AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1997
REGISTRATION NO. 333-35557
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TELECOMMUNICATIONS INCOME FUND XI, L.P.
(Exact name of registrant as specified in its certificate)
AN IOWA LIMITED PARTNERSHIP 7394 39-1904041
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Classification) Identification
incorporation or organization) No.)
100 SECOND STREET, SE
CEDAR RAPIDS, IOWA 52401
(319) 365-2506
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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THOMAS J. BERTHEL
PRESIDENT OF THE GENERAL PARTNER
100 SECOND STREET, SE
CEDAR RAPIDS, IOWA 52401
(319) 365-2506
(Address, including zip code, and telephone number, including area code, of
agent for service)
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MICHAEL K. DENNEY, ESQ.
BRADLEY & RILEY, P. C.
100 FIRST STREET, SW
CEDAR RAPIDS, IOWA 52404
(319) 363-0101
(Recipient of copies of service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
Units of Limited Partnership Interest(1)....... 25,000 Units $1,000 Per Unit(2) $25,000,000 $7,575.75
(1) This Registration Statement covers Units of Limited Partnership Interest
("Units") which will be issued during the Offering Period, as defined
herein.
(2) Subscriptions for Units will be accepted in the minimum amount of two Units
for a minimum subscription price of $2,000.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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TELECOMMUNICATIONS INCOME FUND XI, L.P.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF
FORM S-1 AND REGISTRATION STATEMENT
ITEM NO. AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover........................................ Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings To Fixed Charges.......................... Summary of the Offering and the Partnership; Risk
Factors
4. Use of Proceeds...................................... Estimated Use of Proceeds
5. Determination of Offering Price...................... Summary of the Limited Partnership Agreement
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Cover Page; Investor Suitability Standards; Plan of
Distribution; Summary of Promotional and Sales
Material
9. Description of Securities to be Registered........... Summary of the Offering and the Partnership; Summary
of the Limited Partnership Agreement
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Cover Page; Cash Distributions and Redemptions;
Compensation of the General Partner; Conflicts of
Interest; Prior Experience of the General Partner
and Affiliates; Investment Objectives and Policies;
Equipment Acquisitions; Capitalization;
Management's Discussion and Analysis of Financial
Condition; Financial Statements of the Partnership
and the General Partner
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Fiduciary Responsibility of the General Partner
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION DATED DECEMBER 19, 1997
$25,000,000
TELECOMMUNICATIONS INCOME FUND XI, L.P.
AN IOWA LIMITED PARTNERSHIP
$1,000 PER UNIT
A MINIMUM OF 1,200 UNITS ($1,200,000) OF
LIMITED PARTNERSHIP INTEREST
MINIMUM INVESTMENT: 2 UNITS ($2,000)
---------------------
Telecommunications Income Fund XI, L.P., is a newly organized Iowa limited
partnership (the "Partnership"). The General Partner of the Partnership is
Berthel Fisher & Company Leasing, Inc., an Iowa corporation (the "General
Partner"). The Partnership hereby offers a minimum of $1,200,000 and a maximum
of $25,000,000 in units of limited partnership interest in the Partnership
("Units") for sale to prospective investors in the Partnership ("Limited
Partners") by means of this Prospectus.
THESE ARE SPECULATIVE SECURITIES. THIS OFFERING INVOLVES CERTAIN MATERIAL
RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 13. THE MOST SIGNIFICANT RISK
FACTORS TO BE CONSIDERED BY AN INVESTOR ARE:
- Limited Partners must rely solely on the General Partner. There are
conflicts of interest between the Partnership and the General Partner.
- Program Assets to be acquired by the Partnership are unspecified.
- The Partnership has no operating history.
- The General Partner is entitled to substantial fees which will be received
regardless of whether Limited Partners receive a return of their
investment. Such fees include Acquisition Fees (5% of Equipment acquired
and financings placed by the Partnership ($72,058 from Gross Proceeds at
the Minimum Offering if maximum leverage is used and $1,501,191 from Gross
Proceeds at the Maximum Offering if maximum leverage is used)) and
Management Fees of 2.0% of the payments received by the Partnership on
account of its leasing and financing activities. See "Estimated Use of
Proceeds."
- It is not certain that investors will ever receive their own money back or
that cash distributions will ever be made. Cash distributions may include
a return of capital.
- Lessees may default on leases or become bankrupt.
- Use of leverage to purchase Program Assets will increase the Partnership's
need for cash flow to meet debt service requirements. The Partnership
intends to borrow the maximum of 40.0% of Gross Proceeds ($10,000,000) if
the Maximum Offering is attained.
