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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
Commission File Number 000-25593
TELECOMMUNICATIONS INCOME FUND XI, L.P.
---------------------------------------
(Exact name of Registrant as specified in its charter)
Iowa 39-1904041
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Tama Street, Marion, Iowa 52302
-----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 447-5700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interest (the "Units")
------------------------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
Yes X No
-- --
As of July 15, 2002, 12,390 units were issued and outstanding. Based on the book
value at June 30, 2002 of $304.68 per unit, the aggregate market value at July
15, 2002 was $3,774,985.
TELECOMMUNICATIONS INCOME FUND XI, L.P.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 2002 and December 30, 2001 3
Statements of Operations -
Three months ended June 30, 2002 and 2001 4
Statements of Operations -
Six months ended June 30, 2002 and 2001 5
Statement of Changes in Partners' Equity - six months ended June 30, 2002 6
Statements of Cash Flows - six months ended June 30, 2002 and 2001 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Signatures 12
Certification of Chief Executive Officer 13
Certification of Chief Financial Officer 14
2
TELECOMMUNICATIONS INCOME FUND XI, L.P.
BALANCE SHEETS (UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS
Cash and cash equivalents $ 336,224 $ 520
Net investment in direct financing leases
and notes receivable (Note B) 5,822,620 8,247,891
Allowance for possible loan and lease losses (2,114,731) (2,059,034)
-------------- -------------
Direct financing leases and notes receivable, net 3,707,889 6,188,857
Other receivables 168,827 185,796
Equipment under operating lease -0- 23,949
-------------- -------------
TOTAL ASSETS $ 4,212,940 $ 6,399,122
============== =============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Line of credit agreement (Note C) $ -0- $ 898,873
Outstanding checks in excess of bank balance -0- 12,586
Due to affiliates 1,769 2,981
Distributions payable to partners 99,120 99,296
Accounts payable and accrued expenses 134,065 63,880
Lease security deposits 202,941 226,211
-------------- -------------
TOTAL LIABILITIES 437,895 1,303,827
-------------- -------------
CONTINGENCY (Note E)
PARTNERS' EQUITY, 25,000 units authorized:
General partner, 10 units issued and outstanding 3,637 4,693
Limited partners, 12,380 and 12,402 units issued
and outstanding at June 30, 2002 and
December 31, 2001, respectively 3,771,408 5,090,602
-------------- -------------
TOTAL PARTNERS' EQUITY 3,775,045 5,095,295
-------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 4,212,940 $ 6,399,122
============== =============
See accompanying notes.
3
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------------------
JUNE 30, 2002 JUNE 30,2001
------------- --------------
REVENUES:
Income from direct financing leases and notes receivable $ 142,821 $ 263,972
Gain (loss) on lease terminations 24,806 (95,276)
Other 6,395 7,314
------------- --------------
Total revenues 174,022 176,010
------------- --------------
EXPENSES:
Management fees 30,599 17,900
Administrative services 47,250 39,000
Interest expense 12,093 32,597
Depreciation expense -0- 145,394
Provision for possible loan and lease losses 575,000 253,984
Impairment loss -0- 703,785
Other 83,541 39,417
------------- --------------
Total expenses 748,483 1,232,077
------------- --------------
Net loss $ (574,461) $ (1,056,067)
============= ==============
Net loss per partnership unit (Note D) $ (46.35) $ (83.90)
============= ==============
Weighted average partnership units outstanding 12,393 12,587
============= ==============
See accompanying notes.
4
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
--------------------------------------------
JUNE 30, 2002 JUNE 30,2001
------------- --------------
REVENUES:
Income from direct financing leases and notes receivable $ 322,651 $ 570,383
Gain (loss) on lease terminations 25,883 (210,967)
Other 13,576 33,623
------------- --------------
Total revenues 362,110 393,039
------------- --------------
EXPENSES:
Management fees 41,613 44,205
Administrative services 88,000 78,000
Interest expense 25,387 82,723
Depreciation expense -0- 327,281
Provision for possible loan and lease losses 745,300 257,656
Impairment loss -0- 703,785
Other 176,330 74,861
------------- --------------
Total expenses 1,076,630 1,568,511
------------- --------------
Net loss $ (714,520) $ (1,175,472)
============= ==============
Net loss per partnership unit (Note D) $ (57.61) $ (93.39)
============= ==============
Weighted average partnership units outstanding 12,402 12,587
============= ==============
See accompanying notes.
