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 September 30, 2003
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 447-5700
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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.
[X] Yes [ ] No
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934).
[ ] Yes [X] No
As of October 24, 2003, 12,335 units were issued and outstanding.
TELECOMMUNICATIONS INCOME FUND XI, L.P.
INDEX
Page
Part I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2003 and December 31, 2002 3
Statements of Operations - three months ended
September 30, 2003 and 2002 4
Statements of Operations - nine months ended
September 30, 2003 and 2002 5
Statement of Changes in Partners' Equity - nine months ended
September 30, 2003 6
Statements of Cash Flows - nine months ended
September 30, 2003 and 2002 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
Item 4. Controls and Procedures 11
Part II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 11
Signatures 12
2
TELECOMMUNICATIONS INCOME FUND XI, L.P.
BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2003 2002
----------- -----------
ASSETS
Cash and cash equivalents $ 423,985 $ 408,718
Net investment in direct financing leases
and notes receivable (Note B) 1,935,366 3,617,605
Allowance for possible loan and lease losses (850,271) (984,556)
----------- -----------
Direct financing leases and notes receivable, net 1,085,095 2,633,049
Other receivables 78,432 82,931
----------- -----------
TOTAL ASSETS $ 1,587,512 $ 3,124,698
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Due to affiliates $ 2,244 $ 2,065
Distributions payable to partners 98,680 98,952
Accounts payable and accrued expenses 75,923 113,371
Lease security deposits 22,802 36,392
----------- -----------
TOTAL LIABILITIES 199,649 250,780
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CONTINGENCY (Note C)
PARTNERS' EQUITY, 25,000 units authorized:
General partner, 10 units issued and outstanding 1,715 2,914
Limited partners, 12,339 and 12,359 units issued
and outstanding at September 30, 2003 and
December 31, 2002, respectively 1,386,148 2,871,004
----------- -----------
TOTAL PARTNERS' EQUITY 1,387,863 2,873,918
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 1,587,512 $ 3,124,698
=========== ===========
See accompanying notes.
3
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------
September 30, September 30,
2003 2002
--------- ---------
REVENUES:
Income from direct financing leases and notes receivable $ 45,300 $ 101,614
Gain (loss) on lease terminations (506) (3,573)
Other 9,003 7,488
--------- ---------
Total revenues 53,797 105,529
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EXPENSES:
Management fees 7,664 9,049
Administrative services 38,400 53,250
Provision for possible loan and lease losses -0- 100,400
Other 19,460 44,338
--------- ---------
Total expenses 65,524 207,037
--------- ---------
Net loss $ (11,727) $(101,508)
========= =========
Net loss per partnership unit $ (.95) $ (8.19)
========= =========
Weighted average partnership units outstanding 12,359 12,389
========= =========
See accompanying notes.
4
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
-----------------
September 30, September 30,
2003 2002
----------- -----------
REVENUES:
Income from direct financing leases and notes receivable $ 178,935 $ 424,265
Gain on lease terminations 63,526 22,310
Other 18,707 21,064
----------- -----------
Total revenues 261,168 467,639
----------- -----------
EXPENSES:
Management fees 34,614 50,662
Administrative services 115,200 141,250
Interest expense -0- 25,387
Provision for possible loan and lease losses 4,000 845,700
Other 100,282 220,668
----------- -----------
Total expenses 254,096 1,283,667
----------- -----------
Net income (loss) $ 7,072 $ (816,028)
=========== ===========
Net income (loss) per partnership unit $ .57 $ (65.82)
=========== ===========
Weighted average partnership units outstanding 12,366 12,397
=========== ===========
See accompanying notes.
5
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
General Total
Partner Limited Partners Partners'
(10 Units) Units Amounts Equity
----------- ----------- ----------- -----------
Balance at December 31, 2002 $ 2,914 12,359 $ 2,871,004 $ 2,873,918
Distributions to partners (725) 0 (896,131) (896,856)
Net income 19 0 23,961 23,980
----------- ----------- ----------- -----------
Balance at March 31, 2003 2,208 12,359 1,998,834 2,001,042
Distributions to partners (240) 0 (296,616) (296,856)
Net loss (4) 0 (5,177) (5,181)
----------- ----------- ----------- -----------
Balance at June 30, 2003 1,964 12,359 1,697,041 1,699,005
Distributions to partners (240) 0 (296,184) (296,424)
Net loss (9) 0 (11,718) (11,727)
Withdrawals of limited partners 0 (20) (2,991) (2,991)
----------- ----------- ----------- -----------
Balance at September 30, 2003 $ 1,715 12,339 $ 1,386,148 $ 1,387,863
=========== =========== =========== ===========
See accompanying notes.