- There are significant restrictions on the transferability of Units, and it
is not anticipated that an active market will ever develop for Units. The
Units will not be listed on an exchange.
- The Limited Partners' federal tax liability may exceed their cash
distributions for a given year.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PRICE TO SELLING PROCEEDS TO
UNITS PUBLIC COMMISSIONS(1) PARTNERSHIP(2)
Per Unit......................... -- $1,000 $90 $910
Total Minimum(3)................. 1,200 $1,200,000 $108,000 $1,092,000
Total Maximum(4)................. 25,000 $25,000,000 $2,250,000 $22,750,000
(1) The Units in the Partnership are being offered through Berthel Fisher &
Company Financial Services, Inc. ("Financial Services"), an affiliate of the
General Partner, as Managing Sales Agent. Financial Services will in turn
engage other broker-dealers who are members of the National Association of
Securities Dealers, Inc. as Selected Sales Agents to offer to sell the
Units. The Managing Sales Agent will receive a Fee of 9.0% of Gross Proceeds
of the Offering, payable by the Partnership. Out of such amount, the
Managing Sales Agent will pay a fee to Selected Sales Agents of 6.0% of the
Gross Proceeds from Units sold by the Selected Sales Agents (6.5% to
Selected Sales Agents who sell more than $1,000,000 of Units). See
"Compensation of the General Partner and Affiliates" and "Plan of
Distribution."
(2) Does not take into account Organizational and Offering Expenses payable by
the Partnership. See "Estimated Use of Proceeds."
(3) The minimum does not include Units purchased by the General Partner or
Affiliates.
(4) The maximum includes Units purchased by the General Partner or Affiliates.
(COVER CONTINUED ON NEXT PAGE)
THE DATE OF THIS PROSPECTUS IS , 1997.
The Partnership intends to use the Net Proceeds of this offering to acquire
Equipment to be leased to unaffiliated third parties and to acquire other
Program Assets. The Partnership intends that a major percentage of the Equipment
acquired by the Partnership will be telecommunication equipment. See "Investment
Objectives and Policies." The Partnership has been formed primarily for
income-oriented investment purposes. Most of its income is expected to be
"passive activity income". THERE CAN BE NO ASSURANCE THAT ANY OF THE
PARTNERSHIP'S OBJECTIVES WILL BE ACHIEVED OR THAT ANY SPECIFIC LEVEL OF CASH
DISTRIBUTIONS CAN OR WILL BE ATTAINED. See "Risk Factors," "Investment
Objectives and Policies" and "Tax Consequences."
If all of the Selected Selling Agent Fees are paid to the Managing Sales
Agent, it is estimated that Front End Fees paid to the General Partner and
affiliates of the General Partner from Gross Proceeds will be: (a) 13.1% of
Gross Proceeds assuming no borrowing ($157,429 if the Minimum is sold and
$3,279,762 if the Maximum is sold; and (b) 10.7% of Gross Proceeds and
borrowings assuming maximum borrowing ($180,058 if the Minimum is sold and
$3,751,191 if the Maximum is sold). After paying all fees and expenses and
establishing reserves, if the Minimum of Units is sold and the maximum is
borrowed, it is estimated that $965,942 of Net Proceeds will be invested in
Program Assets, and if the Maximum of Units is sold and the maximum is borrowed,
it is estimated that $20,123,809 of Net Proceeds will be invested in Program
Assets. AFTER DEDUCTION OF ALL FRONT END FEES TO BE PAID FROM GROSS PROCEEDS,
ESTABLISHING A RESERVE AND ASSUMING THE PARTNERSHIP BORROWS THE MAXIMUM (40.0%
OF GROSS PROCEEDS), IT IS ESTIMATED THAT 80.5% OF THE LIMITED PARTNERS'
INVESTMENT WILL BE AVAILABLE AS NET PROCEEDS FOR INVESTMENT BY THE PARTNERSHIP.
SEE "ESTIMATED USE OF PROCEEDS."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
The Partnership is not a mutual fund or any other type of investment company
within the meaning of the Investment Company Act of 1940 and is not subject to
regulation thereunder.
Until the minimum Gross Proceeds of $1,200,000 have been raised, payments
made by subscribers will be held by First National Bank Iowa, Cedar Rapids, Iowa
as Escrow Agent. See "Payment for Units" under "Plan of Distribution." The
offering will terminate on the Closing Date, which is to be no later than one
year after the Effective Date; provided that if the Minimum Offering has been
achieved and registration is renewed with the applicable federal and state
agencies, the General Partner may extend the offering period and postpone the
Closing Date for up to an additional year (i.e., two years) from the Effective
Date.
