements of the proposed investment will also be analyzed. Since current
yield bearing securities require future cash flows to service debt or make
dividend payments, the projected performance of a Portfolio Company must be
adequate to meet these needs. Further, since the Trust will frequently be a
long-term equity investor in a Portfolio Company, the projected valuation of the
Portfolio Company is critical to the projected rate of return and the pricing of
the investment. Projected valuations are based upon projected performance.
TRUST'S RIGHTS. Enhanced Yield Investments often include rights that may be
unusual in other types of investments. Those rights are often critical to a
successful Enhanced Yield 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 are normally tied to certain affirmative and
negative covenants of the Portfolio Company. The Trust Advisor will be
aggressive in negotiating extensive rights to enhance the probability of an
Enhanced Yield Investment's success. The Trust Advisor anticipates that its
designees will serve on the boards of many of the Trust's Portfolio Companies.
Therefore, it is an important part of the investment criteria that the Portfolio
Company agree to the rights required by the Trust.
PRICING. Pricing of an investment in a Portfolio Company is an important
factor to be considered by the Trust Advisor. Pricing is the single most
important element of any investment affecting that investment's rate of return,
assuming all other factors are equal. But in addition to reviewing pricing
relative to the projected rate of return required by the Trust, the Trust
Advisor will review pricing relative to
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comparables. That is, the Trust Advisor will compare the pricing of an Enhanced
Yield Investment with the pricing of other similar Enhanced Yield Investments in
other companies similar to the Portfolio Company.
QUANTITATIVE FACTORS
The Quantitative Factors included in the Guidelines established by the Trust
are (1) portfolio concentration limits, (2) restrictions regarding investments
in Managed Companies and Non-Managed Companies, (3) restrictions regarding
investments in companies involving Affiliates, and (4) restrictions required by
regulations.
PORTFOLIO CONCENTRATION. The Trust will direct its investment efforts to
small and medium sized companies that, in the Trust Advisor's view, provide
opportunities for significant capital appreciation and prudent diversification
of risk. The Trust Advisor expects that the Trust's initial Enhanced Yield
Investments in Portfolio Companies typically will range from $500,000 to
$2,500,000. However, the Trust Advisor will recommend investments of less than
$500,000 if the Trust Advisor believes such an investment to be a prudent use of
funds of the Trust, which will have the affect of increasing the number of
Portfolio Companies in the Trust's investment portfolio, thereby enhancing
diversification.
The Trust will be limited in the amount of Available Capital it may
initially invest in any one Portfolio Company. Generally, the Trust may not
initially invest more than the greater of $2,500,000 or 10% of its Available
Capital in a single Portfolio Company. However, with the approval of its
Independent Trustees, the Trust may make initial Enhanced Yield Investments in
up to two (2) Portfolio Companies utilizing, in each case, up to 20% of its
Available Capital. These requirements will result, if the maximum number of
Shares is sold, in the Trust holding at least eight Portfolio Companies before
any Follow-On Investments are taken into account. The purpose of this
requirement is to spread the exposure of the Trust's invested capital over a
number of Portfolio Companies. If the maximum initial investment and the maximum
Follow-On Investment (see following paragraph) is made, more than sixty percent
(60%) of the Available Capital may be invested in two Portfolio Companies and
more than thirty percent (30%) may be invested in one Portfolio Company. If the
maximum initial investment and the maximum Follow-On Investment is made in two
Portfolio Companies, the Trust may invest in as few as four Portfolio Companies.
The Trust Advisor anticipates that the Trust will not typically invest at these
maximum levels, which will allow it to diversify by investing in a greater
number of Portfolio Companies than it can when it invests at the maximum level.
In addition to Mezzanine Investments and Other Investments, the Trust may
make Follow-On Investments in a Portfolio Company in which the Trust has
invested to protect or enhance its initial investment in such Portfolio Company.
Such Follow-On Investments may be in the form of senior debt, subordinated debt
or equity securities or a combination thereof. See "Follow-On Investments,"
above. The total amount of Follow-On Investments in a particular Portfolio
Company may not exceed the greater of $2,500,000 or 10% of the Trust's Available
Capital. Therefore, it is possible that the Trust may invest the greater of
$5,000,000 or 20% of the Trust's Available Capital in each Portfolio Company.
Even though the limitations discussed in the previous paragraphs provide
restrictions on the Trust's portfolio concentration, if in the opinion of the
Trust Advisor and the Independent Trustees the Trust does not have and does not
expect to have total Available Capital sufficient to permit a well diversified
portfolio of investments, the Trust Advisor will follow its own more restrictive
policy intended to enhance the Trust's investment diversification. In such case,
the Trust Advisor's policy will be to recommend Enhanced Yield Investments that
do not require significant Follow-on Investments. Further, the Trust will not
acquire investments that require the Trust to take a lead role in investing in a
Portfolio Company. Instead, the Trust Advisor will recommend investing in
Enhanced Yield Investments that permit the Trust to participate with other
investors so the amount of investment by the Trust in any particular Portfolio
Company is smaller in amount than the Trust would invest if it had or
anticipated having a greater amount of Available Capital. Also, the investments
sought by the Trust Advisor will include a greater proportion of Enhanced Yield
Investments having less risk, such as High Yield Debt and Bridge Investments,
and a smaller proportion of Venture Investments. The purpose of this policy is
to invest in a larger number of
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portfolio companies than the minimum that would be permitted by the rules set
forth in the foregoing paragraphs, thereby spreading the general risk of
investment over a larger number of Enhanced Yield Investments.
MANAGED AND NON-MANAGED COMPANIES. Managed Companies are Portfolio
Companies to which the Management Board, an affiliate of the Management Board,
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. See "Regulation." Such managerial assistance
may include naming one or more directors to the Portfolio Company's board of
directors, assisting the Portfolio Company in recruiting capable directors or
key management personnel, assisting the Portfolio Company in establishing
working relationships with professional advisers, such as investment bankers,
commercial bankers, accountants and lawyers. The Trust Advisor shall be very
aggressive in negotiating rights regarding the Trust's investments and will seek
to have its designee sit as a director or board observer in most Portfolio
Companies in which the Trust invests. The Trust Advisor shall assign personnel
with financial or management expertise to work closely with a Portfolio Company
on an ongoing basis and also to serve as directors of a Portfolio Company where
appropriate. Such personnel shall provide periodic consultation and advice to
the directors or management of a Portfolio Company relating to particular
business decisions or policies.
A Non-Managed Company is a Portfolio Company to which the Management Board
or their affiliates do not offer significant managerial assistance. As a
business development company under the Investment Company Act, the Trust is
subject to certain limitations regarding Non-Managed Companies. The Trust will
comply with all applicable regulations. Generally the Trust may not invest in
Non-Managed Companies unless, at the time of such investment, at least 70% of
its total assets are invested in Managed Companies and certain qualified
Temporary Investments.
INVESTMENTS IN PORTFOLIO COMPANIES INVOLVING AFFILIATES. The Trust expects
to invest in Enhanced Yield Investments issued by Portfolio Companies that have
entered into or will enter into lease financing arrangements or other financing
arrangements with certain Affiliates of the Trust Advisor. Such Affiliates may
include companies that are wholly owned by the parent company of the Trust
Advisor and the Corporate Trustee, or it may include other non-wholly owned
Affiliates of the parent company. In each such case and in all transactions
involving these Affiliates, the Affiliate will be engaged in the ordinary course
of business of providing lease, loan or other financing or financial services to
the Portfolio Company. Such financing or financial services from such Affiliates
may, from time to time, involve equity-oriented investments as an adjunct to the
financing or financial services. To comply with all applicable regulations and
because the Trust Advisor believes that these Affiliates will be a good source
of investment opportunities and may provide supplemental financing or services
to some of the Trust's Portfolio Companies, the Trust will seek all exemptions
required to allow the Trust to invest with other Affiliates or in companies in
which those Affiliates have invested or may invest. If the Trust does not comply
with regulations, is not exempt from regulations or does not receive an
exemption regarding investing in companies involving Affiliates, it will not
make such investments.
OTHER REGULATIONS. The Trust may be subject from time to time to other
regulations. The Trust Advisor shall be responsible for keeping up to date with
all regulations affecting the Trust. As the Trust becomes subject to more or
different regulations the Trust Advisor will work with the Independent Trustees
to establish additional Guidelines for investments where it is appropriate. Such
Guidelines would be designed to allow the Trust to conduct business according to
its objectives and to maintain its ability to conduct business as a business
development company under the Investment Company Act.
As of the date of this Memorandum, the Trust Advisor believes that the
Guidelines set out herein are adequate to serve the Trust's objectives. If
regulations change or the Trust changes its objectives these Guidelines may
require modification and will be modified only upon the approval of the
Independent Trustees. These Guidelines will also require modification if the
Trust decides to establish a Small Business Investment Company ("SBIC") as
discussed hereinafter. See "Establishment of a Small
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Business Investment Company," below. Such modifications may take the form of
separate Guidelines that only apply to investments made by an SBIC established
by the Trust. The establishment of an SBIC and new Guidelines would require
approval by the Independent Trustees.
APPROVAL OF INVESTMENTS
The Trust will invest in Enhanced Yield Investments that the Trust Advisor
determines meet the Guidelines, provided a majority of the Independent Trustees
determine that the Enhanced Yield Investments meet the Quantitative Factors of
the Guidelines. In addition, upon the approval of a majority of the Independent
Trustees, the Trust may invest in Enhanced Yield Investments that do not meet
the Quantitative Factors of the Guidelines. There can be no assurance as to what
proportion of the Enhanced Yield Investments will meet the Guidelines.
The Trust will invest only in transactions recommended by the Trust Advisor
and approved by the Independent Trustees. See "Conflicts of Interest."
Notwithstanding the foregoing, the Independent Trustees shall have no duty to
investigate or confirm that an Enhanced Yield Investment meets the Qualitative
Factors of the Guidelines.
Provided the Trust Advisor structures an Enhanced Yield Investment within
the parameters of the Guidelines and certifies to that effect, and the
Independent Trustees determine that the investment meets the applicable
Quantitative Factors of the Guidelines, the investment will be eligible for
investment by the Trust to the extent the Trust has available funds sufficient
to make the investment. In connection with any certification that an investment
meets the Guidelines, the Trust Advisor will submit to the Independent Trustees
a summary of the terms of the investment, a description of the Portfolio Company
and any other information that is necessary to enable the Independent Trustees
to review whether the proposed investment complies with the Quantitative Factors
of the Guidelines.
As stated above, the Trust may also invest in Enhanced Yield Investments
that do not meet the Quantitative Factors of the Guidelines. Any Enhanced Yield
Investments that do not conform to the applicable Quantitative Factors of the
Guidelines must be approved by the Trust Advisor and a majority of the
Independent Trustees. Before any such investment may be made, the Trust Advisor
must submit to the Independent Trustees a description of the Portfolio Company,
annual current and projected performance for the Portfolio Company, and the
principal proposed terms of the recommended investment. In order to approve a
proposed investment that does not meet the Quantitative Factors of the
Guidelines, the Trust Advisor and the Independent Trustees must determine that
the investment is appropriate in light of the Trust's objectives and policies.
In addition, in approving a particular investment that does not meet the
Quantitative Factors of the Guidelines, the Trust Advisor and the Independent
Trustees are required to determine that (a) the terms of the transaction,
including consideration to be paid, are reasonable and fair to the Shareholders
and do not involve overreaching of the Trust or the Shareholders on the part of
any person concerned and (b) the proposed transaction is consistent with the
interests of the Shareholders and is consistent with the investment objective
and policies of the Trust as set forth herein.
Follow-On Investments must pass the same approval process as initial
investments. Follow-On Investments will be classified as Mezzanine Investments
or Other Investments and, subject to the provisions set forth above for initial
investments, must comply with the applicable Quantitative Factors of the
Guidelines.
At the closing of each Enhanced Yield Investment, the Trust Advisor shall
certify that no material adverse change has been made in the material terms of
such investment from the terms approved by the Independent Trustees.
The Independent Trustees will meet as frequently as needed to review
recommended investments and to approve investments as set forth herein. The
Trust Advisor anticipates that the Independent Trustees may meet as often as one
to two times per month, especially during the Investment Period.
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LIQUIDATING INVESTMENTS
Subject to the supervision of the Independent Trustees, the Trust Advisor
will be responsible for the decision and the actions necessary to liquidate an
Enhanced Yield Investment. See "Conflicts of Interests." Each transaction
resulting in the liquidation of an investment or a portion thereof that requires
a decision on the part of the Trust will be reviewed by the Independent
Trustees. The Trust Advisor will provide the Independent Trustees a summary of
the transaction, expected returns to the Trust, and any other information
necessary to support the liquidation of the investment as a reasonable and
appropriate action relative to the objectives of the Trust regarding liquidation
of investments. The Trust Advisor anticipates that there will be frequent
transactions that result in the liquidation of an investment or portion thereof
that occur even though the investment does not meet or exceed the Guidelines
that applied to that investment when it was initially made. In these cases the
Trust Advisor's responsibility is to maximize returns as discussed herein. The
Guidelines should be considered guides only for making investments. The
Guidelines have no bearing upon the decision to liquidate an investment and will
not be considered when deciding to liquidate an investment. The Trust Advisor
must consider the actual facts and circumstances of each investment at the
particular time that the liquidation of an investment is being proposed, and
must make a decision based upon such facts and circumstances.
The liquidation of an Enhanced Yield Investment may occur at different
stages for any particular Portfolio Company. Normal liquidation of certain
securities making up an Enhanced Yield Investment may occur according to the
terms of the securities and may not require the involvement of a third party or
a decision to be made by or on behalf of the Trust. This is especially true for
debt securities that are self-liquidating. It is also true for other securities
that have redemption, put, call or other features that lead to or cause the
liquidation of the security by the Portfolio Company. While a third party may be
required to refinance the Portfolio Company in the case of the liquidation of a
debt instrument or the exercise of redemption, put rights or call rights, the
liquidation transaction is typically between the Trust and the Portfolio
Company. The liquidation of the longer-term equity participations included in
Enhanced Yield Investments often require a third party. Normal events that lead
to the liquidation of an equity participation include public offerings of equity
securities by the Portfolio Company, the sale of the Portfolio Company to a
third party, and the sale of the Trust's securities to a third party. In the
case of a sale to a third party, such third parties may include the management
of the Portfolio Company or the Portfolio Company itself in a transaction
negotiated by the Trust and the Portfolio Company. In the case of a public
offering the Trust may have registration rights that allow it to sell some or
all of its position in the initial registration and offering or in a secondary
registration and offering. The Trust may also sell in the market securities it
holds in a publicly traded Portfolio Company as long as the securities are
registered and freely tradeable or for some other reason they are exempt from
trading restrictions. The Trust may also distribute freely tradeable securities
to the 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 the Trust has such a large block of stock that it would drastically
depress stock prices if it were to try to liquidate this stock quickly. If stock
or other securities are distributed, the Shareholder will be subject to
brokerage fees that the Trust 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. See "Time Required to
Maturity of Investments; Limitations on Current Distributions; Liquidity of
Investments" under "Risk Factors." Distributions of this type would be completed
where the Trust Advisor believes that generally Shareholders will receive
greater net benefit from liquidating the stock or securities themselves.
The sale of the Portfolio Company or the Trust's securities to a third party
buyer will generally involve a negotiated transaction where the Trust may
receive all cash or all securities or a combination thereof. Usually in such a
transaction the Trust's debt instruments will become due and either prepaid or
assumed, at the Trust's option. Such a transaction may also invoke other rights
that the Trust may have as a part of its investment.
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The Trust may hold certain classes of securities while it liquidates its
holdings of other securities or portions thereof constituting an Enhanced Yield
Investment. For example, it may sell the subordinate debt or preferred stock
portion of an Enhanced Yield Investment while retaining the common stock
portion.
In structuring investments, the Trust Advisor will be aggressive in
negotiating the appropriate rights and agreements with a prospective Portfolio
Company with respect to the method and timing of the disposition of the Trust's
investment. These rights affecting liquidation of securities may include items
such as put rights, acceleration rights, co-sale rights, rights of first refusal
and certain rights to have a Portfolio Company's securities owned by the Trust
or others sold as part of an offering or other disposition by the Portfolio
Company.
Timing of the liquidation of the Trust's enhanced Yield Investment will
usually depend upon, among other things, a Portfolio Company's performance, the
judgment of the controlling investors (which may include the Trust Advisor
acting for the Trust) as to value, the ability of the Portfolio Company to
refinance its outstanding securities, other financial market opportunities and
the future prospects of the Portfolio Company. For example, in growth situations
a Portfolio Company's need for capital may necessitate an entry into the public
markets. General market conditions will also influence the timing of liquidity
for the Trust, as management, directors and major investors (including the
Trust) seek to maximize financial returns and to position the Portfolio Company
to meets its financial needs in the market.
The Trust may engage brokers, including any of its Affiliates, Selling
Agents or their affiliates, to assist in the disposition of portfolio
investments if such engagement complies with or is exempt from regulations or
the proper exemptions are secured. These same parties may be engaged as
underwriters and/or brokers to assist it in the sale of its assets or securities
if the engagement complies with or is exempt from regulation or the proper
exemptions are secured. The underwriters of a public offering of a Portfolio
Company's securities and brokers assisting in the sale of a Portfolio 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
the Management Board by the Trust will require prior approval by a majority of
the Independent Trustees.
The Trust will bear the costs of disposing of an investment to the extent
not paid by the Portfolio Company.
VALUATION
On a quarterly basis the Trust Advisor will perform a valuation of the
unliquidated assets of the Trust, including Temporary Investments, Mezzanine
Investments, and Other Investments.
The fair value of investments for which no market exists (which will include
most Enhanced Yield Investments to be made by the Trust) will be determined in
good faith by the Management Board.
Trust investments for which market quotations are readily available and
which are freely tradable will be valued 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. The valuation of securities that are in a class of public
securities that are restricted from free trading (such 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 the Trust
holds a large block that could not be sold without severely depressing prices)
will be set by discounting the closing sales or bid price to reflect the
illiquidity caused by such restrictions.
Temporary Investments will usually be valued at cost. Temporary Investments
will generally be highly liquid. See "Temporary Investments," below.
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The Independent Trustees will review all quarterly valuations and determine
whether the valuations conform to the valuation policy. The Trust Advisor 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 the Trust
Advisor's methodology of valuation or to conduct a valuation.
In connection with the annual examination of the Trust's financial
statements, the Trust's independent public accountants will review the
procedures applied by the Trust Advisor in valuing portfolio securities and
investments and will inspect underlying documentation as to whether such
procedures are reasonable and such documentation is appropriate.
INVESTMENT OPERATIONS
After the Initial Closing, the Trust will begin investing the proceeds of
the offering in Enhanced Yield Investments identified by the Trust Advisor.
Pending such investments, proceeds of the offering will be invested in Temporary
Investments.
LOCATING INVESTMENTS. It is expected that investment opportunities will be
identified for the Trust principally by the Trust Advisor. Investment proposals
may, however, come to the Trust directly or to the Trust Advisor from other
third party sources, including the Dealer Manager and its affiliates,
unsolicited proposals from management of prospective Portfolio Companies, the
public, and referrals from banks, lawyers, accountants and members of the
financial community. The Trust may pay such persons (including the Dealer
Manager and its Affiliates and other Affiliates of the Management Board other
than directors, officers and employees of the Dealer Manager) directly or
through reimbursement to the Trust Advisor, finder's fees to the extent
permissible under applicable law and consistent with industry practice and only
upon the approval of the Independent Trustees. Under Section 57 of the
Investment Company Act, finder's fees in excess of 1% may be paid to Affiliates
of Management and to any Selling Agent (while they are acting as principal
underwriter for the Trust) and their affiliates only upon receipt of an
appropriate exemptive order from the SEC. The Trust will apply for such
exemptive orders, if necessary. The Trust will not pay any finder's fees to the
Management Board in connection with any of the Trust's investments.
Notwithstanding anything else to the contrary herein the Trust will be
responsible for reimbursement of all finder's fees paid by the Trust Advisors to
non-affiliated parties.
EVALUATING INVESTMENTS. Prior to committing funds to an investment,
investigation and research will be conducted 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 the Trust Advisor 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, the Trust Advisor may
engage, on behalf of the Trust, third party experts and consultants to assist it
in the evaluation of certain investment opportunities.
STRUCTURING INVESTMENTS. Enhanced Yield Investments typically will be
negotiated directly with the prospective Portfolio Company or its affiliates.
The Trust Advisor 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 Portfolio
Company's business (including representation on its board of directors). The
Trust Advisor will seek to structure the terms of the investment so as to
provide for the capital needs of the Portfolio Company and to comply with
Guidelines required for such investments. It will be the Trust Advisor's
objective to maximize return on its investment while maintaining acceptable risk
exposure with respect to the investment.
SELECTION AND INVESTMENT. All investments actually made by the Trust must
be recommended by the Trust Advisor to the Trustees for approval. Upon approval
of a recommended investment by the Independent Trustees it will be the Trust
Advisor's responsibility to consummate the investment on terms not materially
dissimilar to those approved.
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The Trust intends to acquire a portfolio of Enhanced Yield Investments
primarily in businesses characterized by strong management, visible cash flow,
and a strong and identifiable market niche. The Trust will concentrate its
investment efforts on small and medium sized companies that, in the Trust
Advisor's view, provide opportunities for significant capital appreciation,
relative ease of acquisition and disposition, and prudent diversification of
risk. The Trust will seek investments in a variety of industries.
The Trust is a closed-end fund and intends to invest or commit for
investment all of its Available Capital within the later of two years from the
date of effectiveness of this Prospectus or one year from termination of the
offering ("Interim Investment Period"). Any remaining Capital Contributions in
the Trust that have not been invested or committed for investment in Enhanced
Yield Investments within the Interim Investment Period, to the extent not
utilized or reserved for operating expenses, working capital or Follow-On
Investments, and to the extent not distributed as part of quarterly
distributions of Cash Revenues (see "Distribution of Cash revenues" under
"Distribution and Allocations") will be distributed to the Shareholders as soon
as practicable after the Interim Period, without reduction of Front End Fees.
However, any net offering proceeds invested in Enhanced Yield Investments that
are liquidated during the 60 months following the date of the Final Closing (the
"Investment Period"), to the extent not utilized or reserved for expenses or for
Follow-On Investments, may be reinvested in Enhanced Yield Investments within
the Investment Period. Any such proceeds not so reinvested (or committed for
reinvestment), utilized or reserved will be distributed to Shareholders as soon
as practicable. The Trust Advisor cannot estimate the number of Enhanced Yield
Investments that will be liquidated during the Investment Period or the amount
of proceeds therefrom that will be reinvested. The Trust Advisor anticipates
that at the end of the Investment Period substantially all of the Trust's
investments will be in Enhanced Yield Investments.
INVESTMENT MONITORING AND FOLLOW-ON SUPPORT. Successful Enhanced Yield
Investments typically require active monitoring of, and significant
participation in, major business decisions of Portfolio Companies. In many
cases, representatives of the Management Board will serve as members of the
board of directors of Portfolio Companies. Such managerial assistance is
required of a business development company and is intended to enable the Trust
to exercise significant influence and provide management assistance with respect
to such matters 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 the securities
of the Portfolio Company. In connection with the Trust Advisor's services as
directors of Portfolio Companies it may receive from the Portfolio Company
reimbursements for expenses incurred by the Trust Advisor. All fees earned from
Portfolio Companies for services as directors will be paid to the Trust. When
necessary or appropriate, the Trust Advisor, on behalf of the Trust, may engage
third party consultants with the requisite financial or management expertise to
assist the management of Portfolio Companies on specific problems. The Trust
Advisor may also, where appropriate and in the best interests of the Trust,
assign directorships for which the Trust is entitled to other third parties that
have greater expertise with respect to the specific needs or business of a
Portfolio Company. In this case, fees earned for such director services may be
paid directly to these third parties.
After making its initial investment in a Portfolio Company, the Trust may be
requested to make Follow-On Investments. Follow-On Investments may be made to
take advantage of warrants or other preferential rights granted to the Trust or
otherwise to increase the Trust's position in a successful or promising
Portfolio Company. The Trust may also be called upon to provide additional
equity or mezzanine financing needed by a Portfolio Company to fully implement
its business plans, to develop a new line of business or to recover from
unexpected business problems. Upon the approval of the Trustees, the Trust may
make Follow-On Investments in Portfolio Companies from funds on hand. In
addition, the Trust may reinvest in Follow-On Investments cash receipts and
proceeds from the disposition of Enhanced Yield Investment. The total of the
Trust's initial and Follow-On Investments in a Portfolio Company may exceed the
initial investment limitations described above, but the total amount of Follow-
On Investments in a Portfolio Company may not exceed the greater of $2,500,000
or 10% of the Trust's Available Capital.
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LIQUIDATING INVESTMENTS. The Trust Advisor will work closely with each
Portfolio Company to develop different alternatives to provide liquidity of the
Trust's investment. These activities may include, among other things, providing
counsel and advise with respect to positioning the Portfolio Company for a
public offering, assisting the Portfolio Company in engaging an underwriter for
a public offering, providing counsel and advice with respect to positioning the
Portfolio Company for sale to a third party acquiror and assisting the Portfolio
company in either engaging an investment banker or other professional to locate
a third party acquiror.
Subject to the required exemptions, if any, being granted, Affiliates of the
Trust Advisor may be engaged and earn fees from Portfolio Companies for services
provided to assist a Portfolio Company in generating liquidity such as
activities involving investment banking or mergers and acquisitions. Such
engagement must be approved by a majority of the Independent Trustees.
After the Trust's investment in a Portfolio Company, the Trust Advisor will
continually review all alternatives that may generate liquidity of the Trust's
investments. The Trust Advisor's objective in pursuing alternatives to generate
liquidity will be to maximize the total return the Trust receives for its
investment. See "Liquidating Investments" above.
TEMPORARY INVESTMENTS
Pending investment in Enhanced Yield Investments, the Trust Advisor will
invest the Trust's available funds in interest bearing bank accounts, 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
(collectively "Temporary Investments"). Temporary 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.
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. See "Managed and Non-Managed
Companies" under "Investment Criteria" above and "Regulation."
The Trust expects that substantially all of its available funds will be
invested in Enhanced Yield Investments or committed for investment by the end of
the Interim Investment Period. Funds that are committed for investment will be
invested in Temporary Investments until invested in Enhanced Yield Investments.
MISCELLANEOUS
ORIGINAL ISSUE DISCOUNT AND PAYMENT IN KIND SECURITIES
Certain Enhanced Yield Investments may include investments in 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, Enhanced Yield Investments may include
securities that pay interest or dividends in kind, i.e., in securities, for an
initial period of time. The Trust may also purchase Temporary Investments having
an original issue discount. To the extent the Trust invests in securities with
original issue discount or that pay interest or dividends in kind, current
distributions by the Trust may be less than the total taxable income accruing on
the Trust's investments.
RESTRICTIONS ON TRUST BORROWINGS
The Trust may borrow funds, up to the allowable limits established by all
applicable regulation affecting the Trust, to make investments, pay expenses
(except for the payment of Organizational and Offering Expenses advanced by the
Trust Advisor) or make distributions. The Trust Advisor may secure
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borrowings on behalf of the Trust, subject to review by the Independent
Trustees, as long as such borrowings do not exceed and the Trust Advisor
certifies that they do not exceed all limits established by regulations
affecting the Trust. The Investment Company Act prohibits the Trust from
incurring indebtedness in excess of Fifty Percent (50%) of its net assets. See
"Establishment of a Small Business Investment Company ("SBIC")" and
"Regulation." Investments made while borrowings by the Trust exceed five percent
(5%) of Trust assets is commonly known as leverage.
ESTABLISHMENT OF A SMALL BUSINESS INVESTMENT COMPANY ("SBIC")
The Trust may establish an SBIC upon the recommendation of the Trust Advisor
and subject to prior review by the Independent Trustees. An SBIC is a regulated
investment company that is licensed by the Small Business Administration ("SBA")
and may have access to loans from the SBA. However, there is no assurance the
SBA will have funds available to make loans or preferred stock investments in
SBIC's. To qualify for funds that may be available, the SBIC must conform to
certain rules and regulations regarding investments. SBIC's are required to
invest in companies that often have characteristics very similar to those that
the Trust will seek for Enhanced Yield Investments. The government-backed
funding that is available is in the form of debentures and/or preferred
stock-like securities. The Trust would have to make an investment in an SBIC to
establish and license the organization. The minimum investment to license an
SBIC is $2,500,000. While this allows the SBIC to make investments and obtain
leverage through certain types of government-backed funding, if the SBIC wishes
to take advantage of more aggressive government-backed funding vehicles the
minimum amount of capital that the Trust would be required to invest could range
from $5,000,000 to $10,000,000. The leverage or government-backed funding that
would be available to an SBIC formed by the Trust would range from two to four
times the capital invested by the Trust. The actual amount of leverage available
will depend upon several factors, the most important being the amount of
investment by the Trust and the type of government-backed funding securities
that are used. At the date of this Prospectus the Trust Advisor has no
recommendation regarding the establishment of an SBIC other than it is a
worthwhile activity to research further to determine the benefits and
disadvantages an SBIC may have for the Trust.
If an SBIC is formed, its investments will be subject to the same criteria,
Guidelines, approval processes and liquidation process as the Trust's Enhanced
Yield Investments unless the Independent Trustees approve separate criteria
and/or Guidelines for the SBIC. Any separate criteria or Guidelines approved for
the SBIC shall be consistent with the general objectives of the Trust. Any
leverage obtained by the SBIC will comply not only with the regulations of the
SBIC, but also with those of the Trust. All such leverage obtained must be
reviewed and approved by the Independent Trustees, and the Trust Advisor must
certify to the Trust that this additional leverage complies with all applicable
rules and regulation or that waivers, variances or exemptions from such rules
and regulation have been secured.
INVESTMENT RESTRICTIONS
As a business development company, the Trust is limited in its choice of
investments under the Investment Company Act. See "Regulation." The Trust will
not purchase any securities on margin (except for the use of short-term credit
necessary for the clearance of transactions), make short sales of securities,
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 its portfolio securities to any
other person or enter into repurchase agreements with respect to its portfolio
securities. Except for commitments to invest funds in Portfolio Companies beyond
its initial investment in such companies, the Trust will not enter into reverse
repurchase agreements, firm commitment agreements or standby commitment
agreements.
The Trust shall not purchase or retain the securities of any Portfolio
Company if the Trustees or the Trust Advisor, or the officers and directors of
any Trustee or the Trust Advisor, own beneficially more than one half of one per
cent of the securities of any Portfolio Company or together own beneficially
more than five per cent of the securities of the Portfolio Company. The Trust
shall not invest in the securities of
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investment companies. The Trust 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 its
assets in foreign securities where the Trust would pay equalization tax.
OPERATING EXPENSES
The Trust will pay all operating expenses not specifically borne 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.
The operating expenses that will be paid by the Trust will include the
following: the Trust's share of transaction and other costs incident to the
acquisition and disposition of investments, whether or not such transactions are
completed, if the transaction has been approved or reviewed by the Independent
Trustees; all trust administration expenses; 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; all litigation costs and other extraordinary or
nonrecurring expenses and other expenses properly payable by the Trust.
Affiliates of the Trust Advisor that provide such services will receive payment
for such services on terms approved by the Independent Trustees as being not
less favorable to the Trust than those obtainable from unaffiliated parties.
The Trust Advisor, at its expense, will provide the Trust with office space,
facilities, equipment and certain personnel (whose salaries and benefits will be
paid by the Trust Advisor) necessary for the conduct of the Trust's business.
See "Trust Advisor" under "Management Arrangements." In addition, the Trust
Advisor will provide the Trust with certain administrative services for the
purpose of maintaining certain books and records of the Trust and handling
communications and correspondence with Shareholders. The Trust Advisor will
receive payment for such services on terms approved by the Independent Trustees
as being not less favorable to the Trust than those obtainable from unaffiliated
parties.
MANAGEMENT ARRANGEMENTS
Berthel Fisher & Company Planning, Inc., an Iowa corporation, is the Trust
Advisor. The Independent Trustees are Henry T. Madden and Henry Royer. 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 an investment advisor to the Trust and will provide certain administrative
services to the Trust. The respective duties and responsibilities of the Trust
Advisor and the Independent Trustees are discussed below.
TRUST ADVISOR
Berthel Fisher & Company Planning, Inc., the Trust Advisor, is a corporation
organized under the laws of the State of Iowa in 1989. The principal office of
the Trust Advisor is located at 100 Second Street, S.E., Cedar Rapids, Iowa. The
Trust Advisor was organized as a subsidiary of Berthel Fisher & Company
("Berthel Fisher") to serve as a registered investment advisor. All of the
voting stock of the Trust Advisor is owned by Berthel Fisher. Berthel Fisher, a
financial services holding company, was formed in 1985 as an Iowa corporation to
hold the stock of Berthel Fisher & Company Financial Services, Inc. ("Financial
Services"), a broker-dealer registered with the NASD. 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 the Trust's investments. See "Independent Trustees" below.
The Trust Advisor will be principally responsible for approving the Trust's
investments, assisting Portfolio Companies in arranging any additional financing
necessary for leveraged transactions or working capital 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 the operation of the Trust pursuant to the
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Management Agreement to be entered into by the Trust and the Trust Advisor prior
to the Initial Closing of the sale of Shares in this Offering. See "Management
Agreement" below. The Trust Advisor will identify, evaluate, structure, monitor
and arrange for the disposition of the Trust's investments. The Trust Advisor
also manages the Trust's 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 the Capital Account of the Trust Advisor upon or
prior to the first distribution in liquidation, as required by Section 14.7 of
the Declaration of Trust. The Trust Advisor will be allocated one hundred
percent of the Profit of the Trust until such allocations equal the amounts
distributable to the Trust Advisor. The Trust Advisor will be allocated one
percent (1%) of the Losses for any fiscal period. The Trust Advisor will also be
entitled to an interest in the Trust based on its Capital Contribution, if any,
made to acquire Shares of the Trust. The Trust Advisor will be entitled to one
percent (1%) of Distributions until Shareholders receive Payout, and thereafter,
the Trust Advisor will receive twenty percent (20%) of Distributions. See
"Distribution and Allocations."
The Trust Advisor 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 Trust Advisor also provides the Trust, at the Trust Advisor's 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.