5
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
GENERAL LIMITED PARTNERS TOTAL
PARTNER ---------------- PARTNERS'
(10 UNITS) UNITS AMOUNTS EQUITY
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 4,693 12,402 $ 5,090,602 $ 5,095,295
Distributions to partners (240) 0 (297,608) (297,848)
Net loss (111) 0 (139,948) (140,059)
Withdrawals of limited partners 0 (5) (2,013) (2,013)
----------------------------------------------------------------------
Balance at March 31, 2002 4,342 12,397 4,651,033 4,655,375
Distributions to partners (240) 0 (297,120) (297,360)
Net loss (465) 0 (573,996) (574,461)
Withdrawals of limited partners 0 (17) (8,509) (8,509)
----------------------------------------------------------------------
Balance at June 30, 2002 $ 3,637 12,380 $ 3,771,408 $ 3,775,045
======================================================================
See accompanying notes.
6
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30,2001
------------- --------------
OPERATING ACTIVITIES
Net income (loss) $ (714,520) $ (1,175,472)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Loss (gain) on lease terminations (25,883) 210,967
Depreciation and amortization 5 327,281
Provision for possible loan and lease losses 745,300 257,656
Impairment loss -0- 703,785
Changes in operating assets and liabilities:
Other receivables 16,969 62,039
Outstanding checks in excess of bank balance (12,586) (36,073)
Due to affiliates (1,212) (257)
Accrued expenses and other liabilities 70,185 (31,643)
------------- --------------
Net cash from operating activities 78,258 318,283
------------- --------------
INVESTING ACTIVITIES
Acquisitions of, and purchases of equipment for, direct financing leases (7,123) (510,412)
Issuance of notes receivable (76,226) -0-
Repayments of direct financing leases 491,975 1,120,007
Repayments of notes receivable 313,860 141,295
Proceeds from sale or early termination of direct financing leases,
notes receivable, and equipment under operating lease 1,063,008 623,418
Net lease security deposits paid (23,270) (18,088)
------------- --------------
Net cash from investing activities 1,762,224 1,356,220
------------- --------------
FINANCING ACTIVITIES
Borrowings from line of credit 1,146,090 1,462,952
Repayments of line of credit (2,044,962) (2,522,685)
Withdrawals paid to partners (10,522) (10,615)
Distributions paid to partners (595,384) (604,144)
------------- --------------
Net cash from financing activities (1,504,778) (1,674,492)
------------- --------------
Net increase in cash and cash equivalents 335,704 11
Cash and cash equivalents at beginning of period 520 503
------------- --------------
Cash and cash equivalents at end of period $ 336,224 $ 514
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 30,066 $ 96,447
Reclassification of equipment from direct financing leases to notes receivable 428,749 -0-
See accompanying notes.
7
TELECOMMUNICATIONS INCOME FUND XI, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002. For further information, refer to the
financial statements and notes thereto included in the Partnership's annual
report on Form 10-K for the year ended December 31, 2001.
NOTE B - NET INVESTMENT IN DIRECT FINANCING LEASES AND NOTES RECEIVABLE
The Partnership's net investment in direct financing leases and notes receivable
consists of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Minimum lease payments receivable $ 3,997,856 $ 5,768,242
Estimated unguaranteed residual values 333,206 455,000
Unamortized initial direct costs 4 9
Unearned income (540,767) (940,067)
Notes receivable 2,032,321 2,964,707
-------------- --------------
Net investment in direct financing leases and notes receivable $ 5,822,620 $ 8,247,891
============== ==============
NOTE C - BORROWING AGREEMENTS
In January 1999, the Partnership obtained financing under a line of credit
agreement with a bank. The amount available to borrow under the line of credit
was limited to $2,000,000 or 32% of qualified accounts, primarily leases and
notes receivable. On October 26, 1999, the agreement was amended, increasing the
available amount to $4,400,000 (limited by 32% of qualified accounts) and
extending the maturity from June 30, 2000 to June 30, 2002. The interest rate
was 1% over the prime rate, with a $4,000 minimum monthly interest charge which
began in July, 1999, and the line of credit was collateralized by substantially
all assets of the Partnership. The line of credit was guaranteed by the General
Partner and certain affiliates of the General Partner. This agreement was not
renewed and was paid in full in June, 2002.
NOTE D - NET LOSS PER PARTNERSHIP UNIT
Net loss per partnership unit is based on the weighted average number of units
outstanding (including both general and limited partners) which were 12,393 and
12,402 for the three and six months ended June 30, 2002, respectively, compared
to 12,587 for the three and six months ended June 30, 2001.