THE PARTNERSHIP WILL UTILIZE THIS PROSPECTUS TO MAKE OFFERS AND
SOLICITATIONS ONLY IN STATES IN WHICH THE PARTNERSHIP HAS MADE APPROPRIATE
FILINGS OR OTHERWISE COMPLIED WITH STATE LAW. THE USE OF FORECASTS IN CONNECTION
WITH THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO THE CONTRARY AND ANY
PREDICTION, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR
FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS
PROGRAM IS NOT PERMITTED.
INVESTORS ARE REQUIRED TO REPRESENT THAT THEY MEET THE OFFERING'S
SUITABILITY STANDARDS AND THAT THEY ARE PURCHASING FOR INVESTMENT AND NOT FOR
RESALE.
PROSPECTIVE INVESTORS ARE ENCOURAGED TO READ CAREFULLY THE ENTIRE
PROSPECTUS, WHICH CONTAINS A COMPLETE COPY OF THE FORM OF PARTNERSHIP AGREEMENT,
AND WHICH IS ACCOMPANIED BY ANY CURRENT SUPPLEMENT.
2
TABLE OF CONTENTS
PAGE
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SUMMARY OF THE OFFERING AND THE PARTNERSHIP................................................................ 5
Risk Factors............................................................................................. 5
Estimated Use of Proceeds................................................................................ 6
Compensation of The General Partner And Affiliates....................................................... 7
Conflicts of Interest.................................................................................... 7
Tax Consequences......................................................................................... 8
Tax Status of the Partnership.......................................................................... 8
Publicly Traded Partnerships........................................................................... 8
Passive Activity Income Tax Rules...................................................................... 8
Management............................................................................................... 8
Prior Experience of The General Partner And Affiliates................................................... 8
Investment Objectives And Policies....................................................................... 9
Equipment Acquisitions................................................................................... 10
Cash Distributions And Redemption........................................................................ 10
Operating Distributions................................................................................ 10
Distributions on Liquidation and Winding Up............................................................ 10
Redemptions............................................................................................ 11
RISK FACTORS............................................................................................... 11
Risks of Equipment Ownership And Leasing................................................................. 11
Partnership And Business Risks........................................................................... 13
Federal Income Tax Risks................................................................................. 16
INVESTOR SUITABILITY STANDARDS............................................................................. 17
ESTIMATED USE OF PROCEEDS.................................................................................. 20
COMPENSATION OF THE GENERAL PARTNER AND AFFILIATES......................................................... 21
CONFLICTS OF INTEREST...................................................................................... 27
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER............................................................ 30
TAX MATTERS................................................................................................ 32
Brief Summary of Material Tax Consequences of Investment................................................. 32
Tax Consequences......................................................................................... 32
EMPLOYEE BENEFIT PLANS..................................................................................... 48
MANAGEMENT................................................................................................. 50
The Partnership.......................................................................................... 50
The General Partner and Its Affiliates................................................................... 50
Executive Officers of the General Partner................................................................ 51
Directors of the General Partner......................................................................... 52
Operation of the General Partner......................................................................... 53
PRIOR EXPERIENCE OF THE GENERAL PARTNER AND AFFILIATES..................................................... 53
General.................................................................................................. 53
Differences Between the Partnership and Other Public and Private Programs................................ 54
Information Regarding Private Programs................................................................... 55
INVESTMENT OBJECTIVES AND POLICIES......................................................................... 55
General.................................................................................................. 55
Types of Equipment to be Acquired........................................................................ 57
Telecommunications Industry in General................................................................... 57
Telecommunications Equipment Market Factors.............................................................. 58
Telecommunications Equipment Residual Values............................................................. 58
Acquisition Policies and Procedures...................................................................... 59
Temporary Investments; Return of Uninvested Net Proceeds................................................. 60
3
PAGE
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Leases................................................................................................... 61
Financing................................................................................................ 62
Working Capital Reserves................................................................................. 64
Sales of Lease Receivables and Residual Values........................................................... 64
Sale of Equipment........................................................................................ 65
Demand for Equipment..................................................................................... 66
EQUIPMENT ACQUISITIONS..................................................................................... 66
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT............................................................... 66
Partnership Capital...................................................................................... 67
