1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ 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, 1998 Commission File Number 0-25574 ------- TELECOMMUNICATIONS INCOME FUND X, L.P. -------------------------------------- (Exact name of Registrant as specified in its charter) Iowa 42-1401715 ---- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Second Street S.E., Cedar Rapids, Iowa 52401 ---------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 365-2506 -------------- 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 September 30, 1998, 89,653 Units were issued and outstanding. Based on the book value of $127.73 per Unit, the aggregate market value at September 30, 1998 was $11,451,546. 2 TELECOMMUNICATIONS INCOME FUND X, L.P. INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Balance sheets - September 30, 1998 and December 31, 1997. 3 Statements of income and comprehensive income - Three months ended September 30, 1998 and three months ended September 30, 1997 4 Nine months ended September 30, 1998 and nine months ended September 30, 1997 5 Statement of changes in partners' equity - nine months ended September 30, 1998 6 Statements of cash flows - nine months ended September 30, 1998 and nine months ended September 30, 1997 7 Notes to financial statements 8 Item 2. Management's discussion and analysis of financial condition and results of operations 9 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings 12 Signatures 2 3 TELECOMMUNICATIONS INCOME FUND X, L.P. BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- ASSETS Cash and cash equivalents $ 651,767 $ 5,928 Available-for-sale security 4,496 140,888 Net investment in direct financing leases and notes receivable(Note B) 11,833,126 21,827,573 Allowance for possible losses (338,637) (3,855,618) ------------- -------------- Direct financing leases and notes receivable, net 11,494,489 17,971,955 Equipment held for sale 38,899 112,000 Intangibles less accumulated amortization of $28,186 at September 30, 1998 and $30,489 at December 31, 1997 362 7,009 Other assets 68,113 561,375 ------------- -------------- TOTAL ASSETS $ 12,258,126 $ 18,799,155 ============= ============== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Line of credit agreement (Note C) $ -0- $ 5,354,801 Due to affiliates 280,409 23,256 Distributions payable to partners 201,719 202,250 Accrued expenses and other liabilities 151,985 223,092 Lease security deposits 172,467 509,544 Note payable (Note C) -0- 583,233 ------------- -------------- TOTAL LIABILITIES 806,580 6,896,176 ------------- -------------- PARTNERS' EQUITY, 100,000 units authorized: General partner, 40 units issued and outstanding 8,523 8,272 Limited partners, 89,613 units at September 30, 1998 and 89,849 units at December 31 1997 issued and outstanding 11,582,350 11,927,080 Gain on redeemed partnership units 29,437 -0- Accumulated other comprehensive loss (168,764) (32,373) ------------- -------------- TOTAL PARTNERS' EQUITY 11,451,546 11,902,979 ------------- -------------- TOTAL LIABILITIES AND PARTNERS' EQUITY $ 12,258,126 $ 18,799,155 ============= ============== See accompanying notes. 3 4 TELECOMMUNICATIONS INCOME FUND X, L.P. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ INCOME: Lease income $ 397,386 $ 826,356 Interest income 31,745 14,590 Gain on lease terminations 318,827 24,003 Other 19,780 49,792 ------------ ------------- Total income 767,738 914,741 ------------ ------------- EXPENSES: Management fees 44,273 99,028 Administrative services 20,999 21,000 Interest 27,318 118,779 Professional fees 25,948 1,292 Provision for possible losses 54,056 17,025 Depreciation 24,368 164,368 Other 40,814 61,021 ------------ ------------- Total expenses 237,776 482,513 ------------ ------------- Net income 529,962 432,228 Other comprehensive loss: Unrealized loss on available for sale security (115,408) -0- ------------ ------------- Comprehensive income $ 414,554 $ 432,228 ============ ============= Net income per partnership unit $ 5.91 $ 4.81 ============ ============= Weighted average partnership units outstanding 89,680 89,892 See accompanying notes. 4 5 TELECOMMUNICATIONS INCOME FUND X, L.P. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ INCOME: Lease income $ 1,480,287 $ 2,245,457 Interest income 106,981 14,590 Gain on lease terminations 769,824 61,073 Other 53,559 59,229 ------------ ------------ Total income 2,410,651 2,380,349 ------------ ------------ EXPENSES: Management fees 157,665 267,359 Administrative services 67,777 66,822 Interest 252,634 267,646 Professional fees 114,576 66,814 Provision for possible losses 73,059 67,005 Depreciation 73,102 310,348 Other 138,855 108,487 ------------ ------------ Total expenses 877,668 1,154,481 ------------ ------------ Net income 1,532,983 1,225,868 Other comprehensive loss: Unrealized loss on available for sale security (136,392) -0- ------------ ------------ Comprehensive income $ 1,396,591 $ 1,225,868 ============ ============ Net income per partnership unit $ 17.07 $ 13.61 ============ ============ Weighted average partnership units outstanding 89,800 90,084 See accompanying notes. 