NOTE E - CONTINGENCY
The General Partner's parent has approximately $2.2 million of unsecured
subordinated debt due on December 31, 2002 and may not have sufficient liquid
assets to repay such amounts. The General Partner's parent is pursuing
additional financing, refinancing, and asset sales to meet its obligations. No
assurance can be provided that the General Partner's parent will be successful
in its efforts. The inability of the General Partner to continue as a going
concern as a result of the parent's inability to restructure its debts would
require the Partnership to elect a successor general partner.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS RESULTS OF OPERATIONS
Income derived from direct financing leases and notes receivable was $322,651
for the six months ending June 30, 2002 compared to $570,383 for the same period
of 2001. The decrease is due to a smaller portfolio of direct financing leases
and notes receivable and a significant number of lease and note contracts that
are past due over 90 days, at which time the Partnership places these contracts
on a non-accrual basis, as discussed below. The Partnership's net investment in
direct financing leases and notes receivable was $5,822,620 at June 30, 2002 and
$9,024,127 at June 30, 2001. Other income of $13,576 for the first six months of
2002 is interest income on a money market account and other investments and late
charges on lease payments, and is down from $33,623 a year ago. The decrease is
due to a decrease in late charges received. The Partnership had a gain on lease
terminations for the first six months of 2002 of $25,883 versus a loss of
$210,967 a year ago. The loss in 2001 was primarily due to the sale of equipment
under operating lease resulting from the repossessed equipment originally leased
to Alpha Telecommunications, Inc. ("ATI").
Management fees are paid to the General Partner and represent 2% of the gross
rental payments, loan payments, and other financing payments received. These
rental payments were $2,080,650 the first six months of 2002 compared to
$2,210,250 for the first six months of 2001. The decreased management fees are
due to a decrease in the gross rental payments, loan payments, and other
financing payments received.
Administrative services of $88,000 for the first six months of 2002 represent
fees paid to the General Partner for the operation of the Partnership as defined
in the Partnership Agreement. The Partnership pays the General Partner monthly
for these services. These fees were $78,000 for the first six months of 2001.
The increase is due to increased costs incurred by the General Partner on behalf
of the Partnership.
Interest expense is incurred on the Partnership's line of credit agreement.
Interest expense for the first six months of 2002 was $25,387 compared to
$82,723 for the same period of 2001. The decrease is the result of a lower line
of credit balances and lower interest rates. The line of credit was paid in full
in June, 2002 and was not renewed.
Depreciation expense was $-0- for the first six months of 2002 compared to
$327,281 for the first six months of 2001. Depreciation was on the equipment
originally leased to ATI, which was sold in 2001. Other expenses include legal,
accounting, data processing, and other miscellaneous expenses. These costs
increased from $74,861 in 2001 to $176,330 in 2002, and is primarily the result
of legal and repossession expenses incurred as a result of past due customers.
The Partnership's delinquencies and other conditions are discussed in more
detail in the following paragraphs and in the Partnership's Form 10-K for the
year ended December 31, 2001.
The telecommunications industry has seen a significant downturn in the last year
that has adversely affected the Partnership. The value of payphones and payphone
routes has declined substantially in recent years and is due to various factors,
including but not limited to the following:
- - Lack of sufficient dial around revenues for payphone operators
- - Decrease in usage of payphones, due to the use of mobile phones, etc.
- - Lack of economies of scale being achieved with the cost of lines purchased
from local exchange carriers
- - Lack of available capital for payphone operators
- - Decrease in the number of payphone operators
9
Management believes that these conditions may be overcome if current lobbying
efforts are successful and economic conditions become more favorable for
payphone operators. However, no assurance can be given that any of these
conditions may improve or that current values in the telecommunications industry
will not continue to decline.
At June 30, 2002, nine customers were past due over 90 days. When a payment is
past due more than 90 days, the Partnership discontinues recognizing income on
the contract. The Partnership's net investment in the past due contracts was
$2,187,833, or 38% of the Partnership's portfolio of leases and notes. The
allowance for possible loan and lease losses is $2,114,731 at June 30, 2002. The
provision for possible loan and lease losses for the first six months of 2002
was $745,300 (compared to $257,656 a year ago), and is primarily the result of a
significantly deteriorated value of the phones and other equipment under certain
lease contracts. One lessee, Alpha Tel-Com, filed for bankruptcy during 2001,
had a net investment of $762,952 at March 31, 2002. The value of the phones
under the Alpha Tel-Com deteriorated significantly, with the Partnership
realizing approximately $232,000 from the sale of the equipment during the
second quarter of 2002. Approximately $210,000 of these proceeds was financed to
a new customer under a note agreement. Another lessee, Bax Group has filed for
bankruptcy and the Partnership estimates that proceeds will total approximately
$177,000 on this contract. The Partnership's net investment in the Bax Group
contract was $549,187 at June 30, 2002. These two lessees resulted in the
Partnership increasing the provision for possible loan and lease losses by
approximately $400,000 for the first six months of 2002. Management believes its
allowance for possible loan and lease losses is adequate for the past due
customers and the remainder of the portfolio at June 30, 2002, based on the
underlying collateral values of the lease and note contracts for past due
contracts and historical loss ratios. However, no assurance can be given that
future losses or increases in the allowance for possible loan and lease losses
will not be necessary. Management will continue to monitor the past due
contracts and take the necessary steps to protect the Partnership's investment.