Partnership Allocations.................................................................................. 67
Voting Rights of Limited Partners........................................................................ 67
Liability of Partners to Third Parties................................................................... 68
Exculpation and Indemnification of the General Partner................................................... 68
Withdrawal or Removal of the General Partner............................................................. 69
Dissolution and Liquidation.............................................................................. 69
Amendment................................................................................................ 70
Appointment of the General Partner as Attorney-in-Fact................................................... 70
Principal Office of the Partnership...................................................................... 70
Applicable Law........................................................................................... 70
Transferability of Units................................................................................. 70
Roll-up Protection....................................................................................... 71
CASH DISTRIBUTIONS AND REDEMPTIONS......................................................................... 72
Cash Distributions....................................................................................... 72
Redemption of Units...................................................................................... 75
Liquidation Policies..................................................................................... 76
REPORTS TO LIMITED PARTNERS................................................................................ 76
MAINTENANCE OF RECORDS..................................................................................... 77
CAPITALIZATION............................................................................................. 78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION................................................ 79
Liquidity and Capital Resources.......................................................................... 79
Operations............................................................................................... 80
PLAN OF DISTRIBUTION....................................................................................... 80
Introduction............................................................................................. 80
Broker-Dealers and the Selling Agreements................................................................ 80
The Offering of Units.................................................................................... 81
Admission of Limited Partners............................................................................ 81
Cancellation of Offering................................................................................. 82
Subscription for Units................................................................................... 82
Payment for Units........................................................................................ 83
SUMMARY OF PROMOTIONAL AND SALES MATERIAL.................................................................. 83
EXPERTS.................................................................................................... 84
LEGAL MATTERS.............................................................................................. 84
ADDITIONAL INFORMATION..................................................................................... 84
FINANCIAL STATEMENTS OF THE PARTNERSHIP AND THE GENERAL PARTNER............................................ 85
GLOSSARY................................................................................................... 111
EXHIBIT "A"--AGREEMENT OF LIMITED PARTNERSHIP.............................................................. A-1
EXHIBIT "B"--SUBSCRIPTION AGREEMENT........................................................................ B-1
EXHIBIT "C"--TABULAR INFORMATION CONCERNING PRIOR TRANSACTIONS............................................. C-1
EXHIBIT "D"--NOTICE TO CALIFORNIA INVESTORS................................................................ D-1
4
SUMMARY OF THE OFFERING AND THE PARTNERSHIP
The Partnership is an equipment leasing program. The principal office of the
Partnership is located at 100 Second Street, SE, Cedar Rapids, Iowa 52401. The
Partnership's phone number is (319) 365-2506. The principal investment objective
of the Partnership is to obtain the maximum available economic return from its
Investment in Program Assets. The Partnership intends to purchase Equipment and
lease it to unaffiliated third parties, with a view toward generating Cash Flow
during its Operating Phase, making Operating Distributions, reinvesting
undistributed Cash Flow from operations in additional Equipment for lease, and
maximizing the residual values of Equipment upon sale.
The following is a summary of the pertinent facts and highlights from the
material contained in this Prospectus. The following summary is qualified in its
entirety by the more detailed information contained elsewhere in this
Prospectus.
I. RISK FACTORS
The purchase of Units involves risks. Prospective investors should carefully
review the section entitled "Risk Factors" beginning on page 13 before
purchasing Units. The material risks of an investment in the Partnership are
summarized as follows:
- INVESTORS CANNOT TAKE PART IN MANAGEMENT OF THE PARTNERSHIP AND MUST RELY
SOLELY ON THE GENERAL PARTNER. Limited Partners cannot take an active role
in management and must rely solely upon the General Partner for management
of the Partnership.
- EQUIPMENT TO BE PURCHASED WITH NET PROCEEDS AND THE LESSEES OF SUCH
EQUIPMENT ARE UNSPECIFIED AND CANNOT BE ASSESSED BY INVESTORS. No
Equipment has been identified by the Partnership for purchase, and no
lessees have been identified. Accordingly, investors are unable to assess
for themselves the exact nature of Equipment that will be purchased by the
Partnership or the quality of lessees.
- THE PARTNERSHIP HAS NO OPERATING HISTORY. The Partnership is newly formed
and has no operating history. However, the officers and directors of the
General Partner also serve or have served as general partners, officers or
directors of affiliates of the General Partner which are currently
operating or have operated leasing businesses. See "Prior Experience of
the General Partner and Affiliates" and Exhibit C--"Tabular Information
Concerning Prior Transactions."
- GENERAL PARTNER ENTITLED TO FEES. The General Partner is entitled to
substantial fees which it will receive regardless of whether Limited
Partners receive a return of their investment.
- LIMITED PARTNERS MAY NOT RECEIVE A RETURN AND MAY NOT RECEIVE THEIR
INVESTMENT BACK. It is not certain either that Limited Partners will ever
receive their own money back or that they will receive a return on their
investment. Cash Distributions made during the Operating Phase may include
a return of the Limited Partners' own money.