5 6 TELECOMMUNICATIONS INCOME FUND X, L.P. STATEMENT OF CHANGES IN PARTNERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) Unrealized Gain (Loss) General Gain on on Available Partner Limited Partners Redeemed for-Sale Partners' (40 Units) Units Amount Units Security Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 8,272 89,849 $ 11,927,080 $ -0- $ (32,373) $ 11,902,979 Net income 358 -- 517,257 -0- -0- 517,615 Distributions (270) -- (606,481) -0- -0- (606,751) Change in accumulated comprehensive loss -0- -- -0- -0- (44,964) (44,964) ---------------------------------------------------------------------------------- Balance at March 31, 1998 8,360 89,849 11,837,856 -0- (77,337) 11,768,879 Withdrawal of limited partners -0- (76) (19,000) -0- -0- (19,000) Net income 336 -- 485,070 -0- -0- 485,406 Distributions (270) -- (606,103) -0- -0- (606,373) Change in accumulated comprehensive loss -0- -- -0- -0- 23,982 23,982 Gain on redeemed units -0- -- -0- 9,866 -0- 9,866 ---------------------------------------------------------------------------------- Balance at June 30, 1998 8,426 89,773 11,697,823 9,866 (53,355) 11,662,760 Withdrawal of limited partners -0- (160) (40,000) -0- -0- (40,000) Net income 367 -- 529,595 -0- -0- 529,962 Distributions (270) -- (605,068) -0- -0- (605,338) Change in accumulated comprehensive loss -0- -- -0- -0- (115,409) (115,409) Gain on redeemed units -0- -- -0- 19,571 -0- 19,571 ---------------------------------------------------------------------------------- Balance at September 30, 1998 $ 8,523 89,613 11,582,350 $ 29,437 (168,764) 11,451,546 ================================================================================== See accompanying notes. 6 7 TELECOMMUNICATIONS INCOME FUND X, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ OPERATING ACTIVITIES Net Income $ 1,532,983 $ 1,225,868 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 6,647 6,647 Provision for possible losses 73,059 67,005 Gain on lease terminations (769,823) (61,073) Depreciation 73,102 310,348 Changes in operating assets and liabilities: Other assets 9,349 (340,290) Due to affiliates 257,153 (45,530) Accrued expenses and other liabilities (71,107) 91,089 ------------- ------------- Net cash provided by operating activities 1,111,363 1,254,064 INVESTING ACTIVITIES Acquisitions of, and purchases of equipment for, direct financing leases (2,668,204) (1,160,272) Issuance of notes receivable -0- (535,000) Repayments of direct financing leases 1,429,792 3,036,584 Repayments of notes receivable -0- 5,066 Purchase of equipment for an operating lease -0- (2,800,000) Proceeds from early termination of direct financing leases 8,896,024 880,728 Net lease security deposits repaid (337,077) (51,386) ------------- ------------- Net cash provided by (used in) investing activities 7,320,535 (624,280) FINANCING ACTIVITIES Net proceeds from (payments on) line-of-credit (5,354,801) 1,414,881 Repayments of long term debt (583,233) (595,496) Distributions paid to partners (1,818,462) (1,824,139) Redemption of partnership units (29,563) (112,530) ------------- ------------- Net cash used in financing activities (7,786,059) (1,117,284) Net increase (decrease) in cash and cash equivalents 645,839 (487,500) Cash and cash equivalents at beginning of period 5,928 516,612 ------------- ------------- Cash and cash equivalents at end of period $ 651,767 $ 29,112 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 295,139 $ 266,831 North American miscellaneous receivable written off 493,913 -0- North American security deposits of leases written off 99,071 -0- Crescent note conversion of all Digital leases 2,631,890 -0- See accompanying notes. 7 8 TELECOMMUNICATIONS INCOME FUND X, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles 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, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Partnership's annual report on Form 10-K for the year ended December 31, 1997. NOTE B -- NET INVESTMENT IN DIRECT FINANCING LEASES Components of the net investment in direct financing leases are as follows: September 30, 1998 December 31, 1997 ------------------ ----------------- Lease payments receivable $ 13,002,000 $ 22,500,795 Estimated residual values of leased equipment 733,059 2,256,257 Unamortized initial direct costs 28,889 93,855 Unearned lease income (2,913,617) (4,527,844) Notes receivable 982,795 1,504,510 ------------- ------------- Net