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THE MANAGEMENT BOARD AND DIRECTORS AND OFFICERS OF THE TRUST ADVISOR. A
Management Board consisting of the Trust Advisor and the Independent Trustees
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 the Trust Advisor.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION HELD WITH REGISTRANT DURING PAST FIVE YEARS (1)
- ------------------------------ -------------------------------- ------------------------------------------------
<S> <C> <C>
Thomas J. Berthel* Chairman of the Board and Chief Chief Executive Officer of Berthel Fisher &
100 Second Street, S.E. Executive Officer of Trust Company
Cedar Rapids, IA 52401 Advisor
James D. Thorp* Managing Director and President Manager of investment banking division of
100 Second Street, S.E. of Trust Advisor Berthel Fisher & Company Financial Services,
Cedar Rapids, IA 52401 Inc.; principal with private equities investment
management firm.
Von Elbert* Director of Trust Advisor Vice President, Treasurer and Chief Financial
100 Second Street, S.E. Officer of Galt Sand Company
Cedar Rapids, IA 52401
Ronald O. Brendengen* Treasurer, Chief Financial Chief Financial Officer and Treasurer of Berthel
100 Second Street, S.E. Officer and Director of Trust Fisher & Company and related companies
Cedar Rapids, IA 52401 Advisor
Leslie D. Smith* Secretary and Director of Trust General Counsel of Berthel Fisher & Company
100 Second Street, S.E. Advisor Financial Services, Inc., Associated General
Cedar Rapids, IA 52401 Counsel for Gateway 2000, Inc. and Operations
Counsel for General Electric Capital Corporation
Henry T. Madden Trustee In 1986 organized the Institute for
Entrepreneurial Management in the University of
Iowa College of Business Administration advising
potential and new entrepreneurs and teaching
courses on entrepreneurship in the MBA program.
He teaches courses in Corporate Strategy in the
Executive MBA and MBA PROGRAMS. Mr. Madden has
been consulting with developmental stage
companies since 1981.
Henry Royer Trustee Served as Chairman and President of The
Merchants National Bank of Cedar Rapids (merged
into Firstar Bank of Cedar Rapids, N.A. in 1991)
from 1983 to 1994. From 1994 to the present,
serves as President and CEO of River City Bank,
Sacramento, California.
</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.
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The following information is a summary of certain prior investment and
related business activities of the principal executive officers of the Trust
Advisor and the Independent Trustees.
Thomas J. Berthel, age 43, serves as Chief Executive Officer and Chairman of
the Board of the Trust Advisor and as the Chief Executive Officer of Berthel
Fisher & Company, the parent company of the Trust Advisor and the Dealer
Manager. He has held these positions since 1985. Until June, 1993, Mr. Berthel
served as President of the Dealer Manager. From 1993 until the present he has
served as Chief Executive Officer and as a Director of the Dealer Manager. Mr.
Berthel is also 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 also serves as an individual general partner of each of the eight
private programs referred to above. Mr. Berthel holds a bachelor's degree from
St. Ambrose College in Davenport, Iowa (1974). He also holds a Master's degree
in Business Administration from the University of Iowa in Iowa City, Iowa
(1993). By virtue of his ownership of Berthel Fisher & Company, the parent of
the Trust Advisor, Mr. Berthel is a controlling person of the Trust Advisor.
James D. Thorp, age 36, is the President and Managing Director of the Trust
Advisor. As such he is the person primarily responsible for the day-to-day
management of the Trust's portfolio. He was elected as a Director of Berthel
Fisher & Company in April, 1994. He serves as Vice President -- Investment
Banking of Berthel Fisher & Company Financial Services, Inc., the Dealer
Manager, a position he has held since 1993. In this position he is responsible
for all the investment banking, corporate finance and due diligence activities
of the Dealer Manager. During his tenure in this position he has been
responsible for, directed and completed nine private financings for company
clients totaling over $20 million. From 1983 to 1992, Mr. Thorp served in
various positions and finally as Principal for Allsop Venture Partners III and
its affiliates, a private equities investment management concern managing over
$105,000,000 in capital invested in over 80 portfolio companies. These companies
spanned a myriad of industries and involved many transaction types that covered
the spectrum of private equities investing, from seed investments to later stage
expansions and turnaround financing to leveraged buyouts. During his tenure at
Allsop Venture Partners III he reviewed and analyzed business plans for
potential financings of over $1.5 billion, performed due diligence on projects
representing potential financings of over $200 million and was personally
responsible for actually investing over $10 million. The funds under management
while Mr. Thorp was at Allsop Venture Partners III and its affiliates
consistently yielded twice the average internal rate of return generated by
similar private equities investment firms. He has served as a director on the
boards of seven portfolio companies and is a past member of the National Venture
Capital Association, the National Association of Small Business Investment
Companies and the Midwest Regional Association of Small Business Investment
Companies. He is a graduate of the Ninth Annual Management Institute of the
National Association of Small Business Investment Companies. Mr. Thorp received
a Bachelor of Science degree in Business Administration in 1981 from Oklahoma
State University. In 1983 he was awarded a Master of Business Administration --
Finance from the Wharton School, University of Pennsylvania.
Ronald O. Brendengen, age 40, is the Chief Financial Officer, Treasurer and
a Director of the Trust Advisor. He has served since 1985 as Controller and
since 1987 as the Treasurer and a Director of Berthel Fisher & Company, the
parent company of the Trust Advisor. 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.
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Von Elbert, age 55, is a Director of the Trust Advisor. 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 the present, Mr. Elbert has served as the Vice President,
Treasurer and Chief Financial Officer of Galt Sand Company, a manufacturer of
wearing apparel. Mr. Elbert also serves as a director of Hawkeye Bank of Cedar
Rapids. Mr. Elbert received his BBA degree from the University of Iowa in 1962.
Leslie D. Smith, age 47, is a Director and the Secretary of the Trust
Advisor. 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. At Life Investors Inc., Mr. Smith was responsible for
managing mortgage and real estate transactions. From 1985 to 1990 Mr. Smith was
General Counsel for Leaseamerica Corporation, Cedar Rapids, Iowa. In that
capacity, Mr. Smith performed all duties generally associated with the position
of General Counsel. 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 as employed as Associate General Counsel for Gateway 2000, Inc., in
North Sioux City, South Dakota.
Henry T. Madden, age 65, is an Independent Trustee of the Trust. Mr Madden
was awarded a B.S.M.E. from the University of Notre Dame in 1951 and an M.B.A.
from the University of Pittsburgh in 1966. He began his career as an Industrial
Engineer, then Quality Control Manager in Technical Ceramics for 3M Company in
Chattanooga, Tennessee. He became Manager of Production Engineering, then
Manager for a 1,500 employee, $50 million in sales Allis-Chalmers Plant,
manufacturing power and distribution transformers in Pittsburgh, Pennsylvania.
In 1966 Mr. Madden became General Plant Manager of the Allis-Chalmers, Cedar
Rapids, Iowa Plant manufacturing construction machinery.
In 1969, Mr. Madden became Division Manager for Hydraulic Truck Cranes for
Harnischfeger Corporation. In 1975 Mr. Madden became President, Harnischfeger
GMBH in Dortmund, West Germany, a joint venture with August Thyssen A. G. of
West Germany, manufacturing truck cranes, creating a 100 million deutsche mark
business. He also served as Managing Director for Harnischfeger International
Corporation for Europe, East Europe, and North and West Africa, responsible for
all Harnischfeger product sales in that area.
In 1981, Mr. Madden became a consultant to and assumed the responsibilities
of General Manager of Oak Hill Engineering Inc. in Cedar Rapids, Iowa,
manufacturing wire harnesses. In 1983, he started a company, Enertrac Inc.,
designing, manufacturing and marketing communications systems. Mr. Madden
financed Enertrac Inc. through an initial public offering and merged it into
another company in 1986.
In 1986, Mr. Madden organized the Institute for Entrepreneurial Management
in the University of Iowa College of Business Administration advising potential
and new entrepreneurs and teaching courses on entrepreneurship in the MBA
program. He also teaches courses in Corporate Strategy in the Executive MBA and
MBA Programs. Mr. Madden has been consulting with developmental stage companies
since 1981.
Henry Royer, age 63, is an Independent Trustee of the Trust. Mr. Royer
graduated in 1953 from Colorado College with a B.A. in Money and Banking. From
1950 until 1962, Mr. Royer was employed for four years by Pillsbury Mills and
for four years by Peavey Company as a grain merchandiser. From 1962 through 1965
Mr. Royer was employed as Treasurer and served on the Board of Lehigh Sewer Pipe
and Tile.
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Mr. Royer joined First National Bank of Duluth in 1965, and served in
various capacities, including Assistant Cashier, Assistant Vice President,
Assistant Manager of the Commercial Loan Department and Senior Vice President in
Charge of Loans. When he left the bank in 1983 he was serving as Executive Vice
President/Loans.
Upon leaving First National Bank of Duluth, Mr. Royer joined The Merchants
National Bank of Cedar Rapids (currently Firstar Bank Cedar Rapids, N.A.) where
he served as Chairman and President until August, 1994. Since September, 1994,
Mr. Royer has been the President and Chief Executive Officer of River City Bank,
Sacramento, California.
MANAGEMENT AGREEMENT
The Trust Advisor and the Trust will enter into a Management Agreement prior
to the Initial Closing. The Management Agreement has been approved by the
Independent Trustees. Unless earlier terminated, the Management Agreement will
remain in effect until December 31, 1996, 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, the Trust Advisor will perform
management services and certain investment advisory and other services necessary
for the operation of the Trust. The Management Agreement provides that the Trust
Advisor 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 quarterly in arrears.
The amount of the Management Fee to be paid at the end of a particular quarter
shall be determined by multiplying the value of the assets of the Trust as of
the last day of the previous quarter by .00625 (one-fourth of 2.5%). The amount
of the Management Fee to be paid at the end of the quarter in which the Initial
Closing occurs shall be determined by multiplying the value of the assets of the
Trust immediately following the Initial Closing by .00625 (determined after
reduction for selling, organization and other expenses), pro-rated on a daily
basis for the number of days in the period beginning with the date of Initial
Closing and ending with the last day of the first quarter in which the Initial
Closing occurs.
The Trust Advisor is entitled to a Management Share. See "Distribution and
Allocations" and "Summary of the Declaration of Trust." The Investment Company
Act and the Advisers Act currently restrict the aggregate amount that can be
paid to a fund advisor. See "Regulation."
The Management Agreement and the Declaration of Trust provide for
indemnification by the Trust of 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 or claims by the Trust, in right of the Trust or by or in right of any
Shareholders, or any loss suffered by the Trust that arises out of any action or
inaction of a Managing Person if, in any such foregoing case, 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 the
Declaration of Trust and the action of the Managing Person did not constitute
negligence or misconduct of the Managing Person. To the extent that the 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 the Managing Person against the expenses, including attorneys'
fees, actually and reasonably incurred in connection therewith. In addition to
the foregoing, in the absence of a determination by a court or administrative
agency that the person seeking indemnification is not liable by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of duties
as described in Section 17(h) of the Investment Company Act, indemnification by
the Trust 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 the Trust's net assets and not from
Shareholders.
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INDEPENDENT TRUSTEES
The Independent Trustees will provide overall guidance and supervision with
respect to the operations of the Trust, will approve the Trust's 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 the management arrangements of the Trust, 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 the Trust an annual fee of
$12,000, a fee of $1,000 for each meeting of the Management Board attended up to
an annual limit of $24,000 in meeting fees and reimbursement for certain
out-of-pocket expenses relating to attendance at such meetings. Independent
Trustees will not receive any additional compensation from the Trust or its
Portfolio Companies for any additional services rendered.
CORPORATE TRUSTEE
TJB Capital Management, Inc. was organized as a Delaware corporation on
January 25, 1995 for the purpose of organizing the Trust. The principal office
of the Corporate Trustee is located at 1105 N. Market Street, Suite 1300,
Wilmington, Delaware 19801. The Corporate Trustee is an Affiliate of the Trust
Advisor.
CUSTODIAN
The Trust will act as the custodian of its securities to the extent
permitted under the Investment Company Act and the rules and regulations
thereunder. The Trust will be subject to the restrictions imposed on
self-custodians by the Investment Company Act and the rules and regulations
thereunder. The Trust has entered into an agreement with Firstar Bank Cedar
Rapids, N.A., with respect to the safekeeping of such securities. The principal
business office of such person is 222 Second Avenue, S.E., Cedar Rapids, Iowa.
TRANSFERRING AND DISBURSING AGENT
The Corporate Trustee will act as the transfer agent for the Trust. The
Trust Advisor will act as the disbursing agent for the Trust. The Corporate
Trustee will be paid for such services on terms approved by the Independent
Trustees as being not greater than the amount that is competitive with that
charged for comparable administrative services in the same geographic area by
unrelated third parties.
INDEPENDENT PUBLIC ACCOUNTANT
The Trust has selected Ernst & Young LLP, 222 Third Avenue, S.E., Cedar
Rapids, Iowa, 52401 to audit the annual financial statements and to perform such
other procedures as may be periodically requested.
CONFLICTS OF INTEREST
The Trust Advisor, the Corporate Trustee and their Affiliates, including the
Dealer Manager, may be subject to various conflicts of interest in connection
with their relationships and transactions with the Trust. The contractual and
other arrangements between the Trust and the Trust Advisor, the Corporate
Trustee and their Affiliates, including the Dealer Manager, have not been
established by arm's length
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negotiations. The Selling Agents may also be subject to various conflicts of
interest in connection with their relationships and transactions with the Trust,
the Trust Advisor and their Affiliates. Such conflicts of interest may include:
1. TRANSACTIONS WITH THE TRUST AND PORTFOLIO COMPANIES. Berthel Fisher &
Company is the sole shareholder of the Trust Advisor, the Corporate Trustee and
the Dealer Manager. All of these related entities may perform various services
for the Trust and its Portfolio Companies. Such services may include making
loans to the Trust and its Portfolio Companies, serving as directors or officers
of Portfolio Companies and providing services in connection with mergers and
acquisitions, leasing, real estate, insurance and economic forecasting. In
consideration of such services, such persons may receive various fees,
commissions and reimbursements to the extent permitted under applicable law.
Depending upon the Trust Advisor's influence and control with respect to
Portfolio Companies, the selection of such persons to perform such services for
Portfolio Companies may not be a disinterested decision and the terms and
conditions for the performance of such services, and the amounts and terms of
such compensation, may not be determined in arm's-length negotiations.
Notwithstanding the foregoing, the interest rates and financing charges that
such persons may charge the Trust or its Portfolio Companies for funds made
available to it or them will not exceed those that would ordinarily and
customarily be charged by unrelated lending institutions on comparable loans for
the same purpose. Additionally, any loans by the Trust Advisor or its Affiliates
or by the stockholder of the Trust Advisor (other than such persons who are
engaged in the commercial lending business) to the Trust will be limited to a
term of not more than 24 months.
Certain Selling Agents or their Affiliates also may perform a variety of
financial services for the Trust and its Portfolio Companies, including
investment banking services, securities broker-dealer services (including
execution of portfolio transactions) and services in connection with mergers and
acquisitions, leasing, real estate, insurance and economic forecasting. Any such
Selling Agents or their Affiliates may receive various fees, commissions and
disbursements with respect to such services to the extent permitted by
applicable law and rules of the NASD.
The Declaration of Trust imposes various constraints on the Trust Advisor
and its Affiliates in their dealings with the Trust. The Investment Company Act
also contains restrictions as to certain transactions among the Trust, the Trust
Advisor and their Affiliates. See "Regulation." Generally, transactions
involving the Trust and the Trust Advisor and certain of their Affiliates must
receive the prior approval of the SEC or the Independent Trustees, or both.
There can be no assurance that such prior approval will be obtained. The
Trustees and the Trust Advisor will be subject to fiduciary duties to the Trust
in evaluating the capabilities, services and compensation of persons rendering
services to the Trust.
2. CONFLICTS AS TO INVESTMENT OPPORTUNITIES. The stockholder of the Trust
Advisor and other Affiliates and subsidiaries of the Trust Advisor may make
investments for their own accounts and may be in competition with the Trust for
such investments. In addition, the Trust Advisor may serve as managing general
partner of private or public partnerships or as the controlling person of other
entities that may have an investment objective similar to that of the Trust.
Although the Trust Advisor is obligated to use its best efforts to provide the
Trust with continuing and suitable investment opportunities consistent with its
investment objective and policies, the Trust Advisor is not required, except as
provided below, to present to the Trust any particular investment opportunity
which has come to its attention, even if such opportunity is within the
investment objective and policies of the Trust. Accordingly, the Trust may not
be given the opportunity to participate in certain investments made by
Affiliates of the Trust Advisor. In addition, if the Trust rejects an investment
opportunity for any reason, the Trust Advisor and its Affiliates would generally
be permitted to accept it. The Trust will be reimbursed by the Trust Advisor or
any Affiliate of the Trust Advisor for any costs or expenses paid or incurred by
the Trust with respect to an investment rejected by the Trust and accepted by
the Trust Advisor or such Affiliate. Before the Trust Advisor or its Affiliates
make any investment that is within the Trust's investment objective for its or
their own account, the Trust Advisor will offer such proposed investment to the
Trust, which will have a right of first refusal
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with respect to such investment. The Trust Advisor will endeavor to resolve
conflicts with respect to investment opportunities in a manner deemed equitable
to all to the extent possible under the prevailing facts and circumstances and
consistent with the Trust Advisor's fiduciary duties.
No Selling Agent is obligated to present to the Trust any investment
opportunity that has come to its attention, even if such opportunity is within
the investment objective and policies of the Trust. The Selling Agents and their
Affiliates may make investments for their own accounts and may provide
investment advisory and other services to persons or entities with an investment
objective identical or similar to that of the Trust.
3. TIMING OF DISPOSITION OF TRUST INVESTMENTS. The Trust Advisor will
receive certain amounts measured by the distributions of the Trust as set forth
under "Distribution and Allocations" and "Trust Advisor" under "Management
Arrangements." The interests of the Trust Advisor may conflict with the
interests of the Shareholders with respect to the timing of the disposition of
Trust investments. However, the acts of the Trust Advisor are subject to
supervision by the Independent Trustees, and all the Trustees and the Trust
Advisor will be subject to a fiduciary duty to the Trust in evaluating decisions
as to the retention and disposition of the Trust's investments.
4. ALLOCATION OF THE TRUST ADVISOR'S TIME AND SERVICES. The Trust will not
have independent management or employees and will rely upon the Trust Advisor
and its Affiliates for management and administration of the Trust and its
assets. The Trust Advisor also provides management and administrative services
to other companies owned by the Trust Advisor's Affiliates. The Trust Advisor
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 the Trust and
other entities to which the Trust Advisor and its Affiliates may provide similar
services. The officers and directors of the Trust Advisor and their Affiliates
will devote such time to the affairs of the Trust as they, in their sole
discretion, determine to be necessary for the conduct of the operations of the
Trust.
5. OTHER RELATIONSHIPS WITH PORTFOLIO COMPANIES. The Trust Advisor and its
Affiliates may have other continuing relationships with Portfolio Companies in
which the Trust has invested. Such relationships could influence the Trust
Advisor to take actions, or forebear from taking actions, which an unrelated
fund advisor might otherwise not take or forbear from taking.
6. PARTICIPATION BY AN AFFILIATE AS DEALER MANAGER. As an Affiliate of the
Trust Advisor, the Dealer Manager may experience a conflict of interest in
performing its due diligence in connection with the public offering of the
Shares. Although the Trust Advisor believes that the Dealer Manager has
exercised due diligence in its investigation of the offering, the review
performed by the Dealer Manager cannot be considered to be independent.
7. LACK OF SEPARATE REPRESENTATION. The Trust, the Trust Advisor, the
Management Board and the Dealer Manager are represented by the same legal
counsel with respect to most matters. Separate counsel will be retained by the
Independent Trustees for the Trust in connection with any dispute that may arise
between the Trust and the Trust Advisor, the Management Board or any of their
respective Affiliates.
DISTRIBUTION AND ALLOCATIONS
GENERAL
Distributions from the Trust are governed by Article VIII of the Declaration
of Trust. Allocation of Profit and Loss are governed by Article IV of the
Declaration of Trust, and the interest of Shareholders in income and loss are
governed by Article VII of the Declaration of Trust. Such provisions are complex
and should be reviewed with care in their entirety by prospective Investors. The
summary set forth below is qualified in its entirety by the detailed provisions
of the Declaration of Trust, including definitions contained therein, to which
reference is hereby made and the form of which appears as Exhibit A to this
Prospectus.
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DISTRIBUTION OF CASH REVENUES
OFFERING PERIOD DISTRIBUTIONS -- THE UNDERWRITING RETURN. During the period
beginning with the date of the Prospectus and ending with the Final Closing (the
"Offering Period"), each Investor shall earn an Underwriting Return computed on
a daily basis for each Investor as set forth herein. The Underwriting Return for
an Investor shall be equal to (i) the interest, if any, actually earned on the
Investor's funds held in escrow prior to the Initial Closing, plus (ii) after
the Initial Closing, 10% (simple annual interest, not compounded) computed on a
daily basis for each Investor on the capital contributed (without regard to
discounts) for Shares by each Investor, for the period beginning with the later
of the date an Investor's subscription is accepted or the Initial Closing and
ending with the Final Closing. At the Final Closing, the Trust will distribute
in payment of the Underwriting Return the lesser of (i) all of the cash revenues
of the Trust earned from any source during the Offering Period and received by
the Trust at or prior to the Final Closing, or (ii) the Underwriting Return.
There is no guarantee that the full Underwriting Return will be paid at the
Final Closing. If the Underwriting Return is not fully paid at the Final
Closing, the unpaid balance of the Underwriting Return shall be paid as set
forth below under "Distributions of Cash Revenues After the Final Closing" and
"Distributions of Shareholder Contributions and Capital."
DISTRIBUTIONS OF CASH REVENUES AFTER THE FINAL CLOSING. After the Final
Closing, the Trust will make quarterly distributions of all Cash Revenues, to
the extent that the Trust has cash available for such purpose. The Trust will
not make a distribution if a majority of the Independent Trustees determine that
such distribution is not in the best interest of the Trust and the Shareholders.
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. Cash available for the purpose of distributing
Cash Revenues shall be equal to Cash Available For Distribution (but not
decreased by the amount used to pay all expenses of the Trust) plus all other
cash of the Trust, including Shareholder contributions. Cash Revenues shall 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 shall not include realized gains from Portfolio Companies
or other investments of the Trust, invested funds returned to the Trust, or
principal payments received by the Trust in repayment of loans made by the
Trust. The Trust will not borrow funds in order to make a distribution under
this section, but the Trust may utilize Shareholder contributions to make
distributions. In no event shall funds be advanced by the Trust advisor or
borrowed for purpose of distributions, if the amount of such distributions would
exceed the Trust's 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 such a distribution is made from any source other than
the Trust's accumulated undistributed net income, determined in accordance with
good accounting practice and not including 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, unless such payment is accompanied by
a written statement which adequately discloses the source or sources of such
payment.
All quarterly distributions of Cash Revenue will be made 99% to the
Shareholders and 1% to the Trust Advisor until the Shareholders have received
Payout. After Payout, all distributions shall be made 80% to the Shareholders
and 20% to the Trust Advisor. Payout occurs when all Shareholders have received
distributions equal to 100% of all of the amount originally invested in the
Trust (without regard to or reduction for discounts) plus the Priority Return
plus the Underwriting Return. The Priority Return is the amount equal to a
return of 8% per annum simple interest (non-compounded) computed, from the Final
Closing on the declining balance of the amount invested in the Trust (without
regard to or reduction for discounts) by each Shareholder. For purposes of
calculating the Priority Return, Capital Contributions invested in the Trust by
Shareholders shall be reduced by distributions of Cash Revenues made to
Shareholders that are in excess of the Priority Return, and by other
distributions that result in the return of capital to Shareholders, as described
below.
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Quarterly distributions of Cash Revenues to Shareholders shall be allocated
in the following priority: (i) to pay the Priority Return; (ii) to pay any
Priority Return accrued in prior years but not yet paid; (iii) to the reduction
to zero of the amount of Shareholders' Capital Contributions used to compute
Priority Return, and then to the payment of any unpaid Underwriting Return.
After Payout, all distributions shall be made 80% to the Shareholders and
20% to the Trust Advisor.
PAYMENT OF TRUST EXPENSES
The Trust will establish reserves from Shareholder Capital Contributions and
from realized gains on Trust investments in order to pay the ongoing expenses of
the Trust that the Trust has an obligation to pay, including the Management Fee
and other costs and expenses incident to the holding and managing of the Trust's
investments or for the operation and management of the Trust including, without
limitation, taxes and insurance. The Trust will normally maintain not less than
One Percent (1%) of the offering proceeds as reserves.
DISTRIBUTIONS OF SHAREHOLDER CONTRIBUTIONS AND CAPITAL
GENERAL. The Trust Advisor does not presently intend to distribute
shareholder contributions or capital during the five years following the Final
Closing except such capital that may be distributed as part of the quarterly
distributions of Cash Revenues as discussed above. However, the Trust Advisor,
with the approval of the Independent Trustees may otherwise decide to distribute
Shareholder Contributions and capital if in the opinion of the Trust Advisor and
the Independent Trustees there are insufficient investment opportunities
available to the Trust, or if such distribution is warranted for the benefit of
the Shareholders. After the five year period following the Final Closing, the
Trust may distribute any funds that the Trust Advisor, with the approval of the
Independent Trustees, believes are not necessary for the operation of the Trust.
CASH AVAILABLE FROM REALIZED GAINS ON INVESTMENTS AND SOURCES OTHER THAN
CASH REVENUE. In the discretion of the Trust Advisor, and subject to review by
the Independent Trustees, cash received from realized gains on Investments may
be paid to Shareholders or reserved for general Trust purposes or for Follow-On
Investments within the limitations set forth above under "Investment Objective
and Policies." Reinvestment of proceeds resulting from the sale or refinancing
of Trust assets may take place 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. Cash available from Investments that is not applied
to Follow-On 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, to its Shareholders, in the following priority:
(a) 99% to the Shareholders, as a class, and 1% to the Trust Advisor, until
the Shareholders, as a class, have received
(i) payment of the Priority Return accrued through the end of the quarter
for which the distribution is being made;
(ii) payment of 100% of the amount contributed to the Trust by
Shareholders (without regard to or reduction for discounts); and
(iii) payment of the Underwriting Return,
the payment of all of items (a)(i) through (iii) being defined as Payout;
(b) 80% to the Shareholders, as a class, and 20% to the Trust Advisor.
To the extent that making any distribution to the Trust Advisor would result
in the Trust Advisor's receiving cumulative distributions in excess of that
permitted by the Investment Adviser's Act of 1940, the amount of such
distribution will instead be deferred until the payment of such amount does not
violate the terms of the Investment Adviser's Act of 1940, 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.
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ALLOCATION OF PROFITS AND LOSSES
The profits and losses of the Trust, including all gains derived by the
Trust during any fiscal period from any sale, transfer, injury, destruction or
other disposition of Trust property or an interest therein, (including, without
limitation, proceeds from insurance, refinancing or condemnation) are to be
determined as of the end of each fiscal year, and for any fiscal period shall be
allocated as follows:
(a) First, One Percent (1%) to the Trust Advisor until the Shareholders have
received Payout, and thereafter, Twenty Percent (20%); and
(b) Ninety-nine Percent (99%) to the Shareholders until the Shareholders
have received Payout, and thereafter, Eighty Percent (80%).
Notwithstanding the foregoing, to the extent an allocation of Losses after
Payout will reduce the Trust Advisor's capital account to a negative amount, the
allocation will be made One Percent (1%) to the Trust Advisor and Ninety-nine
Percent (99%) to the Shareholders until the Shareholders' capital accounts are
zero. No allocation will be made to the Shareholders' accounts that will reduce
the Shareholders' accounts to a negative amount.
Except as otherwise provided in the Declaration of Trust, all items of Trust
income, gain, expense, loss, deduction and credit for a particular fiscal period
and any other allocations not otherwise specifically provided for shall be
divided among the Shareholders as a class and the Trust Advisor in the same
proportions as they share profits or losses, as the case may be, for the fiscal
period.
ALLOCATIONS AMONG SHAREHOLDERS
Allocations of profits shall be made among Shareholders as follows: (i) all
profits shall be allocated to the holders of rights to Underwriting Returns in
proportion to their holdings of such rights until the amounts so allocated equal
the amount distributed at Final Closing to Shareholders in respect of the
Underwriting Return, (ii) thereafter until Payout, each Shareholder shall be
allocated that percentage of the aggregate amounts allocated to all Shareholders
as the number of Shares owned by the Shareholder bears to the aggregate number
of Shares owned by all Shareholders; (iii) after Payout, all profits shall be
allocated to the holders of a right to Underwriting Returns not distributed at
Final Closing in proportion to their holdings of such rights until the amounts
so allocated together with the amount allocated under (i) above, equal the total
Underwriting Return, and (iv) thereafter, each Shareholder shall be allocated
that percentage of the aggregate amounts allocated to all Shareholders as the
number of Shares owned by the Shareholder bears to the aggregate number of
Shares owned by all Shareholders.
MINIMUM ALLOCATION TO TRUST ADVISOR
Notwithstanding anything to the contrary set forth herein, 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.
TAX ALLOCATION
Notwithstanding anything to the contrary set forth herein, 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 that constitutes
income to the Trust Advisor under the Code, any amount allowed as a deduction
for federal income tax purposes to the Trust (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
the Trust Advisor.
DETERMINATION OF DISTRIBUTIONS AND ALLOCATIONS AMONG SHAREHOLDERS
Except as described above, 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
such Shareholders. All distributions and allocations will be distributed or
allocated, as the case may be, to the persons shown on the records of the Trust
to have been Shareholders as of the last day of the fiscal quarter for which
such distribution or allocation is to be made.
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TRANSFERABILITY OF SHARES
GENERAL
Interest in Shares in the Trust will be recorded in the books and records of
the Trust as provided by Delaware law. No transfer or assignment of a
Shareholder's interest in the Trust will be effective except to the extent made
in accordance with the provisions of the Declaration of Trust. Sales, transfers
or assignments of interests in the Trust will be recognized quarterly.
Shares will be represented by share certificates, and are transferable,
subject to the restrictions on transfer described herein and in the Declaration
of Trust, upon submission to the Trust Advisor of duly executed transfer
documentation in form and substance acceptable to the Trust Advisor. Except for
transfers incident to divorce and certain gratuitous transfers or assignments,
no sale, transfer or assignment of a Shareholder's Shares may be made to any
Person unless such Person (i) meets the applicable suitability requirements
contained in this Prospectus or (ii) is a Shareholder.
RESTRICTIONS
No sale, assignment or transfer that would result in the transferor or any
transferee holding less than one Share will be recognized for any purpose
without the consent of the Trust Advisor, which consent will be granted only for
good cause. In no event may any Shares 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, each transferee
must certify that he satisfies the Investor suitability standards described in
this Prospectus. See "Investor Suitability Standards" under "Terms of the
Offering."
No sale, transfer or assignment or negotiation of an interest in the Trust
will be recognized or effective if such sale, transfer or assignment, together
with all other such transfers on the books of the Trust 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 the Trust
Advisor that such 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, the Trust Advisor
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 public traded partnership. A transferor will not
be required to make the representations described above if the transferor
represents that the transfer is effected through an agent whose procedures have
been approved by the Trust Advisor as consistent with the requirements for
avoiding classification as a publicly traded partnership. It is anticipated that
the Dealer Manager will be such an agent.
In addition, pursuant to IRS Advance Notice No. 88-75 and recently issued
proposed Regulations under Section 7704 of the Code, no sale or other transfer
of a Share will be recognized if such sale or transfer, together with all other
such transfers during the same taxable year would result in the transfer of more
than 5.0% of the interests in the Trust (or 2.0% in the case the Trust also
relies on a matching service exclusion) or 2.0%, if the de minimis rule of the
proposed Regulations under Section 7704 is adopted. For purposes of the 5.0% and
2.0% limitation under Notice 88-75 described in the preceding sentence, the
following transfers will be disregarded: (i) transfers in which the basis of the
interest in Shares in the hands of the transferee is determined, in whole or in
part, by reference to its basis in the hands of the transferor or is determined
under section 732 of the Code; (ii) transfers at death; (iii) transfers between
members of a family (as defined in section 267(c)(4) of the code); (iv) the
issuance of interests by or on behalf of the Trust in exchange for cash,
property, or services; (v) distributions from a retirement plan qualified under
section 401(a) of the Code; and (vi) block transfers. The term "block
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transfer" means the transfer by a Shareholder in one or more transactions during
any 30 calendar day period of Shares representing in the aggregate more than
5.0% of the total interest in the Trust's capital or profits.
Under the proposed Regulations, the types of transfers that will be
disregarded in determining whether the interests are readily tradeable on a
substantial equivalent of a secondary market are the same as under Notice 88-75
except that distributions from individual retirement accounts are disregarded,
any exemption for transfer pursuant to a right under a redemption or repurchase
agreement that is exercisable on the happening of certain events (the Trust has
no such agreement) is disregarded, and transfers pursuant to a closed end
redemption plan (the Trust has no such plan) are disregarded. Further, the
definition of "block transfers" means the transfer by a partner in one or more
transactions during any thirty (30) calendar day period of interests
representing in the aggregate more than two percent (2%) of the total interests
in the Trust capital or profits. The Trust will not allow the transfer of any
shares in the Trust if such transfer would cause, in the opinion of the
Trustees, a violation of the publicly traded partnership provisions as finally
adopted.
Sales, transfers, assignments or negotiations the recognition and
effectiveness of which are so suspended and deferred will be recognized (in
chronological order to the extent practicable) when, and to the extent that,
such recognition will not result in there having been transfers of in excess of
the permitted percentage in interest of the Trust and will not likely result in,
or substantially increase such risk of, reclassification. The Trust Advisor has
the authority to amend the transferability provisions of the Declaration of
Trust to the extent necessary or desirable (or to eliminate or amend provisions
to the extent no longer necessary) to preserve the tax status of the Trust.
In connection with any sale, exchange, transfer or assignment, the Trust
Advisor may, in its discretion, require an opinion of counsel satisfactory in
form and substance to the Trust Advisor that such sale, exchange, transfer or
assignment would not result in a termination of the Trust for purposes of
Section 708 of the Code, cause the Trust to lose its status as a partnership or
to be classified as a publicly traded partnership and be taxable as a
corporation for federal income tax purposes or violate any federal securities
laws or any state securities or "Blue sky" laws, including Investor suitability
standards thereunder.
