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 MARCH 31, 2002
Commission File Number 000-25593
TELECOMMUNICATIONS INCOME FUND XI, L.P.
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(Exact name of Registrant as specified in its charter)
Iowa 39-1904041
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(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")
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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
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As of April 11, 2002, 12,407 units were issued and outstanding. Based on the
book value at March 31, 2002 of $375.22 per unit, the aggregate market value at
April 11, 2002 was $4,655,355.
TELECOMMUNICATIONS INCOME FUND XI, L.P.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - March 31, 2002 and December 30, 2001 3
Statements of Operations -
Three months ended March 31, 2002 and 2001 4
Statement of Changes in Partners' Equity - three
months ended March, 2002 5
Statements of Cash Flows - three months ended
March 31, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Signatures 11
2
TELECOMMUNICATIONS INCOME FUND XI, L.P.
BALANCE SHEETS (UNAUDITED)
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
ASSETS
Cash and cash equivalents $ 8,800 $ 520
Net investment in direct financing leases
and notes receivable (Note B) 7,756,763 8,247,891
Allowance for possible loan and lease losses (2,099,496) (2,059,034)
----------- -----------
Direct financing leases and notes receivable, net 5,657,267 6,188,857
Other receivables 163,083 185,796
Equipment under operating lease -0- 23,949
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TOTAL ASSETS $ 5,829,150 $ 6,399,122
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Line of credit agreement (Note C) $ 790,080 $ 898,873
Outstanding checks in excess of bank balance -0- 12,586
Due to affiliates 3,618 2,981
Distributions payable to partners 99,256 99,296
Accounts payable and accrued expenses 55,260 63,880
Lease security deposits 225,561 226,211
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TOTAL LIABILITIES 1,173,775 1,303,827
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CONTINGENCY (Note E)
PARTNERS' EQUITY, 25,000 units authorized:
General partner, 10 units issued and outstanding 4,342 4,693
Limited partners, 12,397 and 12,402 units issued
and outstanding at March 31, 2002 and
December 31, 2001, respectively 4,651,033 5,090,602
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TOTAL PARTNERS' EQUITY 4,655,375 5,095,295
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TOTAL LIABILITIES AND PARTNERS' EQUITY $ 5,829,150 $ 6,399,122
=========== ===========
See accompanying notes.
3
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
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MARCH 31, 2002 MARCH 31,2001
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REVENUES:
Income from direct financing leases
and notes receivable $ 179,830 $ 306,411
Gain (loss) on lease terminations 1,077 (115,691)
Other 7,181 26,309
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Total revenues 188,088 217,029
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EXPENSES:
Management fees 11,014 26,305
Administrative services 40,750 39,000
Interest expense 13,294 50,126
Depreciation expense -0- 181,887
Provision for possible loan and lease losses 170,300 3,672
Other 92,789 35,444
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Total expenses 328,147 336,434
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Net loss $(140,059) $(119,405)
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Net loss per partnership unit (Note D) $ (11.29) $ (9.48)
========= =========
Weighted average partnership units outstanding 12,411 12,591
========= =========
See accompanying notes.
4
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
THREE MONTHS ENDED MARCH 31, 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 income (111) 0 (139,948) (140,059)
Withdrawals of limited partners 0 (5) (2,013) (2,013)
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Balance at March 31, 2002 $ 4,342 12,397 $ 4,651,033 $ 4,655,375
========================================================
See accompanying notes.
5
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31,2001
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OPERATING ACTIVITIES
Net income (loss) $ (140,059) $ (119,405)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Loss (gain) on lease terminations (1,077) 115,691
Depreciation and amortization 3 181,887
Provision for possible loan and lease losses 170,300 3,672
Changes in operating assets and liabilities:
Other receivables 22,713 (92,258)
Outstanding checks in excess of bank balance (12,586) (44,747)
Due to affiliates 637 1,580
Accrued expenses and other liabilities (8,620) (41,222)
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Net cash from operating activities 31,311 5,198
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INVESTING ACTIVITIES
Acquisitions of, and purchases of equipment for,
direct financing leases -0- (244,816)
Issuance of notes receivable (51,224) -0-
Repayments of direct financing leases 248,118 561,324
Repayments of notes receivable 117,651 65,884
Proceeds from sale or early termination of direct
financing leases, notes receivable, and equipment
under operating lease 71,767 601,022
Net lease security deposits paid (650) (16,022)
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Net cash from investing activities 385,662 967,392
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FINANCING ACTIVITIES
Borrowings from line of credit 454,346 791,749
Repayments of line of credit (563,138) (1,458,365)
Withdrawals paid to partners (2,013) (3,776)
Distributions paid to partners (297,888) (302,192)
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Net cash from financing activities (408,693) (972,584)
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Net increase in cash and cash equivalents 8,280 6
Cash and cash equivalents at beginning of period 520 503
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Cash and cash equivalents at end of period $ 8,800 $ 509
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 13,739 $ 58,636
Noncash investing and financing activities
Sale of equipment under operating lease -0- 286,114
See accompanying notes.
6
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. 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 three months ended
March 31, 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:
March 31, 2002 December 31, 2001
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Minimum lease payments receivable $ 5,419,030 $ 5,768,242
Estimated unguaranteed residual values 454,311 455,000
Unamortized initial direct costs 6 9
Unearned income (838,953) (940,067)
Notes receivable 2,722,369 2,964,707
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Net investment in direct financing
leases and notes receivable $ 7,756,763 $ 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 to increase the
available amount from $2,000,000 to $4,400,000 (limited by 32% of qualified
accounts) and extend the maturity from June 30, 2000 to June 30, 2002. At March
31, 2002, the borrowing limit was $908,000. The line of credit agreement bears
interest at 1% over the prime rate, with a $4,000 minimum monthly interest
charge which began in July, 1999, and is collateralized by substantially all
assets of the Partnership. The line of credit is guaranteed by the General
Partner and certain affiliates of the General Partner. This agreement is
cancelable by the lender after giving a 90-day notice. The General Partner
believes amounts available under the line of credit are adequate for the
foreseeable future. The amount outstanding under this line of credit at March
31, 2002 was $790,080.