investment in direct financing leases $ 11,833,126 $ 21,827,573 ============= ============= NOTE C -- CREDIT ARRANGEMENTS The Partnership had a line of credit agreement with a bank which expired June 30, 1998. On September 3, 1998, the Partnership entered into a similar agreement with the previous lender. The new line of credit agreement carries interest at 1% over prime or 9.25% at September 30, 1998. The agreement allows the Partnership to borrow the lessor of $4.0 million, or 40% of the Partnership's Qualified Accounts as defined in the agreement. The agreement expires June 30, 2000 and is secured by substantially all assets of the Partnership. This line of credit is guaranteed by the General Partner and certain affiliates of the General Partner. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended Nine Months Ended 1998 1997 1998 1997 --------- --------- ---------- ---------- Results of Operations: Description - ---------------------- Lease income $397,386 $826,356 $1,480,287 $2,245,457 Interest income 31,745 14,590 106,981 14,590 Gain on lease terminations 318,827 24,003 769,824 61,073 Management fee expense 44,273 99,028 157,665 267,359 Interest expense 27,318 118,779 252,634 267,646 Depreciation 24,368 164,368 73,102 310,348 Provision for possible losses 54,056 17,025 73,059 67,005 Lease income declined during the three month period ended September 30, 1998 as compared to the same period last year, primarily due to the decline in the Partnership's lease portfolio. The Partnership's net investment in direct financing leases has declined approximately $5.9 million from the balance at September 30, 1997. This decrease is attributable to the early termination of certain leases in 1997 and 1998 at the request of the lessee, which enabled the Partnership to recognize gains on the 1998 terminations of $769,824. Management fees paid to the General Partner represent 5% of the lease and note payments received. These payments have decreased approximately $1.1 million in the third quarter of 1998 compared to the same period a year ago. This decrease is due to the early termination of leases as described above and other leases being delinquent in making their lease payments as noted below. The decrease in interest expense is a result of the Partnership using the proceeds of various lease terminations to reduce the balance of its line of credit. Lease income and interest expense will increase as the Partnership utilizes funds from its line of credit agreement to invest in new leases. During the second quarter of 1997, the Partnership entered into an agreement to finance $2.8 million of equipment. The transaction was classified as an operating lease which generated approximately $140,000 of depreciation in the third quarter of 1997. This agreement was subsequently restructured and reclassified to a direct finance lease. The Partnership received 47,962 shares of common stock of Phonetel Corporation as part of a lease financing agreement in 1997. The Partnership has been valuing these shares at market. Due to operational losses sustained by Phonetel, the market value of Phonetel's common stock has decreased significantly, resulting in an unrealized loss of approximately $168,764 as of September 30, 1998. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The General Partner has established general and specific loss reserves as follows: September 30, 1998 September 30, 1997 ------------------ ------------------ General Reserve $316,819 $369,403 Specific Reserve - UTS -0- 15,006 Specific Reserve - VAC -0- 21,000 Specific Reserve - Property Taxes 21,818 -0- The General Partner has determined all loss reserves are adequate at September 30, 1998. As previously discussed in the Partnership's 10-K Report for 1997, the Partnership provided for a specific loss reserve of $3,319,159 at December 31, 1997, equal to the carrying value of the assets leased to North American Communications Group, Inc. ("NACG"). The Partnership foreclosed on these assets in February, 1998. As a result, the assets were removed from the Partnership's books and charged to the specific reserve established at December 31, 1997. An additional $7,069 of assets associated with NACG were also written off in the first quarter of 1998. The Partnership will continue to attempt to sell and/or re-lease these assets. Any amounts received through such efforts will be treated as a recovery of previous charges. Lease and note payments receivable of 31 or more days past due amounted to $146,819 (contract balance remaining of $5,364,787) at September 30, 1998. This represents 1.01% of the Partnership's lease and note payments receivable. The General Partner continues to monitor these leases and will take whatever steps are necessary to protect the Partnership's interest