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.
The Trust Advisor intends that no public market for Shares develop.
Furthermore, the Trust Advisor intends to use its best efforts to implement the
transfer restrictions contained herein and in the 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 the Declaration of Trust for the purpose of
preventing the Trust from being classified as a publicly traded partnership
taxable as a corporation. See "Publicly Traded Partnerships (PTP)" under "Tax
Matters." Shareholders therefore may not be able to liquidate their investments
in the Trust in the event of an emergency or for any other reason. Moreover, the
lack of a public market may affect the price for which a Shareholder would be
able to sell Shares. The Dealer Manager may provide limited Investor services
which may assist Shareholders desiring to sell their Shares but will not
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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, the Dealer Manager will not be able to solicit any potential buyers
of Shares, but may afford only a matching service to sellers and potential
buyers. The Dealer Manager will not receive any compensation from the Trust for
providing such Investor services and the Dealer Manager will not impose any
charge for such investor services on Shareholders. The Dealer Manager is under
no obligation to provide any investor service and if provided, such services may
be terminated at any time. In connection with any sale of Shares that is
arranged by the Dealer Manager in the performance of such investor services, the
Dealer Manager will receive a fee. The Dealer Manager intends to charge the
seller a $50 service charge per executed order to sell and the buyer a
commission equal to 6% of the gross sales proceeds, but such fee may vary from
time to time. The Trust Advisor does not intend to have the Trust redeem or
repurchase Shares although the Trust reserves 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 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 the Declaration of Trust.
SUMMARY OF THE DECLARATION OF TRUST
THE RIGHTS AND OBLIGATIONS OF THE TRUST ADVISOR, THE INDEPENDENT TRUSTEES
AND THE SHAREHOLDERS ARE GOVERNED BY THE DECLARATION OF TRUST, A COPY OF WHICH
IS ATTACHED HERETO AS EXHIBIT A. NO PROSPECTIVE INVESTOR SHOULD SUBSCRIBE FOR
SHARES WITHOUT FIRST THOROUGHLY REVIEWING THE DECLARATION OF TRUST. THE
FOLLOWING IS ONLY A BRIEF SUMMARY OF CERTAIN SIGNIFICANT PROVISIONS OF THE
DECLARATION OF TRUST NOT DISCUSSED ELSEWHERE IN THIS PROSPECTUS AND SHOULD NOT
BE CONSIDERED AS A COMPLETE DISCUSSION OF ALL OF THE PROVISIONS OF THE
DECLARATION OF TRUST. SEE MANAGEMENT ARRANGEMENTS, TERMS OF THE OFFERING, PLAN
OF DISTRIBUTION, COMPENSATION AND FEES, INVESTMENT OBJECTIVE AND POLICIES,
DISTRIBUTION AND ALLOCATIONS, TRANSFERABILITY OF SHARES AND DECLARATION OF TRUST
(EXHIBIT A).
ACCOUNTING
The accounting period of the Trust will end on December 31 of each year. The
Trust will utilize the accrual method of accounting for the Trust's operations
on the basis used in preparing the Trust's federal income tax returns with such
adjustments as may be in the Trust's best interest.
BOOKS AND RECORDS; REPORTS
The Trust will keep appropriate records relating to its activities. All
books, records and files of the Trust will be kept at its principal offices at
Cedar Rapids, Iowa. An independent certified public accounting firm will prepare
the Trust's federal income tax returns as soon as practicable after the
conclusion of each year. The Trust will use its 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 the Trust's 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 annual
financial statements for the Trust that have been audited by the Trust's
accounting firm. As a business development company, the Trust will also be
required to make periodic reports to
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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). The
Trust will provide copies of such reports to the Investors. Upon the request of
an official or agency administering the securities laws of any state in which
the Shares are sold the Trust shall submit to such official or agency the
reports and statements required to be distributed to Shareholders pursuant to
the Declaration of Trust. See Exhibit A, Declaration of Trust, for detailed
information regarding information and reports available to Shareholders.
As described under "Compensation and Fees," the Trust will pay the Trust
Advisor an annual Management Fee for services performed under the Management
Agreement in an amount equal to 2.5% of the total assets of the Trust. The Trust
expects that it will value its liquid assets at current market values. The Trust
expects that because of the likely illiquidity of its investments in the
Portfolio Companies, the value of the Trust's total assets (i.e., the value of
its assets less its liabilities) in Portfolio Companies will be calculated based
on their original cost to the Trust unless a realization event or other
significant development relating to one or more of the investments provides a
factual basis for a restatement of the Trust's carrying value of the
investments. The Trust expects that such restatement may take into
consideration, among other things, such factors as earnings, expenses, market
prices for similar assets, an assessment of the investment's future prospects
and restrictions, if any, applicable thereto.
NO ASSESSMENTS
Assessments are additional amounts of capital paid by a Shareholder beyond
the Shareholder's subscription commitment. Mandatory assessments of any kind are
prohibited.
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 the Trust Advisor under the Declaration of Trust are
quite broad. The Trust Advisor 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 Investors have no power to take part
in the management of, or to bind, the Trust.
The Corporate Trustee has a fiduciary responsibility for the safekeeping and
use of all funds and assets of the Trust, whether or not in the Corporate
Trustee's immediate possession or control, and the Corporate Trustee shall not
employ, or permit another to employ, such funds or assets in any manner except
for the exclusive benefit of the Trust. No Shareholder shall contract away the
fiduciary obligation owed to the Shareholder by the Corporate Trustee under
common law.
The Management Board (which is comprised of the Trust Advisor 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 the Trust's 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 the Trust Advisor's other
actions but does not have management or administrative powers over the Trust or
the Trust's investments except as described above. The Management Board
nonetheless may require action by the Trust Advisor to the extent necessary to
carry out the fiduciary duties of the Management Board's members.
A sale, lease, pledge or other transfer of substantially all the Trust's
assets outside the ordinary course of its business requires the approval of the
holders of a majority of the outstanding Shares.
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ROLL-UP TRANSACTIONS
Roll-Ups are governed by the provisions of the Declaration. 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 Securities Act of 1933 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.
In connection with a proposed Roll-Up, the person sponsoring the Roll-Up
shall offer to Shareholders who vote "no" on the proposal the choice of: (i)
accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up;
or (ii) one of the following: (A) remaining as Shareholders in the Trust and
preserving their interests therein on the same terms and conditions as existed
previously; or (B) receiving cash in an amount equal to the Shareholders' pro
rata share of the appraised value of the net assets of the Trust.
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 the 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.
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.
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 the Declaration.
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.
SHAREHOLDER MEETINGS
The Trust Advisor may call meetings of the Shareholders concerning any
matter on which they may vote as provided by the 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 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.
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AMENDMENTS AND VOTING RIGHTS
The Trust Advisor may amend the Declaration of Trust without notice to or
approval of the Shareholders for the following purposes: (1) 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; (2) 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 Investor; (3) to otherwise equitably
resolve issues arising under this Prospectus or the Declaration of Trust so long
as similarly situated Investors are not treated materially differently; (4) to
maintain the federal tax status of the Trust and any of its Shareholders as
Shareholders of this Trust (so long as no Investor's liability is materially
increased without such Investor's consent); (5) 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 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 (6) to comply with law.
Other amendments to the Declaration of Trust may be proposed either by the
Trust Advisor 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 Shareholder or
Shareholder rights in the Trust's profits, losses, deductions, credits, revenues
or distributions in more than a de minimis matter, or change his rights on
dissolution or any voting rights without the Shareholder's consent. Any
amendment which changes the Trust Advisor's management rights requires its
consent.
The consent of all Shareholders is required for the following additional
actions by the Trust: actions contravening the Declaration of Trust or the
Certificate of Trust of the Trust; actions making it impossible to carry on the
Trust's activities; confessing a judgment in excess of 10% of the Trust's
assets; dissolving or terminating the Trust, other than as provided by the
Declaration of Trust; allowing the Trust Advisor to possess or hold Trust
Property for other than a Trust purpose or adding new Trust Advisors except as
described below.
REMOVAL OF TRUST ADVISOR
The holders of at least 10% of the Shares may propose the removal of a Trust
Advisor, either by calling a meeting or soliciting consents in accordance with
the terms of the Declaration of Trust. Removal of a Trust Advisor requires
either the affirmative vote of a majority of the Shares (excluding Shares held
by the Trust Advisor 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. The Trust Advisor 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 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.
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Alternatively, subject to the Trust's obtaining an exemptive order from the
Commission, if required, the Trust Advisor may elect to engage a qualified
independent appraiser and cause the Trust to engage another qualified
independent appraiser (at the Trust's expense in each case) to value the Trust
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 would be borne by the
Trust) whose determination, made on the same basis, would be final and binding.
The Trust 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, the Trust would make allocations to the Trust
Advisor'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
the Trust's fiscal year had ended, solely for the purpose of determining the
Trust Advisor's capital account. If the Trust Advisor has a positive capital
account after such allocation, the Trust would deliver a promissory note of the
Trust to the Trust Advisor, the principal amount of which would be equal to the
Trust Advisor'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 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 unpaid principal payable only from funds that would otherwise have
been available for distribution to the Trust Advisor.
If the capital account of the Trust Advisor has a negative balance after
such allocation, the Trust Advisor would be obligated to contribute to the
capital of the Trust in its sole 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,
resignation or other incapacity, bearing interest at the rate specified above.
If the Trust Advisor 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 the Trust 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, the Trust Advisor must
call a special meeting of Shareholders to elect Independent Trustees. Vacancies
must be filled within 90 days. An Independent Trustee may resign effective on
the designation of a successor and may be removed for cause by at least
two-thirds of the remaining Management Board members, or with or without cause
by action of the holders of a majority in interest of the Shareholders.
DISSOLUTION OF TRUST
The Trust will dissolve on the earliest to occur of (a) the later of
December 31, 2005 or ten years from the Final Closing, provided the Trust 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 the best interest of the
Trust and in the best interest of the Shareholders, (b) the sale of
substantially all of the assets of the Trust, (c) the removal, dissolution,
resignation, insolvency, bankruptcy, death or other legal incapacity or
disqualification of any Trust Advisor, (d) the vote of either all Shareholders
or the Trust Advisor and a majority in interest of the Shareholders or (e) any
other event requiring dissolution by law. After termination, the Trust will wind
up its affairs within three years of the date of dissolution. The Trust will
wind up its activities after dissolution unless (i) the remaining Trust Advisors
and a majority in interest of the Shareholders (calculated without regard to
Shares held by the Trust Advisors or their Affiliates) or (ii) if there is no
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remaining Trust Advisor, a majority in interest of the Shareholders, elects to
continue the Trust. The Trust Advisor (or in the absence thereof, a liquidating
trustee chosen by the Shareholders) will liquidate the Trust's assets if it is
not continued.
MANAGEMENT SHARE
The Management Share is the interest in the Trust that represents the
beneficial interests and management rights of the Trust Advisor in its capacity
as Trust Advisor. The Management Share excludes the Trust Advisor's interest, if
any, attributable to Shares acquired by it. The Management Share has no voting
rights and is deemed to have attached to it the rights appertaining to the Trust
Advisor under the Declaration of Trust.
TRANSFERABILITY OF INTEREST OF TRUST ADVISOR IN MANAGEMENT SHARE
The Trust Advisor may not resign except for cause (which cause does not
include the fact or determination that continued service would be unprofitable
to the Trust Advisor) and may not transfer its interest in the Trust except to
pledge it as security for a loan to the Trust Advisor 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
The Trust Advisor is obligated under the Declaration of Trust to restore any
deficit in its capital account upon or prior to the first distribution in
liquidation of the Trust. The Trust Advisor reserves the right, however, to
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.
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. An Investor should
not rely solely on this brief summary of the tax consequences of an investment
in the Trust but should review the entire section entitled "Tax Consequences"
and consult with the Investor's own counsel before making an investment
decision.
1. 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 opinion of Bradley & Riley, P.C.
("Counsel"), 100 First Street, S.W., Cedar Rapids, Iowa, that the Trust will be
treated as a partnership for tax purposes. If the IRS determines that the entity
is not a partnership for tax purposes, an Investor would experience a
substantial reduction in yield.
2. If the IRS determines that the Trust is a "publicly traded partnership",
the Trust will be treated like a corporation for tax purposes with the
result that the yield to the Investor on his or her investment will be
substantially reduced. Based on representations by the Trust Advisor and an
applicable IRS Notice, Counsel has rendered an opinion that it is more likely
than not that the Trust 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 Counsel that an investment by an Investor in the Trust will not
be considered a passive activity.
4. Investment by employee benefit plans, including individual retirement
accounts or other tax-exempt entities, in the Trust may result in additional
reporting requirements and may result in the tax exempt entity paying tax on the
income earned from its investment in the Trust.
B. TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
for persons considering an investment in the Trust. This summary is based upon
the 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
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consequences that could affect an investment in the Trust. No assurance can be
provided that any deductions or other federal income tax advantages that are
herein described or that a prospective Investor in the Trust may consider
available will in fact be allowed by the IRS.
The tax opinion rendered by Counsel is based upon the facts described in
this Prospectus and upon the facts as they have been represented by the Trust
Advisor to Counsel or determined by Counsel as of the date of the opinion. Any
alteration of the facts may adversely affect the opinion rendered. Furthermore,
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, Counsel is rendering
its opinion that a substantial majority of the material tax benefits
contemplated by the investment in the Trust, in the aggregate, more likely than
not will be realized.
1. PARTNERSHIP TAX STATUS. The ability of an Investor to realize tax
benefits from investing in a business trust, such as this Trust, depends upon
its classification as a partnership for federal income tax purposes, rather than
as an association taxable as a corporation. In Rev. Rul. 88-79, 1988-2 C.B. 361,
the IRS stated that the same principles applied in determining whether an entity
will be treated as a corporation or a partnership will be applied in determining
whether a business trust will be treated as a partnership or an association. The
IRS has also issued a revenue procedure that sets out guidelines for obtaining
an advance ruling from the IRS that a limited partnership will be classified as
a partnership for tax purposes. Rev. Proc. 89-12, 1989-1 C.B. 798 requires,
among other things, that a general partner maintain a specified minimum capital
account balance and contribute a specified amount of capital as set forth in the
revenue procedure.
The Trust Advisor has not requested, and does not intend to request, a
ruling from the IRS that the Trust will be classified as a partnership for
federal income tax purposes. Based on the IRS's advanced ruling position on
classification of a partnership for tax purposes, it is Counsel's opinion that
the Trust could not receive an advanced ruling on its classification as a
partnership because of requirements that the Trust Advisor maintain a specified
minimum capital account balance, contribute a specific amount of capital and
have and maintain a net worth based on the value of the Trust. Rev. Proc. 89-12
is not intended to define as a matter of law the requirements for classification
as a partnership, and the revenue procedure specifically provides that its
provisions are not intended to be substantive rules for determination of partner
and partnership status and are not to be applied on audit. However, in the
absence of such a ruling, there can be no assurance that the Trust will not be
taxed as a corporation. The Trust will rely upon the opinion of Counsel as to
its partnership tax status. Unlike a tax ruling, an opinion of Counsel
represents only such Counsel's best legal judgment, and has no binding effect or
official status of any kind, and no assurance can be given that the conclusions
reached in said opinion would be sustained by a court if contested.
It is the opinion of Counsel that, pursuant to existing law and Treasury
Regulations (specifically Sections 301.7701-2 and 301.7701-3) and provided the
Trust is organized and operated in accordance with the provisions of the
Declaration of Trust, the Trust 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 treated as an association taxable as a corporation.
The Regulations provide that, in the absence of significant relevant "other
factors," an unincorporated organization will be treated as a partnership for
tax purposes if it has fewer than three of the following attributes: (1)
continuity of life; (2) free transferability of interests; (3) limited
liability; and (4) centralized management.
Section 301.7701-2(b)(1) of the Regulations provides that if the death,
insanity, bankruptcy, retirement, resignation or expulsion of any member will
cause a dissolution of the organization, continuity of life does not exist.
Section 301.7701-2(b)(1) further states that if the retirement, death, or
insanity of a general partner of a limited partnership causes a dissolution of
the partnership, unless the remaining general partners agree to continue the
partnership or unless all remaining members agree to continue
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the partnership, continuity of life does not exist. In Rev. Rul. 88-79 the IRS
indicated that the managing shareholder of a trust will be treated as a general
partner of a limited partnership making the determination as to classification
of a trust as a partnership. Based on the IRS Regulations, the Trust should not
be considered to have continuity of life because the Trust will generally
dissolve upon the death, insanity, retirement, bankruptcy, resignation or
expulsion of the Trust Advisor.
Under Section 14.1 of the Declaration of Trust, the Trust shall be dissolved
upon, among other reasons, the death, removal, dissolution, resignation,
insolvency, bankruptcy, or other legal incapacity of the Trust Advisor. Section
14.2 of the Declaration of Trust provides that upon the occurrence of any event
of dissolution described in Section 14.1 that the Trust will be dissolved and
wound up unless the Trust Advisor and a majority of the Shareholders elect to
continue the Trust or, if there is no remaining Trust Advisor, a majority of the
Shareholders elect to continue the business of the Trust.
The IRS in Rev. Proc. 92-35, 1992-1 C.B. 790 announced that it would not
take the position that a limited partnership has the corporate characteristics
of continuity of life if, under local law and the partnership agreement the
bankruptcy or removal of a general partner causes the dissolution of the
partnership. Specifically, the IRS ruled that if under local law and the
partnership agreement the bankruptcy or removal of a general partner causes a
dissolution of the partnership unless the remaining general partners or at least
a majority in interest of all remaining partners agree to continue the
partnership, the IRS will not take the position that the limited partnership has
the corporate characteristics of continuity of life. Also, the IRS has issued
Proposed Regulations under Section 301.7701-2(b)(1) to specifically state that a
limited partnership lacks continuity of life even if dissolution of the
partnership can be avoided by the remaining general partners' agreement or a
majority in interest of the limited partners' and general partners' agreement to
continue the partnership.
Based on the Regulations and published positions of the IRS, the Trust
should not be considered to have limited liability because, while the Trust
Advisor does not have assets sufficient to satisfy the advance ruling
requirements, the Trust Advisor does have substantial assets and is not serving
merely as "dummy" of the Shareholders while serving as the Trust Advisor.
Section 301.7701-2(d)(2) provides that a general partner does not have
personal liability if the general partner has no substantial assets (other than
its interest in the partnership) and when the general partner is merely a
"dummy" acting as the agent of the limited partners. Rev. Rul. 88-79, applied
the criteria under Section 301.7701-2(d)(2) to a trust in determining whether
limited liability exists.
Under Section 7701-2(d)(2) both the requisites set forth above (no
substantial assets and a mere "dummy") must exist before the general partner's
personal liability is ignored in determining whether the corporate
characteristic of limited liability is considered to exist. No definition of
"substantial assets" is given under the Regulations and while such a definition
is given under Rev. Proc. 92-35, this only establishes the IRS's advance ruling
position.
The Trust Advisor has represented that it has a net worth in excess of
$250,000 on the effective date of this Prospectus and that it will maintain a
net worth of not less than one percent (1%) of the aggregate of all Shares sold
by the Trust during the term of the Trust. Based on this representation and the
representation that the Trust Advisor is not acting merely as an agent for the
Shareholders, it is the opinion of counsel that personal liability exists as to
the Trust Advisor and thus the Trust will not possess the corporation
characteristics of limited liability. In the event that the assets of the Trust
Advisor no longer are considered substantial and the Trust Advisor is considered
a "dummy" under the rationale of Section 301.7701-2(d)(2) the Trust may be
considered to have the corporate characteristics of limited liability.
Also, the Trust is not expected to have free transferability of interests
because any transferee of an interest in the Trust cannot be substituted as a
Shareholder without the consent of the Trust Advisor, which consent the Trust
Advisor can withhold in its sole discretion. Further, under Article 13 of the
Trust Declaration, the Trust Advisor may not sell, assign or otherwise transfer
its interest without first obtaining the consent of a majority in interest of
the Shareholders, except to make an assignment as security for a
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loan or to waive or assign compensation or fees payable to it. Section
301.7701-2(e) of the Regulations provides that an organization has free
transferability of interests only if each of its members or those members owning
substantially all of the interests in the organization have the power, without
the consent of other members, to substitute for themselves a person who is not a
member of the organization.
An entity is considered to have centralized management if any person (or any
group of persons which does not include all the members) has continuing
exclusive authority to make the management decisions necessary to the conduct of
the business for which the organization was formed. Section 301.7701-2(c)(4)
provides that centralized management ordinarily exists in a limited partnership
if substantially all the interests in the partnership are owned by the limited
partners. Rev. Rul. 88-79 indicates that the IRS will apply the same criteria in
the case of a business trust whose beneficiaries own substantially all of the
interests in the Trust and are not authorized to participate in management
decisions.
Because substantially all of the interests in the Trust will be owned by
Shareholders who will be viewed as equivalent to limited partners and a majority
in interest of those beneficiaries have the right to remove the Trust Advisor it
is the opinion of Counsel that the Trust will possess the corporate
characteristic of centralized management.
Because the Trust will not have continuity of life, limited liability or
free transferability, Counsel is of the opinion that the Trust will be treated
as a partnership and not as associations taxable as a corporation for tax
purposes.
If the Trust were classified as an association taxable as a corporation, it
would be subject to federal income tax on its taxable income at regular
corporate tax rates. The Shareholders would not be entitled to take into account
their distributive share of the Trust's deductions, if any, and would be subject
to tax on their share of the Trust's 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. Classification of the Trust
as an association taxable as a corporation would result in a substantial
reduction in yield and after-tax Cash Flow, if any, to a Shareholder.
2. "PUBLICLY TRADED" PARTNERSHIPS (PTP). Because the Trust will be treated
as a partnership for federal income tax purposes, the provisions of Section 7704
of the Code provide rules on when certain PTPs will be treated as corporations
for federal income tax purposes. There are three (3) sections of the Code that
affect the taxation of PTPs. Section 7704 of the Code contains provisions that
will, if applicable, tax certain "publicly traded" partnerships as corporations.
Section 469(k) of the Code provides that net income from a PTP will not be
considered passive income that can offset passive losses from other activities.
Income from a PTP is treated like portfolio income that cannot be used to offset
losses from passive activities. Each partner who holds an interest in a PTP must
treat any loss from the partnership separately from any income or loss from
other PTPs. Suspended losses from a PTP may be offset only against future income
of that PTP unless and until there has been a complete disposition of that PTP.
Finally, Section 512(c) of the Code treats a tax exempt entity's share of gross
income of PTPs as gross income derived from an unrelated trade or business that,
subject to the organization's share of partnership deductions, is taxable to the
tax-exempt entity.
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 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 buyers and sellers have the opportunity to
buy, sell or exchange interests in a time frame and with regularity and
continuity that the existence of a market maker would provide.
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Section 7704(c) of the Code provides that an entity that would otherwise be
treated as a PTP under Section 7704(a) will not be treated as a PTP if more than
90% of the entity's gross income consists of qualifying income. Qualifying
income is defined under Section 7704(d) as including among other types of income
interest, dividends, gains from the sale or disposition of a capital asset (or
property described in Section 1231(b)) held for the production of income
described in subparagraphs of Paragraph 1 of Section 7704(d). However, Section
7704(c)(3) 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 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 elect 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.
The IRS, in Advance Notice 88-75, 1988-2 C.B. 386 ("Notice 88-75"), lists
certain types of limited, non-public transfers that will be disregarded in
determining whether a partnership is publicly traded. In addition to providing
for these Exempt Transfers, Notice 88-75 states that partnership interests will
not be deemed "readily tradable on a secondary market (or the substantial
equivalent thereof) if any of the three safe harbors provided for in that Notice
is satisfied. One of these is the five percent safe harbor." It provides that a
secondary market or its equivalent will not exist if the sum of the percentage
interests in Trust capital or profits represented by Trust interests that are
sold or otherwise transferred (including purchases by the Trust of its own
interests) during the Trust's taxable year does not exceed 5.0% of the total
interests in Trust capital or profits. Exempt Transfers do not count towards the
5.0% ceiling. In determining whether the Trust satisfies the 5.0% safe harbor,
non-exempt privately arranged transactions and redemptions will be counted. The
issuance of interests by the Trust, however, is not considered to involve
"transfers" for purposes of Notice 88-75, and such transactions are therefore
not counted towards the 5.0% ceiling.
On May 2, 1995, the IRS issued proposed regulations relating to the
classification of certain publicly traded partnerships as corporations. Prior to
the issuance of these proposed regulations the IRS' only guidance on when an
entity would be treated as a publicly traded partnership was set forth in Notice
88-75. The IRS states in the proposed regulations that the regulations will
apply to taxable years of partnerships beginning on or after the date the final
regulations are published. Further, the IRS stated in the proposed regulations
that the definition of readily tradeable on a secondary market or substantial
equivalent thereof for purpose of Section 7704(b) will continue to apply until
these regulations are effective. Further, the IRS has requested comments on
whether transactional relief is necessary for partnerships that qualified for an
exclusion contained in Notice 88-75 but do not qualify for an exclusion
contained in the proposed regulations and, if so, the type of relief that would
be appropriate.
The proposed regulations modify the IRS' position in Notice 88-75 in several
areas that could affect the Trust if the regulations become final. Specifically,
in lieu of the 5% and 2% safe harbors set forth in Notice 88-75, the proposed
regulations provided a more limited de minimis trading exclusion. The proposed
regulations provide that interests in a partnership are not readily tradable on
a substantial equivalent of a secondary market if the sum of the percentage
interests in partnership capital or profits transferred during the taxable year
of the partnership do not exceed 2% of the total interests in partnership
capital or profits. All transfers of an interest in a partnership are taken into
account for purposes of this 2% rule, except for (1) private transfers; (2)
transfers pursuant to redemptions and repurchase agreements meeting certain
requirements as specified in the regulations; and (3) transfers pursuant to the
qualified matching service, as discussed below. The 2% rule differs from the
percentage safe harbors in Notice 88-75 because the 2% rule applies only for
purposes of determining whether interests in a partnership are readily tradeable
on the substantial equivalent of a secondary market and not on a
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secondary market. As a result, the 2% rule does not apply in determining whether
interests are readily tradable on a secondary market and thus does not apply to
partnerships with interests subject to firm quote trading.
The proposed regulations contained a qualified matching service exclusion
similar to the matching service exclusion contained in section II.D of Notice
88-75, including the limitation that the qualified matching service exclusion
will not apply if the sum of the percentage interests in the partnership capital
and profits exceeds 10% of the total interests in the partnership. The proposed
regulations contain certain modifications to prevent a qualified matching
service from operating on a secondary market or the substantial equivalent
thereof. The Trust intends that should any trading of interests in the Trust
occur through a qualified matching service the Trust will monitor share trading
to attempt to comply with the qualified matching service provision, and further,
the Trust will apply limitations on the percentage of Shares that can be validly
traded under a qualified matching service under the regulations as fully adopted
to insure that the interests being traded do not violate the final regulations.
The Corporate Trustee and Trust Advisor have represented to Counsel that (i)
the Trust will not list Shares for trading or otherwise encourage or condone the
establishment of a market for Shares, (ii) the Corporate Trustee and Trust
Advisor do not expect Shares to be readily tradeable on a secondary market,
based upon their experience with affiliated limited partnerships, and (iii) the
Management Board and the Trust Advisor will not consent to the assignment,
redemption or other disposition of Shares if, in the opinion of Counsel to the
Trust, the sum of the percentage interests in Trust capital or profits assigned,
redeemed or otherwise disposed of during a Trust taxable year after such
assignment, redemption or other disposition exceeds 5.0% (2.0% if the
Regulations are adopted) of the total interest in Trust capital or profits.
Based upon these representations and Notice 88-75, it is the opinion of Counsel
that the Trust will not be treated as "publicly traded partnership."
Because of the uncertainty in this area and until final regulations are
issued by the IRS, the Trust will adopt such restrictions as the Trustees
determine appropriate to insure that the Trust is not treated as a publicly
traded partnership. Until final regulations are adopted the Trust will follow
the provisions of Notice 88-75 and, depending on transitional relief provided,
will apply the rules adopted in the final regulations under Section 7704(b) of
the Code.
While the Trust Advisor will use its best efforts to limit the type and
number of transfers of Shares to those that will allow the Trust to remain
within the 5.0% (2.0% if the de minimis proposed Regulation is adopted) safe
harbor, the Trust Advisor cannot guarantee that the Trust will satisfy this safe
harbor during each of its taxable years. It is conceivable that transfers of
Shares could occur that would cause the Trust to fall outside the safe harbor.
No assurances can be offered that if the amount and type of trading in the
Shares were to fall outside the safe harbor, the IRS would not claim publicly
traded partnership status with respect to the Trust.
Based upon the representation of the Trust Advisor to prohibit any transfer
of Shares that would cause the Trust to fall outside the 5.0% (or the 2.0% de
minimis exception) safe harbor provided in Notice 88-75 and the proposed
Regulations, Counsel is of the opinion that the Trust will not be a "publicly
traded partnership" within the meaning of Section 7704, and, consequently,
Section 7704 will not alter the Trust's treatment as a partnership, rather than
as an association taxable as a corporation, for federal income tax purposes.
If the Trust were treated for federal income tax purposes as a corporation,
the Trust and the Shareholders would be taxed as set forth in Paragraph 1 above
on Partnership Tax Status. Tax-exempt entities would, as set forth above, be
subject to tax on the entity's income as unrelated trade or business income.
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).
Each Shareholder will report on that Shareholder's personal income tax return
their distributive share (as
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determined under the Declaration of Trust) of all terms of the Trust's income,
gain, loss, deduction, credit and tax preferences, whether or not cash is
distributed to the Shareholder. The amount of any loss currently deductible by a
Shareholder will be limited to the Shareholder's adjusted basis for the
Shareholder's Shares in the Trust and the "at risk" rules. A Shareholder may be
subject to tax if the Trust has income or gain even though a cash distribution
is not made by the Trust.
As a general rule, the adjusted tax basis for a Shareholder in Shares of the
Trust will be the Shareholder's Capital Contribution increased by his or her
share of the Trust's income and gain and reduced by the Shareholder's share of
Trust distributions, expenses, losses and non-deductible expenditures. A
Shareholder would also be entitled to increase basis by the Trust's qualifying
nonrecourse liabilities. However, it is not anticipated that the Trust will
incur qualifying nonrecourse liabilities, and thus Shareholders should assume
their basis in the Trust will not be increased by any Trust liabilities. Other
liabilities (recourse) incurred by the Trust will not increase a Shareholder's
basis in the Trust unless the Shareholder is personally liable for the repayment
of the liability.
Distributions of cash by the Trust to a Shareholder will constitute a return
of capital (and not taxable income) to the Shareholder to the extent of the
Shareholder's adjusted tax basis in the Shares. A return of capital will reduce
a Shareholder's adjusted tax basis for the Shares in the Trust. If a
Shareholder's adjusted tax basis for Shares in the Trust should be reduced to
zero, the Shareholder's share of any cash distributions for any year will be
taxable to the Shareholder as though it were a gain on the sale or exchange of
property.
Non-liquidating distributions of property other than cash to a Shareholder
will reduce the Shareholder's interest in the basis in the Trust by an amount
equal to the Trust's basis in such property provided, however, that the adjusted
basis cannot be reduced below zero. A Shareholder's tax basis in property
distributed will be equal to the reduction in the Shareholder's basis in his or
her interest in the Trust. A reduction in a Shareholder's share of indebtedness
on the Trust will be credited as a distribution of cash.
Expenses and losses of the Trust will, subject to the Shareholder satisfying
the "at-risk" rules, be deductible by a Shareholder only to the extent of the
adjusted tax basis of the Shareholder in the Shares. Any loss unavailable as a
current deduction because of insufficient tax basis is allowed as a deduction at
the end of the first succeeding taxable year that the Shareholder's 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 incurred
by the Trust and passed through to the Shareholders 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. The Trust expects 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 held by the Trust and are
pro rata by the distributing corporation to all of its shareholders, including
the Trust, the receipt of such stock by the Trust 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 that the distributions are non-pro rata or
the Trust has 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.
It is anticipated that the Trust 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 not satisfy the requirements of
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Section 305. The effect is that the Trust will report income to its
shareholders, it will constitute ordinary income and the Trust may not have the
cash available to distribute to its Shareholders to provide them with cash
necessary to pay the taxes on the value of the distributions received by the
Trust.
5. INTEREST INCOME. The Trust will make investments in certain types of
instruments that will result in the receipt of interest income. Interest income
will represent currently taxable income to the Trust and is subject to tax at
ordinary income tax rates. In some situations the Trust 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 the Shareholder with no cash being
available for distribution by the Trust.
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) a Shareholder's
deduction for that Shareholder's share of Trust 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, a Shareholder is considered to be at risk on the sum
of (i) amounts of money contributed to the Trust; (ii) the adjusted basis of
other property contributed to the Trust, (iii) income generated by the Trust;
and (iv) amounts borrowed by the Shareholder or the Trust for use in the Trust's
activities where the Shareholder is personally liable for repayment. Borrowings
by the Trust, whether recourse or nonrecourse, will not increase a Shareholder's
amount of risk. A Shareholder will be considered to be at risk on funds borrowed
only if and to the extent the Shareholder is personally liable for repayment or
the borrowings are fully secured by the Shareholder's personal assets (other
than the Shares in the Trust) and subject to the limitation that the funds are
not borrowed from a person with an interest in the Trust or a person related to
such a person.
A Shareholder's amount at risk will be reduced by losses allowed as
deductions and cash distributions made by the Trust and increased by the
Shareholder's share of the Trust income. Distributions to a Shareholder will
generally reduce the amount considered at risk. The "at risk" rules provide that
the amount of any distribution received by a Shareholder or any other reduction
in the Shareholder's 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 the Trust makes a distribution to a Shareholder
that does not exceed the Shareholder's adjusted basis in the Shares in the
Trust, but does exceed the Shareholder's amount at risk, the Shareholder will
have ordinary income.
If in a year a Shareholder has a loss from the Trust, the effect of Section
465(a) is to permit deduction of such loss up to the aggregate amount the
Shareholder has 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) 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 the taxpayer is
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 Section 1.465-2(b) of the Regulation 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) provides
that a Shareholder's distributive share of loss is allowed as a deduction only
to the extent of the adjusted basis of the Shareholder at the end of the year in
which the loss is incurred. If a Shareholder's distributive share of loss items
exceeds the Shareholder's basis, as adjusted for Capital Contributions,
distributions, the Shareholder's share of any income items and changes in the
Shareholder's share of liabilities, then only
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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 such Shareholder has 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 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 each time the
investor may deduct any suspended passive activity losses against nonpassive
income.