NOTE D - NET INCOME (LOSS) PER PARTNERSHIP UNIT
Net income (loss) per partnership unit is based on the weighted average number
of units outstanding (including both general and limited partners) which were
12,411 for the three months ended March 31, 2002 compared to 12,591 for the
three months ended March 31, 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.
7
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 $179,830
for the quarter ending March 31, 2002 compared to $306,411 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 $7,756,763 at March 31, 2002
and $9,493,453 at March 31, 2001. Other income of $7,181 for the first quarter
of 2002 is interest income on a money market account and other investments and
late charges on lease payments, and is down from $26,309 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 quarter of 2002 of $1,077 versus a loss
of $115,691 a year ago. The loss in 2001 was primarily to the sale of equipment
under operating lease resulting from the repossessed equipment originally leased
to Alpha Telecommunications, Inc.
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 $550,700 the first three months of 2002 compared to
$1,315,250 for the first three 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 $40,750 for the first quarter 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 $39,000 for the first quarter of 2001.
Interest expense is incurred on the Partnership's line of credit agreement.
Interest expense for the first three months of 2002 was $13,294 compared to
$50,126 for the same period of 2001. The decrease is the result of a lower line
of credit balance - $790,080 at March 31, 2002 compared to $1,707,807 at March
31, 2001, and also lower interest rates.
Depreciation expense was $-0- for the first quarter of 2002 compared to $181,887
for the first quarter of 2001. Depreciation was on the equipment originally
leased to Alpha Telecommunications, Inc., which was sold in 2001. Other expenses
include legal, accounting, data processing, and other miscellaneous expenses.
These costs increased from $35,444 in 2001 to $92,789 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
8
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 March 31, 2002, seven 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
$3,031,174, or 39% of the Partnership's portfolio of leases and notes. The
allowance for possible loan and lease losses is $2,099,496 at March 31, 2002.
The provision for possible loan and lease losses for the first quarter of 2002
was $170,300 (compared to $3,672 a year ago), and is primarily the result of a
significantly deteriorated value of the phones under one particular lease
contract. This lessee filed for bankruptcy during 2001, and the Partnership
anticipates selling the equipment, with total proceeds approximating $244,000,
of which approximately $211,000 was sold in April, 2002. The remainder is
expected to be sold in the second quarter 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 March 31, 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, office and computer equipment, and industrial equipment,
representing approximately 51%, 25%, and 18%, respectively, of the portfolio at
March 31, 2002. Three lessees account for approximately 35% of the Partnership's
portfolio at March 31, 2002, two of which are past due over 90 days, and
represent approximately 10% and 12% of the portfolio, respectively.
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 March 31, 2002, that working capital reserve, as defined, would be
$125,930, and the Partnership had this amount available from its cash and cash
equivalents and its availability from the line of credit agreement.
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 to increase the
available amount from $2,000,000 to $4,400,000 (limited by 32% of qualified
accounts) and extend the maturity from June 30, 2000 to June 30, 2002. At March
31, 2002, the borrowing limit was $908,000. The line of credit agreement bears
interest at 1% over the prime rate, with a $4,000 minimum monthly interest
charge which began in July, 1999, and is collateralized by substantially all
assets of the Partnership. The line of credit is guaranteed by the General
Partner and certain affiliates of the General Partner. This agreement is
cancelable by the lender after giving a 90-day notice. The General Partner
believes amounts available under the line of credit are adequate for the
foreseeable future. The amount outstanding under this line of credit at March
31, 2002 was $790,080.
9
Cash flow from operating activities was $31,311 for the first quarter of 2002,
compared to $5,198 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 $385,662 for 2002, compared to $967,392 for
2001. This decrease is primarily attributable to a decrease in proceeds received
from repayments of direct financing leases and notes receivable, and proceeds
from the sale or early termination of lease or note contracts. The decrease in
repayments of lease and note contracts is a result of delinquent contracts. The
Partnership used $408,693 of cash for financing activities during the first
quarter of 2002, compared to a use of cash of $972,584 a year ago. This decrease
in use of cash is the result of lower net repayments of the line of credit. A
year ago, the Partnership used proceeds from the sale or early termination of
lease and note contracts to reduce the line of credit balance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The table below provides information about the Partnership's notes receivable
and line of credit agreement that are sensitive to changes in interest rates.
The table presents the principal amounts due and related weighted average
interest rates by expected maturity dates as of March 31, 2002.
Assets Liabilities
--------------------------------- -------------------------
Expected Fixed Rate Average Variable Rate Interest
Maturity Date Notes Receivable Interest Rate Line of Credit Rate
------------- ---------------- ------------- -------------- ----
2002 $ 611,799 14.99% $ 790,080 5.75%
2003 524,807 14.91% -0- -
2004 528,943 14.76% -0- -
2005 470,927 14.57% -0- -
2006 585,893 13.03% -0- -
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Total $ 2,722,369 $ 790,080
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Fair Value $ 2,580,000 $ 790,080
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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.
10
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.
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(Registrant)
Date: May 3, 2002 /s/ Ronald O. Brendengen
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Ronald O. Brendengen,
Chief Financial Officer, Treasurer
Date: May 3, 2002 /s/ Daniel P. Wegmann
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Daniel P. Wegmann, Controller
11