- LESSEES MAY DEFAULT OR BECOME BANKRUPT. Lessees may default on the
obligations under a lease or become bankrupt. If the Partnership cannot
re-lease or sell the Equipment, the Partnership will experience a loss of
anticipated revenues. Such defaults or bankruptcies will result in a
reduction of distributions to Limited Partners.
- THERE MAY BE INSUFFICIENT REVENUE TO MEET DEBT SERVICE WHEN LEVERAGE IS
USED. The use of leverage increases the risk of an investment in the
Partnership because it requires the Partnership to meet debt repayment
requirements even though the lease of Equipment purchased with the debt
may fail or produce insufficient revenue to meet the debt service
obligations. The General Partner intends to borrow the maximum of 40.0% of
the Gross Proceeds ($10,000,000 if the Maximum of $25,000,000 of Units is
sold).
- NO PUBLIC MARKET FOR UNITS AND NO RIGHT TO REDEMPTION. There is no public
market for the Units, and it is not likely that a market will develop. The
Units are subject to restrictions on transfer and
5
can only be transferred in conformity with the Partnership Agreement and
in compliance with applicable law.
- THE STATUS OF THE PARTNERSHIP AS A PARTNERSHIP FOR TAX PURPOSES MAY BE
CHALLENGED. The availability of any tax benefits of investing in the
Partnership is dependent upon the classification of the Partnership as a
partnership, and not as an association taxable as a corporation. The IRS
may challenge the Partnership's classification as a partnership.
- ADVERSE TAX CONSEQUENCES WILL RESULT IF PARTNERSHIP IS TREATED AS
"PUBLICLY TRADED". The treatment of the Partnership by the IRS as a
publicly traded partnership will have significant adverse effects on
investors.
- EQUIPMENT MAY RAPIDLY DECLINE IN VALUE. Equipment purchased by the
Partnership may rapidly decline in value, thereby impairing the General
Partner's ability to obtain Residual Value. Upon the sale of equipment at
the end of a lease, Private Programs operated by the General Partner
received a nominal price, usually less than ten percent (10.0%) of the
cost of the equipment.
- PARTNERSHIP MAY PURCHASE EQUIPMENT FROM A MANUFACTURER IN WHICH AFFILIATE
OWNS AN INTEREST. An Affiliate of the General Partner owns approximately
6.2% of Intellicall, Inc., one of several manufacturers from which the
Partnership will acquire Equipment. The General Partner has a conflict of
interest that could result in the General Partner making credit and
leasing decisions to benefit that manufacturer.
- EMERGING GROWTH COMPANIES MAY BE WEAK LESSEES. The Partnership may enter
into leases with emerging growth companies. These leases involve a higher
degree of risk than leases with established companies.
II. ESTIMATED USE OF PROCEEDS
If the minimum number of Units is sold and the maximum (40.0% of Gross
Proceeds) is borrowed, it is estimated that 19.5% of the Gross Proceeds will be
used to pay fees and expenses and for reserves, and 80.5% will be used to
acquire Program Assets. If the maximum number of Units is sold and the maximum
(40.0% of Gross Proceeds) is borrowed, it is estimated that 19.5% of the Gross
Proceeds will be used to pay fees and expenses and for reserves, and 80.5% will
be used to acquire Program Assets. See Table I of Exhibit C--Tabular Information
Concerning Prior Transactions, for information regarding the Managing Sales
Agent's history of not raising the maximum offering size for transactions
greater than $1,000,000. See "Estimated Use of Proceeds."
The Partnership will use Gross Proceeds to pay Front End Fees (fees and
expenses incurred by the Partnership in connection with the organization of the
Partnership, the offering and sale of Units and the acquisition of Program
Assets) in an amount no greater than $199,429 (16.6% of Gross Proceeds) assuming
no indebtedness, and in an amount no greater than $222,058 (18.5% of Gross
Proceeds) assuming indebtedness equal to 40% of Gross Proceeds and assuming only
$1,200,000 of Units are sold. Front End Fees paid from Gross Proceeds will be no
greater than $4,154,762 (16.6% of Gross Proceeds) assuming $25,000,000 of Units
are sold and assuming no indebtedness, and will be no greater than $4,626,191
(18.5% of Gross Proceeds) assuming $25,000,000 of Units are sold and assuming
indebtedness equal to 40% of Gross Proceeds. The table included in "Estimated
Use of Proceeds" shows estimated Total Organization and Offering Expenses (other
than Managing Sales Agent Fee and Selected Selling Agents Commissions) of 3.5%,
or $42,000 at the Minimum Offering amount. Because it is highly likely that
these expenses will exceed $42,000, the General Partner will promptly pay all
such Organization and Offering Expenses that are in excess of the maximum
percentage limits set forth in that table.