The issue whether the activities of the Trust are passive activities is
whether the investment activities of the Trust constitutes a trade or business.
If the activities of the Trust do not constitute a "trade or business" as
defined under the Regulations under Section 469 of the Code the activities of
the Trust will not be considered "passive activities." Rather, the activities
will be considered as producing portfolio income and any deductions or losses
attributable to such activities will be considered nonpassive activity losses.
Section 1.469-2T(c)(3)(i) of the Treasury Regulations provides that other
than income derived in the ordinary course of a trade or business that 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. The Trust, while qualifying as a small business
development company, will not elect to be taxed as a regulated investment
company. Thus, the issue is whether the Trust will be considered engaged in a
trade or business under Section 469 of the Code in determining whether its
activities constitute passive activities.
Based on the provisions of Section 469 of the Code and the Regulations
thereunder and the fact that the Trust intends to hold its investments on a
long-term basis rather than engage in short-swing profit taking, the Trust
intends to take the position on its tax returns that it is not engaged in a
trade or business. Further, it will be the position of the Trust 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 engaging in the providing of management and other services as an
income generating activity. Thus, the Trust intends to take the position that it
is 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 the
losses of the Trust will not constitute passive activity losses. The result will
be that interest, dividend income or net capital gains of the Trust will
constitute portfolio income that cannot be used to offset losses from passive
activities. Further, any deductions of the Trust will be characterized as
investment expense and as such will be treated as miscellaneous itemized
deductions on an individual's tax return. Miscellaneous itemized deductions may
be deducted only to the extent that the deductions exceed 2% of an individual's
adjusted gross income. Further, any capital losses will be subject to the
limitation on capital losses provided under the Code.
The issue of whether the Trust is or is not engaged in a trade or business
is based on facts and circumstances existing at that time. While the Trust
intends to characterize its activities as nonpassive in nature, the Internal
Revenue Service may recharacterize such activities as a trade or business with
the
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result that a Shareholder's investment could be considered as passive activity.
If the Service were to recharacterize the Trust activities as passive in nature,
(i.e. the Trust is considered to be engaged in a trade or business) investors
will be subject to the passive activity rules set forth above and specifically
any losses incurred in the passive activity can, until the investor disposes of
his or her entire investment, only be claimed as a deduction to the extent that
the investor has 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.
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) 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 the Regulations, 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).
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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 Trust 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 Trust
liabilities, each Shareholder will receive a distribution in accordance with the
Shareholder's positive capital account balance. In addition, the Declaration
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 the Declaration of Trust provides that the
Shareholders' capital accounts shall be maintained in accordance with the
Regulations under Section 704 of the Code, that on liquidation of the Trust or a
shareholder's interest in the Trust that distributions in all cases are to be
made in accordance with the positive capital account balance of the Shareholder
and that qualified income offset and "minimum gain chargeback" provisions are
included in the Declaration of Trust, it is the 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) 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 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, the Trust 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 THE TRUST ADVISOR. The Trust
will pay fees to the Trust Advisor for management, administrative and
organizational services performed for the Trust. 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
the Trust Advisor or related parties, or any other party, and may challenge such
deductions based upon the payment being excessive, based upon a
recharacterization of the payment, or based upon 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, 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
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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 60 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 60
months. A substantial amount of the Trust's expenditures may be characterized as
start-up expenditures with the result that the Trust will elect to amortize such
expenses over a 60 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 as organizational and start-up by the Trust 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 that the
Trust seeks to claim as investment deductions may not be considered start-up
costs, or organizational costs that will have to be amortized over 60 months.
If the Trust 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 the disposition of these rights by the Trust.
11. SECTION 754. Under Sections 734, 743, and 754, 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, the Trust does 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 the Trust Advisor reserves the right to do so.
12. METHOD OF ACCOUNTING AND TAXABLE YEAR. The Trust will utilize the
accrual method of accounting and its taxable year will be the appropriate year
as provided in Section 706(b). It is anticipated 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) 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 Counsel is of
the opinion that the accrual method of accounting should be recognized, it
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"). 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
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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 his limitation under Section 163(d).
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.
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 two percent (2%) of such
individual's adjusted gross income. Section 1.67-2T of Temporary Regulations
under Section 67 provides that the provisions of Section 67 are applicable to
partners as to items of deductions that are defined as miscellaneous itemized
deductions. Under this Temporary Regulation, an individual Shareholder's
allocable share of expenses of the Trust will be deductible only to the extent
that such expenses, when aggregated with the individual Shareholder's other
investment expenses, if any, exceed two percent (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 three percent (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 1994 is $111,800 ($55,900 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 eighty percent (80%) of allowable deductions.
The Trust's expenses will be considered investment expenses. Depending upon a
Shareholder's individual circumstances (if the total of miscellaneous deduction
do not exceed 2.0% of the Shareholder's Adjusted Gross Income), a Shareholder's
allocable share of such expenses could be nondeductible. In any case, such
expenses would only provide a current tax benefit to a Shareholder who itemizes
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, in the case of a Shareholder owning tax exempt obligations,
it is possible that the IRS might take the position that a Shareholder's
allocable portion of any Trust interest expense, or any interest expense
incurred by the Shareholder to purchase or carry Shares, should be viewed as
incurred by him to continue carrying tax exempt obligations, and that such
Shareholder should not be allowed to deduct all or a portion of such interest.
It is not known whether Rev. Proc. 72-18, if applicable, would be upheld as
valid by the courts.
16. PROFIT MOTIVE. Under Section 183 of the Code, if the Trust lacks a
profit or income motive (other than tax purposes) in its operations,
substantially all of a Shareholder's losses, if any, attributable to an
investment in the Trust for any year would be disallowed as a deduction. In the
opinion of Counsel, it is more likely than not that the Trust will be able to
satisfy the profit motive requirements.
Section 183 creates the presumption that an entity is engaged in for profit
if in any three years out of five consecutive tax years the gross income from
the activity exceeds the deduction attributed to the activity. If the Trust
fails to produce a profit in at least three of five years the presumption will
not be
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available and the possibility increases that the IRS may successfully challenge
that the Trust is not engaged in for profit. Because the test of whether an
activity is engaged in for profit is based on facts and circumstances, no
assurance can be provided that Section 183 may not be applied to disallow
deductions taken by a Shareholder attributable to the Shares in the Trust.
17. TAX PROCEDURES AND PENALTIES. Based on current provisions of the Code,
the tax treatment of items of the Trust's income and loss will be determined at
the Trust level and not at the individual level of each Shareholder. The tax
return of the Trust 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.
A Shareholder would be liable for any interest on tax deficiencies resulting
from an adjustment to the Trust's 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 the Trust's 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 20.0% 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
and valuation misstatements in connection with Section 482 transactions.
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 10.0% 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 "tax shelter" for this purpose includes a plan or arrangement the
principal purpose of which is the avoidance or evasion of federal income tax.
18. CAPITAL GAINS AND LOSSES. Gains or losses, if any, from the sale of
securities held for investment by the Trust will be treated as long-term capital
gains or losses, if such securities are held for investment by the Trust for
more than one (1) year. Long-term capital gains of individuals are currently
taxed at a maximum rate of twenty-eight percent (28%) 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.
19. ALTERNATIVE MINIMUM TAX. An individual alternative minimum tax is
imposed under the Internal Revenue Code that is applicable if the alternative
minimum tax, calculated as set forth below, exceeds the regular individual tax.
The alternative minimum tax liability of a non-corporate taxpayer is calculated
by (1) adding together 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, subject to exemption being
phased out completely as set forth below, of $33,750 for single taxpayers,
$45,000 for married taxpayers filing joint returns or $22,500 for married
taxpayers filing separate returns, estates and trusts. Married taxpayers filing
separate returns must also add to that total an amount equal to the lesser of
(a) 25% of the sum determined under clauses (1) and (2) above in
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excess of $165,000 or (b) $22,500. The total amount determined in the preceding
two sentences (the "Taxable Excess") is then taxed at the following rates: all
taxpayers other than married individuals filing separate returns are taxed at
26% of the first $175,000 of the Taxable Excess and at 28% of any additional
Taxable Excess, reduced by any applicable foreign tax credit; while married
individuals filing separate returns are taxed at 26% of the first $87,500 of the
Taxable Excess and at 28% of any additional Taxable Excess, reduced by any
applicable foreign tax credit.
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.
Under the Code, the exemptions listed above are phased out where alternative
minimum taxable income exceeds $150,000 ($112,500 for single persons and $75,000
for estates, trusts and married persons filing separately). Among the tax
preference adjustment items that could result from investing in the Trust and
which would be included in determining the alternative minimum taxable income is
depreciation attributable to personal property placed in service after 1986 to
the extent that it exceeds the amount available under the 150% declining balance
method.
The impact of the alternative minimum tax must be determined by each
individual Shareholder based upon the operations of the Trust and the
Shareholder's personal tax situation. Accordingly, any prospective Shareholder
should consult the Shareholder's own tax advisor to determine the tax
consequences to them personally 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 (i.e.
disposition of more than 50% of the Shares in a 12 month period or other events
of dissolution set forth in the Declaration of Trust) may have important tax
consequences to the Shareholders. All Shareholders must recognize their
distributive shares of Trust income, gain, expense, loss, deduction or credit
accrued during the Trust's tax year up until the date of termination whether or
not any such items are distributed. Also, Shareholders must account for their
distributive shares of gains or losses realized from the sale or other
disposition of Trust assets in liquidation of the Trust.
The Code provides that if 50% or more of the capital and profit interests in
a partnership are sold or exchanged within a single 12-month period, the
partnership 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 applies.
Section 751 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.
In 1994, Congress passed legislation that would treat the distribution by a
partnership to its partners of marketable securities like a cash distribution.
The effect of this provision, unless the Trust could come within an exception,
would be that the distribution by the Trust of marketable securities would
trigger
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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. Marketable securities means financial instruments (stocks,
other equity interests, evidences of indebtedness, options) 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 the new provisions, two of which may have application to the
Trust. First, the Code provides that the IRS may issue regulations excepting
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 created is that the new provisions do not
apply to marketable securities distributed by an investment partnership, which
has never engaged in a trade or business, to an eligible partner. 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.
No regulations have been issued under this recently enacted position. The
Trust's holdings may or may not consist of marketable securities. If the Trust's
investments in Portfolio Companies are marketable securities the Trust intends
to rely on one of the above two exceptions in the event that the Trust does make
a distribution of a security to its Shareholders. However, the IRS may challenge
any exception claimed by the Trust with the result that the distribution of the
security to a Shareholder will be treated as a taxable event with the result
that a Shareholder may have a taxable event and not have received cash to pay
the resulting tax obligation.
21. CHARACTER OF GAIN OR LOSS. The sale or disposition of property by
other partnerships or similar entities in which the Trust owns 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. Each Shareholder is
generally entitled to treat the Shareholder's share of Section 1231 gains and
losses as long-term capital gains and losses if the Shareholder's 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 unrecaptured net
Section 1231 losses of the Shareholder for the five (5) most recent prior years.
If the Shareholder's share of Section 1231 losses exceeds the Shareholder's
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 the Trust holds 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 the Trust holds an interest will, under
Section 1250 of the Code, be treated as ordinary income to the extent of any
depreciation taken with respect to such buildings in excess of straight-line
depreciation. If buildings have been held for one year or less, all depreciation
will be recaptured as ordinary income. In the case of a disposition of property
in an installment sale, any ordinary income under these recapture provisions is
to be recognized in the year of the disposition.
Under Section 751 of the Code, recapture rules are applied on the
disposition of Shares by a Shareholder with the result that a 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.
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22. INVESTMENT BY CERTAIN TYPES OF TAX EXEMPT ENTITIES.
A. 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);
(ii) trusts meeting the requirements for an Individual Retirement Account
("IRA") under Section 408(a) (referred to herein, along with trusts
described in (i), as "Qualified Plans"); and
(iii) organizations described in Section 501(c) and 501(d) (collectively
"Tax Exempt Entities").
However, the exemption from income taxes does not apply to taxable income
derived by Qualified Plans and Tax Exempt Entities 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 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. Fiduciaries of Tax Exempt Entities considering
investing in Shares should consult their own tax advisors concerning the rules
governing "unrelated business taxable income."
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 the Trust's 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."
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 the Trust invests in and owns property on which there is "acquisition
indebtedness," a portion of each distributive share of the Trust's taxable
income (including capital gain) may constitute "unrelated business taxable
income." This portion would be determined in accordance with the provisions of
Section 514 and is the portion of the distributive share that would be
considered unrelated trade or business income of the Trust to a Tax Exempt
Entity would be approximately equivalent to the ratio of the Trust's debt to the
basis of the Trust's property. A Tax Exempt Entity that purchases Shares may be
required to report such portion of its pro rata share 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.
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If the Trust were to incur "acquisition indebtedness" in its 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 own account or his
own interest. To prevent a possible violation of these self-dealing rules,
neither the Trust Advisor 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 the assets of the Trust 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 made by the Trust and (ii) certain transactions
that the Trust might seek to enter into might constitute "prohibited
transactions" under ERISA and the Code.
On November 13, 1986, 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, the Trust
Advisor will not admit any Qualified Plan as a Shareholder or consent to an
assignment of Shares if such admission or
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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 the
Trust should not, solely by reason of such investment, include any of the
underlying assets of the Trust.
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, the Trust would not qualify as a "venture capital operating company"
until 50% of its assets (excluding short-term investments pending long-term
commitment) have been used to purchase interests in projects that constitute
"venture capital interests." Consequently, counsel to the Trust 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 tax advisor and counsel regarding the effect of the plan
asset rules on an investment in the Trust by a Qualified Plan.
23. 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 (the Trust Advisor) to
register such an investment with the Service if, as of the close of any of the
first five taxable years of the investment, such investment (i) satisfies a
certain computed ratio of aggregate deductions and credits to cash invested for
any Investment and (ii) is expected to reduce the then cumulative tax liability
of any Investor. Based on the Forecasted financial Statement projections, the
deductions available from the Trust that will be available to offset Trust
income are not expected to exceed the ratio established for registration as a
tax shelter. Accordingly, the Trust Advisor 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 an Investor'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 Investors.
The Trust will also retain a list of all Investors in the Trust pursuant to
Internal Revenue Service regulations.
24. 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
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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. The Trust is 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 the Trust. No opinion has been or will be
rendered by Counsel on matters of state or local tax law.
25. 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 advisers as to the
advisability of investing in Shares and with respect to the following tax
information.
While it is not entirely free from doubt, it is likely that the Trust will
not be engaged in a trade or business within the United States and, therefore,
that a foreign investor will not be engaged in a U.S. trade or business (nor
have a permanent establishment in the U.S.) by reason of ownership of Shares. If
a foreign investor is not engaged in a U.S. trade or business (and does not have
a permanent establishment in the U.S.), such investor's share of certain items
of Trust ordinary income will be subject to a 30% withholding tax (subject to
reduction or elimination by provisions in applicable tax treaties). Sections
871(h) and 881(c), with certain exceptions, exempt from the withholding tax
certain interest on portfolio debt instruments which includes, INTER ALIA,
interest paid on a registered debt obligation issued after July 18, 1984. The
Code does not contain a similar exemption for U.S. source dividends.
If a foreign investor's share of Trust capital gain and capital gain from
the disposition of his Shares is not effectively connected with his conduct of a
U.S. trade or business, is U.S.-source capital gain and is derived by an
individual foreign investor who was physically present in the U.S. for an
aggregate of 183 days or more during the taxable year, the gain, net of the
investor's U.S.-source capital losses, will be subject to a flat 30% withholding
tax (subject to reduction or elimination by provisions in applicable tax
treaties). If such gain is not effectively connected with the foreign investor's
conduct of a U.S. trade or business and the foreign investor was not physically
present in the U.S. for 183 days or more during the taxable year, such gain will
not be subject to tax in the U.S.
If the Trust's anticipated activities cause a foreign investor who acquires
shares to be engaged in a trade or business within the U.S., and to have a
permanent establishment in the U.S. for the purposes of any applicable income
tax treaty, Trust income derived by a foreign investor engaged in a trade or
business in the U.S. (or having a permanent establishment in the U.S.) will
constitute income "effectively connected" with the conduct of such trade or
business (or income attributable to such permanent establishment). Consequently,
such an investor will be required to file U.S. income tax returns and will be
subject to U.S. income tax on his share of income from the Trust at the same
rates applicable to a U.S. resident individual or corporation. In determining
taxable income from the Trust, the investor will be permitted the same
deductions allowed a U.S. resident individual or corporation. However, a
prerequisite to receiving the benefit of the deductions is the filing of a true
and accurate U.S. income tax return. Additionally, any Trust losses allocated to
a foreign investor will not be deductible from his U.S.-source income that is
not effectively connected with a U.S. trade or business (or permanent
establishment in the U.S.). Under the circumstances described in this paragraph,
a foreign investor's distributive share of capital gains of the Trust will
normally be subject to U.S. tax at capital gain rates.
If a foreign investor who engages in a U.S. trade or business (or had a
permanent establishment in the U.S.) by reason of his investment in Shares sells
his Shares, he will be subject to a tax in the same manner as a U.S. investor.
Additionally, foreign investors may be subject to federal and state estate and
gift taxes and to the alternative minimum tax.
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If a foreign investor is subject to U.S. income tax on his share of income
from the Trust at regular U.S. rates and is required to file U.S. income tax
returns as described above, such foreign investor's share of Trust taxable
income (including capital gains) is not subject to the 30% withholding tax
described above, provided that the foreign investor completes and files in
duplicate with the Trust IRS Form 4224 ("Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States"). Such form must be filed with the Trust prior to the acceptance
by the Managing Shareholder of the subscription of such foreign investor, and
annually thereafter for each fiscal year of the Trust in which the foreign
investor is a Shareholder. Pursuant to the Subscription Agreement which is
attached to his Prospectus as Exhibit B, foreign investors provide the Managing
Shareholder with the right to sell their Shares if the Trust does not receive a
completed Form 4224 for any year.
The Trust is required to withhold an amount equal to a foreign Shareholder's
allocable share of the Trust's income that is effectively connected with the
conduct of a U.S. trade or business multiplied by the foreign Shareholder's
"applicable percentage." A foreign Shareholder's applicable percentage is equal
to the highest appropriate tax rate. That rate is currently 39.6% for
individuals and 35% for corporations. Distributions subject to this withholding
tax will not be subject to the 30% withholding tax discussed above. Any amount
of tax withheld under this provision will be treated as a credit against the
foreign Shareholder's tax liability and will be treated as a distribution to the
foreign Shareholder on the last day of the Trust's taxable year.
Foreign investors should consult their own tax advisors about whether they
will be treated as being engaged in a U.S. trade or business (or having a
permanent establishment in the U.S.), whether gain from the sale of Shares is
effectively connected with their conduct of a U.S. trade or business (or
permanent establishment in the U.S.), the U.S. tax consequences relating to an
investment in the Trust in their own particular circumstances and about the tax
consequences to such foreign investors in their country of residence.
REGULATION
The Trust has elected to be treated as a business development company under
the Investment Company Act. As a business development company, the Trust will be
subject to certain provisions of the Investment Company Act, and certain of its
proposed operations will be subject to review by the Commission. The Trust may
not withdraw its election without first obtaining the approval of a majority of
its outstanding voting securities. Generally, to be eligible to elect business
development company status, a company must engage in the business of furnishing
capital and offering significant managerial assistance to Eligible Portfolio
Companies that do not have ready access to capital through conventional
financial channels.
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 certain types of Eligible Portfolio Companies; (iv) offer to
extend or make available significant managerial assistance to such Eligible
Portfolio 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.
As a business development company, the Trust will also be subject to the
provisions of the Investment Advisers Act (the "Advisors Act"). The Advisors Act
generally prohibits investment advisers from entering into investment advisory
contracts with an investment company that provide for compensation to the
investment adviser 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 company.
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. The Trust has entered
into a
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Management Agreement with Berthel Fisher & Company Planning, Inc. (the "Trust
Advisor") that provides for incentive compensation to the Trust Advisor based on
the capital appreciation of the Trust's investments.
The Small Business Investment Incentive Act of 1980 also added provisions of
the Investment Company Act that apply to business development companies. The
following is a brief description 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.
An Eligible Portfolio Company generally is a company that (i) is organized
under the laws of, and has its principal place of business in, any state or
states, (ii) is not an investment company (except for wholly owned small
business investment corporations licensed by the Small Business Administration
("SBICs")) and (iii)(a) does not have a class of securities registered on an
exchange or included in the Federal Reserve Board's over-the-counter margin
list, (b) is actively controlled by the business development company acting
either alone or as part of a group acting together and an Affiliate of the
business development company is a member of the Portfolio Company's board of
directors or (c) meets 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 an Eligible Portfolio Company.
"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (1) any arrangement whereby a business
development company, through its directors, officers, employees or general
partners, offers to provide and, if accepted, does provide significant guidance
and counsel concerning the management, operations or business objectives or
policies of a Portfolio Company, (2) the exercise of a controlling influence
over the management or policies of a Portfolio 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 Portfolio
Company. A business development company may satisfy the requirements of clause
(1) with respect to any particular Portfolio Company by purchasing securities of
such Portfolio 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 Portfolio 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 Portfolio
Companies that are treated as qualifying assets (as defined below) for the
purpose of satisfying the 70% test discussed below.
The Investment Company Act prohibits or restricts the Trust from investing
in certain types of companies. Moreover, the Investment Company Act requires the
Trust to acquire only "qualifying assets" and certain assets necessary for its
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 the
Trust's total assets consists of qualifying assets. Qualifying assets include:
(i) privately acquired securities of companies that are Eligible Portfolio
Companies at the time the business development company acquires their
securities; (ii) securities of bankrupt or insolvent companies; (iii) securities
of Eligible Portfolio 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 Portfolio Company or its officers, directors or Affiliates. The Trust
expects that its investments in Portfolios Companies will be Qualifying Assets
under the Investment Company Act. The Trust 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.
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The Trust may invest up to 30% of its assets in securities that generally
are not qualifying assets; however, the Trust intends to retain maximum
flexibility in connection with its investments and, therefore, does not have a
policy as to the minimum percentage of its assets that will be so invested. The
foregoing is not a fundamental policy of the Trust and may be changed under the
Investment Company Act without Shareholder approval.
The provisions of the Investment Company Act set forth above may prevent the
Trust from purchasing Enhanced Yield Investments that are suitable for
investment but which are either not qualifying assets or are not issued by an
Eligible Portfolio Company to which the Trust is in a position to make available
significant managerial assistance. A proposed investment may not be made either
because the Trust is prohibited from investing in it or because the Trust
Advisor believes it is inadvisable to use up the Trust's flexibility to make
investments in assets that are not qualifying assets. The Trust, together with
an investor group, may from time to time choose to seek control of a Portfolio
Company as a means of satisfying the Eligible Portfolio Company requirement and
the significant managerial assistance requirement. However, the Trust may not be
able to obtain control of certain prospective Portfolio Companies. The inability
of the Trust to obtain control reduces the number of potential issuers in which
the Trust could invest and may make it more difficult to find suitable
investments and cause the Trust to maintain more assets in Temporary Investments
for a longer period of time than if it obtained control.
The Trust is 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 the ability of the Trust to sell Shares at
a price representing proceeds to the Trust of an amount less than the then net
asset value per Share. Shares in the Trust will be sold at a price to the public
of $1,000, 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 Trust's net asset value plus
applicable selling commissions, does not closely approximately $1,000 per Share
due to a change in the value of the Trust 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 the Trust other than an amount
equal to or greater than the net asset value of a Share may be made only if (i)
the Management Board (including a majority of the Independent Trustees) have
determined that such sale would be in the best interests of the Trust and its
Shareholders and (ii) the Management Board (including the Independent Trustees),
in consultation with the Dealer Manager, have determined in good faith that the
sales price closely approximates the market value of such Shares, less any
selling commission or discount. The Trust does not intend to adjust the purchase
price of Shares if the net asset value drops below $1,000 per Share.
After the Offering, the Trust may sell its 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 Shares issued by the Trust,
including a majority of Shares held by nonaffiliated Shareholders.
Many of the transactions involving the Trust and its Affiliates (as well as
Affiliates of such Affiliates) that were prohibited without the prior approval
of the SEC under the Investment Company Act prior to its amendment by the Small
Business Investment Incentive Act of 1980 now require the prior approval of a
majority of the Independent Trustees and a majority of the Independent Trustees
having no financial interest in the transactions. However, certain transactions
involving closely affiliated persons of the Trust, including the Trust Advisor,
still 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
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engaging in certain transactions involving the Trust or any company controlled
by the Trust. 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 the
Trust and its Portfolio Companies.
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 the Trust indirectly owns, controls
or holds with power to vote any specified percentage or amount of the
outstanding voting securities of one of the Trust's Portfolio Companies, the
amount of such voting securities the Trust owns 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 the Trust Advisor and their
Affiliates.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust by
Bradley & Riley, P.C., Cedar Rapids, Iowa. Bradley & Riley, P.C. also serves as
counsel to the Trust Advisor and the Dealer Manager.
EXPERTS
The statement of assets and liabilities as of April 19, 1995, appearing in
the Prospectus and Registration Statement have been audited by Ernst & Young
LLP, 222 Third Avenue, S.E., Cedar Rapids, Iowa, 52401, independent auditors, as
set forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration Statement under the Securities Act has been filed with the
SEC, Washington, D.C., with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information pertaining to the securities
offered hereby, reference is made to the Registration Statement, as amended,
including the exhibits filed as a part thereof. Copies of the Registration
Statement may be obtained from the SEC in Washington, D.C., upon payment of the
fees prescribed therefor and may be examined at such office without charge.
GLOSSARY OF TERMS
As used in this Prospectus, the following definitions of terms are
applicable:
"Acquisition Expenses" means 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" means 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.
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"Affiliate" of any person includes any of the following:
(a) Any person directly or indirectly owning, controlling, or holding with
power to vote five percent (5%) or more of the outstanding voting securities of
such other person.
(b) Any person five percent (5%) or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held, with power to
vote, by such other person.
(c) Any person directly or indirectly controlling, controlled by, or under
common control with such other person.
(d) Any executive officer, director, trustee, partner, copartner, or
employee of such other person.
(e) Any legal entity for 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.
(g) If such other person is an unincorporated investment company not having
a board of directors, the depositor thereof.
"Available Capital" means 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 Enhanced Yield Investments.
"Berthel Growth & Income Trust I" means the Trust.
"Bridge Investments" are 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 Contributions" means 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 of the Declaration of
Trust.
"Cash Available For Distribution" means Cash Flow plus cash funds available
for distribution from reserves less amounts set aside for restoration or
creation of reserves. Cash Available For Distribution shall not include realized
gains from Portfolio Companies or other investments of the Trust, invested funds
returned to the Trust, or principal payments received by the Trust in repayment
of loans made by the Trust.
"Cash Flow" means 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" means gross cash funds provided from operation of the Trust,
including, without limitation, the following: all interest earned and paid to
the Trust; all cash dividends earned and paid to the Trust; and all fees earned
and paid to the Trust. Cash Revenues shall not include realized gains from
Portfolio Companies or other investments of the Trust, invested funds returned
to the Trust, or principal payments received by the Trust in repayment of loans
made by the Trust.
"Closing" means the Initial Closing, any other subsequent Closing and the
Final Closing, when the Trust will accept subscriptions and cash from Investors
and issue Shares to Investors.
"Code" means the Internal Revenue Code of 1986.
"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)
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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.
"Corporate Trustee" means TJB Capital Management, Inc., or its successors as
Corporate Trustee.
"Dealer Manager" means Berthel Fisher & Company Financial Services, Inc.
"Declaration of Trust" means the trust document that established the Trust.
The Declaration of Trust is attached to the Prospectus as Exhibit A.
"Enhanced Yield Investments" are Mezzanine Investments and Other
Investments.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934.
"Final Closing" means the last Closing of the sale of the Shares.
"Follow-On Investments" are additional investments that "follow" the Trust's
initial investment in a Portfolio Company, whether the initial investment was a
Mezzanine Investment or an Other Investment. A Follow-On Investment may be
classified either as a Mezzanine Investment or as an Other Investment. A
Follow-On Investment in a particular Portfolio Company will not necessarily be
or remain classified in the same category that the initial investment in that
Portfolio Company was classified.
"Front End Fees" means 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.
"Guidelines" means investment criteria established by the Trust that govern
the investments it will seek and acquire.
"High Yield Debt Investments" are secured or unsecured debt securities that
have current yields greater than normally available from a bank, and that have
no associated equity rights, equity investment or Mezzanine Investment.
"Independent Expert" means 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 Trustees" are Henry T. Madden and Henry Royer, both of whom are
individuals who are not "interested persons" of the Trust as defined in the
Investment Company Act, and their successors in such capacity.
"Investment in Trust Assets" means 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.
"Initial Closing" means the Closing held when subscriptions for the minimum
number of Shares have been received and accepted, and the proceeds of such
subscriptions have been received by the Trust.
"Interim Investment Period" means 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" means the Investment Company Act of 1940, as
amended.
"Investment Period" means the 60 month period following the date of the
Final Closing.
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"Investment Set-up Fee" means the fee paid by the Trust to the Corporate
Trustee for services related to establishing the Trust. The Investment Set-up
Fee is equal to .5% of the aggregate purchase price of the Shares. Because the
Investment Set-up Fee will be paid to an Affiliate of the Dealer Manager, the
Investment Set-up Fee may be considered to be compensation to the Dealer
Manager.
"Investors" are persons who subscribe for Shares.
"IRA" means Individual Retirement Accounts.
"IRS" means the Internal Revenue Service.
"Managed Companies" are 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" means the contract between the Trust and the Trust
Advisor that describes the services to be provided by the Trust Advisor to the
Trust in consideration of the Management Fee.
"Management Board" consists of the Trust Advisor and the Independent
Trustees.
"Management Fee" means the annual fee paid to the Trust Advisor for services
performed under the Management Agreement in an amount equal to 2.5% of the total
assets of the Trust.
"Managing Person" means 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.
"Mezzanine Investments" are investments that are designed to yield a
projected return over the life of the investment that is higher than secured
debt financing, but lower than equity financing. Mezzanine Investments represent
a layer of corporate financing between equity and senior debt. Senior debt is
typically provided by financial institutions on a secured basis.
"NASD" means the National Association of Securities Dealers, Inc.
"Non-Managed Companies" are Portfolio Companies to which the Trust Advisor
the Management Board or their Affiliates do not offer significant managerial
assistance.
"Organizational and Offering Expenses" means 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 including, but not limited to, total underwriting and brokerage discounts
and commissions (but not including fees of the underwriter's attorneys), the
Wholesale Marketing Fee, the Investment Set-up Fee, 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.
"Other Investments" are securities invested in by the Trust that are not
Mezzanine Investments. Other Investments will include (1) High Yield Debt
Investments, (2) Venture Investments, (3) Bridge Investments and (4) Publicly
Traded Securities.
"Payout" occurs when each Shareholder has received distributions equaling
100% of all of their original investment plus the Priority Return plus the
Underwriting Return.
"Portfolio Companies" are companies, either Managed or Non-Managed,
securities of which are acquired by the Trust as Investments.
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"Priority Return" means the amount equal to a return of 8% per annum simple
interest (non-compounded) computed from the Final Closing on the declining
balance of the amount invested in the Trust (without regard to or reduction for
discounts) by each Shareholder. The Priority Return will cease when the amount
originally invested by the Shareholders has been returned. For purposes of
calculating the Priority Return, the amount originally invested in the Trust by
Shareholders (Capital Contributions) shall be reduced by distributions of cash
to Shareholders in excess of the Priority Return, and by other distributions
that result in the return of capital to Shareholders.
"Publicly Traded Securities" are securities that are traded on a public
market.
"Qualified Plan" means any pension, profit-sharing or stock bonus plan,
including Keogh plans and IRA's.
"Quantitative Factors" are factors included in the Guidelines established by
the Trust, and include (1) portfolio concentration limits, (2) restrictions
regarding investments in Managed and Non-Managed Companies, (3) restrictions
regarding investments in companies involving Affiliates and (4) restrictions
required by regulations.
"Registrant" means Berthel Growth & Income Trust I.
"Roll-Up" means 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" means a partnership, trust, corporation or other entity
that would be created or survive after the successful completion of a proposed
Roll-Up transaction.
"SBIC" means a small business investment company licensed by the Small
Business Administration. An SBIC is a regulated investment company that may have
access to additional government-backed funding if the SBIC conforms to certain
rules and regulations regarding investments.
"SEC" means the Securities Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Agents" means the Dealer Manager and other members of NASD who will
find buyers for the Shares.
"Service" means the Internal Revenue Service.
"Shareholder" means an Investor who purchases Shares of the Registrant.
"Shares" means beneficial interests in the Trust purchased by investors.
"Sponsor" means 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
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independent manager of a portion of the Trust assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accounts, and underwriters whose only compensation is
for professional services rendered in connection with the offering of Shares. A
person may also be deemed a Sponsor of the Trust by:
(a) taking the initiative, directly or indirectly, in founding or organizing
the business or enterprise of the Trust, either alone or in conjunction with
one or more other persons;
(b) receiving a material participation in the Trust in connection with the
founding or organization of the business of the Trust, in consideration of
services or property, or both services and property;
(c) having a substantial number of relationships and contacts with the
Trust;
(d) possessing significant rights to control Trust properties;
(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.
"Tangible Net Worth" means the excess of total assets over total
liabilities, total assets and total liabilities each to be determined in
accordance with GAAP (generally accepted accounting principles), excluding,
however, from the determination of total assets, all assets which would be
classified as intangible assets under GAAP, including, without limitation,
organization fees and expenses, goodwill, patents, trademarks, trade names,
copyrights, and franchises.
"Temporary Investments" are investments made by the Trust pending investment
in Enhanced Yield Investments. Temporary Investments include interest bearing
bank accounts, money market mutual funds, treasury securities with maturities of
less than one year, certificates of deposit with maturities of
less than one year, commercial paper (rated or unrated) and other short-term
securities.
"Termination Date" means the date the offering of Shares will terminate,
which will be twelve months following the effective date of this Prospectus,
provided however, if the minimum number of Shares is sold and the Trust renews
registration with the SEC and with the various state agencies, the offering
period may be extended for up to an additional year.