6
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
2003 2002
----------- -----------
Operating Activities
Net income (loss) $ 7,072 $ (816,028)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Gain on lease terminations (63,526) (22,310)
Depreciation and amortization 1 7
Provision for possible loan and lease losses 4,000 845,700
Changes in operating assets and liabilities:
Other receivables 30,498 26,857
Outstanding checks in excess of bank balance -0- (12,586)
Due to affiliates 179 (255)
Accounts payable and accrued expenses (37,448) 55,717
----------- -----------
Net cash from operating activities (59,224) 77,102
----------- -----------
Investing Activities
Purchases of equipment for direct financing leases (37,931) (13,182)
Issuance of notes receivable (41,000) (76,226)
Repayments of direct financing leases 639,029 773,181
Repayments of notes receivable 174,213 378,135
Proceeds from sale or early termination of direct financing leases,
notes receivable, and equipment under operating lease 847,168 1,081,941
Net lease security deposits paid (13,589) (25,032)
----------- -----------
Net cash from investing activities 1,567,890 2,118,817
----------- -----------
Financing Activities
Borrowings from line of credit -0- 1,146,090
Repayments of line of credit -0- (2,044,962)
Withdrawals paid to partners (2,991) (13,264)
Distributions paid to partners (1,490,408) (892,744)
----------- -----------
Net cash from financing activities (1,493,399) (1,804,880)
----------- -----------
Net increase (decrease) in cash and cash equivalents 15,267 391,039
Cash and cash equivalents at beginning of period 408,718 520
----------- -----------
Cash and cash equivalents at end of period $ 423,985 $ 391,559
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ -0- $ 30,066
Non-cash investing activity:
Reclassification of equipment from direct financing leases to
notes receivable -0- 428,749
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 of 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 nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. 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, 2002.
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:
September 30, 2003 December 31, 2002
------------------ -----------------
Minimum lease payments receivable $ 1,292,617 $ 2,343,231
Estimated unguaranteed residual values 159,583 242,762
Unamortized initial direct costs -0- 1
Unearned income (247,893) (360,026)
Notes receivable 731,059 1,391,637
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Net investment in direct financing leases and notes receivable $ 1,935,365 $ 3,617,605
============== ==============
NOTE C - CONTINGENCY
Berthel Fisher & Company, Inc. ("BFC"), the parent of the General Partner, is in
default on $2.2 million of its unsecured debt that was due December 31, 2002.
BFC is pursuing additional financing, refinancing, and asset sales to meet its
obligations and must raise a minimum of $2.4 million. Approximately $900,000 has
been raised as of the filing of this report. No assurance can be provided that
BFC will be successful in its efforts. Since BFC is in default, its creditors
could take legal action to enforce their right to repayment. No legal action has
been taken at this time. The failure of BFC to raise the minimum amount of
capital or legal action taken by the creditors could impact BFC's ability to
continue as a going concern. This could ultimately affect the ability of the
General Partner to continue as a going concern. If this were to happen, the
Partnership would need to appoint a new general partner. The new general partner
could require additional fees and charges that would have a significant negative
impact on the Partnership.
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 $178,935
for the nine months ending September 30, 2003 compared to $424,265 for the same
period of 2002. The decrease is due to a smaller portfolio of direct financing
leases and notes receivable. The Partnership's net investment in direct
financing leases and notes receivable was $1,935,366 at September 30, 2003 and
$5,470,631 at September 30, 2002. Other income of $18,707 for the first nine
months of 2003 is interest income on a money market account and other
investments and late charges on lease payments, and is down from $21,064 a year
ago. The Partnership had a gain on lease terminations for the first nine months
of 2003 of $63,526 compared to a gain of $22,310 for the first nine months of
2002. The gain in 2003 was primarily due to the payoff of one lessee that had
previously been on a non-accrual status.
Management fees are paid to the General Partner and represent 2% of the gross
rental payments, loan payments, and other financing payments received. These
gross rental and other payments were $1,730,700 the first nine months of 2003
compared to $2,533,100 for the first nine months of 2002.
Administrative services were $115,200 for the first nine months of 2003 compared
to $141,250 for the same period a year ago. This expense represents fees paid
monthly to the General Partner for the operation of the Partnership as defined
in the Partnership Agreement.
Interest expense for the first nine months of 2003 was $0 compared to $25,387
for the same period of 2002. This expense was incurred on the Partnership's line
of credit agreement, which was paid in full in June, 2002 and was not renewed.
Other expenses include legal, accounting, data processing, and other
miscellaneous expenses. These costs decreased from $220,668 in 2002 to $100,282
in 2003, primarily due to legal and repossession expenses incurred in 2002 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, 2002.
The telecommunications industry has seen a significant downturn in recent years
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:
o Lack of sufficient dial around revenues for payphone operators
o Decrease inusage of payphones, due to the use of mobile phones, etc.
o Lack of economies of scale being achieved with the cost of lines purchased
from local exchange carriers
o Lack of available capital for payphone operators
o Decrease in the number of payphone operators
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.