Front End Fees means the fees and expenses paid by any party for any
services rendered during the Partnership's organizational or acquisition phase,
including Organization and Offering Expenses (expenses incurred in connection
with formation of the Partnership and preparing the Partnership for registration
and subsequently offering and distributing it to the public, including sales
commissions paid to brokers or
6
dealers in connection with the distribution of Interests), Acquisition Fees
(fees and commissions paid by any party in connection with the initial purchase
or manufacture of Equipment acquired by or financings placed by the Partnership)
and Acquisition Expenses (legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses, and miscellaneous
expenses relating to selection and acquisition of Program Assets) and any other
similar fees, however designated. That portion of Organization and Offering
Expenses consisting of commissions to broker dealers will be paid to an
Affiliate of the General Partner and other broker dealers who sell Interests.
Such Organization and Offering Expenses as printing, legal and accounting
expenses and advertising expenses will be paid to the persons or entities
providing such services. Acquisition Fees will generally be paid to the General
Partner, but in limited circumstances Acquisition Fees may be paid to unrelated
third parties. The General Partner will pay Acquisition Expenses out of its
Acquisition Fee to the persons or entities providing services for which such
expenses are incurred.
III. COMPENSATION OF THE GENERAL PARTNER AND AFFILIATES
The General Partner and Affiliates will receive various types of
compensation in connection with the offering and operation of the Partnership.
See "Compensation of the General Partner and Affiliates."
- The Managing Sales Agent, an affiliate of the General Partner, will
receive a fee equal to 9.0% of the Gross Proceeds ($108,000 if the minimum
is sold and $2,250,000 if the maximum is sold).
- The General Partner will receive fees for acquisition services equal to
5.0% of the cost of Equipment and financing provided by the Partnership.
- The General Partner will provide re-leasing services to the Partnership at
a price not to exceed 2% of rental payments received on account of such
re-leasing activities.
- Until the General Partner elects to begin the liquidation of the
Partnership assets, the General Partner will receive (i) a fee for
services in connection with managing the operations of the Partnership
equal to 2.0% of the aggregate amount of Gross Rental Payments, loan
payments and other payments received by the Partnership on account of its
leasing and financing activities, (ii) reimbursement of expenses, and
(iii) interest on loans, if any, made to the Partnership. Payments to the
General Partner for managing the operations of the Partnership will cease
accruing upon the election of the General Partner to liquidate the
Partnership (the close of the Operating Phase).
- The General Partner has an interest in the profits and losses of the
Partnership to the extent it owns Units.
- When Limited Partners have received a return of their Capital
Contribution, plus a return of 9.6% per annum during the Operating Phase
(the period that ends when the General Partner elects to begin the
liquidation of the Partnership's assets), and no less than an 8.0% annual,
cumulative, compounded daily, distribution based on their Adjusted Capital
Contributions, the General Partner will receive 20.0% of all remaining
amounts distributed.
IV. CONFLICTS OF INTEREST
There are numerous conflicts of interest between the Partnership and the
General Partner and its Affiliates. These conflicts arise primarily because the
General Partner has established all of the terms relating to investment in the
Units, the General Partner will control the Partnership, the General Partner
also conducts its own leasing activities, and the General Partner and its
Affiliates will receive various forms of compensation from the Partnership. See
"Conflicts of Interest."
7
V. TAX CONSEQUENCES
There are numerous tax consequences relating to an investment in Units that
are fully described in "Tax Consequences" and that should be reviewed in full.
The most significant tax consequences are highlighted below:
A. TAX STATUS OF THE PARTNERSHIP
The General Partner has not requested a private letter ruling from the IRS
that the Partnership will for federal income tax purposes be classified as a
partnership rather than as an association taxable as a corporation. The
Partnership has received an opinion from its tax counsel as to its tax status as
a partnership, but such opinion is not binding upon the IRS. If the Partnership
were taxed as a corporation, the after-tax return to a Limited Partner from an
investment in the Partnership would likely be reduced. See "Federal Income Tax
Risks" under "Risk Factors" and "Tax Consequences."
B. PUBLICLY TRADED PARTNERSHIPS
If the Partnership is a "publicly traded partnership," it will be treated as
a corporation for tax purposes and would be subject to other adverse tax
treatment. Based upon representation of the General Partner that it intends to
limit transfers, tax counsel has opined that the Partnership will not be treated
as "publicly traded." See "Federal Income Tax Risks" under "Risk Factors" and
"Tax Consequences."