"Trust" means the Berthel Growth & Income Trust I, a Delaware business
trust.
"Trust Advisor" means Berthel Fisher & Company Planning, Inc., an Iowa
corporation.
"Trustee" means the Corporate Trustee or any of the Independent Trustees.
"Underwriting Return" means the return earned during the period beginning
with the investment of funds by an Investor and ending with the Final Closing.
The Underwriting Return is equal to interest, if any, actually earned prior to
the Initial Closing on the Investors' funds held in escrow, plus 10% simple
annual interest, computed on a daily basis, for the period beginning with the
Initial Closing and ending with the Final Closing.
"Venture Investments" are investments in early stage growth companies that
have extraordinary prospects to increase shareholder value and equity
investments in leveraged buyout transactions. Venture Investments have
significant speculative characteristics and high risk of loss, and generally
have the same structure as Mezzanine Investments.
"Wholesale Marketing Fee" means a fee paid to the Dealer Manager equal to
2.5% of the aggregate purchase price of Shares sold for wholesale marketing
services rendered in connection with organizing the sales and marketing efforts
with respect to the offering of Shares.
90
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENT OF ASSETS AND LIABILITIES
OF BERTHEL GROWTH & INCOME TRUST I AS OF APRIL 19, 1995
AND BALANCE SHEET OF BERTHEL FISHER & COMPANY PLANNING, INC.
AS OF APRIL 19, 1995
F-1
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
BERTHEL GROWTH & INCOME TRUST I
APRIL 19, 1995 WITH
REPORT OF INDEPENDENT AUDITORS
F-2
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENT OF ASSETS AND LIABILITIES
APRIL 19, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-4
Statement of Assets and Liabilities................................................... F-5
Notes to Statement of Assets and Liabilities.......................................... F-6
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Berthel Growth & Income Trust I
We have audited the accompanying statement of assets and liabilities of
Berthel Growth & Income Trust I as of April 19, 1995. This statement of assets
and liabilities is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Berthel
Growth & Income Trust I as of April 19, 1995, in conformity with generally
accepted accounting principles.
[LOGO]
April 19, 1995
F-4
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENT OF ASSETS AND LIABILITIES
APRIL 19, 1995
<TABLE>
<S> <C>
ASSETS
Cash............................................................................. $ 10,205
Deferred offering costs.......................................................... 328,000
Organizational costs............................................................. 5,000
---------
343,205
LIABILITIES
Accrued organizational and offering costs........................................ 283,789
Due to Berthel Fisher & Company Planning, Inc.................................... 49,211
Due to Berthel Fisher & Company.................................................. 250
---------
333,250
---------
Net assets equivalent to $995.50 per share (applicable to 10 outstanding shares
of beneficial interest -- 50,000 shares authorized)............................. $ 9,955
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
APRIL 19, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Berthel Growth and Income Trust I (the "Trust") was formed as a
nondiversified, closed-end management investment company electing status as a
business development company ("BDC") under the Investment Company Act of 1940
(the "1940 Act"), as amended. The Trust was formed on February 10, 1995 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 1940 Act. As
a BDC, the Company's investment objective is to achieve capital appreciation and
current income principally by making investments through private placements in
securities of small- and medium-sized privately- and publicly-owned companies.
The securities will consist primarily of subordinated debt or preferred stock
combined with equity participation in common stock or rights to acquire common
stock. The Trust will be offering a minimum of 1,500 and a maximum of 50,000
shares of beneficial interest ("Shares") at an offering price of $1,000 per
share. Each share sold carries a sales load of $70 representing the selling
agent's commission, a wholesale marketing fee of $25, an investment set-up fee
of $5 and a due diligence fee of $5, netting $895 per share to the Trust.
The Trust will terminate upon the liquidation of all of its investments, but
no later than December 31, 2005, or ten years from the final closing of the sale
of the Shares offered hereby, if later.
Berthel Fisher & Company Planning, Inc., a wholly-owned subsidiary of
Berthel Fisher & Company, serves as trust advisor.
DEFERRED OFFERING COSTS
Estimated costs incurred, or to be incurred, by the Trust directly related
to its offering of Shares have been deferred and will be reflected as a
reduction of net assets upon consummation of the offering.
ORGANIZATIONAL COSTS
Organizational costs, all of which have been incurred, are capitalized and
will be amortized over five years using the straight-line method.
2. RELATED PARTY TRANSACTIONS
It is anticipated that the Trust will enter into certain transactions with
related parties, primarily the Trust Advisor and its affiliates. Such
transactions, as described in the Trust's prospectus, will include commissions
on shares sold, wholesale marketing fees, investment set-up fees, reimbursement
of due diligence and operating expenses and management fees.
3. FEDERAL 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 the statement of assets and
liabilities of the Trust, as taxable income or loss of the Trust is included in
the income tax returns of the investors.
F-6
<PAGE>
BALANCE SHEET
BERTHEL FISHER & COMPANY
PLANNING, INC.
APRIL 19, 1995 WITH
REPORT OF INDEPENDENT AUDITORS
F-7
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
BALANCE SHEET
APRIL 19, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-9
Balance Sheet........................................................................ F-10
Notes to Balance Sheet............................................................... F-11
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Berthel Fisher & Company Planning, Inc.
We have audited the accompanying balance sheet of Berthel Fisher & Company
Planning, Inc. as of April 19, 1995. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 referred to above presents fairly, in all
material respects, the financial position of Berthel Fisher & Company Planning,
Inc. as of April 19, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
April 19, 1995
F-9
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
BALANCE SHEET
APRIL 19, 1995
<TABLE>
<S> <C>
ASSETS
Cash........................................................................... $ 263,906
Recoverable under tax allocation agreement (Note 4)............................ 12,000
Due from Berthel Fisher & Company.............................................. 1,547
Due from Berthel Growth and Income Trust I (Note 3)............................ 49,211
Computer software, less allowances for depreciation of $3,978.................. 3,722
-----------
$ 330,386
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued expenses............................................................. $ 6,500
Note payable to Berthel Fisher & Company (Note 3)............................ 95,621
-----------
102,121
Stockholder's equity (Note 3):
Common stock, no par value --
Authorized -- 10,000 shares................................................
Issued and outstanding -- 1,000 shares..................................... 1,431,000
Note receivable issued for common stock...................................... (1,165,000)
Retained earnings deficit.................................................... (37,735)
-----------
Total stockholder's equity..................................................... 228,265
-----------
Total liabilities and stockholder's equity..................................... $ 330,386
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
NOTES TO BALANCE SHEET
APRIL 19, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Berthel Fisher & Company Planning, Inc. (the "Company") is a wholly-owned
subsidiary of Berthel Fisher & Company. The Company is a registered investment
advisor and serves as Trust Advisor to Berthel Growth & Income Trust I (the
"Trust"), a newly-formed business development company under the Investment
Company Act of 1940 which will invest in certain types of securities upon
completion of its Form N-2 Registration Statement offering.
COMPUTER SOFTWARE
Computer software is stated at cost less allowance for depreciation. For
financial reporting purposes, depreciation is computed by the straight-line
method over the five-year estimated useful life of the asset. The Company uses
accelerated methods in computing depreciation for income tax purposes.
2. MANAGEMENT AGREEMENT
The Company has entered into a management agreement with the Trust that
provides for an annual management fee equal to 2.5% of the value of the assets
of the Trust. The Trust will also reimburse the Company for certain
administrative expenses associated with the administration of the Trust, which
amount will not exceed the amount that is competitive with that charged for
comparable administrative services in the same geographic area by unrelated
third parties. In addition, the Trust will pay the Company incentive
compensation based on the capital appreciation of the Trust's investments.
3. RELATED PARTY TRANSACTIONS
In addition to the management agreement with the Trust (see Note 2), the
Company also entered into financing arrangements with other affiliated entities
primarily for purposes of short-term financing.
On April 19, 1995, Berthel Fisher & Company contributed cash of $250,000 and
signed an unsecured note for $1,165,000 to the Company as an addition to its
common stock investment. The note receivable is due on demand and bears interest
at 10%.
The note payable to Berthel Fisher & Company is due on demand and carries
interest at a rate of 12%.
The Company has paid certain direct expenses on behalf of the Trust
amounting to $49,211. The Trust will reimburse the Company upon consummation of
its initial offering.
4. INCOME TAXES
The results of the Company's operations are included in the consolidated 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 of taxable operating income or losses.
Generally, this allocation results in profitable companies recognizing a tax
provision as if the individual company filed a separate return, and loss
companies recognizing benefits to the extent that their losses contribute to
reduce consolidated taxes.
F-11
<PAGE>
SEE PAGE 28 OF THIS PROSPECTUS FOR A DETAILED DESCRIPTION OF THE
TRUST'S INVESTMENT OBJECTIVES AND POLICIES
<PAGE>
EXHIBIT A
DECLARATION OF TRUST
<PAGE>
DECLARATION OF TRUST
FOR
BERTHEL GROWTH & INCOME TRUST I
This Declaration of Trust provides for arbitration of certain matters.
This Amended and Restated DECLARATION OF TRUST (the "Declaration") is made
as of June 5, 1995, 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 are accepted as
holders of shares of beneficial interest under this Declaration.
WHEREAS, the Corporate Trustee wishes to organize the BERTHEL GROWTH &
INCOME TRUST I (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 by the
Corporate Trustee on February 10, 1995, with the Secretary of State of Delaware
to evidence the existence of the Trust;
NOW, THEREFORE, the Corporate Trustee declares that it constitutes and
appoints itself Trustee of the sum of $10.00 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 & Income Trust I" 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 provide capital appreciation
potential and current income by investing primarily in private placements of
subordinated debt, preferred stock and related equity securities in small to
medium sized private and publicly owned companies. The Trust will classify its
investments in two major categories, Mezzanine Investments and Other
Investments. These two categories collectively will be referred to herein as
Enhanced Yield Investments. The companies invested in will be without
limitation to any field, sector, industry or line of business. 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
A-1
<PAGE>
things necessary or incidental to the conduct of any such activities. Without
limiting the foregoing, the Trust may guarantee debt, supply security for such
debt or for the issuance of letters of credit, enter into lease transactions,
and acquire goods and services for the furtherance of the purpose of the Trust.
(c) The Trust is authorized and empowered to elect to be a business
development company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and to operate as such.
(d) Any proceeds of the offering not invested or committed for investment in
Portfolio Companies 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 100 Second Street, S.E., Cedar Rapids, Iowa, 52403 or such other
place as the Trust may from time to time designate by notice to all Investors.
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 Investors. 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 $25,000,000
(25,000 Shares) immediately following the admission of such Investors.
Notwithstanding the foregoing, the Trust may increase the $25,000,000 (25,000
Shares) to not more than $50,000,000 (50,000 Shares) at any time prior to the
Termination Date.
(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). Prior to the Initial Closing, Investors shall be admitted as Shareholders as
of the Initial Closing. After the Initial Closing, purchasers shall be admitted
as Shareholders on the date the purchaser'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
$1,500,000 (1,500 Shares) have not been sold or if the Trust withdraws the
offering of Shares in accordance with the terms of this Declaration, the Trust
shall be immediately dissolved at the expense of the Trust Advisor and all
subscription funds shall be forthwith returned to the
A-2
<PAGE>
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) The full cash price for Shares must be paid to the Trust at the time of
subscription. After the Initial Closing, an Investor who subscribes for more
than $500,000 of Shares and who assures the Trust that his account with the
Investor's Selling Agent (other than the Dealer Manager) contains or will
contain cash or other good funds on the specified settlement date will not be
required to deliver cash with his subscription agreement. Each such Investor
shall authorize his Selling Agent to debit his customer account for the purchase
of such Shares. Each such Investor must have funds to cover his subscription
payment in his account on the specified settlement date and his account will be
debited on the settlement date.
(e) 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, 2005, 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 capital appreciation and distributable income from the Trust Property;
and
(i) To do business as a "business development company" as defined by the
Investment Company Act.
1.9 UNDERWRITING RETURN. During the period beginning with the date of the
Prospectus and ending with the Final Closing (the "Offering Period"), each
Investor shall earn an Underwriting Return computed on a daily basis for each
Investor as set forth herein. The Underwriting Return for an Investor shall be
equal to (i) the interest, if any, actually earned on the Investor's funds held
in escrow prior to the
A-3
<PAGE>
Initial Closing, plus (ii) after the Initial Closing, 10% (simple annual
interest, not compounded) for each Investor on the capital contributed (without
regard to discounts) for Shares by each investor, for the period beginning with
the date an Investor's subscription is accepted and ending with the Final
Closing. At the Final Closing, the Trust will make a distribution in respect of
the Underwriting Return as provided in Section 8.1(c).
1.10 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"), 100 First Street, S.W., Cedar Rapids, Iowa, that the
Trust will be treated as a partnership for tax purposes.
1.11 REFUND OF INVESTMENT. All prospective investors shall have the right
to receive a refund of their investment 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 five percent (5%) or more of the outstanding voting
securities of such other person.
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<PAGE>
(b) Any person five percent (5%) or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held, with power
to vote, by such other person.
(c) Any person directly or indirectly controlling, controlled by, or under
common control with such other person.
(d) Any executive officer, director, trustee, partner, copartner, or
employee of such other person.
(e) Any legal entity for 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.
(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 Enhanced Yield Investments.
"BOARD" or "MANAGEMENT BOARD" -- The Trust Advisor and the Independent
Trustees, acting together in accordance with the terms hereof.
"BRIDGE INVESTMENTS" -- Interim debt investments that generally have an
expected maturity of twelve months or less. Bridge Investments may include
secured debt, senior debt, subordinated debt and other types of debt
instruments, and may also include preferred stock and other equity rights to
enhance yield.
"CAPITAL ACCOUNT" -- The amount representing a Shareholder's capital
interest in the Trust, as determined under Article 6 hereof.
"CAPITAL CONTRIBUTIONS" -- The aggregate capital contributions of the
Investors accepted by the Trust in payment of the purchase price of one or more
Shares (inclusive of the amount of any discount or any fee or other compensation
waived by the Trust, the Trust Advisor or the Dealer Manager) plus any amounts
contributed by the Trust Advisor pursuant to Section 14.7.
"CASH AVAILABLE FOR DISTRIBUTION" -- Cash Flow plus cash funds available for
distribution from reserves less amounts set aside for restoration or creation of
reserves. Cash Available For Distribution shall not include realized gains from
Portfolio Companies or other investments of the Trust, invested funds returned
to the Trust, or principal payments received by the Trust in repayment of loans
made by the Trust.
"CASH FLOW" -- Cash funds provided from operations, without deduction for
depreciation, but after deducting cash funds used to pay all other expenses,
debt payments, capital improvements and replacements. Cash withdrawn from
reserves is not Cash Flow.
"CASH REVENUES" -- Gross cash funds provided from operation of the Trust,
including, without limitation, the following: all interest earned and paid to
the Trust; all cash dividends earned and paid to the Trust; and all fees earned
and paid to the Trust. Cash Revenues shall not include realized gains from
Portfolio Companies or other investments of the Trust, invested funds returned
to the Trust, or principal payments received by the Trust in repayment of loans
made by the Trust.
"CERTIFICATE" -- The Certificate of Trust of the Trust, as amended from time
to time.
"CODE" -- The Internal Revenue Code of 1986, as amended from time to time,
and any rules and regulations promulgated thereunder.
"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;
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(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.
"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 100 Second Street,
S.E., Cedar Rapids, Iowa 52401.
"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).
"ENHANCED YIELD INVESTMENTS" -- Mezzanine Investments and Other Investments.
"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 One Million Five Hundred Thousand Dollars
($1,500,000), (ii) deposits at least One Million Five Hundred Thousand Dollars
($1,500,000) 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.
"HIGH YIELD DEBT INVESTMENTS" -- Secured or unsecured debt securities that
have current yields greater than normally available from a bank, and that have
no associated equity rights, equity investment or Mezzanine Investment.
"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 persons"
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 Henry T. Madden and Henry
Royer.
"INITIAL CLOSING" -- The Closing held when subscriptions for the minimum
number (1,500) 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.
"INVESTMENT SET-UP FEE" -- The fee paid by the Trust to the Corporate
Trustee for services related to establishing the Trust. The Investment Set-up
Fee is equal to .5% of the aggregate purchase price of the Shares.
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"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, a majority in interest of all the then current
Investors or members of the group. Such Majority, or any lesser or greater
interest prescribed herein, shall be calculated based upon the number of Shares
owned by each Investor.
"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.
"MEZZANINE INVESTMENTS" -- Investments that are designed to yield a
projected return over the life of the investment that is higher than secured
debt financing, but lower than equity financing. Mezzanine Investments
represent a layer of corporate financing between equity and senior debt. Senior
debt is typically provided by financial institutions on a secured basis.
"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.
"OTHER INVESTMENTS" -- Securities invested in by the Trust that are not
Mezzanine Investments. Other Investments will include (1) High Yield Debt
Investments, (2) Venture Investments, (3) Bridge Investments and (4) Publicly
Traded Securities.
"PAYOUT" -- The point at which total cumulative distributions to each
Investor from the Trust equals 100% of all of their original investment (without
regard to or reduction for discounts) plus the Priority Return plus the
Underwriting Return.
"PORTFOLIO COMPANIES" -- Companies the securities of which are acquired by
the Trust as investments.
"PRIORITY RETURN" -- For each Investor, the amount equal to a return of 8%
per annum simple interest (non-compounded) computed, from the Final Closing, on
the declining balance of the amount
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invested in the Trust (without regard to or reduction for discounts) by each
Investor. For purposes of calculating the Priority Return, the declining
balance is the amount originally invested in the Trust by an Investor, reduced
by distributions (other than distributions of the Underwriting Return) made to
that Investor that are in excess of the Priority Return, and by other
distributions that result in the return of capital to Investors. Distributions
(other than those applied to the Underwriting Return) shall first be applied to
the payment of the Priority Return as calculated to the date of such
distribution, and any excess shall be applied to reduce the balance of the
amount invested.
"PROFITS OR LOSSES" -- For a given fiscal period, an amount equal to the
Trust's taxable income or loss for such period, determined in accordance with
Code Section 703(a) (for this purpose, all items of income, gain, expense, loss,
deduction or credit required to be stated separately pursuant to Code Section
703(a)(1) shall be included in taxable income or loss), with the following
adjustments:
(a) Any income of the Trust that is exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to this
definition and any income and gain described in Regulation Section
1.704-1(b)(2)(iv)(g) shall be added to such taxable income or loss;
(b) Any expenditures of the Trust described in Code Section 705(a)(2)(B) or
treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulation
Section 1.704-1 (b)(2)(iv)(i), and not otherwise taken into account in computing
Profits or Losses pursuant to this definition shall be subtracted from such
taxable income or loss;
(c) In the event of a distribution in kind under Section 8.5 the amount of
any unrealized gain or loss deemed to have been realized on the property
distributed shall be added or subtracted from such taxable income or loss; and
(d) Notwithstanding any other provision of this definition, any items which
are specially allocated pursuant to Sections 4.5, 4.6, 4.7 and 7.4 shall not be
taken into account in computing Profits or Losses.
"PROSPECTUS" -- The Prospectus of the Trust, as the same may be amended or
supplemented from time to time.
"PUBLICLY TRADED SECURITIES" -- Securities that are traded on a public
market.
"REGISTRATION STATEMENT" -- The Registration Statement of the Trust filed
with the Securities Exchange Commission pursuant to the Act, as the same may be
amended or supplemented from time to time.
"REGULATION" -- A final or temporary Treasury regulation promulgated under
the Code.
"ROLL-UP" -- A transaction involving the acquisition, merger, conversion or
consolidation, either directly or indirectly, of the Trust and the issuance of
securities of a Roll-Up Entity. Such term does not include:
(a) a transaction involving securities of the Trust that have been for at
least twelve (12) months listed on a national exchange or that are traded
through 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.
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"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 One Thousand Dollars ($1,000).
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 owner of a Share.
"SPONSOR" -- Any person directly or indirectly instrumental in organizing
the Trust, wholly or in part, or any person who will control, manage or
participate in the management of the Trust, and any Affiliate of such person.
Not included is any person whose only relation with the Trust is that of an
independent manager of a portion of the Trust assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accounts, and underwriters whose only compensation is
for professional services rendered in connection with the offering of Shares. A
person may also be deemed a Sponsor of the Trust by:
(a) taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Trust, either alone or in
conjunction with one or more other persons;
(b) receiving a material participation in the Trust in connection with the
founding or organization of the business of the Trust, in consideration
of services or property, or both services and property;
(c) having a substantial number of relationships and contacts with the
Trust;
(d) possessing significant rights to control Trust properties;
(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" -- Twelve months 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 twelve month period as the Termination Date if the Escrow Date has
occurred prior to such date;
(b) If the minimum number of Shares is sold and the Trust renews
registration with the SEC and with the various state agencies,the offering
period may be extended for up to any additional year; 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 & Income Trust I, 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.
"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.
"UNDERWRITING RETURN" -- The Underwriting Return for an Investor means the
return earned during the period beginning with the investment of funds by an
Investor and ending with the Final Closing. The
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Underwriting Return is equal to interest, if any, actually earned prior to the
Initial Closing on the Investor's funds held in escrow, plus 10% simple annual
interest, computed on a daily basis on the amount contributed (without regard to
discounts), for the period beginning with the Initial Closing and ending with
the Final Closing.
"VENTURE INVESTMENTS" -- Investments in early stage growth companies that
have extraordinary prospects to increase shareholder value and equity
investments in leveraged buyout transactions. Venture Investments have
significant speculative characteristics and high risk of loss, and generally
have the same structure as Mezzanine Investments.
"WHOLESALE MARKETING FEE" -- See Section 9.1 of this Declaration.
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. The Corporate
Trustee shall have a fiduciary responsibility for the safekeeping and use of all
funds and assets of the Trust, whether or not in the Corporate Trustee's
immediate possession or control, and the Corporate Trustee shall not employ, or
permit another to employ, such funds or assets in any manner except for the
exclusive benefit of the Trust. In addition, a Shareholder shall not contract
away the fiduciary obligation owed to the Shareholder by the Trust under common
law.
(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.
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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,
but it may enter into a separate obligation to perform a Trust contract.
3.4 LIABILITY OF INVESTORS IN GENERAL. No Investor in his capacity as an
Investor shall have any liability for the debts and obligations of the Trust in
any amount beyond the unpaid amount, if any, of the Capital Contributions
subscribed for by such Investor. Each Investor 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 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 the
requirements of the Investment Company Act are met.
3.7 INDEMNIFICATION OF MANAGING PERSONS. (a) Each Managing Person shall be
indemnified from the Trust Property against any losses, liabilities, judgments,
expenses and amounts paid in settlement of any claims sustained by such Managing
Person in connection with the Trust or claims by the Trust, in right of the
Trust or by or in right of any Shareholders, if the Managing Person would not be
liable under the standards of Section 3.6 and, in the case of Managing Persons
other than the Trustees and the Trust Advisor, the indemnitees were acting
within the scope of authority validly delegated to them by the Trustees or the
Trust Advisor. The termination of any action, suit or proceeding by judgment,
order or settlement shall not, of itself, create a presumption that the Managing
Person charged did not act in good faith and in a manner that he reasonably
believed was in the Trust's best interests. To the extent that any Managing
Person is successful on the merits or otherwise in defense of any action, suit
or proceeding or in defense of any claim, issue or matter therein, the Trust
shall indemnify that Managing Person against the expenses, including attorneys'
fees, actually and reasonably incurred by him in connection therewith. Any
indemnification is recoverable only out of Trust net assets and not from
Shareholders.
(b) Notwithstanding the foregoing, no Managing Person or any broker-dealer
shall be indemnified, nor shall expenses be advanced on its behalf, for any
losses, liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws, unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or
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(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, the Massachusetts
Securities Division and other 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.
3.9 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) 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.
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ARTICLE IV
ALLOCATION OF PROFIT AND LOSS
4.1 PROFITS. Profits for any fiscal period shall be allocated among the
Shareholders and the Trust Advisor as follows:
(a) First, One Hundred Percent (100%) to the Trust Advisor until the Profits
so allocated to the Trust Advisor plus the cumulative Profits allocated to the
Trust Advisor for prior fiscal periods during which a Profit was earned by the
Trust equal the cumulative amounts distributable to the Trust Advisor under
Article 8 hereof for the current and prior periods; and
(b) The balance, if any, to the Investors.
4.2 LOSSES. Losses for any fiscal period shall be allocated Ninety Nine
Percent (99%) to the Investors and One Percent (1%) to the Trust Advisor until
Payout. After Payout, Losses shall be allocated Eighty Percent (80%) to the
Investors and Twenty Percent (20%) to the Trust Advisor; provided, however, (i)
to the extent an allocation pursuant to this sentence would result in the Trust
Advisor having a negative capital account, One Percent (1%) shall be allocated
to the Trust Advisor and Ninety Nine Percent (99%) shall be allocated to the
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
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.
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4.6 TAX ALLOCATION. Notwithstanding anything to the contrary in this
Declaration, to the extent that the Trust Advisor is treated for federal income
tax purposes as having received an interest in the Trust as compensation for
services which constitutes income to the Trust Advisor under Code Section 61,
any amount allowed as a deduction for federal income tax purposes to the Trust
(whether as an ordinary and necessary business expense or as a depreciation or
amortization deduction) as a result of such characterization shall be allocated
solely for federal income tax purposes to the Trust Advisor.
4.7 ALLOCATION OF GAINS FROM DISPOSITIONS. In addition to the allocation
of Profits under Section 4.1, all gains derived by the Trust during any fiscal
period from any sale, transfer, injury, destruction or other disposition of
Trust Property or an interest therein, other than in the ordinary course of
operation of Trust Property (including, without limitation, proceeds from
insurance, refinancing or condemnation) shall be allocated to the Trust Advisor
to the extent that the Capital Account of the Trust Advisor would have otherwise
been negative as of the end of such fiscal period. Gain or loss allocable to
each Shareholder will be adjusted accordingly.
ARTICLE V
CAPITAL CONTRIBUTIONS OF SHAREHOLDERS
5.1 CAPITAL CONTRIBUTIONS. The Capital Contributions of the Investors
shall aggregate not less than One Million Five Hundred Thousand Dollars
($1,500,000), nor more than Twenty-five Million Dollars ($25,000,000) except as
provided in Section 1.6(a) and shall be made by the Investors in exchange for
Shares represented by $1,000 each, payable as set forth in Section 5.2.
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, as provided in Section 1.6(d).
5.3 ADDITIONAL CAPITAL CONTRIBUTIONS. There shall be no additional Capital
Contributions by the Investors.
5.4 TRUST ADVISOR'S CAPITAL CONTRIBUTIONS. The Trust Advisor in its
capacity as Trust Advisor shall make Capital Contributions in accordance with
Section 14.7.
ARTICLE VI
CAPITAL ACCOUNTS
6.1 CAPITAL ACCOUNTS. Capital Accounts shall be established and maintained
for each Shareholder and for the Trust Advisor and shall be adjusted as follows:
(a) The Capital Account of each Shareholder and the Trust Advisor shall be
increased by:
(1) The amount of such Shareholder's or the Trust Advisor's Capital
Contributions to the Trust;
(2) The amount of Profits allocated to such Shareholder and the Trust
Advisor pursuant to Articles 4 and 7;
(3) The fair market value of property contributed by the Shareholder and
the Trust Advisor to the Trust (net of liabilities secured by the
contributed property that the Trust under Code Section 752 is considered to
have assumed or taken subject to); and
(4) Any items in the nature of revenues, income or gain that are
specially allocated to such Shareholder or the Trust Advisor or adjusted
pursuant to Sections 4.5, 4.6, 4.7 and 7.4.
(b) The Capital Account of each Shareholder and the Trust Advisor shall be
decreased by:
(1) The amount of Losses allocated to such Shareholder or the Trust
Advisor pursuant to Articles 4 and 7;
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(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 Investor, including without
limitation Capital Contributions.
ARTICLE VII
INTEREST OF SHAREHOLDERS IN INCOME AND LOSSES
7.1 DETERMINATION OF INCOME AND LOSS. At the end of each Trust fiscal
year, and at such other times as the Trust shall deem necessary or appropriate,
each item of Trust income, gain, expense, loss, deduction and credit shall be
determined for the period then ending and shall be allocated to the Capital
Account of each Shareholder and the Trust Advisor in accordance with the
provisions hereof. With respect to the admission of Shareholders, the Trust will
use the "interim closing date" method of accounting as permitted by the
Regulations.
7.2 DETERMINATION OF INCOME AND LOSS IN THE EVENT OF TRANSFER. If a
Shareholder transfers such Shareholder's interest in the Trust in accordance
with the terms of this Declaration, the determination and allocation described
in Section 7.1 shall be made as of the date of such transfer and thereafter all
such allocations shall be made to the account of the transferee of such
interest; provided, however, that the Trust may agree that such determination
and allocation shall be pro rata to the Shareholders based upon the actual
number of days in such fiscal year that each such Shareholder held an interest
in the Trust. In the event of a pro rata determination and allocation, the
foregoing provisions of this Section relating to a pro rata determination and
allocation will not be applicable to the distributive shares, with respect to
the Shares transferred, of items of Trust income, gain, expense, loss, deduction
and credit arising out of (a) the sale or other disposition of all or
substantially all Trust Property, or (b) other extraordinary nonrecurring items,
all of which will be allocated to the holder of such Trust interest on the date
such items of Trust income, gain, expense, loss, deduction and credit are earned
or incurred.
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7.3 ALLOCATION OF NET INCOME AND NET LOSSES. All items of income, gain,
expense, loss, deduction and credit of the Trust from operations and in the
ordinary course of operation of Trust Property shall be allocated among the
Shareholders and the Trust Advisor in accordance with Article 4.
7.4 QUALIFIED INCOME OFFSET AND OTHER ALLOCATION PROVISIONS. (a) If there
is a net decrease in "partnership minimum gain" (within the meaning of
Regulation Section 1.704-2(d)) during a fiscal period, then there shall be
allocated to each Shareholder and the Trust Advisor items of income and gain for
such fiscal period (and, if necessary, subsequent fiscal periods) in proportion
to, and to the extent of, an amount equal to the portion of such Shareholder's
or the Trust Advisor's share of the net decrease in "partnership minimum gain"
during such fiscal period that is allocable to the disposition of Trust Property
subject to one or more nonrecourse liabilities of the Trust. However, such
allocation shall be reduced to the extent (i) the Shareholder or the Trust
Advisor contributes capital to the Trust that is used to repay the nonrecourse
liability and (ii) the Shareholder's or the Trust Advisor's share of the net
decrease in "partnership minimum gain" is caused by the repayment. The foregoing
is intended to be a "minimum gain chargeback" provision as described in
Regulation Section 1.704-2(f), and shall be interpreted and applied in all
respects in accordance with such Regulation. If there is a net decrease in the
minimum gain attributable to a "partner nonrecourse debt" (as defined in
Regulation Section 1.704-2(b)(4)) for a fiscal period, then, in addition to the
amounts, if any, allocated pursuant to the first sentence of this Subsection
7.4(a), there shall be allocated to each Shareholder or the Trust Advisor with a
share of such minimum gain attributable to a "partner nonrecourse debt" items of
income and gain for such fiscal period (and, if necessary, subsequent fiscal
periods) in proportion to, and to the extent of, an amount equal to the portion
of such Shareholder's or Trust Advisor's share of the net decrease in the
minimum gain attributable to a "partner nonrecourse debt" during such fiscal
period that is allocable to the disposition of Trust Property subject to one or
more nonrecourse liabilities of the Trust. However, such amount shall be reduced
to the extent (i) the Shareholder or the Trust Advisor contributes capital to
the Trust that is used to repay the nonrecourse liability and (ii) the
Shareholder's or the Trust Advisor's share of the net decrease in the minimum
gain attributable to a "partner nonrecourse debt" is caused by the repayment.
(b) If during any fiscal period of the Trust a Shareholder or the Trust
Advisor unexpectedly receives an adjustment, allocation or distribution
described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which
causes or increases a deficit balance in the Shareholder's or the Trust
Advisor's Adjusted Capital Account, there shall be allocated to the Shareholder
or the Trust Advisor's items of income and gain (consisting of a pro rata
portion of each item of Trust income, including gross income, and gain for such
period) in an amount and manner sufficient to eliminate such deficit balance as
quickly as possible. The foregoing is intended to be a "qualified income offset"
provision as described in Regulation Section 1.704-1(b)(2)(ii)(d), and shall be
interpreted and applied in all respects in accordance with such Regulation.
(c) Notwithstanding anything to the contrary in Article 4 or this Article 7,
any item of cdeduction, loss or Code Section 705(a)(2)(B) expenditure that is
attributable to "partner nonrecourse debt" shall be allocated in accordance
with the manner in which the Shareholders or the Trust Advisor bear the economic
risk of loss for such debt (determined in accordance with Regulation Section
1.704-2(i)).
(d) Solely for federal, state and local income and franchise tax purposes
and not for book or Capital Account purposes, income, gain, loss and
deduction with respect to property carried on the Trust's books at a value other
than its tax basis shall be allocated (i) in the case of property contributed in
kind, in accordance with the requirement of Code Section 704(c) and such
Regulations as may be promulgated thereunder from time to time, and (ii) in the
case of other property, in accordance with the principles of Code Section 704(c)
and the Regulations thereunder, in each case, as incorporated among the
requirements of the relevant provisions of the Regulations under Code Section
704(b).
(e) All or a portion of the remaining items of Trust income or gain for the
fiscal period, if any, shall be specially allocated to the Investors in
proportion to the cumulative distributions each has received
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pursuant to Section 8.1(e) from the commencement of the Trust, until the
aggregate amounts allocated to each Investor pursuant to this Section 7.4(f) for
such period and all prior periods equal the cumulative amount of such
distributions to such Investor.
7.5 CURATIVE ALLOCATION. The allocations set forth in Section 7.4 hereof
(the "Regulatory Allocations") are intended to comply with certain requirements
of the Regulations. It is the intent of the Shareholders and Fund Advisor that,
to the extent possible, all Regulatory Allocations will be offset either with
other Regulatory Allocations or with special allocations of other items of Trust
income, gain, loss, or deduction pursuant to this Section 7.5. Therefore,
notwithstanding any other provision of this Section 7 (other than the Regulatory
Allocations), the Fund Advisor shall make such offsetting special allocations in
whatever manner it determines appropriate so that, after such offset allocations
are made, each partner's Capital Account balance is, to the extent possible,
equal to the Capital Account balance such partner would have had if the
Regulatory Allocations were not part of the Agreement and all Trust items were
allocated pursuant to Section 7.3.