in these assets. As of September 30, 1998, there were three customers with payments over 90 days past due. The contract balance on these accounts was $792,754. The General Partner has reviewed these contracts and determined the Partnership's investment in these contracts is sufficiently collateralized. The Partnership recognizes that the arrival of the Year 2000 poses a unique challenge to the ability of all systems to recognize the date change from December 31, 1999 to January 1, 2000 and, like other companies, has assessed its computer applications and business processes to provide for their continued functionality. An assessment of the readiness of external entities which it interfaces with, such as vendors, counterparties, customers, payment systems, and others, is ongoing. The Partnership does not expect the cost to address the Year 2000 will be material. The Partnership has determined that the software it utilizes in its operations is compatible with the Year 2000. The Partnership has not yet fully determined whether the Year 2000 issue has been addressed by all of its customers. If the Partnership's customers have not addressed this issue, it could lead to non-payments of amounts owed to the Partnership. The Partnership has contacted all of its customers regarding this issue. The customers contacted have indicated various stages of readiness. The Partnership will continue to determine customer Year 2000 compliance by follow-up with customers who have indicated non-compliance. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended September 30, 1998 September 30, 1997 - ---------------------------------------------------------------------------------------------------- Major Cash Sources: - ------------------- Principal portion of lease payments received $1,429,792 $2,933,812 Proceeds received on sale of leases 8,896,024 880,728 Net proceeds from debt -0- 1,414,881 Major Cash Uses: - ---------------- Purchase of equipment and leases 2,668,204 1,160,272 Net Payments on debt 5,938,034 595,496 Distributions to partners 1,818,462 1,824,139 - ---------------------------------------------------------------------------------------------------- The Partnership has entered into a new line of credit agreement which allows it to borrow the lessor of $4.0 million or 40% of the Partnership's Qualified Accounts. See footnote C for further discussion. The line of credit agreement will allow the Partnership to expand its existing portfolio which will, in turn, increase its cash flow. 11 12 PART II OTHER INFORMATION ----------------- Item 1. Legal Proceedings As reported in the Partnership's 10-K filing for 1997, a foreclosure proceeding was filed on February 20, 1998 by the Partnership and affiliated partnership, Telecommunications Income Fund IX, L.P., against the North American Communication Group, Inc. ("NACG") Leases. On February 20, 1998, the Partnership filed a Petition to Foreclose Security Interests in the amount of $4,192,979 against NACG, CWC Communications, Inc., North American Communications Corporation (Missouri) d/b/a North American Communications of Georgia, Inc., North American Communications of Mississippi, Incorporated, North American Communications Group, Inc. d/b/a North American Communications of Louisiana, Inc. Troy P. Campbell, Sr. as Guarantor and Archie W. Welch, Jr. as Guarantor, in the Iowa District Court for Linn County located in Cedar Rapids, Iowa. The Defendants appeared in court and asked for additional time to file their answer which was granted by the court. In May 1998, Defendants filed a Motion to Dismiss For Lack of Personal Jurisdiction which was opposed by the Plaintiff TIFX. A Hearing was held July 31, 1998, in order for each side to argue the motion before the court. In August, the Court ruled that it had personal jurisdiction against the corporate defendants, but that the Court did not have jurisdiction against the individual Guarantors. As a result of that ruling, the Plaintiff TIFX filed a Notice of Appeal on September 14, 1998 and a Brief in support of that Notice of Appeal will be filed in the very near future. The corporate defendants filed an Answer denying the allegations in the Petition. Discovery is now going forward in the litigation against the corporate defendants at the same time as the Appeal is moving forward against the individual Guarantors. 12 13 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 X, L.P. -------------------------------------- (Registrant) Date: November 10, 1998 Ronald O. Brendengen/s/ ----------------- ---------------------------------------------- Ronald O. Brendengen, Chief Financial Officer, Treasurer Date: November 10, 1998 Daniel P. Wegmann/s/ ----------------- ---------------------------------------------- Daniel P. Wegmann, Controller 13