C. PASSIVE ACTIVITY INCOME TAX RULES
An investment in the Partnership will be considered to be an investment in a
"passive activity." Losses from passive activities do not reduce an individual
Limited Partner's federal taxable income from salaries, active businesses in
which he materially participates, or portfolio items such as stocks or
interest-bearing securities. Income from a passive activity may be offset by
losses from other passive activities.
Due to the complexity of the passive activity rules and other tax law rules
promulgated by Congress, prospective investors are urged to consult their own
tax advisors as to the particular income tax consequences to them of the
purchase, ownership, and disposition of Units. See "Federal Income Tax Risks"
under "Risk Factors" and "Tax Consequences."
VI. MANAGEMENT
The General Partner of the Partnership is Berthel Fisher & Company Leasing,
Inc., Cedar Rapids, Iowa. The General Partner will manage and control all of the
affairs of the Partnership, and will make all investment decisions with respect
to the Partnership's acquisition, leasing and sale or other disposition of
Equipment and other Program Assets. The General Partner has four executive
officers, one of whom is a full time employee, and a board of directors
consisting of five persons, including three of the four executive officers.
VII. PRIOR EXPERIENCE OF THE GENERAL PARTNER AND AFFILIATES
The General Partner has operated a leasing business since 1988. The General
Partner has served as general partner of Telecommunications Income Fund IX, L.P.
("TIF IX"), a publicly held equipment leasing limited partnership that began
operations on October 31, 1991, and Telecommunications Income Fund X, L.P. ("TIF
X"), a publicly held equipment leasing limited partnership that began operations
on September 29, 1993. The General Partner has duties in connection with the
operation of TIF IX and TIF X that are similar to its duties under the
Partnership Agreement of the Partnership.
Affiliates of the General Partner previously operated eight Private
Programs, all of which were primarily involved in the leasing of
telecommunications equipment. Operations in all of the Private Programs have
been completed. The general partners' duties in connection with the operations
of the Private Programs were generally similar to the General Partner's duties
under the Partnership Agreement
8
of the Partnership. See "Conflicts of Interest," "Prior Experience of the
General Partner and Affiliates," "Management" and "Exhibit C--Tabular
Information Concerning Prior Transactions."
VIII. INVESTMENT OBJECTIVES AND POLICIES
The principal investment objective of the Partnership is to obtain the
maximum available economic return from its Investment in Program Assets. To
achieve this objective, the Partnership plans to (i) purchase Equipment for
lease to unaffiliated third parties, (ii) purchase Equipment that is subject to
existing leases, in which case the Partnership will also acquire the lessor's
interest in the lease, and (iii) sell or re-lease Equipment as leases expire. To
facilitate leasing arrangements, the Partnership may enter into lease
commitments with various third parties so that appropriate and adequate security
filings can be completed and to enable lessees to plan for equipment
installation. These commitments may involve the taking by the Partnership of
security interests in property other than the Equipment. The Partnership will
collect commitment fees in connection with the giving of lease commitments. In
some circumstances, the Partnership will enter into financing arrangements which
will involve making secured loans to or other debt arrangements with
unaffiliated third parties. These financings will be completed only if such
financings are advantageous to the Partnership, and will include cases where
lease transactions with those third parties would result in unfavorable tax
treatment. Such loans will generally be securitized with a first security
interest in equipment.
The Partnership's activities will be undertaken with a view toward (i)
generating Cash Flow from operations, with the intent to make monthly
distributions during the Operating Phase (the period that ends when the General
Partner elects to begin the liquidation of the Partnership assets); (ii)
increasing the Partnership's assets by reinvesting in additional Program Assets
(during the Operating Phase) any undistributed Cash Flow from operations; (iii)
obtaining the residual values of Equipment upon sale; (iv) obtaining values from
sales of the Partnership's lease portfolios upon entering the Liquidating Phase
(the period during which the General Partner will liquidate the Partnership
assets); and (v) providing cash distributions to the Partners during the
Liquidating Phase. See "Risk Factors," "Investment Objectives and Policies" and
"Tax Consequences."
The Partnership will acquire primarily telecommunications equipment, but the
Partnership will also acquire other types of equipment that meets the investment
objectives of the Partnership. Telecommunications equipment acquired by the
Partnership will generally be call processing systems for use in hotels,
hospitals, detention centers and other facilities, pay telephone equipment and
related equipment. See "Types of Equipment to be Acquired" under "Investment
Objectives and Policies" and "Acquisition Policies and Procedures" under
"Investment Objectives and Policies." Equipment the Partnership acquires will
generally be leased to third parties under Full Payout Leases or will be subject
to Full Payout Leases at the time the Equipment is acquired. A Full Payout Lease
is a lease under which the non-cancelable rental payments due during the initial
term of the lease are sufficient to cover the Purchase Price of Equipment.