ARTICLE VIII
INTEREST OF SHAREHOLDERS IN CASH DISTRIBUTIONS
8.1 DISTRIBUTION OF CASH REVENUES. Subject to the terms of this
Declaration, the Trust shall make distributions of Cash Revenues out of the
Trust's funds in the following manner:
(a) INDEBTEDNESS TO SHAREHOLDER OR TRUST ADVISOR. First, to the extent
that payments of principal or interest are due, Cash Revenues shall be applied
pro rata (in accordance with the percentage of total loans that are owing to
each Shareholder and the Trust Advisor) to the payment to the Shareholders and
the Trust Advisor of interest and principal, in that order, on loans, if any,
made by the Shareholders or the Trust Advisor to the Trust.
(b) SPECIAL PROVISIONS. Distributions made in connection with the
dissolution and termination of the Trust under Section 14.1 are governed by
Section 8.3, and shall be excluded from consideration under Sections 8.1 and
8.2.
(c) OFFERING PERIOD DISTRIBUTIONS -- THE UNDERWRITING RETURN. During the
period beginning with the date of the Prospectus and ending with the Final
Closing (the "Offering Period"), each investor shall earn the Underwriting
Return. At the Final Closing, the Trust will distribute in payment of the
Underwriting Return the lesser of (i) all of the cash revenues of the Trust
earned from any source during the Offering Period and received by the Trust at
or prior to the Final Closing, or (ii) the Underwriting Return. If the
Underwriting Return is not fully paid by such distribution, the unpaid balance
of the Underwriting Return shall be paid as set forth in 8.1(d), 8.2(a) and
8.3(c).
(d) DISTRIBUTIONS OF CASH REVENUES AFTER THE FINAL CLOSING;
PRE-PAYOUT. After the Final Closing and until Payout, the Trust will make
quarterly distributions of all Cash Revenues that the Trust receives to the
extent that the Trust has cash available for 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
Independent Trustees determine that such distribution would not be in the best
interest of the Trust and the Shareholders.
All quarterly distributions of Cash Revenue will be made 99% to the
Shareholders and 1% to the Trust Advisor until the Shareholders have received
Payout.
Quarterly distributions of Cash Revenues shall be allocated in the following
priority: (i) to pay the Priority Return; (ii) to pay any Priority Return
accrued in prior years but not yet paid; (iii) to the reduction to zero of the
amount of Shareholders' Capital Contributions used to compute Priority Return,
and then (iv) to the payment of any unpaid Underwriting Return.
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(e) DISTRIBUTIONS OF CASH REVENUES -- POST-PAYOUT. After Payout is
achieved, Eighty Percent (80%) of all distributions of Cash Revenues made in any
calendar year or portion thereof after the application of Sections 8.1(a) and
(b) shall be made to the Shareholders and the remaining Twenty Percent (20%)
shall be made to the Trust Advisor.
8.2 DISTRIBUTIONS OF CASH AVAILABLE FROM REALIZED GAINS ON INVESTMENTS AND
ALL SOURCES OTHER THAN CASH REVENUES. In the discretion of the Trust Advisor,
and subject to review by the Independent Trustees, cash received from realized
gains on Investments and cash available from all sources other than Cash
Revenues may be distributed or reserved for general Trust purposes or for future
Investments. Reinvestment of proceeds resulting from the sale or refinancing of
Trust assets may take place if sufficient cash will be distributed to pay state
and federal income tax, if any, created by the sale or refinancing of such
assets. Cash available from Investments that is not applied to future
Investments or reserved for any other Trust purpose will be distributed
quarterly by the Trust, within 60 days after the end of the calendar quarter in
the following priority:
(a) 99% to the Shareholders, as a class, and 1% to the Trust Advisor, until
the Shareholders, as a class, have received
(i) payment of the Priority Return accrued through the end of the
quarter for which the distribution is being made;
(ii) payment of 100% of the amount contributed to the Trust by
Shareholders (without regard to or reduction for discounts); and
(iii) payment of the Underwriting Return, and
(b) 80% to the Shareholders, as a class, and 20% to the Trust Advisor.
To the extent that making any distribution to the Trust Advisor would result
in the Trust Advisor's receiving cumulative distributions in excess of that
permitted by the Investment Advisor's Act, the amount of such distribution will
instead be deferred until the payment of such amount does not violate the terms
of the Investment Advisor's Act, and if, at termination of the Trust, such
distribution cannot be made without violating such Act, then the amount that
cannot be distributed to the Trust Advisor will be distributed to the
Shareholders.
8.3 DISTRIBUTIONS UPON DISSOLUTION. Upon dissolution and termination of
the Trust under Section 14.1, the proceeds of the sale or other disposition of
the Trust Property shall be paid or distributed in the following order of
priority:
(a) First, there shall be paid to the Trust's creditors, other than
Shareholders and the Trust Advisor, funds, to the extent available,
sufficient to extinguish current Trust liabilities and obligations, including
costs and expenses of liquidation (or provision for payment shall be made, which
provision may include a distribution of assets subject to the obligations in
question);
(b) Second, any 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 Capital Accounts, after giving effect to all
adjustments to Capital Accounts for all fiscal periods through and including the
fiscal period in which dissolution occurs.
8.4 LIMITATION. Notwithstanding any other provision of this Declaration,
no distribution may be made selectively to one Shareholder or group of
Shareholders but must be made ratably to all Shareholders entitled to that type
of distribution at that time, subject to the provisions of Section 12.11(b).
8.5 DISTRIBUTION IN KIND. The Trust may elect to make distribution in kind
of any of the assets of the Trust that consist of readily marketable securities.
If the Trust elects to make distribution in kind of any of the assets of the
Trust other than readily marketable securities, it shall give notice of its
election to each Shareholder, specifying the nature and value of all such assets
to be distributed in kind, the risks associated with the direct ownership of the
assets, the deadline for giving notice of refusal to accept a distribution in
kind and to the extent advisable, the estimated time necessary for the Trust to
liquidate assets if those assets are not distributed and other information as
required. In making such election, the Trust shall not arbitrarily value assets
to be distributed in kind nor shall it specify assets to be distributed in kind
in such a manner as to unreasonably advantage or disadvantage any Shareholder. A
Shareholder may refuse to accept a distribution in kind by giving written notice
to the Trust not later than thirty (30) days after the effective date of the
Trust's notice of distribution. If a Shareholder refuses distribution in kind,
the Trust shall retain in the Trust's name the portion of the assets that were
to be distributed in kind and that were to be allocated to the refusing
Shareholder (the "Retained Assets") and shall liquidate the Retained Assets in
accordance with this Declaration. Upon liquidation of the Retained Assets, the
sum realized shall be distributed to the Shareholder refusing distribution in
kind in full discharge of the Trust's obligation to distribute the Retained
Assets. In determining the Capital Accounts, a distribution of assets in kind
shall be considered a sale of the property distributed so that any unrealized
gain or loss with respect to such property shall be deemed to have been realized
and allocated in accordance with Article 4.
8.6 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to the Trust, the Shareholders, or the Trust Advisor shall be
treated as amounts distributed pursuant to this Article 8 for all purposes under
this Declaration. The Trust may allocate any such amounts among the Shareholders
and the Trust Advisor in any manner that is in accordance with applicable law.
8.7 LIMITATION. Distributions to Shareholders shall not be made to the
extent they are prohibited by restrictions contained in the Investment Company
Act, the Delaware Act or other provisions of this Declaration.
ARTICLE IX
OPERATION OF TRUST
9.1 WHOLESALE MARKETING FEE. The Trust shall pay the Dealer Manager out of
Trust Property a Wholesale Marketing Fee in an amount equal to Two and One-half
Percent (2.5%) of each Capital Contribution from the offering of Shares. The
Wholesale Marketing Fee is for its services in connection with organizing the
sales and marketing efforts with respect to the offering of Shares. The fee
shall be payable on the Escrow Date as to Shares purchased through that date and
on each Closing date thereafter on which the Trust receives and collects full
payment for additional accepted subscriptions for Shares.
9.2 SELLING COMMISSIONS AND DEALER MANAGER FEE. The Trust shall pay out of
Trust Property to Berthel Fisher & Company Financial Services, Inc. (the "Dealer
Manager") or to any broker-dealer who
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effects the sale of one or more whole or fractional Shares a selling commission
ranging from 7.0% to 2.0% of the aggregate purchase price of Shares sold, which
the Dealer Manager may reallow to participating Selling Agents on Shares sold
through them. Selling commissions will vary depending on the number of Shares
purchased by an Investor. The selling commissions will be paid at each Closing,
computed on the aggregate purchase price of the Shares sold and accepted by the
Trust at each Closing. For sales to Investors who purchase less than $500,000 of
Shares, the commissions will be 7.0%. For sales to Investors who purchase
$500,000 or more but less than $1,000,000 of Shares, the commissions will be
5.0%. For sales to Investors who purchase $1,000,000 or more but less than
$1,500,000 of Shares, the commissions will be 4.0%. For sales to Investors who
purchase $1,500,000 or more but less than $2,000,000 of Shares, the commissions
will be 3.0%. For sales to Investors who purchase $2,000,000 or more of Shares,
the commissions will be 2.0%.
The difference between 7.0% and the applicable commission set forth in the
preceding paragraph will be reimbursed to an Investor at the Closing of the sale
of the Shares. Investors who purchase $500,000 or more but less than $1,000,000
of Shares will receive a discount of 2.0%. Investors who purchase $1,000,000 or
more but less than $1,500,000 of Shares will receive a discount of 3.0%.
Investors who purchase $1,500,000 or more but less than $2,000,000 of Shares
will receive a discount of 4.0%. Investors who purchase $2,000,000 or more of
Shares will receive a discount of 5.0%. Such discounts in commissions will
reduce the purchase price payable by an Investor. The proceeds to the Trust net
of commissions will not be affected by these discounts for volume purchases. For
purposes of Trust allocations, 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 gross investment. All commissions and fees
payable by the Trust in respect of sales of Shares under the offering of Shares
shall be due and payable promptly after the latest to occur of (i) acceptance by
the Trust of an Investor's subscription, (ii) the Escrow Date or (iii) the
receipt by the Trust of the gross purchase price for the Shares.
9.3 OTHER EXPENSES. (a) The Trust shall pay the Corporate Trustee out of
Trust Property an Investment Set-up Fee in an amount equal to .5% of Capital
Contributions for Shares sold. The Set-up Fee shall be payable on the Escrow
Date as to Shares purchased through that date and on each Closing date
thereafter on which the Trust receives and collects full payment for additional
accepted subscriptions for Shares.
(b) 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 Investment Set-up Fee and the Wholesale Marketing
Fee) exceed Four Percent (4.0%) of the aggregate Capital Contributions, the
Trust Advisor shall pay such excess.
(c) The Trust shall reimburse the Trust Advisor and the Corporate Trustee
for all other actual and necessary direct expenses paid or incurred in
connection with the operation of the Trust, 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 responsibilities assigned to it by
this Declaration, were consistent with this Declaration and do not constitute
Organizational and Offering Fees. The Trust shall reimburse the Trust Advisor
for all actual and necessary expenses paid or incurred in connection with the
operation of the Trust. 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.
The Trust Advisor, at its expense, will provide the Trust with office space,
facilities, equipment and certain personnel (whose salaries and benefits will be
paid by the Trust Advisor) necessary for the conduct of the Trust's business. In
addition, the Trust Advisor will provide the Trust with certain administrative
services for the purpose of maintaining certain books and records of the Trust
and handling communications and correspondence with Shareholders. The Trust will
reimburse the Dealer Manager and other Selling Agents for certain expenses
incurred in connection with their due diligence activities with regard to the
offering in an amount not to exceed 0.5% of the aggregate purchase price of
Shares
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sold. The Trust shall not reimburse rent or depreciation, utilities, capital
equipment, other administrative items of the Sponsor or salaries, fringe
benefits, travel expenses and other administrative items incurred or allocated
to any Controlling Person of the Sponsor.
(d) 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.
(e) In respect of the acquisition or disposition of all or a portion of the
investments that the Trust may make, the Trust may be required to or may find
it most advantageous to engage a broker or similar adviser and to pay a
brokerage fee to the broker or other persons responsible for bringing the
acquisition or disposition opportunity to the Trust's attention or for
investigating, evaluating or negotiating the acquisition or disposition of the
Trust's interest therein. Where permitted, if an Affiliate of the Trust Advisor
performs those services in respect of an investment acquisition or disposition
opportunity for the Trust, the Affiliate of the Trust Advisor so providing those
services shall be entitled to receive a brokerage fee from the Trust not
exceeding the amount permitted by Section 57 of the Investment Company Act. The
Trust may pay Acquisition Fees and Acquisition Expenses that do not exceed 3.5%
of the proceeds of the offering. All brokerage fees, Acquisition Fees and
Acquisition Expenses must be at competitive rates. Other services provided by a
Sponsor cannot be considered in charging a brokerage fee higher than the
competitive rate for brokerage services only.
ARTICLE X
ACCOUNTING
10.1 ELECTIONS. The Trust shall elect the calendar year as its fiscal
year. The Trust shall adopt the accrual method of accounting or such other
method of accounting as the Trust shall determine. The Trust shall elect to be
taxed only as a partnership. The Trust shall not be required to make an election
under Section 754 of the Code or corresponding state taxation laws.
10.2 BOOKS AND RECORDS. The Trust's books and records shall be kept at the
principal place of business of the Trust and shall be maintained on the basis
utilized in preparing the Trust's federal income tax return with such
adjustments in accounting as are required by this Declaration or as the Trust
determines would be in the best interests of the Trust.
10.3 REPORTS. (a) The Trust will keep each Investor and assignees
complying with Article 13 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:
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(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;
(B) Cash Flow from operations during a prior period which have
been held as reserves;
(C) proceeds from disposition of Trust assets; and
(D) reserves from the gross proceeds of the offering originally
obtained from the Shareholders.
(4) Within seventy-five (75) days after the end of the Trust's fiscal
year, all information necessary for the preparation of the
Shareholders' federal income tax returns.
(c) The annual report to Shareholders shall contain a breakdown of the costs
reimbursed to the Sponsor. Within the scope of the annual audit of the Trust
Advisor's and Corporate Trustee's financial statements, the independent
certified public accountants must issue a special report on the allocation of
such costs to the Trust. The special report shall be in accordance with the
American Institute of Certified Public Accountants United States Auditing
Standards relating to special reports.
(d) Within 180 days after the end of each year following the first
anniversary of the Termination Date, the Trust shall provide the
Investors 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 Enhanced Yield
Investments, as that term is defined in the Prospectus and 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
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accounts, 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.
ARTICLE XI
RIGHTS AND OBLIGATIONS OF INVESTORS
11.1 PARTICIPATION IN MANAGEMENT. No Investor (other than the Trust
Advisor acting in its capacity as such) shall have the right, power, authority
or responsibility to participate in the ordinary and routine management of the
Trust's affairs or to bind the Trust in any manner.
11.2 RIGHTS TO ENGAGE IN OTHER VENTURES. No Investor or any officer,
director, shareholder or other person holding a legal or beneficial interest in
any Investor 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 an Investor shall not
be transferable except under the conditions set forth in Article 13 hereof.
11.4 INFORMATION. (a) Each Investor'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
Investor 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.
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(2) A copy of the Shareholder list shall be mailed to any Shareholder
requesting the Shareholder list within ten (10) days of the request. The
copy of the Shareholder list shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than
10-point type). A reasonable charge for copy work may be charged by the
Trust.
(3) The purposes for which a Shareholder may request a copy of the
Shareholder list include, without limitation, matters relating to
Shareholders' voting rights under the Declaration of Trust and the exercise
of Shareholders' rights under federal proxy laws.
(4) If the Sponsor of the Trust neglects or refuses to exhibit, produce,
or mail a copy of the Shareholder list as requested, the Sponsor
shall be liable to any Shareholder requesting the list for the costs,
including attorneys' fees, incurred by that Shareholder for compelling the
production of the Shareholder list, and for actual damages suffered by any
Shareholder by reason of such refusal or neglect. It shall be a defense that
the actual purpose and reason for the requests for inspection or for a copy
of the Shareholder list is to secure such list of Shareholders or other
information for the purpose of selling such list or copies thereof, or of
using the same for a commercial purpose other than in the interest of the
applicant as a Shareholder relative to the affairs of the Trust. The Sponsor
may require the Shareholder requesting the Shareholder list to represent
that the list is not requested for a commercial purpose unrelated to the
Shareholder's interest in the Trust. The remedies provided hereunder to
Shareholders requesting copies of the Shareholder list are in addition to,
and shall not in any way limit, other remedies available to Shareholders
under federal law, or the laws of any state.
(c) The Trust shall establish reasonable standards governing, without
limitation, the information and documents to be furnished and the time and the
location, if appropriate, of furnishing that information and documents.
Costs of providing information and documents shall be borne by the requesting
Investor 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 Investors 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 Investor'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 in interest 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 operations 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
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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 1.
12.3 SPECIFIC LIMITATIONS. (a) The Trust Advisor shall not take any of the
following actions without the approval of all Investors:
(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;
(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 Investors 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 Investors.
(e) A Sponsor shall not acquire assets from the Trust.
(f) The Trust may not lease assets to the Sponsor. The Trust shall not
purchase or lease assets from the Sponsor. Notwithstanding the foregoing,
the Sponsor may purchase (but not from an affiliated program) assets in its own
name (and assume loans in connection therewith) and temporarily hold title
thereto, for the purposes of facilitating the acquisition of the assets, the
borrowing of money, obtaining financing for the Trust, provided that all of the
following conditions are met: (i) The assets are purchased by the Trust for a
price no greater than the cost of the assets to the Sponsor. (ii) All income
generated by, and expenses associated with, the assets so acquired shall be
treated as belonging to the Trust. (iii) There are no other benefits arising out
of such transaction to the Sponsor apart from compensation otherwise permitted
in this Declaration.
(g) No loans may be made by the Trust to the Sponsor.
(h) The Trust may not acquire assets in exchange for Shares.
(i) The Trust shall not give the Sponsor an exclusive right to sell or
exclusive employment to sell assets for the Trust.
(j) The Trust shall not pay, directly or indirectly, a commission or fee
to a Sponsor, except as part of a Front End Fee, in connection with the
reinvestment of Cash Available For Distribution or of the proceeds of the
resale, exchange, or refinancing of Trust assets.
(k) No rebates or give-ups may be received by the Sponsor nor may the
Sponsor participate in any reciprocal business arrangements which would
circumvent the provisions of this Declaration, or which would circumvent the
restrictions against dealing with Affiliates or promoters.
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(l) No Sponsor shall directly or indirectly pay or award any commissions or
other compensation to any person engaged to sell Shares or give
investment advice to a potential Shareholder, provided, however, that this
clause shall not prohibit the payment to a registered broker-dealer or other
properly licensed person of normal sales commissions for selling Shares.
(m) The funds of the Trust shall not be commingled with the funds of any
other persons.
(n)Investment in Other Programs. (i) The Trust shall be permitted to invest
in general partnerships or joint ventures with non-Affiliates that own
and operate specific assets, if the Trust, alone or together with any publicly
registered Affiliate of the Trust, acquires a controlling interest in such a
general partnership or joint venture, but in no event shall duplicate fees be
permitted. For purposes of this section, "controlling interest" means an equity
interest possessing the power to direct or cause the direction of the management
and policies of the general partnership or joint venture, including the
authority to:
(A) review all contracts entered into by the general partnership
or joint venture that will have a material effect on its
business or assets;
(B) cause a sale or refinancing of the assets or its interest
therein subject, in certain cases where required by the
partnership or joint venture agreement, to limits as to time, minimum
amounts and/or a right of first refusal by the joint venture partner;
(C) approve budgets and major capital expenditures, subject to a
stated minimum amount;
(D) veto any sale or refinancing of the assets, or alternatively,
to receive a specified preference on sale or refinancing
proceeds; and
(E) exercise a right of first refusal on any desired sale or
refinancing by the joint venture partner of its interest in the
assets, except for transfer to an Affiliate of the joint venture
partner.
(ii) The Trust shall be permitted to invest in general partnerships or
joint ventures with other publicly registered Affiliates of the Trust if all
of the following conditions are met:
(A) The Trust and such Affiliate have substantially identical
investment objectives.
(B) There are no duplicate fees.
(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.
(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.
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(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.
(iv) Programs structured to conduct operations through separate
single-purpose entities managed by the Sponsor (multi-tier
arrangements) shall be permitted provided that the terms of any such
arrangements do not result in the circumvention of any of the requirements
or prohibitions contained in this Declaration. In particular, all such
program agreements shall accompany the Prospectus, if available, and shall
contain provisions which assure that all of the following restrictions will
be present:
(A) There will be no duplication or increase in Organizational
and Offering Expenses, Sponsor's compensation, program
expenses or other fees and costs.
(B) There will be no substantive alteration in the fiduciary and
contractual relationship between the Sponsor and the
Shareholders.
(C) There will no diminishment in the voting rights of
Shareholders.
(v) Other than as specifically permitted in Subsections ii), (iii)
and (iv) above, the Trust shall not be permitted to invest in general
partnerships or joint ventures with Affiliates.
(vi) The Trust shall be permitted to invest in general partnership
interests of limited partnerships only if the Trust, alone or
together with any publicly registered Affiliate of the Trust meeting the
requirements of Subsection (ii) above, acquires a "controlling interest" as
defined in Subsection (i), no duplicate fees are permitted, and no
additional compensation is paid to the Sponsor.
(o) On financing made available to the Trust by the Sponsor, the Sponsor may
not receive interest in excess of the lesser of the Sponsor's cost of funds
or the amounts which would be charged by unrelated lending institutions on
comparable loans for the same purpose. The Sponsor shall not impose a prepayment
charge or penalty in connection with such financing and the Sponsor shall not
receive points or other financing charges. The Sponsor shall be prohibited from
providing permanent financing for the Trust. For purposes of this Section,
"permanent financing" shall mean any financing with a term in excess of twelve
(12) months.
12.4 SPECIFIC POWERS. In addition to the powers and duties otherwise
provided for in this Declaration, the Trust Advisor has the following powers and
duties, subject to the supervision and review of the Board under Section 12.5:
(a) To direct or supervise the Corporate Trustee, the Trust and the Trust's
agents in the exercise of any action relating to the Trust's affairs,
including without limitation the powers described in Section 1.8;
(b) To take the actions specified in Section 12.3 if the approvals specified
therein are obtained;
(c) To amend this Declaration as specified in Section 15.8(a) or other
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;
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(g) To withdraw the offering of Shares at any time as provided in Section
1.6;
(h) To take any action in its discretion that may be necessary, advisable or
appropriate to maintain the Trust's status as a business development company
under the Investment Company Act, without any requirement to give notice to or
to obtain the prior or subsequent consent of any Investor;
(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 Investors 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
Investors.
(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 Investors 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 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 $12,000 annually, plus $1,000
per meeting of the Board attended up to a maximum of $24,000 in meeting fees per
year. 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 in interest of the Shareholders. Removal of an Independent Trustee
shall not affect the validity of any actions taken prior to the date of removal.
12.6 OFFICERS OF TRUST. (a) The Trust Advisor may appoint a President, one
or more Vice Presidents as designated by the Trust Advisor, a Secretary and such
other officers and agents as the Trust Advisor may from time to time consider
appropriate, none of whom need be a Shareholder. Except as otherwise prescribed
by the Trust Advisor or in this Declaration, each officer shall have the powers
and duties usually appertaining to a similar officer of a Delaware corporation
under the direction of the Trust Advisor and shall hold office at the pleasure
of the Trust Advisor. Any two or more offices may be held by the same person.
Any officer may resign by delivering a written resignation to the Trust Advisor
and such resignation shall take effect upon delivery or as specified therein.
(b) All conveyances of real property or any interest therein by the Trust
may be made by the Corporate Trustee, which shall execute on behalf of the
Trust any instruments necessary to effect the conveyance. A certificate of the
Secretary of the Trust stating compliance with this Section 12.6(b) shall be
conclusive in favor of any person relying thereon.
(c) All other documents, agreements, instruments and certificates that
are to be made, executed or endorsed on behalf of the Trust shall be
made, executed or endorsed by such officers or persons as the
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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 is authorized to execute any document, to take any action on
behalf of the Trust within this Section 12.6(c), and to authorize other officers
to execute confirmatory documents or certificates.
12.7 PRESUMPTION OF POWER. The execution by the Corporate Trustee, the
Trust Advisor or the officers 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 the Trust's
officers 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 Investors, 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 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 Investors (excluding
Shares held by the Trust Advisor that is the subject of the vote or by its
Affiliates), such Trust Advisor shall be removed. A Majority of the Independent
Trustees may also remove the Trust Advisor.
(b)In the event of any such removal or other incapacity (other than
voluntary resignation without cause) of a Trust Advisor as enumerated in
Section 14.1(c), the former Trust 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 Investors pursuant
to this Declaration. For purposes of this Section 12.11(b)(1), from and
after the
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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 Investors
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 Investors 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 Investors provided in this
Declaration that are attributable to Shares acquired by the former Trust
Advisor.
(3) If the Trust and the Trust Advisor cannot agree upon the amount to be
paid to the Trust Advisor pursuant to this section, the Trust may
require that such amount be determined by arbitration in accordance with the
then current rules of the American Arbitration Association. The expense of
arbitration shall be borne equally by the terminated Trust Advisor and the
Trust.
(c) In the event that a Trust Advisor is removed or no longer serves as a
Trust Advisor due to an incapacity enumerated in Section 14.1(c), the
former Trust Advisor shall not be entitled to any uncollected fees specified in
Article 9 to the extent not accrued before the date of such removal or other
incapacity.
12.12 INDEMNIFICATION OF DEALER MANAGER. (a) The Dealer Manager shall not
have any duty, responsibility or obligation to the Trust, the Trustees or any
Shareholder as a consequence of its right to receive any selling commissions or
placement agent fees from the Trust in connection with any offering of Shares,
except to the extent provided under the Act. The Dealer Manager has not assumed,
and will not assume, any responsibility with respect to the Trust nor will it be
permitted by the Trust to assume any duties, responsibilities or obligations
regarding the management, operations or any of the business affairs of the
Trust, subsequent to any offering of Shares.
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(b)The Dealer Manager shall be indemnified and held harmless by the Trust
against any losses, damages, liabilities or costs (including attorneys'
fees) arising from any threatened, pending or completed action, suit, claim or
proceeding by any Shareholder against the Dealer Manager (except as may be
limited by the Act or applicable state statutes, including, but not limited to,
the Massachusetts Securities Act), based upon the assertion that the Dealer
Manager has any continuing duty or obligation, subsequent to any offering of
Shares, to the Trust, the Trustees or any Shareholder or otherwise to monitor
Trust operations or report to Investors concerning Trust operations.
(c) Notwithstanding anything to the contrary contained in this Declaration,
any person acting as broker-dealer shall not 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.
(d) 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 under this section.
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.
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 Investors, except that (i) the Trust Advisor may
pledge its Management Share for a loan to the Trust Advisor provided that such
pledge does not reduce the cash flow of the Trust distributable to other
Shareholders and (ii) the Trust Advisor may waive, defer or assign compensation
or fees payable to it. Without concurrence of a majority in interest of the
Shareholders, the Trust Advisor may not voluntarily withdraw from the Trust
without one hundred twenty (120) days prior written notice to the Shareholders,
unless such withdrawal would not affect the tax status of the Trust and would
not materially adversely affect the Shareholders. If the Shareholders elect to
continue the Trust, the withdrawing Trust Advisor shall pay all expenses
incurred as a result of its withdrawal.
13.2 TRANSFERS BY INVESTORS. An Investor 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:
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(a) Shares may not be transferred to any person or entity if, as determined
by the Trust, such assignment would have adverse regulatory consequences to the
Trust or any Trust Property. The Trust shall have no obligation to
transfer shares on the books and records of the Trust if such transfer would
violate the Publicly Traded Partnership provisions as determined in the sole and
absolute discretion of the Trustees.
(b) The written approval of the Trust Advisor must be obtained, the granting
or denial of which shall be within its sole and absolute discretion.
(c) The transferor and transferee must deliver a dated notice in writing
signed by each, confirming that (i) the transferee accepts and agrees to
comply with all the terms of this Declaration and (ii) the transfer was made in
compliance with this Declaration and all applicable laws and regulations
including the Rules and Regulations restricting transfers as may be adopted by
the Trust Advisor from time to time to prevent the Trust from being treated as a
Publicly Traded Partnership.
(d) The transferor, transferee and the Trust must execute all other
certificates, instruments and documents and take all such additional action as
the Trust may deem appropriate.
(e) The Trust may require as a condition to any transfer that may create
a future interest that an opinion of counsel acceptable to the Trust be
delivered to the Trust 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 be an
Investor owning Shares with the same rights as appertained to the transferor.
Any purported sale or transfer consummated without first complying with this
Section 13.2 shall be void and the Trust shall have no obligation to recognize
the ownership right of any transferee of Shares.
13.3 ASSIGNMENTS BY OPERATION OF LAW. If any Investor 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 an Investor's Shares is made, the legal
representatives, heirs and legatees (and spouse, if the Shares have been
community property of such Investor and his or her spouse), bankruptcy
assignees, successors, assigns and corporate, partnership or trust distributees
or such other involuntary transferees shall not become transferees but shall
have (subject to the other terms and provisions hereof) such rights as are
provided with respect to such persons under the law; provided, however, that
such legal representatives, heirs and legatees, spouse, bankruptcy assignees,
successors, assigns and corporate, partnership or trust distributees or
involuntary transferees may become transferees in accordance with the provisions
of Section 13.2.
13.4 EXPENSES OF TRANSFER. In the sole discretion of the Trust, the person
acquiring Shares pursuant to any of the provisions of this Article 13 may be
required to bear all costs and expenses necessary to effect a transfer of such
Shares including, without limitation, reasonable attorney's fees incurred in
preparing any required amendments to this Declaration and the Certificate to
reflect such transfer or acquisition and the cost of filing such amendments with
the appropriate governmental officials.
13.5 SURVIVAL OF LIABILITIES. No sale or assignment of Shares shall
release the transferor from those liabilities to the Trust which survive such
assignment or sale as a matter of law or that are imposed under Section 3.4.
13.6 NO ACCOUNTING. No transfer of Shares, whether voluntary, involuntary
or by operation of law, shall entitle the transferor or transferee to demand or
obtain immediate valuation, accounting or payment of the transferred Shares.
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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, 2005, 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 Investors; 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 Investors (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 Investors 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 Investors
elect to continue the Trust, it shall be continued with the new Trust Advisor or
Trust Advisors who shall succeed to and assume all of the powers, privileges and
obligations of the previous Trust Advisor or Trust Advisors hereunder except as
specified in Section 12.11. In the event of a dissolution under this Section
14.2, the former Trust Advisor or Trust Advisors shall have the rights specified
in Section 12.11.
14.3 OBLIGATIONS ON DISSOLUTION. The dissolution of the Trust shall not
release any of the parties hereto from their contractual obligations under this
Declaration.
14.4 LIQUIDATION PROCEDURE. Upon dissolution of the Trust for any reason:
(a) A reasonable time shall be allowed for the orderly liquidation of the
assets of the Trust and the discharge of liabilities to creditors so as to
enable the Trust to minimize the losses normally attendant to a liquidation,
provided the Trust will, in any event, liquidate any remaining investments
within three (3) years from the occurrence of the event of dissolution;
(b) The Shareholders and the Trust Advisor shall continue to share Profits
and Losses for all tax and other purposes during the period of liquidation; and
(c) The Trust Advisor shall act as liquidating Trust Advisor and shall
proceed to liquidate the Trust Properties to the extent that they have
not already been reduced to cash unless the liquidating Trust Advisor elects to
make distributions in kind to the extent and in the manner herein provided and
such cash, if any, and property in kind, shall be applied and distributed in
accordance with Article 8.
14.5 LIQUIDATING TRUSTEE. (a) If the dissolution of the Trust is caused by
circumstances under which no Trust Advisor shall be acting as a Trust Advisor or
if all liquidating Trust Advisors are unable or refuse to act, a Majority of the
Investors 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
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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 AN INVESTOR OR
TRUSTEE. The death, insanity, dissolution, winding up, insolvency, bankruptcy,
receivership or other legal termination of a Trustee or an Investor who is not a
Trust Advisor shall have no effect on the life of the Trust and the Trust shall
not be dissolved thereby.
14.7 TRUST ADVISOR'S CAPITAL CONTRIBUTIONS. Upon or prior to the first
distribution in liquidation, the Trust Advisor shall contribute to the capital
of the Trust an amount equal to any deficit in the Capital Account of such Trust
Advisor calculated just prior to the date of such distribution, to the extent
not previously contributed.
14.8 WITHDRAWAL OF OFFERING. Dissolution of the Trust resulting from
withdrawal of the offering of Shares is governed by Section 1.6(c) and Section
12.4(g).
ARTICLE XV
MISCELLANEOUS
15.1 NOTICES. Notices or instruments of any kind that may be or are
required to be given hereunder by any person to another shall be in writing and
deposited in the United States Mail, certified or registered, postage prepaid,
addressed to the respective person at the address appearing in the records of
the Trust. Any Investor 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.
Investors 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
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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 Investors 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 Investors holding
Ten Percent (10%) or more of the outstanding securities or Shares entitled to
vote on the matter demand a solicitation, the Trust shall transmit the notice of
solicitation not later than twenty (20) days after receipt of the demand.
(c) GENERAL. To the extent not inconsistent with this Declaration,
Delaware law governing stockholders' meetings, proxies and consents for
corporations shall apply as to the procedure, validity and use of meetings,
proxies and consents. Any Shareholder may waive notice of or attendance at any
meeting or notice of any consent, whether before or after any action is taken.
The date on which the Trust transmits the notice of meeting or notice soliciting
consents shall be the record date for determining the right to vote or consent.
A list of the names, addresses and shareholdings of all Shareholders shall be
maintained as part of the Trust's books and records.
15.3 LOAN TO TRUST BY SHAREHOLDER. If any Shareholder or the Trust Advisor
shall, in addition to his Capital Contribution to the Trust, lend any monies to
the Trust, the amount of any such loan shall not increase such Shareholder's or
the Trust Advisor's Capital Account and it shall not entitle such Shareholder or
the Trust Advisor to any increase in such Shareholder's share of the
distributions of the Trust, but the amount of any such loan shall be an
obligation on the part of the Trust to such Shareholder or the Trust Advisor and
shall be repaid to the Shareholder or the Trust Advisor on the terms and at the
interest rate negotiated at the time of the loan, and the loan shall be
evidenced by a promissory note executed by the Trust except that no Shareholder
shall be personally obligated to repay the loan, which shall be payable and
collectible only out of the assets of the Trust.
