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 June 30, 1999 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.)
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 July 30, 1999, 9,887 units were issued and outstanding. Based on the book
value at June 30, 1999 of $843.04 per unit, the aggregate market value at July
30, 1999 was $8,335,136.
2
TELECOMMUNICATIONS INCOME FUND XI, L.P.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 1999 and December 31, 1998 3
Statements of Operations- three months ended June 30, 1999 and June 30, 1998 4
Statements of Operations- six months ended June 30, 1999 and June 30, 1998 5
Statement of Changes in Partners' Equity - six months ended June 30, 1999 6
Statement of Cash Flows - six months ended June 30, 1999 and June 30, 1998 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 12
Signatures 13
2
3
TELECOMMUNICATIONS INCOME FUND XI, L.P.
BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
ASSETS
Cash and cash equivalents $ 337,546 $ 500,713
Net investment in direct financing leases
and notes receivable (Note B) 8,391,409 4,640,514
Allowance for possible losses (147,189) (87,818)
----------- -----------
Notes receivable and direct financing leases, net 8,244,220 4,552,696
Other assets 613 --
----------- -----------
TOTAL ASSETS $ 8,582,379 $ 5,053,409
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Line of credit agreement (Note C) $ 304,609 $ --
Due to affiliates 5,112 3,472
Distributions payable to partners 73,900 45,038
Accrued expenses and other liabilities 16,741 10,591
Lease security deposits 109,103 90,810
----------- -----------
TOTAL LIABILITIES 509,465 149,911
----------- -----------
PARTNERS' EQUITY, 25,000 units authorized:
General partner, 10 units issued and outstanding 9,006 9,254
Limited partners, 9,566 and 5,784 units issued
and outstanding at June 30, 1999 and
December 31, 1998, respectively 8,063,908 4,894,244
----------- -----------
TOTAL PARTNERS' EQUITY 8,072,914 4,903,498
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,582,379 $ 5,053,409
=========== ===========
See accompanying notes.
3
4
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
INCOME:
Lease and interest income $217,105 $ 60,077
Gain on lease terminations -- 17,764
Other 17,578 15,708
-------- --------
Total income 234,683 93,549
-------- --------
EXPENSES:
Management fees 9,024 2,541
Administrative services 21,000 21,000
Interest expense 723 --
Provision for possible losses 36,672 33,487
Other 21,643 10,112
-------- --------
Total expenses 89,062 67,140
-------- --------
Net income $145,621 $ 26,409
======== ========
Net income per partnership unit (Note D) $ 16.98 $ 8.07
======== ========
Weighted average partnership units outstanding 8,576 3,273
See accompanying notes.
4
5
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
INCOME:
Lease and interest income $385,508 $ 79,480
Gain on lease terminations -0- 17,764
Other 18,071 18,299
-------- --------
Total income 403,579 115,543
-------- --------
EXPENSES:
Management fees 16,108 2,874
Administrative services 42,000 35,000
Interest expense 4,396 -0-
Provision for possible losses 61,742 51,573
Other 56,827 15,266
-------- --------
Total expenses 181,073 104,713
-------- --------
Net income $222,506 $ 10,830
======== ========
Net income per partnership unit (Note D) $ 29.35 $ 4.37
======== ========
Weighted average partnership units outstanding 7,582 2,480
See accompanying notes.
5
6
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
GENERAL TOTAL
PARTNER LIMITED PARTNERS PARTNERS'
(10 UNITS) UNITS AMOUNT EQUITY
- ---------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 9,254 5,784 $ 4,894,244 $ 4,903,498
Proceeds from sale of limited
partnership interests -- 1,723 1,723,000 1,723,000
Syndication costs incurred -- -- (215,375) (215,375)
Distributions (240) -- (157,473) (157,713)
Net Income 102 -- 76,783 76,885
-------------------------------------------------------
Balance at March 31, 1999 9,116 7,507 6,321,179 6,330,295
Proceeds from sale of limited
partnership interests -- 2,059 2,059,000 2,059,000
Syndication costs incurred -- -- (257,375) (257,375)
Distributions (240) -- (204,387) (204,627)
Net Income 130 -- 145,491 145,621
-------------------------------------------------------
Balance at June 30, 1999 $ 9,006 9,566 $ 8,063,908 $ 8,072,914
========================================================
See accompanying notes.
6
7
TELECOMMUNICATIONS INCOME FUND XI, L.P.
STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
OPERATING ACTIVITIES
Net income $ 222,506 $ 10,830
Adjustments to reconcile net income to
net cash from operating activities:
Gain on lease terminations -- (17,764)
Provision for possible losses 61,742 51,573
Amortization 725 --
Changes in operating assets and liabilities:
Other assets (613) (8,354)
Due to affiliates 1,640 38,834
Accrued expenses and other liabilities 6,150 16,575
----------- -----------
Net cash from operating activities 292,150 91,694
----------- -----------
INVESTING ACTIVITIES
Acquisitions of, and purchases of equipment for,
direct financing leases (2,688,166) (2,685,820)
Issuance of notes receivable (1,476,300) (752,410)
Repayments of direct financing leases 235,561 57,067
Repayments of notes receivable 172,352 --
Proceeds from sales of direct financing leases 2,561 418,485
Net lease security deposits collected 18,293 50,815
----------- -----------
Net cash from investing activities (3,735,699) (2,911,863)
----------- -----------
FINANCING ACTIVITIES
Borrowings from line of credit 915,394 --
Repayments of line of credit (610,785) --
Proceeds from sale of partnership interests 3,782,000 3,518,000
Syndication costs incurred (472,750) (439,750)
Distributions and withdrawal paid to partners (333,477) (75,150)
----------- -----------
Net cash from financing activities 3,280,382 3,003,100
----------- -----------
Net increase (decrease) in cash and cash equivalents (163,167) 182,931
Cash and cash equivalents at beginning of period 500,713 10,593
----------- -----------
Cash and cash equivalents at end of period $ 337,546 $ 193,524
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 4,228 $ --
See accompanying notes.
7
8
TELECOMMUNICATIONS INCOME FUND XI, L.P.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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 six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. These financial statements should be read in conjunction with the
Partnership's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998.
NOTE B - NET INVESTMENT IN DIRECT FINANCING LEASES AND NOTES RECEIVABLE
Components of the net investment in direct financing leases and notes receivable
are as follows:
June 30, 1999
-------------
Lease payments receivable $ 7,183,718
Unamortized initial direct costs 1,241
Estimated residual values of leased equipment 550,321
Unearned lease income (1,520,098)
Notes receivable 2,176,227
-----------
Net investment in direct financing leases $ 8,391,409
===========
NOTE C - CREDIT ARRANGEMENTS
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
is limited to $2,000,000 or 32% of qualified accounts, primarily leases and
notes receivable. The line of credit agreement bears interest at 1% over the
prime rate, with a $4,000 minimum monthly interest charge beginning in July
1999, and is collateralized by substantially all the 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 agreement expires on June 30, 2000. The General Partner
believes amounts available under the line of credit are adequate for the
foreseeable future.
NOTE D - NET INCOME PER PARTNERSHIP UNIT
Net income per partnership unit is based on the weighted average number of units
outstanding (including both general and limited partners) which were 8,576 and
7,582 units for the three and six month periods ended June 30, 1999,
respectively. Units outstanding for the three and six month periods ended June
30, 1998 were 3,273 and 2,480 units, respectively.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------- -----------------
Description:
------------
Lease and interest income $385,508 $79,480
Management fees 16,108 2,874
Administrative services 42,000 35,000
Provision for possible losses 61,742 51,573
Other expenses 56,827 15,266
The increase in lease and interest income is due to the acquisition of equipment
for investment in direct financing leases and notes receivable. The
Partnership's net investment in direct financing leases and notes receivable was
$2,977,610 at June 30, 1998, and has increased to $8,391,409 at June 30, 1999.
Equipment acquisitions for investment in direct financing leases and notes
receivable totalled $4,164,466 for the first six months of 1999.
Management fees are paid to the General Partner and represent 2% of the gross
rental and notes receivable payments received. Gross rental and notes receivable
payments for the first six months of 1999 were $805,400. As the lease portfolio
has increased due to the acquisition of equipment, management fees have
increased and will continue to increase accordingly during the operational phase
of the Partnership.
Administrative services of $42,000 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 $7,000 per month for these services.
Since leasing operations did not commence until February 1998, no administrative
fee was paid to the General Partner in January 1998. The Partnership also pays
the General Partner an equipment acquisition fee equal to 5% of the equipment
costs for new leases.
The provision for possible losses has increased due to the increase in the
Partnership's lease portfolio. At June 30, 1999 the allowance for possible
losses was $147,189 and represents 1.8% of the lease and note portfolio of
$8,391,409. Management continually reviews its reserves and will make
adjustments as needed.