The Partnership's portfolio of leases and notes receivable are concentrated in
pay telephones, and office and computer equipment, representing approximately
56%, and 32%, respectively, of the portfolio at June 30, 2002. One lessee
accounts for approximately 14% of the Partnership's portfolio at June 30, 2002,
and this lessee is past due over 90 days.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership is required to establish working capital reserves of no less
than 1% of the total capital raised to satisfy general liquidity requirements,
operating costs of equipment, and the maintenance and refurbishment of
equipment. At June 30, 2002, that working capital reserve, as defined, would be
$125,930, and the Partnership had this amount available from its cash and cash
equivalents.
In January 1999, the Partnership obtained financing under a line of credit
agreement with a bank. The amount available to borrow under the line of credit
was limited to $2,000,000 or 32% of qualified accounts, primarily leases and
notes receivable. On October 26, 1999, the agreement was amended, increasing the
available amount to $4,400,000 (limited by 32% of qualified accounts) and
extending the maturity from June 30, 2000 to June 30, 2002. The interest rate
was 1% over the prime rate, with a $4,000 minimum monthly interest charge which
began in July, 1999, and the line of credit was collateralized by substantially
all assets of the Partnership. The line of credit was guaranteed by the General
Partner and certain affiliates of the General Partner. This agreement was not
renewed and was paid in full in June, 2002.
10
Cash flow from operating activities was $78,258 for the first six months of
2002, compared to $318,283 for the same period a year ago, resulting from the
income from direct financing leases and notes received less operating expenses.
Cash flow from investing activities was $1,762,224 for 2002, compared to
$1,356,220 for 2001. This increase is primarily attributable to proceeds from
the sale or early termination of lease or note contracts. These proceeds were
used to pay off the line of credit in June, 2002. The Partnership used
$1,504,778 of cash for financing activities during the first six months of 2002,
compared to a use of cash of $1,674,492 a year ago. Management believes the
existing portfolio of direct financing leases and notes receivable will sustain
the current level of distributions and operating expenses for the next twelve
months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The table below presents the principal amounts due and related weighted average
interest rates by expected maturity dates about the Partnership's notes
receivable as of June 30, 2002.
Expected Fixed Rate Average
Maturity Date Notes Receivable Interest Rate
------------- ---------------- -------------
2002 $ 307,806 13.16%
2003 411,451 12.95%
2004 388,784 12.79%
2005 328,489 12.96%
2006 595,791 14.31%
-------------
Total $ 2,032,321
=============
Fair Value $ 1,655,000
=============
The Partnership manages interest rate risk, its primary market risk exposure, by
limiting the terms of notes receivable to no more than five years and generally
requiring full repayment ratably over the term of the note.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELECOMMUNICATIONS INCOME FUND XI, L.P.
(Registrant)
Date: August 9, 2002 /s/ Ronald O. Brendengen
-------------------- --------------------------------------------------------
Ronald O. Brendengen, Chief Financial Officer, Treasurer
Date: August 9, 2002 /s/ Daniel P. Wegmann
-------------------- --------------------------------------------------------
Daniel P. Wegmann, Controller
12
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Telecommunications Income Fund XI
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Thomas J. Berthel, Chief Executive Officer of Berthel Fisher & Company Leasing,
Inc., General Partner of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Company's Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
August 9, 2002 /s/ Thomas J. Berthel
------------------------------------------------
Thomas J. Berthel
President and Chief Executive Officer
Berthel Fisher & Company Leasing, Inc.
General Partner
Telecommunications Income Fund XI, L.P.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Telecommunications Income Fund XI
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Ronald O. Brendengen, Chief Financial Officer of Berthel Fisher & Company
Leasing, Inc., General Partner of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbaines-Oxley Act of
2002, that:
(1) The Company's Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
August 9, 2002 /s/ Ronald O. Brendengen
--------------------------------------------
Ronald O. Brendengen
Chief Financial Officer
Berthel Fisher & Company Leasing, Inc.
General Partner
Telecommunications Income Fund XI, L.P.