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; however, residents of Massachusetts may, at their
option, choose to maintain any such litigation in the Commonwealth of
Massachusetts.
15.5 POWER OF ATTORNEY. Each Investor 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 Investor and all conveyances and other
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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 an
Investor.
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 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 Investors, 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
Investors, 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 Investors 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 Investor; (3) to otherwise equitably
resolve issues arising under the Prospectus or this Declaration so long as
similarly situated Investors are not treated materially differently; (4) to
maintain the federal tax status of the Trust and any of its Shareholders (so
long as no Investor's liability is materially increased without his consent) or
as provided in Section 4.3(d); and (5) to comply with law.
(b) Other amendments to this Declaration may be proposed by either the Trust
Advisor or Investors owning Ten Percent (10%) or more of the outstanding
Shares, in each case by calling a meeting of Investors 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.
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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 after 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
(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.
A-38
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Declaration as of the
date first above written.
TJB CAPITAL MANAGEMENT, INC.
Grantor and Corporate Trustee
By /s/ Thomas J. Berthel
------------------------------
THOMAS J. BERTHEL,
CHIEF EXECUTIVE OFFICER
A-39
<PAGE>
EXHIBIT B
SUBSCRIPTION DOCUMENTS
<PAGE>
BERTHEL GROWTH & INCOME TRUST I SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
1. APPLICATION FOR SHARES. The investor or investors named below (the
"Investor") hereby subscribes for the issuance and sale to the Investor of the
number of shares ("Shares") indicated below of beneficial interest in Berthel
Growth & Income Trust I (the "Trust"), at $1,000 per Share, and, in accordance
with the instructions set forth in the prospectus (the Prospectus") of the Trust
relating to the offer and sale of the Shares under the caption "Terms of the
Offering -- How to Subscribe," will make available funds for the purchase of
such Shares in the amount indicated below. Subscription funds submitted will be
held in escrow under the terms described in the Prospectus.
2. RECEIPT OF PROSPECTUS. By subscribing and paying for Shares, the
investor acknowledges receipt of the Prospectus, wherein the terms and
conditions of the offering of the Shares and the special risks in purchasing
them are described as well as receipt of the Declaration of Trust (the
"Declaration of Trust") attached to the Prospectus as Exhibit A, and 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 Shares ($2,000) and all other Investors is five 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 ("Independent Trustees"), 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, 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, Arizona, Arkansas or New Jersey, the
Investor (i) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $60,000 and has had a minimum, gross annual income of
$60,000 for each of the last two tax years, and reasonably expects to have a
minimum gross annual income of $60,000 for the current tax year or (ii) has a
net worth (exclusive of homes, home furnishings and automobiles) of at least
$225,000, and (iii) the investment in the Trust represents not more than ten
percent (10%) of the Investor's net worth.
If the Investor is a resident of Michigan, the Investor (i) has a net worth
(exclusive of homes, home furnishings and automobiles) of at least $60,000 in
excess of the purchase price of Shares subscribed for and expects to have during
the current and next three (3) years 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 $225,000 in excess of the purchase price of Shares subscribed for,
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;
(iv) the Investor's taxpayer identification number provided to the
Trust is correct ; and
(v) the Investor is not subject to backup withholding, either
because the Investor has not been notified that the Investor is subject to
backup withholding as a result of failure to report all interest
or dividends or because the Internal Revenue Service has notified the
Investor that the Investor is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Code; and
the Investor understands that this information may be furnished to the Internal
Revenue Service by the Trust and that any false statement could be punished by
fine, imprisonment, or both; or
(b) the Investor is a foreign investor, and the Investor understands
that distributions may be subject to withholding and that the Investor may
be subject to certain reporting requirements.
8. CONDITIONS TO SUBSCRIPTIONS. This subscription is made subject to the
following terms and conditions:
(1) Any sale or transfer of Shares in California or involving a California
resident requires the prior written consent of the Commissioner of Corporations
of the State of California, except as provided in the Commissioner's rules.
Additionally, all the statements or certificates representing Shares will bear
the following legend:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE
OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
Any sale or transfer of the Shares outside California and not involving a
California resident does not require the prior written consent of the
Commissioner of Corporations of the State of California.
(2) If the Investor is neither a United States citizen nor a resident of the
United States, then the Investor agrees (i) to supply the Trust with any and all
information necessary so that the Trust may satisfy any and all United States
legal reporting requirements and (ii) to indemnify the Trust, the Trust Advisor,
the Independent Trustees and the Corporate Trustee against any liability
incurred by the Trust as a result of the Trust's failure to withhold any taxes
or comply with any reporting requirements because the foreign investor did not
provide the necessary information to the Trust to enable it to withhold the
necessary taxes or fully to comply with such requirements. Furthermore, if the
Investor is a foreign Investor who fails to file timely Internal Revenue Service
Form 4224 with the Trust (the first such form must be filed in a duplicate with
the Trust prior to the acceptance of such Investor's subscription), such
Investor agrees, pursuant to the power of attorney to be granted by such foreign
Investor to the Trust Advisor to sell such Investor's Shares in the event such
foreign investor fails to file timely Form 4224 with the Trust, to surrender to
the Trust, at the request of the Trust Advisor, such Investor's certificates, if
any, representing the Shares and to execute any and all documents and
instruments requested by the Trust Advisor in order to consummate such sale or
disposition.
(3) The Investor is advised that the Investor is not entitled to cancel,
terminate or revoke this subscription or any agreements of the Investor
hereunder, except as otherwise required under applicable law, and that such
subscription and agreements shall survive the death or disability of the
Investor.
(4) This Subscription Agreement and all rights hereunder shall be
governed by, and interpreted in accordance with, the laws of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned agrees to be bound by this Subscription
Agreement by executing the reverse side hereof on the date therein indicated.
- --------------------------------------------------------------------------------
WHITE - TRUST COMPANY - CANARY - BROKER COPY - PINK - CUSTOMER COPY
<PAGE>
BERTHEL GROWTH & INCOME TRUST I SUBSCRIPTION QUALIFICATION AND SIGNATURE PAGE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NUMBER OF SHARES ($1,000 PER SHARE) (MINIMUM PURCHASE -- 2 SHARES FOR AN IRA;
SHARES FOR ALL OTHER INVESTORS)................................................................................
TOTAL PRICE ($1,000 TIMES THE NUMBER OF SHARES). (BEFORE INITIAL CLOSING, MAKE CHECKS PAYABLE TO FIRSTAR BANK
CEDAR RAPIDS, N.A. -- ESCROW AGENT;
AFTER INITIAL CLOSING, MAKE CHECKS PAYABLE TO BERTHEL GROWTH & INCOME TRUST I)................................. $
</TABLE>
The investor or investors named below (the "Investor"), by payment of the
purchase price of the number of Shares ("Shares") of beneficial interests
indicated above subscribes for the purchase of the number of Shares indicated
above of Berthel Growth & Income Trust I (the "Trust") at a purchase price of
$1,000 per Share.
By such payment, the Investor further acknowledges receipt of the Prospectus
of the Trust including the Declaration of Trust set forth as Exhibit A thereto
(the "Declaration of Trust"), and the Subscription Agreement set forth as
Exhibit B thereto (the "Subscription Agreement"), the terms of which govern the
investment in the Shares being subscribed for hereby. 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.
MANNER IN WHICH TITLE IS TO BE HELD (PLEASE CHECK ONE)
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 _________________________________________________________________
*Arizona minors must meet Arizona investor suitability standards.
**Custodial firm or institution must be specified for Trusts, IRAs, Keoghs and
SEPs.
<TABLE>
<S> <C>
MAILING NAME ______________________________________________________________________________
(CUSTODIAN, IF APPLICABLE) ACCOUNT NUMBER
______________________________________________________________________________
INVESTOR FIRST NAME INITIAL LAST NAME
______________________________________________________________________________
ACCT. NO/PAYEE NAME
MAILING ADDRESS FOR CHECKS
(Acct. No./Payee Name,
if Applicable)
(Custodial Address, if Applicable) ______________________________________________________________________________
STREET ADDRESS
______________________________________________________________________________
CITY STATE ZIP CODE
INVESTORRESIDENCE 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>
ACCOUNT EXECUTIVE ACKNOWLEDGMENT
I am familiar with the standards of suitability set forth in Section 34 of
the NASD Rules of Fair Practice 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
Berthel Fisher & Company Planning, Inc. ACCEPTED BY THE TRUST ADVISOR ON:____________
100 Second Street S.E. (DATE)
Cedar Rapids, Iowa 52403 ACCEPTED BY: ________________________________
(NAME)
</TABLE>
<PAGE>
EXHIBIT C
NOTICE TO CALIFORNIA INVESTORS
<PAGE>
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 260.102.6, 260.141.10 or 260.534
shall cause a copy of this section to be delivered to each issuee or
transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the
transferor's ancestors, descendants, or spouse; or to a transferee by a
trustee or custodian for the account of the transferee or the transferee's
ancestors, descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign
state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting
syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given
by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113, or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or 25113
of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or by
the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement
by subdivision (1) of Section 25102; provided that any such transfer is on
the condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently stamped
or printed thereon in capital letters of not less than 10-point size,
reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
C-1
<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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fee Table and Expenses Summary................. 4
Prospectus Summary............................. 5
Plan of Distribution........................... 11
The Trust...................................... 12
Risk Factors................................... 12
Use of Proceeds................................ 20
Terms of the Offering.......................... 21
Compensation and Fees.......................... 26
Investment Objective and Policies.............. 29
Management Arrangements........................ 43
Conflicts of Interest.......................... 49
Distribution and Allocations................... 51
Transferability of Shares...................... 55
Summary of the Declaration of Trust............ 57
Tax Matters.................................... 62
Regulation..................................... 82
Legal Matters.................................. 85
Experts........................................ 85
Additional Information......................... 85
Glossary of Terms.............................. 85
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>
------------------------------
UNTIL SEPTEMBER 19, 1995 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, 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
&
INCOME
TRUST I
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
TRUST OBJECTIVES
The investment objectives of the Trust are to achieve long term capital
appreciation and current income for its shareholders. The Trust will primarily
invest its assets in private placements of subordinated debt, preferred stock
and related equity securities in small to medium sized private and publicly
owned companies that will be diversified qeographically and across industries.
The Trust's strategy is focused on two "Enhanced Yield" investment categories:
- - MEZZANINE INVESTMENTS. Mezzanine Investments are designed to yield a
projected return over the life of the investment that is higher than
secured debt financing, but lower than equity financing. Common types of
transactions that may result in some type of Mezzanine Investment being
made include:
-- Expansion and growth financing for established companies
-- Leverage buy-out transactions
-- Asset or company acquisitions
-- Recapitalization and capital restructuring
-- Turnaround financing
- - OTHER INVESTMENTS. Other Investments is the second category upon which
the Trust will focus. This category includes four subcategories of
investment types that the Trust may consider:
-- Venture and equity financing
-- Bridge financing
-- High yield debt financing
-- Publicly traded stock
SEE PAGE 29 OF THIS PROSPECTUS FOR A DETAILED DESCRIPTION OF THE TRUST'S
INVESTMENT OBJECTIVES AND POLICIES.
RISK FACTORS
These securities are speculative and involve a high degree of risk, including
the following (see "Risk Factors"):
- - The Trust is newly organized and has no operating history.
- - The Trust's investments will often include a debt feature. Debt
securities acquired by the Trust will be unrated, and may be classified
as junk bonds. Investing in junk bonds involves certain risks. See
"Risk Factors."
- - The Trust's investments in Portfolio Companies will be speculative and
illiquid and will involve a high degree of business and financial risk.
No specific investments have currently been identified.
<PAGE>
- - Investors must rely on the ability of the Trust Advisor to invest in
Portfolio Companies. Investors will not have the opportunity to
personally evaluate the relevant factors that pertain to an investment in
a Portfolio Company.
- - The offering involves significant conflicts of interest for the Trust
Advisor.
- - The Trust Advisor will receive significant fees and other payments in
connection with the operation of the Trust. See "Fee Table and Expenses
Summary."
- - The Trust is authorized to leverage no more than fifty percent of its
total assets; to invest more than fifteen percent of its assets in
restricted securities exclusive of debt securities; in relation to 75
percent of its total assets, to invest more than five percent of such
assets in any one issuer; and to invest more than fifteen percent of its
assets in the securities of issuers that have less than three years
continuous operation.
TRUST INVESTMENT STRATEGY
[Trust Investment Strategy graphic with following text]
CAPITAL CATEGORIES
Typical capitalization of small to medium sized private and public companies
UNSECURED DEBT
- - Trade credit and payables
- - Accrued expenses
- - Deferred taxes
SECURED DEBT
- - Revolving credit lines
- - Asset based credit lines
- - Term debt
- - Lease financing
MEZZANINE
- - Subordinated debt
- - Subordinated debt with equity rights
- - Preferred stock with equity rights
EQUITY
- - Preferred stock
- - Common stock
[Graphic demonstrates that Debt includes Unsecured Debt, Secured Debt,
Subordinated Debt and Subordinated Debt with Equity Rights.]
[Graphic demonstrates that Equity includes Subordinated Debt with Equity
Rights, Preferred stock with Equity Rights, and Equity.]
[Graphic demonstrates that the Trust Investment Focus will include Secured
Debt, Mezzanine financing, and Equity.]
[End of Trust Investment Strategy graphic]
MANAGEMENT STRUCTURE
[Management Structure graphic]
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
MANAGEMENT BOARD
Two Independent Trustees and Trust Advisor
MANAGEMENT SALES
Trust Advisor Dealer Manager
BERTHEL FISHER & BERTHEL FISHER &
COMPANY PLANNING, COMPANY FINANCIAL
INC. SERVICES, INC.
[End of Management Structure graphic]
TRUST INVESTMENT FOCUS
The businesses and industries shown in this column represent typical businesses
and industries which the Trust intends to target to realize its investment
objective.
THERE CAN BE NO ASSURANCE THAT THE TRUST WILL INVEST IN THESE SPECIFIC
BUSINESSES AND INDUSTRIES.
TELECOMMUNICATIONS INDUSTRY
[Photograph of woman on phone to illustrate Telecommunications Industry]
COMPUTER SYSTEMS COMPANIES
[Photograph of two men working at computer to demonstrate Computer
Systems Companies]
PRIVATE PAY PHONE INDUSTRY
[Photograph of man on pay phone to demonstrate Private Pay Phone Industry]
MEDICAL CARE INDUSTRY
[Photograph of woman in lab coat working at electronic billing equipment
to demonstrate Medical Care Industry]
MANUFACTURERS
[Photograph of person in welding mask at work to demonstrate
Manufacturers]
<PAGE>
MANAGEMENT PROFILES
INDEPENDENT TRUSTEES
Henry T. Madden
Independent Trustee
[Photograph of Henry T. Madden]
Mr. Madden, age 65, is an Independent Trustee of the Trust. In 1986 he organized
the Institute for Entrepreneurial Management at the University of Iowa College
of Business Administration advising potential and new entrepreneurs and teaching
courses on entrepreneurship in the MBA program. He also teaches courses in
Corporate Strategy in the Executive MBA and MBA Programs. Mr. Madden has been
consulting with developmental stage companies since 1981. Mr. Madden has been
employed in various management positions with 3M Company, Allis-Chalmers,
Harnischfeger Corporation, Oak Hill Engineering and Enertrac Inc. Mr. Madden
was awarded a B.S.M.E. from the University of Notre Dame in 1951 and M.B.A. from
the University of Pittsburgh in 1966.
Henry Royer
Independent Trustee
[Photograph of Henry Royer]
Mr. Royer, age 63, is an Independent Trustee of the Trust. Since September,
1994, Mr. Royer has been the President and Chief Executive Officer of River City
Bank, Sacramento, California. Mr. Royer was employed by Merchants National Bank
of Cedar Rapids (currently Firstar Bank Cedar Rapids, N.A.) from 1983 to 1994,
where he served as Chairman and President. Prior to 1983, Mr. Royer served in
various capacities with First National Bank of Duluth, Lehigh Sewer and Tile,
Peavey Company and Pillsbury Mills. Mr. Royer graduated in 1953 from Colorado
College with a B.A. in Money and Banking.
TRUST ADVISOR
Thomas J. Berthel
Chairman of the Board and CEO
[Photograph of Thomas J. Berthel]
Mr. Berthel, age 43, serves as Chief Executive Officer and Chairman of the Board
of the Trust Advisor and as the Chief Executive Officer of Berthel Fisher &
Company, the parent company of the Trust Advisor, and the Chief Executive
Officer of the Dealer Manager. Mr. Berthel holds a Financial and Operations
Principal license issued by the National Association of Securities Dealers,
Inc., is a Certified Life Underwriter, and served as an individual general
partner of each of eight private leasing programs. He holds a Bachelor of Arts
Degree from St. Ambrose College and a Masters Degree in Business Administration
from the University of Iowa.
<PAGE>
James D. Thorp
President and Managing Director
[Photograph of James D. Thorp]
Mr. Thorp, age 36, is responsible for the day-to-day management of the Trust
Advisor. He oversees all Berthel Fisher & Company Financial Services, Inc.
investment banking operations. Prior to joining Berthel Fisher & Company, Mr.
Thorp was a principal at Allsop Venture Partners, a $105,000,000 private
equities investment firm. Mr. Thorp was with Allsop Venture Partners from 1983
through 1992. He holds a Bachelor of Science Degree in Business Administration
from Oklahoma State University and a Master of Business Administration-Finance,
from the Wharton School, University of Pennsylvania.
Von Elbert
Director
[Photograph of Von Elbert]
Mr. Elbert, age 55, is a Director of the Trust Advisor and has served as a
Director of Berthel Fisher & Company since 1991. Prior to becoming Vice
President of Galt Sand, Mr. Elbert was President of TLS, Co., a data processing
company specializing in accounting and tax processing services. He also serves
as a Director of Hawkeye Bank, Cedar Rapids, Iowa. He holds a Bachelor Degree
in Business Administration from the University of Iowa.
Ronald O. Brendengen
Treasurer, CFO and Director
[Photograph of Ronald O. Brendengen]
Mr. Brendengen, age 40, is Treasurer, CFO and a Director of the Trust Advisor
and has served as Controller, Treasurer and Director of Berthel Fisher & Company
since 1985. He was elected Chief Financial Officer of Berthel Fisher & Company
in 1994. Mr. Brendengen holds a CPA certificate and Bachelor Degree in
Accounting and Business Administration with a minor in Economics from Mt. Mercy
College.
Leslie D. Smith
Secretary and Director
[Photograph of Leslie D. Smith]
Mr. Smith, age 47, is Secretary and a Director of the Trust Advisor and was
named General Counsel for Berthel Fisher & Company in 1994. He has served as
Senior Attorney for Life Investors, Inc., General Counsel for LeaseAmerica
Corp., Operations Counsel for General Electric Capital Corp., and Associate
General Counsel for Gateway 2000. Mr. Smith received his Bachelor of Arts
Degree from Iowa Wesleyan College and his J.D. from the University of Dayton
School of Law.
<PAGE>
TRUST ADVISOR
Berthel Fisher & Company Planning Inc., the Trust Advisor, is a corporation
organized under the laws of the State of Iowa in 1989. The principal office of
the Trust Advisor is located at 100 Second Street S.E., Cedar Rapids, Iowa
52401. The Trust Advisor was organized as a subsidiary of Berthel Fisher &
Company to serve as a registered investment advisor. Berthel Fisher & Company,
a diversified financial services holding company, was formed in 1985 by Thomas
J. Berthel, as an Iowa corporation to hold the stock of Berthel Fisher & Company
Financial Services, Inc., broker-dealer registered with the NASD. Berthel
Fisher & Company Financial Services, Inc. is the Dealer Manager for Berthel
Growth & Income Trust I.
[Photograph of two women working at computers.]
[Photograph of man and woman standing in office.]
[Photograph of Berthel Fisher & Company Financial Services, Inc. building]
<PAGE>
[BERTHEL FISHER & COMPANY LETTERHEAD]
HOW TO INVEST IN BERTHEL GROWTH & INCOME TRUST I
1. Complete the Subscription Agreement
2. Mail check and Subscription Agreement to Berthel Fisher &
Company Financial Services Inc.
100 Second Street SE
Cedar Rapids, Iowa 52401
For additional information
Phone (319) 365-2506
(800) 356-356-5234
Fax (319) 365-4538
<PAGE>
SUBJECT TO COMPLETION DATED MAY 16, 1996
BERTHEL GROWTH & INCOME TRUST I
CUMULATIVE SUPPLEMENT NO. 3 TO PROSPECTUS
DATED JUNE 21, 1995
The date of this Supplement is
May 16, 1996
This Cumulative Supplement updates and revises the Prospectus dated June 21,
1995 (the "Prospectus"), of Berthel Growth & Income Trust I (the "Trust"), and
forms a part of, and must be accompanied or preceded by, the Prospectus. All the
cross-references used herein, except where otherwise indicated, are to the
Prospectus, and capitalized terms used herein have the same definitions as those
set forth in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY
AUTHORITY, NOR HAS THE COMMISSION OR ANY OTHER AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This page is not the cover page of the Prospectus. For complete information
concerning the Offering, including the risks of investing, all investors should
review the cover page and remainder of the Prospectus dated June 21, 1995.
<PAGE>
THIS SUPPLEMENT HAS THE FOLLOWING MAJOR COMPONENTS:
I.
INTRODUCTION. A BRIEF INTRODUCTION REGARDING THE OFFERING AND THE
DISTRIBUTION OF SHARES;
II.
INVESTMENTS. INFORMATION ON THE STATUS OF INVESTMENTS IN PORTFOLIO
COMPANIES THROUGH MAY 16, 1997
III.
FORMATION OF AN SBIC
IV.
ADDITIONAL INFORMATION. A DESCRIPTION OF ADDITIONAL INFORMATION
REGARDING THE TRUST AND THE OFFERING; AND
V.
FINANCIAL STATEMENTS.
I. INTRODUCTION
On August 30, 1995, the Trust achieved its minimum offering size. The
escrow account was closed and the funds therein were distributed to the
Trust. The Termination Date of the Offering was extended to June 21, 1997,
Through April 31, 1997, the Trust has raised an aggregate of approximately
$9,439,000 from 767 investors.
II. INVESTMENTS
The Trust Advisor has reviewed approximately 300 potential investment
opportunities to date.
A. VisionComm, Inc.
On March 8, 1996, the Trust Advisor entered into a binding letter of
intent to invest in VisionComm, Inc., a Delaware corporation having its
principal place of business at 124 Point West Boulevard, St. Charles,
Missouri 63301. The Trust's investment in VisionComm, Inc. was closed on
April 30, 1996. VisionComm, Inc. is primarily engaged in the
telecommunications and private cable television business. The Trust
invested $2,180,000 in VisionComm and received a Note in the principal
amount of $2,180,000 and various Warrants for the purchase of shares of common
stock of VisionComm, Inc. The Note provides for interest at the rate of 14%
per annum, and was payable on an interest-only basis for one year. The Trust
has received $1,050,304 of principal payments on the Note to date. The Note
will begin to draw equal monthly payments of principal and interest on the
basis of a five year amortization beginning May 31, 1997. The Note is due in
full on March 31, 2001. The Note is secured by all of the assets of
VisionComm, Inc. The Trust also received registration rights with respect to
shares of common stock issued upon exercise of the Warrants. Prior to the
Trust entering into the letter of intent with VisionComm, Inc., the Trust had
no relationship with VisionComm, Inc.
As of April 30, 1997, VisionComm was performing well. It has installed
approximately 408 pay phones, and has acquired or contracted for a greater
number of private cable operations than originally projected. Moreover,
VisionComm has expended less capital than originally projected.
B. Soil Recovery Services, Inc.
On May 31, 1996, the Trust completed an investment in Soil Recovery
Services, Inc., a Texas corporation having its principal place of business at
3740 Colony Drive, Suite LL100, San Antonio, Texas 78230. The Trust invested
$1,000,000 in Soil Recovery Services, Inc. and received a convertible,
subordinate, not-transferable Debenture in the principal amount of $1,000,000.
On September 26, 1996, the Trust served a Notice of Default and a Notice
of Rescission on SRS. The Notice of Default apprised SRS that it was in default
in its obligations pursuant to the Debenture, for failing to make a required
interest payment due August 31, 1996. The Notice of Rescission advised SRS that
the Trust was rescinding its purchase of the Debenture based on violations of
the Iowa Uniform Securities Act. The Trust presently believes that SRS will
be unable to repay the amount of the Trust's investment. SRS has sought
bankruptcy protection. The Trust has commenced litigation against SRS, the
President and CEO of SRS, and others associated with SRS, or involved in the
investment of the Trust in SRS, to attempt to recover the amount of the
Debenture, and other damages sustained by the Trust. Given the available
assets of SRS, there is a low likelihood of recovery from SRS. The available
assets of the other defendants are unknown. The Trust has written off its
investment in SRS.
1
<PAGE>
C. Kinseth Hospitality Company, Inc.
On April 16, 1997 the Trust -- together with its subsidiary, Berthel SBIC,
LLC (the "SBIC") -- invested $2,000,000 in Kinseth Hospitality Company, Inc.
("Kinseth"), 1895 27th Avenue, Coralville, Iowa 52241. (The formation of the
SBIC is discussed in greater detail below). Kinseth is an owner and operator
of hotels and restaurants. In exchange for this investment, Kinseth has
issued to each of the Trust and the SBIC a Promissory Note in the amount of
$1,000,000, bearing interest at a rate of 14% per annum, paying current
interest and no principal during the term, and to be repaid in full in six
years; and a Warrant to purchase, for nominal consideration, approximately
12.5% of the outstanding common stock of Kinseth. Repayment of each
Promissory Note is guaranteed by Kinseth Hotel Corporation, an affiliate of
Kinseth. The Trust has also obtained from Kinseth the right to "put" the
shares obtained by exercise of the Warrant to Kinseth after 6 years, and
certain registration rights.
D. HLM Design Group, Inc.
The Trust believes that it is reasonably likely that the SBIC will
complete an investment in HLM Design Group, Inc. ("HLM") within the next
thirty days. HLM is an architectural firm. The SBIC will invest as a
participant in a group of several investors. If the investment is completed
as contemplated, the SBIC anticipates that it will acquire a debt instrument
in the face amount of $1,000,000 and equity securities, or the right to
acquire equity securities of HLM.
In addition to the investments in VisionComm, Inc., Soil Recovery
Services, Inc., Kinseth Hospitality Company, Inc. and potential investment in
HLM Design Group, Inc. the Trust Advisor is pursuing several other investment
opportunities. The Trust Advisor's present intent is to locate up to four
more potential investments for the Trust and/or the SBIC during the remainder
of 1997. There is no assurance that the Trust Advisor will be successful in
finding suitable investment candidates.
III. FORMATION OF AN SBIC
The SBIC, a newly formed entity wholly-owned by the Trust within the meaning
of Section 2(a)(43) of the Investment Company Act of 1940, has applied to the
Small Business Administration (the "SBA") for a license to operate as a Small
Business Investment Company. The Trust has funded the SBIC with a capital
contribution of $5,000,000, the minimum amount eligible to be contributed
in order to receive leverage under the SBA Small Business Investment Company
program. The Trust Advisor and Independent Trustees will have the same
responsibilities in the management of the SBIC as they currently do for the
Trust. While the application is pending, the Kinseth investment has been
completed. Other investments by the SBIC may be completed while the
application is pending. The SBIC will attempt to obtain SBA pre-approval for
all future investments. However, the Kinseth investment has not been
pre-approved and there is a likelihood that additional investments may not be
pre-approved by the SBA. There is no guarantee that Kinseth or other
investments will be approved by the SBA. If an investment has been completed
prior to SBIC approval and is subsequently not approved by the SBIC, the
Trust will be required to provide additional funds to the SBIC to maintain
$5,000,000 of "contributed capital" in order to remain eligible to receive
SBA leverage. There is no assurance that the Trust will have the additional
funds needed if the SBA does not approve the Kinseth investment or other
investments.
IV. ADDITIONAL INFORMATION
A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
February 10, 1995
Year Ended (date of inception) to
Description: December 31, 1996 December 31, 1995
------------ ----------------- -----------------------
Interest Income $ 411,551 $ 54,566
Management Fees 155,847 30,435
Administrative Services 39,648 24,720
Trustee Fees 44,000 8,000
Audit and Accounting Fees 33,150 -0-
Legal Expense 65,292 -0-
Unrealized Loss on Investments 1,000,000 -0-
INTEREST INCOME: The Trust has earned $185,108 of interest income from short
term temporary investments in 1996. Interest from these short term
investments increased $130,542 from 1995. On April 30, 1996, $2,180,000 of
short term money market investments were liquidated to acquire a 14% senior
secured note with VisionComm. The VisionComm investment generated $201,443
of interest income in 1996. On May 31, 1996, $1,000,000 of money market
funds were liquidated to acquire a 15% convertible subordinated debenture
issued by SRS. The Trust received $25,000 of interest payments on this
investment in 1996. No further interest income was recorded for SRS in
1996. See portfolio income investments for a further discussion of these
investments.
MANAGEMENT FEES: The Trust pays the Trust Advisor an annual management fee
equal to 2.5% of the total assets of the Trust. The increase of $125,412
from 1995 is attributed to the increase in the assets of the Trust.
ADMINISTRATIVE SERVICES: Administrative services of $3,304 per month is paid
to the Dealer Manager for administration of shareholder accounts and other
administrative services. The increase of $14,928 from 1995 is due to the
shorter operating period on which this fee was assessed in 1995.
TRUSTEE FEES: As compensation for services rendered to the Trust, each
Independent Trustee is paid $12,000 annually plus $1,000 per Board meeting
attended up to a maximum of $24,000 in meeting fees per year.
AUDIT AND ACCOUNTING FEES: The Trust incurred $13,500 for audit and tax
preparation fees relating to the 1995 financials and $13,500 has been accrued
for the audit and tax preparation fees relating to the 1996 financials. The
Trust also incurred charges related to the auditors review of the Trust's
Securities and Exchange filings in 1996.
<PAGE>
LEGAL EXPENSE: The legal expenses incurred are associated with the
structuring and monitoring of Trust activities and Trust investments.
Additional legal charges were incurred in connection with the Soil Recovery
Services, Inc. bankruptcy.
UNREALIZED LOSS ON INVESTMENTS: As reported in the 3rd Quarter, 1996 10-Q,
SRS experienced and continues to experience severe cash flow problems and the
Trust served a Notice of Default and a Notice of Rescission on SRS and
commenced litigation against key parties. The last interest payment received
by the Trust was in July 1996. SRS filed for Chapter 11 bankruptcy
protection on December 12, 1996. The Trust is continuing its avenues of
recovery through the bankruptcy court and litigation. The Trust believes it
has a strong case, however, at this time it is unable to determine the
available assets of the defendants. Accordingly, at this time, the Trust has
decided to recognize an unrealized loss of $1,000,000, the cost of the
investment.
SECURITIES AND EXCHANGE COMMISSION FILINGS: On June 14, 1996, the Trust
filed, with the Securities and Exchange Commission, a Cumulative Supplement
No. 2 to the prospectus dated June 21, 1995. Cumulative Supplement No. 2
provided for the renewal of registration and extension of the offering period
to June 20, 1997.
In addition to the extension of the offering period, the purpose of
Cumulative Supplement No. 2 was to: a) report the status of the offering;
b) provide information on the status of investments in portfolio companies
through May 31, 1996; c) provide a description of additional information
regarding the Trust and the Offering; and d) report the financial statements
of the Trust and Berthel Fisher & Company Planning, Inc.
INVESTMENTS:
VISIONCOMM, INC.: Cost Valuation
14% five year secured note receivable $1,405,000 $1,405,000
Warrants for 125,000 shares at $5 per share -0- -0-
---------- ----------
Total $1,405,000 $1,405,000
VisionComm continues to install payphones and has acquired or contracted for
a greater number of private cable operations than originally projected to
date.
Since (1.) the age of the Trust's investment is less than one year,
(2.) VisionComm, Inc. is performing satisfactorily, (3.) the Trust is adequately
collateralized, and (4.) the absence of any transaction that would imply a
different value, the Trustees have recommended that the Trust's investment in
VisionComm be valued at its original cost less principal repayments.
The original investment was $2,180,000 at 14%. VisionComm had principal
repayment of $775,000 in December 1996 and $275,000 in January 1997. The
remaining $1,130,000 continues to perform at 14%. The Trust continues to
hold warrants to purchase 21.5% of the company. The principals of VisionComm
invested an additional $800,000 in the company prior to December 31, 1996.
<PAGE>
SOIL RECOVERY SERVICES, INC.: Cost Valuation
Convertible subordinated debenture $1,000,000 -0-
As reported in the 3rd Quarter, 1996 10-Q, SRS experienced and continues to
experience severe cash flow problems and the Trust served a Notice of Default
and a Notice of Rescission on SRS and commenced litigation against key
parties. The last interest payment received by the Trust was in July 1996.
SRS filed for Chapter 11 bankruptcy protection on December 12, 1996. The
Trust is continuing its avenues of recovery through the bankruptcy court and
litigation. The Trust believes it has a strong case, however, at this time
it is unable to determine the available assets of the defendants.
Accordingly, at this time, the Trust has decided to recognize an unrealized
loss of $1,000,000, the cost of the investment.
OTHER POTENTIAL PORTFOLIO COMPANIES AND TRUST ACTIVITIES: The Trust continues
to receive and review inquiries for financing. The Trust has also completed
and filed an application for the establishment of a small business investment
company ("SBIC").
LIQUIDITY AND CAPITAL RESOURCES:
February 10, 1995
Year Ended (date of inception) to
December 31, 1996 December 31, 1995
-----------------------------------------
Major Cash Source:
Proceeds from issuance of $3,763,000 $5,128,000
beneficial shares
Major Cash Use:
Payments for syndication costs 530,488 743,716
Distributions 250,000 -0-
Net cash from investing activities 2,405,000 5,000
- ----------------------------------------------------------------------------
Pending investment in enhanced yield investments, the Trust invested
$4,993,174 in a money market mutual fund at December 31, 1996.