At June 30, 1999, no customers were past due over 90 days. If a payment is past
due more than 90 days, the Partnership discontinues recognizing income on the
contract.
Other expenses include legal fees, audit fees, data processing expenses, and
other professional and administrative expenses. Legal and accounting expenses
were $24,532 for the first six months of 1999, while data processing expenses
were $21,323 for the same period. The increase in other expenses compared to
1998 is due to the increased lease and note volume in 1999, as opposed to the
minimal expenses incurred in 1998 when the Partnership was beginning its
operations.
The Partnership's portfolio of leases and notes receivable are concentrated in
ATM machines, pay telephones, and office and computer equipment, representing
approximately 36%, 35%, and 17%,
9
10
respectively, of the portfolio at June 30, 1999. Three lessees account for
approximately 68% of the Partnership's portfolio at June 30, 1999.
YEAR 2000 ISSUE
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. The costs of ensuring systems are
compatible with the Year 2000 are not believed to be material. There are no
non-information technology processes that the Partnership has identified which
would affect its operations. An assessment of the readiness of external entities
which it interfaces with, such as vendors, customers, and others, is ongoing. At
present the Partnership does not contemplate that any specific charges will be
incurred for this assessment or any other costs directly related to fixing Year
2000 issues, and if there are any related expenditures, does not expect them to
be significant.
The Partnership is assessing the impact of the Year 2000 issue on information
technology and non-information technology systems used by lessees. No lessee is
contractually obligated to become Year 2000 compliant or to disclose their
capabilities to the Partnership. The Partnership has not yet determined whether
the Year 2000 issue has been addressed by all of its customers. The Partnership
has contacted some of its customers and will continue to contact its customers
in 1999. In a worst case scenario, the inability of lessees to be Year 2000
compliant could result in delayed or no payment of amounts due to the
Partnership. The Partnership has no contingency plans at this time to alleviate
this worst case scenario should it be encountered.
The Partnership has determined that the software it utilizes in its operations
is compatible with the Year 2000. The Partnership utilizes an unrelated third
party for lease servicing. This third party vendor has been contacted and it has
been determined that their lease servicing application is Year 2000 compliant. A
written confirmation regarding compliance of this application has been received
from the software developer.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------- ----------------
Major Cash Sources:
Proceeds from issuance of units $3,782,000 $3,518,000
Borrowings from line of credit 915,394 --
Major Cash Uses:
Payments for syndication costs 472,750 439,750
Purchases of equipment 2,688,166 2,685,820
Issuance of notes receivable 1,476,300 752,410
Payments on line of credit 610,785 --
Distributions and withdrawals paid to partners 333,477 75,150
The demand for equipment leases remains strong and as Partnership Units continue
to be sold, the Partnership's available cash will be used to acquire equipment
for investment in direct financing leases and issue notes receivable.
10
11
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
is limited to $2,000,000 or 32% of qualified accounts, primarily leases and
notes receivable. The line of credit agreement bears interest at 1% over the
prime rate, with a $4,000 minimum monthly interest charge beginning in July
1999, and is collateralized by substantially all the 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 agreement expires on June 30, 2000. The General Partner
believes amounts available under the line of credit are adequate for the
foreseeable future.
At June 30, 1999, adequate cash is being generated to make projected
distributions. However, the Partnership has not yet achieved an earnings level
equivalent to its operating distributions to partners.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The table below provides information about the Partnership's notes receivable
that are sensitive to changes in interest rates. For notes receivable, the table
presents principal cash flows and related weighted average interest by expected
maturity dates as of June 30, 1999.
Expected Maturity Date Principal Balance Due Average Interest Rate
---------------------- --------------------- ---------------------
1999 $ 210,098 15.6 %
2000 461,630 15.6 %
2001 523,703 15.7 %
2002 533,189 16.0 %
2003 and thereafter 447,607 16.5 %
----------
Total $2,176,227
==========
Fair Value $2,176,227
==========
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.
11
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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 XI, L.P.
---------------------------------------
(Registrant)
Date: August 9, 1999 /s/ Ronald O. Brendengen
------------------------- --------------------------------------
Ronald O. Brendengen,
Chief Financial Officer, Treasurer
Date: August 9, 1999 /s/ Daniel P. Wegmann
------------------------- --------------------------------------
Daniel P. Wegmann, Controller
13