The allowance for possible loan and lease losses is based upon a continuing
review of past lease loss experience, current economic conditions, and the
underlying lease asset value of the portfolio. At the end of each quarter a
review of the allowance account is conducted. The Partnership has a total
9
allowance of $885,667 ($35,396 relating to other receivables) or 43% of the
portfolio of leases and notes and other receivables as of September 30, 2003.
The Partnership's provision for possible loan and lease losses was $4,000 for
the first nine months of 2003 compared to $845,700 for the first nine months of
2002, and was the result of various lease and note contract delinquencies and
bankruptcy filings by several customers in 2002. Management will continue to
monitor the portfolio of leases and notes and adjust the allowance for possible
loan and lease losses accordingly.
At September 30, 2003, three 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 $693,017. Management will continue to monitor the past due
contracts and take the necessary steps to protect the Partnership's investment.
The telecommunications industry has seen a significant downturn in recent years
that has adversely affected the Partnership. The net investment on the above
delinquencies of $693,017 represents approximately 36% of the Partnership's
total portfolio of leases and notes. Management believes its total allowance of
$885,667 is adequate for these customers and the remainder of the portfolio and
other receivables at September 30, 2003, 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 total allowance will not be necessary.
The Partnership's portfolio of leases and notes receivable are concentrated in
pay telephones, and office and computer equipment, and industrial equipment,
representing approximately 55%, 29%, and 10%, respectively, of the portfolio at
September 30, 2003. Two lessees account for approximately 32% of the
Partnership's portfolio at September 30, 2003, and these lessees were past due
over 90 days.
Berthel Fisher & Company, Inc. ("BFC"), the parent of the General Partner, is in
default on $2.2 million of its unsecured debt that was due December 31, 2002.
BFC is pursuing additional financing, refinancing, and asset sales to meet its
obligations and must raise a minimum of $2.4 million. Approximately $900,000 has
been raised as of the filing of this report. No assurance can be provided that
BFC will be successful in its efforts. Since BFC is in default, its creditors
could take legal action to enforce their right to repayment. No legal action has
been taken at this time. The failure of BFC to raise the minimum amount of
capital or legal action taken by the creditors could impact BFC's ability to
continue as a going concern. This could ultimately affect the ability of the
General Partner to continue as a going concern. If this were to happen, the
Partnership would need to appoint a new general partner. The new general partner
could require additional fees and charges that would have a significant negative
impact on the Partnership.
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 September 30, 2003, that working capital reserve, as defined,
would be $125,930, and the Partnership had this amount available from its cash
and cash equivalents.
Cash flow from operating activities was a use of cash of $59,224 for the first
nine months of 2003, compared to a source of cash of $77,102 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
$1,567,890 for 2003, compared to $2,118,817 for 2002. The Partnership used
$1,493,399 of cash for financing activities during the first nine months of
2003, compared to a use of cash of $1,804,880 a year ago.
10
Given the current market in general as well as the specific telecommunications
market, the General Partner has determined to limit its investment in new leases
and notes receivable at this time. As cash is available, the General Partner
will continue to assess market conditions to determine whether to make
distributions or reinvest in new leases and notes receivable during the
remaining operating phase of the Partnership. In conjunction with this,
management anticipates that the current level of monthly distributions can be
sustained through December, 2003. Beginning in 2004, the Partnership will only
distribute cash as it is available. As the portfolio of leases and notes
receivable continues to decline, it is expected that expenses will exceed
revenues except to the extent the Partnership is able to generate gains on
termination.
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 pertaining to the Partnership's notes
receivable as of September 30, 2003.
Expected Fixed Rate Average
Maturity Date Notes Receivable Interest Rate
------------- ---------------- -------------
2003 $ 73,933 12.47%
2004 251,873 12.11%
2005 212,027 12.18%
2006 188,015 8.85%
2007 and thereafter 5,211 8.85%
-------------
Total $ 731,059
=============
Fair Value $ 467,000
=============
The Partnership manages interest rate risk, its primary market risk exposure, by
limiting terms of notes receivable to no more than five years and generally
requiring full repayment ratably over the term of the note.
Item 4. Controls and Procedures
-----------------------
An evaluation was performed under the supervision and with the participation of
the Partnership's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures as of September 30, 2003. Based
on that evaluation, the Partnership's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Partnership's disclosure
controls and procedures were effective in timely alerting them to material
information relating to the Partnership required to be included in the
Partnership's periodic SEC filings.
Part II. Other Information
Item 6. Exhibits
--------
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
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: November 12, 2003 /s/ Ronald O. Brendengen
----------------- -----------------------------------
Ronald O. Brendengen,
Chief Financial Officer,
Treasurer
Date: November 12, 2003 /s/ Daniel P. Wegmann
----------------- -----------------------------------
Daniel P. Wegmann, Controller
12