Distributions of $584,480 have been accrued as of December 31, 1996. The
Trust will continue to accrue distributions based on 10% simple annual
interest computed on a daily basis from the initial closing (August 30, 1995)
until the Final Closing.
The Trust Advisor is not aware of any regulatory issues that may have a
substantial negative impact on the portfolio companies it is currently
researching for possible investment of Trust funds.
The effect of interest rate fluctuations and inflation on the current Trust
investments is negligible.
<PAGE>
B. FEE TABLE AND EXPENSES SUMMARY - PAGE 4 OF THE PROSPECTUS
The following material is added to the Fee Table and Expenses Summary on
Page 4 of the Prospectus:
"TRUST ADVISOR INCENTIVE DISTRIBUTION (as a percentage of
distributions from the Trust after payment to Investors of (i) the capital
amount of their investments; (ii) the Underwriting Return of 10%; and
(iii) the Preferred Return to Investors of 8% ............20%"
C. RISK FACTORS - PAGE 17 OF THE PROSPECTUS
The following material is added to the General Risks of Investments in
the Trust
12a. Dilution from Operation Losses
To date, largely because the Trust has written off its investment in SRS,
the Trust has incurred a net loss per beneficial share of $(122.07). As a
result, investors in the Trust will incur immediate dilution in the value of
their investment upon payment for Trust shares.
D. SUPPLEMENTAL SUITABILITY INFORMATION - PAGE 23 OF THE PROSPECTUS
The following supplemental suitability information is inserted on page 23
of the Prospectus:
"SUPPLEMENTAL SUITABILITY INFORMATION
The following suitability standards were adopted subsequent to the date
of filing of the Prospectus. In the event a suitability standard contrary to
the standard set forth below appears elsewhere in the Prospectus, the
standard set forth on this page supersedes the suitability standard set forth
elsewhere in the Prospectus, and investors in the states included herein must
meet these suitability standards.
Prospective Investors in the States of ARIZONA, MISSOURI and OKLAHOMA
will be required to represent that the Investor (i) has a net worth
(exclusive of homes, home furnishings and automobiles) of at least $75,000
and has had a minimum, gross annual income of $75,000 for each of the last two
tax years, and reasonably expects 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.
Prospective Investors in the State of MASSACHUSETTS will be required to
represent that the Investor (i) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $100,000 and has a minimum annual
gross income of $100,000 or (ii) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $500,000; and (iii) the investment
in the Trust represents not more than ten percent (10%) of the Investor's net
worth.
Prospective Investors in the State of NORTH CAROLINA will be required to
represent that the Investor (i) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $80,000 and an annual gross income
of at least $80,000; or (ii) has a net worth (exclusive of homes, home
furnishings, and automobiles) of at least $300,000; and represent (iii) that
the investment in the Trust represents not more than ten percent (10%) of the
Investor's net worth.
Prospective Investors in the State of SOUTH DAKOTA will be required to
represent that the Investor (i) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $70,000 and has a minimum annual
gross income of at least $70,000 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.
Prospective Investors in the State of TEXAS will be required to represent
<PAGE>
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; and (iii) the
investment in the Trust represents not more than ten percent (10%) of the
Investor's net worth (exclusive of homes, home furnishings and automobiles)."
E. APPROVAL OF INVESTMENTS - PAGE 36 OF THE PROSPECTUS
The following is substituted in lieu of the first two paragraphs found on
page 36 of the Prospectus:
"The Trust and the SBIC will invest only in transactions recommended
by the Trust Advisor and approved by the Independent Trustees. See
"Conflicts of Interest." The Trust Advisor shall be responsible for
determining that a proposed Enhanced Yield Investment meets the
Guidelines. The Independent Trustees shall be responsible for
determining that the Trust Advisor has conducted reasonable
investigation to find that an Enhanced Yield Investment meets the
Qualitative Factors of the Guidelines, and for the ultimate decision
to invest the assets of the Trust in an Enhanced Yield Investment.
The Independent Trustees shall not be obligated to determine
independently that a proposed Enhanced Yield Investment meets the
Guidelines, but may rely on the findings of the Trust Advisor, provided
the Independent Trustees conclude that the Trust Advisor has conducted
reasonable investigation.
Upon the approval of a majority of the Independent Trustees, the
Trust may invest in Enhanced Yield Investments that do not meet the
Guidelines. There can be no assurance as to what proportion of the
Enhanced Yield Investments will meet the Guidelines."
F. MANAGEMENT ARRANGEMENTS - PAGE 47 OF THE PROSPECTUS
The following paragraph is added prior to the final paragraph on page 47
of the Prospectus:
Mr. Madden currently serves as an outside director of MACC Private
Equities, Inc. MACC Private Equities, Inc. is a business development
company registered with the Securities and Exchange Commission under the
Securities Act of 1933.
G. INDEPENDENT PUBLIC ACCOUNTANT - PAGE 49 OF THE PROSPECTUS
The following is inserted in lieu of the paragraph found under
"Independent Public Accountant" on page 49 of the Prospectus:
"The Trust has selected Deloitte & Touche LLP, 222 Third Avenue,
S.E., Cedar Rapids, Iowa 52401 to audit the annual financial statements
and to perform such other procedures as may be periodically requested.
See "Experts."
H. EXPERTS - PAGE 85 OF THE PROSPECTUS
The following language is added to the section entitled "Experts" found
on page 85 of the Prospectus:
"The financial statements included in this Prospectus and the related
registration statement schedules included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, 222 Third Avenue,
S.E., Cedar Rapids, Iowa 52401, independent auditors, as stated in their
reports dated February 28, 1997 and February 28, 1997 appearing herein and
elsewhere in the registration statement, which reports express unqualified
opinions and include, for the Trust, an explanatory paragraph referring to
the valuation of not readily marketable securities, and have been so
included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
On October 9, 1995, the Trust appointed the accounting firm of
Deloitte & Touche LLP as its principal independent accountant, replacing
Ernst & Young LLP. This appointment was necessitated by Ernst & Young
LLP's decision to discontinue its office location in Cedar Rapids, Iowa.
The engagement of Deloitte & Touche LLP was recommended by management
and approved by the Trustees of the Trust.
Ernst & Young LLP's reports on the financial statements of the Trust
did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles. Prior to the resignation of Ernst & Young LLP, there were
4
<PAGE>
no disagreements between the accountant and the Trust regarding any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused it
to make a reference to the subject matter of the disagreements in
connection with its report."
I. DECLARATION OF TRUST - EXHIBIT A TO THE PROSPECTUS
1. The Trust has adopted the following new definitions, to be added to
Article II of the Declaration of Trust, which is found on page A-4 of the
Prospectus:
"ACCESS PERSON" -- any director, officer or Advisory Person of the Trust
Advisor, the Dealer Manager or the Trust.
"ADVISORY PERSON" -- (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.
"CONTROL" -- the same meaning given the term "control" in Section
2(a)(9) of the Investment Company Act of 1940.
"SUPERVISORY PERSON" -- a person designated or approved by the
Independent Trustees of the Trust, and having the responsibilities set
forth herein."
2. The Trust has adopted the following new language, to be added as Sections
12.15 and 12.16 of the Declaration of Trust, which is found on page A-32
of the Prospectus:
"12.15 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
5
<PAGE>
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.
12.16 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."
J. SUBSCRIPTION AGREEMENT - EXHIBIT B TO THE PROSPECTUS
The Trust has adopted the following language to be included in the
Subscription Agreement, which is found in Section 4 of Exhibit B to the
Prospectus:
"If the Investor is a resident of the States of ARIZONA, MISSOURI or
OKLAHOMA, the Investor (i) has a net worth (exclusive of homes, home
furnishings and automobiles) of at least $75,000 and has had a minimum,
gross annual income of $75,000 for each of the last two tax years, and
reasonably expects 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.
If the Investor is a resident of the State of MASSACHUSETTS, the
Investor (i) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $100,000 and has a minimum annual gross income of
$100,000 or (ii) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $500,000; and (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 the State of NORTH CAROLINA, the
Investor (i) has a net worth (exclusive of homes, home furnishings and
automobiles) of at least $80,000 and an annual gross income of at least
$80,000; or (ii) has a net worth (exclusive of homes, home furnishings, and
automobiles) of at least $300,000; and represent (iii) that 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 the State of SOUTH DAKOTA, the Investor
(i) has a net worth (exclusive of homes, home furnishings and automobiles)
of at least $70,000 and has a minimum annual gross income of at least
$70,000 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.
If the Investor is a resident of the State of TEXAS, the Investor (i)
has a net worth (exclusive of homes, home furnishings and automobiles) of at
least $150,000 and has a minimum 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; and (iii) the investment in the Trust represents not
more than ten percent (10%) of the Investor's net worth (exclusive of homes,
home furnishings and automobiles)."
6
<PAGE>
IV. FINANCIAL STATEMENTS
BERTHEL GROWTH & INCOME TRUST I
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1996
AND FOR THE PERIOD FEBRUARY 10, 1995
(DATE OF INCEPTION)
TO DECEMBER 31, 1995
AND
INDEPENDENT AUDITORS' REPORT
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND INDEPENDENT AUDITORS' REPORT
The following financial statements are inserted in lieu of and in
substitution of the financial statements found on pages F-1 through F-11 of the
Prospectus.
7
<PAGE>
---------------------------------------------
BERTHEL GROWTH & INCOME
TRUST I
FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1996 AND FOR THE
PERIOD FEBRUARY 10, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Berthel Growth & Income Trust I
We have audited the accompanying statements of assets and liabilities of Berthel
Growth & Income Trust I (the "Trust") as of December 31, 1996 and 1995, and the
related statements of operations, changes in net assets, and cash flows for the
year ended December 31, 1996 and for the period February 10, 1995 (date of
inception) to December 31, 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at December 31, 1996 and 1995 and
the results of its operations and its cash flows for the year ended December 31,
1996 and for the period February 10, 1995 (date of inception) to December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, investments in securities
not readily marketable amounting to $1,405,000 as of December 31, 1996 have been
valued at fair value, as determined by the Board of Trustees ("Trustees"). We
have reviewed the procedures applied by the Trustees in valuing such securities
and have inspected underlying documentation and, in the circumstances, we
believe that the procedures are reasonable and the documentation appropriate.
However, because of the inherent uncertainty of valuation, the Trustees'
estimate of fair values may differ significantly from the values that would have
been used had a ready market existed for the securities, and the differences
could be material.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
February 28, 1997
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS:
Investments in securities (Note 2):
VisionComm, Inc. note receivable (cost $1,405,000) $ 1,405,000
Soil Recovery Services, Inc. convertible subordinated
debenture (cost $1,000,000)
Cash 97,025 $ 102,269
Temporary investment in money market securities 4,993,174 4,272,549
Interest receivable 40,186 17,830
Other assets 7,690 4,167
------------ ------------
Total assets 6,543,075 4,396,815
------------ ------------
LIABILITIES:
Accounts payable and other accrued expenses 23,594
Distributions payable to shareholders (Note 5) 584,480 126,787
Due to affiliate (Note 3) 47,022 27,214
------------ ------------
Total liabilities 655,096 154,001
------------ ------------
COMMITMENTS AND CONTINGENCIES
NET ASSETS (equivalent to $662.24 per share in 1996
and $827.38 per share in 1995) $ 5,887,979 $ 4,242,814
------------ ------------
------------ ------------
Net assets consist of:
Shares of beneficial interest, 25,000 shares authorized -
8,891 and 5,128 shares issued and outstanding in
1996 and 1995, respectively $ 6,782,316 $ 4,257,497
Undistributed net investment loss (894,337) (14,683)
------------ ------------
$ 5,887,979 $ 4,242,814
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
-2-
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FEBRUARY 10, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
REVENUES:
Interest income $ 411,551 $ 54,566
Commitment fees 63,600
------------ ------------
475,151 54,566
------------ ------------
EXPENSES:
Management fees (Note 3) 155,847 30,435
Administrative services 39,648 24,720
Trustee fees 44,000 8,000
Audit and accounting fees 33,150
Legal expense 65,292
Other general and administrative expenses 16,868 6,094
------------ ------------
Total expenses 354,805 69,249
------------ ------------
NET INVESTMENT INCOME (LOSS) 120,346 (14,683)
------------ ------------
UNREALIZED LOSS ON INVESTMENTS (1,000,000)
------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (879,654) $ (14,683)
------------ ------------
------------ ------------
INVESTMENT INCOME PER BENEFICIAL SHARE $ 65.94 $ 17.23
EXPENSES PER BENEFICIAL SHARE (49.24) (21.87)
------------ ------------
NET INVESTMENT INCOME (LOSS)
PER BENEFICIAL SHARE 16.70 (4.64)
UNREALIZED LOSS ON INVESTMENTS PER
BENEFICIAL SHARE (138.77)
------------ ------------
NET LOSS PER BENEFICIAL SHARE $ (122.07) $ (4.64)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES 7,206 3,167
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
-3-
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FEBRUARY 10, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SHARES OF
BENEFICIAL
INTEREST AMOUNT
<S> <C> <C>
NET ASSETS AT FEBRUARY 10, 1995
Proceeds from sales of shares of beneficial interest
(initial capitalization) 10 $ 10,000
Proceeds from sales of shares of beneficial interest 5,118 5,118,000
Net investment loss (14,683)
Syndication costs incurred (743,716)
Distributions payable to shareholders (126,787)
------------ ------------
NET ASSETS AT DECEMBER 31, 1995 5,128 4,242,814
Net investment income 120,346
Unrealized loss on investments (1,000,000)
------------ ------------
Net decrease in assets resulting from operations (879,654)
Proceeds from sales of shares of beneficial interest 3,763 3,763,000
Syndication costs incurred (530,488)
Distributions to shareholders (250,000)
Distributions payable to shareholders (457,693)
------------ ------------
NET ASSETS AT DECEMBER 31, 1996 8,891 $ 5,887,979
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
-4-
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FEBRUARY 10, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets $ (879,654) $ (14,683)
Adjustments to reconcile net decrease in net assets to net cash
flows from operating activities:
Amortization of organizational costs 1,000 833
Unrealized loss on investments 1,000,000
Changes in operating assets and liabilities:
Temporary investment in money market securities (720,625) (4,272,549)
Interest receivable (22,356) (17,830)
Other assets (4,523)
Accounts payable and accrued expenses 23,594
Due to affiliate 19,808 27,214
----------- -----------
Net cash flows from operating activities (582,756) (4,277,015)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of VisionComm, Inc. note receivable (2,180,000)
Repayment of note receivable 775,000
Investment in Soil Recovery Services, Inc. (1,000,000)
Payment of organizational costs (5,000)
----------- -----------
Net cash flows from investing activities (2,405,000) (5,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of shares of beneficial interest 3,763,000 5,128,000
Distribution payments to shareholders (250,000)
Syndication costs incurred (530,488) (743,716)
----------- -----------
Net cash flows from financing activities 2,982,512 4,384,284
----------- -----------
NET INCREASE (DECREASE) IN CASH (5,244) 102,269
CASH AT BEGINNING OF PERIOD 102,269
----------- -----------
CASH AT END OF PERIOD $ 97,025 $ 102,269
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash financing activities - Distributions payable to shareholders $ 584,480 $ 126,787
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
-5-
<PAGE>
BERTHEL GROWTH & INCOME TRUST I
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD
FEBRUARY 10, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS- Berthel Growth & Income Trust I (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a nondiversified,
closed-end management investment company electing status as a business
development company. The Trust was formed on February 10, 1995 under the
laws of the State of Delaware and received approval from the Securities and
Exchange Commission to begin offering shares of beneficial interest
("Shares") effective June 21, 1995. The Trust's investment objective is to
achieve capital appreciation in the value of its net assets and to achieve
current income principally by making investments through private placements
in securities of small and medium sized privately and publicly owned
companies. Securities to be purchased will consist primarily of
subordinated debt or preferred stock combined with equity participation in
common stock or rights to acquire common stock. The Trust is offering a
minimum of 1,500 Shares and a maximum of 50,000 Shares at an offering price
of $1,000 per Share. The minimum offering of 1,500 Shares sold was reached
on August 30, 1995. The offering period will expire June 20, 1997.
The Trust will terminate upon the liquidation of all of its investments,
but no later than December 31, 2005, or ten years from the final closing of
the sale of the Shares offered hereby, subject to possible extension for up
to two additional one-year periods.
Planning, Inc. (the "Trust Advisor") is the Trust's investment advisor and
manager. TJB Capital Management, Inc. (the "Corporate Trustee") provides
certain management services necessary for the conduct of the Trust's
business. Shares are being offered by Berthel Fisher & Company Financial
Services, Inc. (the "Dealer Manager"). Each of these three entities is a
wholly owned subsidiary of Berthel Fisher & Company.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to
the valuation of not readily marketable securities by the Trustees.
TEMPORARY INVESTMENT IN MONEY MARKET SECURITIES - Pending investment in
enhanced yield investments, the Trust has invested in money market
securities with National Financial Services Corporation which are reported
at market value, which approximates cost.
ORGANIZATIONAL COSTS - Organizational costs were capitalized and are being
amortized over five years using the straight-line method.
INVESTMENTS IN SECURITIES - In accordance with accounting practices,
investments that are not readily marketable are valued at fair value, as
determined by the Board of Trustees ("Trustees"). The resulting difference
between cost and market is included in the Statements of Operations.
-6-
<PAGE>
In determining fair value for securities not readily marketable,
investments are initially stated at cost until significant subsequent
events and operating trends require a change in valuation. Among the
factors considered by the Trustees in determining fair value of investments
are the cost of the investment, developments since the acquisition of the
investment, the sales price of recently issued securities, the financial
condition and operating results of the issuer, earnings trends and
consistency of operating cash flows, the long-term business potential of
the issuer, the quoted market price of securities with similar quality and
yield that are publicly traded and other factors generally pertinent to the
valuation of investments. The Trustees, in making their evaluation, have
relied on financial data of investees provided by the management of the
investee companies.
NET LOSS PER BENEFICIAL SHARE - Net loss per beneficial share is based on
the weighted average of shares outstanding.
RECLASSIFICATIONS - Certain amounts in the 1995 financial statements have
been reclassified to conform to the 1996 financial statement presentation.
2. INVESTMENTS
<TABLE>
<CAPTION>
Cost Valuation
<S> <C> <C>
VisionComm, Inc.:
Note receivable $ 1,405,000 $ 1,405,000
Warrants for 125,000 shares at $5 per share 0 0
Soil Recovery Services, Inc. - Convertible
subordinated debenture 1,000,000 0
------------ ------------
$ 2,405,000 $ 1,405,000
------------ ------------
------------ ------------
</TABLE>
The Trust has invested in a senior secured note issued by VisionComm, Inc.,
which is primarily engaged in the telecommunications and private cable
television business. The five year note carries a 14% interest rate with
interest only due the first year, due in equal monthly installments
thereafter.
The Trust has also invested $1,000,000 in a convertible subordinated
debenture issued by Soil Recovery Services, Inc. ("SRS"). The debenture is
for a seven year term with an annual interest rate of 15% with no
prepayment penalty. Interest only is due the first two years with equal
principal payments due at the end of years three through seven. The
debenture can be converted at any time at a conversion rate that will
provide the Trust with approximately 21.5% of common stock of SRS.
SRS experienced and continues to experience severe cash flow problems and
the Trust served a Notice of Default and a Notice of Recission on on SRS
and commenced litigation against key parties. The last interest payment
received by the Trust was in July 1996. SRS filed for Chapter 11
bankruptcy protection on December 12, 1996. The Trust is continuing its
avenues of recovery through the bankruptcy court and litigation.
The Trust has recognized an unrealized loss of $1,000,000 for SRS as
management believes that SRS is insolvent and will be unable to make
payments pursuant to the convertible subordinated debenture.
3. RELATED PARTY TRANSACTIONS
The Trust has entered into a management agreement with the Trust Advisor
that provides for incentive compensation to the Trust Advisor based on the
capital appreciation of the Trust's investments. The Trust pays the Trust
Advisor an annual management fee equal to 2.5% of the value of the assets
of the Trust. The management fee is paid quarterly, in arrears, and is
determined by reference to the value of the assets of the Trust as of the
first day of that quarter. Management fees incurred during the periods
ended December 31, 1996 and 1995 relating to this agreement aggregated
$155,847 and $30,435, respectively.
-7-
<PAGE>
In addition, the Trust paid the Dealer Manager $39,648 and $24,720 during
the periods ended December 31, 1996 and 1995, respectively, for
administration of shareholder accounts and other administrative services.
4. SYNDICATION COSTS
As part of the issuance of Shares, the Trust has paid certain fees
described below to the Dealer Manager, Trust Advisor and Corporate Trustee.
These syndication costs have been treated as a direct reduction of net
assets.
The Trust compensates the Dealer Manager through selling commissions and a
wholesale marketing fee in conjunction with the offering of Shares, and
reimbursement of due diligence expenses. Selling commissions vary between
7% and 2% of the aggregate purchase price of all Shares sold, depending on
the number of Shares purchased by the investor. Selling commissions paid
during the periods ended December 31, 1996 and 1995 aggregated $263,410 and
$321,300, respectively. The wholesale marketing fee of $94,075 and
$127,950 is equal to 2.5% of the public offering price of all Shares sold
during the periods ended December 31, 1996 and 1995, respectively. Due
diligence expenses totaled $3,668 and $27,196 during the periods ended
December 31, 1996 and 1995, respectively.
The Trust pays organizational and offering expenses paid or incurred by the
Trust Advisor in connection with organizing the Trust and offering the
Shares. The amount of reimbursement may not exceed 4% of the aggregate
purchase price of all Shares sold. During the periods ended December 31,
1996 and 1995, respectively, these reimbursement costs aggregated $150,520
and $204,720. Any organizational and offering expenses (excluding the
expenses mentioned above) of the Trust in excess of this amount will be
paid by the Trust Advisor.
The Trust paid the Corporate Trustee a fee equal to .5% of the aggregate
purchase price of all Shares sold aggregating $18,815 and $25,590 during
the periods ended December 31, 1996 and 1995, respectively.
5. DISTRIBUTIONS PAYABLE TO SHAREHOLDERS
Distributions payable is based on actual interest earned by the Trust on
the investors funds held in escrow through the initial closing, plus 10%
simple annual interest, computed on a daily basis from the initial closing
(August 31, 1995) through December 31, 1996, less distributions.
At the final closing, the Trust will distribute the lesser of all the cash
earnings of the Trust earned during the offering period or the underwriting
return. There is no guarantee that the full underwriting return will be
paid at the final closing.
6. FEDERAL 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.
* * * * *
-8-
<PAGE>
-------------------------------------------
BERTHEL FISHER & COMPANY
PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31,1996 AND 1995 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
PAGE
Independent Auditors' Report
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholder's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Berthel Fisher & Company Planning, Inc.
We have audited the accompanying balance sheets of Berthel Fisher & Company
Planning, Inc. (the "Company"), a wholly owned subsidiary of Berthel Fisher &
Company, Inc. as of December 31, 1996 and 1995, and the related statements of
operations, stockholder's equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 28, 1997
Cedar Rapids, Iowa
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
Cash $ 158 $ 21,159
Reimbursable organizational and offering expenses (Note 2) 120,000 360,710
Due from affiliates (Note 2) 264,047 113,980
Deferred offering expenses (Note 2) 373,404
Computer software, less allowance for depreciation
of $6,917 and $5,133 1,027 2,567
Other assets 2,000 3,777
---------- ----------
TOTAL $ 760,636 $ 502,193
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 3,361
Due to affiliates (Note 2) 58,720 $ 23,589
Note payable to Berthel Fisher & Company, Inc. (Note 2) 493,350 253,150
---------- ----------
Total liabilities 555,431 276,739
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDER'S EQUITY:
Common stock, no par value - authorized 10,000 shares,
issued and outstanding 1,000 shares (Note 2) 1,431,000 1,431,000
Note receivable issued for common stock (Note 2) (1,165,000) (1,165,000)
Accumulated deficit (60,795) (40,546)
---------- ----------
Total stockholder's equity 205,205 225,454
---------- ----------
TOTAL $ 760,636 $ 502,193
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements.
-2-
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
REVENUES:
Management fees (Note 2) $ 155,847 $ 30,435
Interest income (Note 2) 118,259 78,130
---------- ----------
274,106 108,565
---------- ----------
EXPENSES:
Management fee (Note 2) 72,000
Employee compensation and benefits 142,819 114,263
Interest expense 46,776 9,769
Other general and administrative expenses 44,760 15,712
---------- ----------
Total expenses 306,355 139,744
---------- ----------
LOSS BEFORE INCOME TAXES (32,249) (31,179)
---------- ----------
INCOME TAX BENEFIT (Note 3) (12,000)
---------- ----------
NET LOSS $ (20,249) $ (31,179)
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements.
-3-
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMANY, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON NOTE ACCUMULATED
STOCK RECEIVABLE DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 16,000 $ (9,367) $ 6,633
Cash contributed by Berthel
Fisher & Company, Inc. 250,000 250,000
Issuance of note receivable
by Berthel Fisher & Company, Inc.
for common stock 1,165,000 $(1,165,000)
Net loss (31,179) (31,179)
------------ ------------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 1,431,000 (1,165,000) (40,546) 225,454
Net loss (20,249) (20,249)
------------ ------------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 $1,431,000 $(1,165,000) $(60,795) $205,205
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
</TABLE>
See notes to financial statements.
-4-
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,249) $ (31,179)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation expense 1,784 1,540
Changes in operating assets and liabilities:
Due from affiliates (150,067) (100,777)
Other assets 1,777 (3,776)
Accounts payable and accrued expenses 3,361
Due to affiliates 35,131 12,773
---------- ----------
Net cash flows from operating activities (128,263) (121,419)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for offering expenses (283,214) (565,430)
Proceeds from reimbursement of expenses from
Berthel Growth and Income Trust I 150,520 204,720
Additions to computer software (244)
---------- ----------
Net cash flows from investing activities (132,938) (360,710)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions by Berthel Fisher & Company, Inc. 250,000
Payments on note payable to Berthel Fisher & Company, Inc. (26,700)
Proceeds from note payable to Berthel Fisher & Company, Inc. 266,900 253,150
---------- ----------
Net cash flows from financing activities 240,200 503,150
---------- ----------
NET INCREASE (DECREASE) IN CASH (21,001) 21,021
CASH AT BEGINNING OF YEAR 21,159 138
---------- ----------
CASH AT END OF YEAR $ 158 $ 21,159
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash financing activity - Note receivable from
Berthel Fisher & Company, Inc. for common stock $ 1,165,000
Noncash investing activity - Deferred offering expenses reclassified from
reimbursable organizational and offering expenses $ 373,404
</TABLE>
See notes to financial statements.
-5-
<PAGE>
BERTHEL FISHER & COMPANY PLANNING, INC.
(A WHOLLY OWNED SUBSIDIARY OF
BERTHEL FISHER & COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Berthel Fisher & Company Planning, Inc. (the "Company") is a
wholly-owned subsidiary of Berthel Fisher & Company, Inc. (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 financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimated.
COMPUTER SOFTWARE - 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.
RECLASSIFICATIONS - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 financial statement
presentation.
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 value of the
assets of the Trust. The management fee is paid quarterly, in arrears, and
is determined by reference to the net value of the assets of the Trust as
of the first day of that quarter. Management fees earned during the years
ended December 31,1996 and 1995 relating to this agreement aggregated
$155,847 and $30,435, respectively.
The Company has an unwritten, month-to-month agreement with its Parent in
which the Company's Parent provided management services at a monthly rate
of $6,000 in 1996.
The Company also entered into a financing arrangement with the Parent
primarily for purposes of short-term financing. The note payable to
Berthel Fisher & Company, Inc. is due on demand, uncollateralized and bears
interest at a rate of 12%.
-6-
<PAGE>
ORGANIZATIONAL AND OFFERING EXPENSES - The Trust reimburses the Company for
organizational and offering expenses paid or incurred by the Company in
connection with organizing the Trust and offering the shares for sale. The
amount of reimbursement may not exceed 4% of the aggregate sales price of
all shares sold. During the years ended December 31, 1996 and 1995, the
organizational and offering expenses incurred by the Company aggregated
$283,214 and $565,430, of which the Trust reimbursed the Company $150,520
and $204,720, respectively. Any organizational and offering expenses of
the Trust in excess of the 4% reimbursement will be the responsibility of
and will be paid by the Company. Management anticipates that the sales of
shares will not be sufficient to provide for reimbursement of all
organization and offering expenses, and therefore costs of $373,404 have
been reclassified as deferred offering expenses. These unreimbursed
amounts will be amortized over a period of not more than sixty months
commencing in 1997.
OTHER TRANSACTIONS - On April 19, 1995, Berthel Fisher & Company, Inc.
contributed cash of $250,000 and issued an unsecured 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%. Interest
income related to this note receivable approximated $118,000 and $74,000
for the years ended December 31, 1996 and 1995, respectively.
Due to affiliates consisted of the following at December 31, 1996 and 1995:
1996 1995
Intercompany interest payable to Berthel
Fisher & Company, Inc. $ 58,211 $ 11,435
Intercompany accounts payable 509 12,154
-------- --------
$ 58,720 $ 23,589
-------- --------
-------- --------
Due from affiliates consisted of the following at December 31, 1996 and
1995:
1996 1995
Intercompany interest receivable from Berthel
Fisher & Company, Inc. $193,025 $ 74,766
Management fee receivable from Berthel Growth
and Income Trust I 47,022 27,214
Receivable from Berthel Fisher & Company, Inc. 24,000 12,000
-------- --------
$264,047 $113,980
-------- --------
-------- --------
3. INCOME TAXES
The results of the Company's operations are included in the consolidated
federal and state tax returns of Berthel Fisher & Company, Inc. 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.
-7-
<PAGE>
Current and deferred components of the income tax benefit for the year
ended December 31, 1996 is summarized as follows:
Current $ 12,000
Deferred
---------
Income tax benefit $ 12,000
---------
---------
* * * * *
-8-
<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 Statements - Included in Prospectus
2. Exhibits
2.a Certificate of Trust*
2.b Not Applicable
2.c Not Applicable
2.d Amended and Restated Declaration of Trust*
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 Soliciting Dealer Agreement*
2.i Not Applicable
2.j Form of Safekeeping Agreement*
2.k Form of Escrow Agreement*
2.l Opinion and Consent of Bradley & Riley, P.C.*
2.m Not Applicable
2.n-2 Tax Opinion and Consent of
Bradley & Riley, P.C.*
2.o Not Applicable
2.p Not Applicable
2.q Not Applicable
2.s Powers of Attorney*
99.2n-1 Consent of Ernst & Young LLP
99.2n-3 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
_______________________
* Previously filed.
Item 25. Marketing Arrangements
There are no items to report.
-1-
<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 Cedar Rapids, and State of Iowa, on the 16th day
of May, 1997.
BERTHEL GROWTH & INCOME TRUST I
By: TJB Capital Management, Inc.
its Corporate Trustee
By /s/ Thomas J. Berthel
________________________________
THOMAS J. BERTHEL, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Thomas J. Berthel May 16
____________________________________ ________________________, 1997
THOMAS J. BERTHEL, Chief Executive
Officer, Executive Director and
Chairman of the Board of the
Corporate Trustee (principal
executive officer)
/s/ James D. Thorp May 16
____________________________________ ________________________, 1997
JAMES D. THORP, President and Managing
Director of the Corporate Trustee
/s/ Ronald O. Brendengen May 16
____________________________________ ________________________, 1997
RONALD O. BRENDENGEN, Director, Chief
Financial Officer and Treasurer of the
Corporate Trustee (principal financial
and accounting officer)
/s/ Leslie D. Smith May 16
____________________________________ ________________________, 1997
LESLIE D. SMITH, Secretary and Director
of the Corporate Trustee
/s/ Henry T. Madden May 16
____________________________________ ________________________, 1997
HENRY T. MADDEN, Independent Trustee of
Berthel Growth & Income Trust I
<PAGE>
/s/ Henry Royer May 16
____________________________________ ________________________, 1997
HENRY ROYER, Independent Trustee of
Berthel Growth & Income Trust I
/s/ Von Elbert May 16
____________________________________ ________________________, 1997
VON ELBERT, Director of the Corporate
Trustee
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
- ------- ----
<C> <S> <C>
99.2n-1 Consent of Ernst & Young LLP
99.2n-3 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 99.2n-1
CONSENT OF ERNST & YOUNG LLP
-44-
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 19, 1995 on the Statement of Assets of
Liabilities as of April 19, 1995 of Berthel Growth & Income Trust I and the
Balance Sheet as of April 19, 1995 of Berthel Fisher & Company Planning,
Inc. in the Prospectus dated June 21, 1995, and to the reference to our firm
under the caption "Experts - Page 85 of the Prospectus" in the Cumulative
Supplement No. 3 to Prospectus dated June 21, 1995, both included in this
Post-Effective Amendment No. 2 to the Berthel Growth & Income Trust I
Registration Statement (Form N-2 No. 33-89506).
Ernst & Young LLP
Des Moines, Iowa
May 15, 1997
45
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-89506 of our report dated February 28, 1997 relating to the
financial statements of Berthel Growth & Income Trust I and of our report
dated February 28, 1997 relating to the financial statements of Berthel
Fisher & Company Planning, Inc., both appearing in the Prospectus, which is a
part of such Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Cedar Rapids, Iowa
May 15, 1997
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF BERTHEL GROWTH & INCOME TRUST I, FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 97,025
<SECURITIES> 6,398,174
<RECEIVABLES> 40,186
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,535,385
<PP&E> 7,690<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,543,075
<CURRENT-LIABILITIES> 655,096
<BONDS> 0
0
0
<COMMON> 6,782,316
<OTHER-SE> (894,337)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 6,543,075
<SALES> 0
<TOTAL-REVENUES> 475,151
<CGS> 0
<TOTAL-COSTS> 354,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,000,000<F4>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 120,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 120,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,346<F1>
<EPS-PRIMARY> (122.07)
<EPS-DILUTED> (122.07)
<FN>
<F1>NET LOSS PER BENEFICIAL SHARE IS BASED ON THE WEIGHTED AVERAGE OF SHARES
OUTSTANDING (7,206 FOR THE PERIOD ENDED DECEMBER 31, 1996).
<F2>ORGANIZATIONAL COSTS, NET.
<F3>NEGATIVE RETAINED EARNINGS
<F4>WRITE OFF OF INVESTMENT IN SOIL RECOVERY SERVICES, INC.
</FN>
</TABLE>