The General Partner may sell the Partnership's Equipment at any time.
However, the General Partner anticipates that it will hold Equipment for a
period of approximately three to five years, depending upon the type of
Equipment and the Partnership's stage of operations. Once the General Partner
elects to go into the Liquidating Phase, the General Partner intends to
liquidate the Partnership's assets as soon as practicable. See "Sale of
Equipment" under "Investment Objectives and Policies" and "Sales of Lease
Receivables and Residual Values" under "Investment Objectives and Policies."
IX. EQUIPMENT ACQUISITIONS
The General Partner may acquire Equipment in its own name and hold title
thereto on a temporary basis for the purpose of facilitating the acquisition of
such Equipment for the Partnership. See "Acquisition Policies and Procedures"
under "Investment Objectives and Policies." The General Partner shall be paid an
Acquisition Fee for Equipment purchased by the Partnership, including Equipment
purchased from the General Partner, and for financings placed by the
Partnership. See "Compensation of the General Partner
9
and Affiliates." If, at the time Limited Partners are first admitted to the
Partnership, the General Partner owns Equipment that meets the standards imposed
by the General Partner for acquisition by the Partnership, the General Partner
will transfer to the Partnership any Equipment approved by the Partnership.
X. CASH DISTRIBUTIONS AND REDEMPTION
A. OPERATING DISTRIBUTIONS
The Partnership intends to make monthly distributions to Partners
("Operating Distributions") during the Operating Phase (the period which ends
when the General Partner elects to begin the liquidation of Partnership assets)
to the extent cash is available for such purpose. See "Cash Distributions and
Redemptions." Partners will receive Operating Distributions after the General
Partner has first received reimbursement for expenses incurred for
administrative services, but before the General Partner receives a Management
Fee. The payment of Operating Distributions will be made only during the
Operating Phase. See "Cash Distributions and Redemptions" for a fuller
explanation of Operating Distributions to be made by the Partnership.
The General Partner anticipates that distributions will begin within 60 days
following the end of the first full calendar quarter after the date that Limited
Partners are first admitted to the Partnership. There is no assurance that
distributions will commence at that time. Distributions may vary in amount and
may be suspended at any time by the General Partner if the Partnership, in the
judgment of the General Partner, is receiving insufficient returns on its Lease
Portfolio.
B. DISTRIBUTIONS ON LIQUIDATION AND WINDING UP
The General Partner expects that the offering of Units will terminate no
later than one year after the Effective Date, but the offering may be extended
for up to an additional one year period. Beginning no earlier than three and
one-half years and no later than five years after the date on which the offering
of Units terminates, the Partnership will enter the Liquidation Phase, which
means it will cease reinvesting in Equipment and other Program Assets and will
not enter into additional leases. The General Partner will then proceed
diligently to wind up the Partnership's affairs and to convert all of the
Partnership's assets into cash, which will be distributed as described in "Cash
Distributions and Redemptions." If the offering is not terminated until two
years after the Effective Date, as will be the case if the offering is extended
for an additional one year period, the Partnership must enter the Liquidation
Phase no later than seven years after the Effective Date.
Amounts remaining available to be distributed among the Partners after
satisfying all Partnership liabilities and obligations and/or providing reserves
for future or contingent Partnership liabilities (and if during the Operating
Phase, after utilizing Cash Flow for Investment in Program Assets to the extent
determined by the General Partner) will be distributed as set forth in "Cash
Distribution and Redemptions."
Once the Partnership enters the Liquidation Phase and the liquidation of
Partnership assets has begun, when the General Partner believes that all but
approximately 20.0% of the Partnership assets have been distributed, it will
cause an audit of the Partnership's books and records to be made. The General
Partner will distribute the remaining Partnership assets in accordance with the
terms of the Partnership Agreement only after the completion of such audit.
Although the General Partner cannot predict how long it will take to wind up the
Partnership's affairs and convert all of the Partnership's assets into cash, the
Partnership must dissolve no later than December 31, 2012. See "Summary of the
Limited Partnership Agreement--Dissolution and Liquidation."
10
C. REDEMPTIONS
The General Partner is permitted, in its sole discretion, and on a very
limited basis, to redeem Units. Units may not be redeemed until after December
31, 1999. The General Partner will not redeem Units if such redemptions would
not be in the best interest of the Partnership or if, in the opinion of counsel
to the Partnership, such redemptions could result in the Partnership being
characterized as a "publicly traded" partnership for Federal income tax
purposes. See "Redemption of Units" under "Cash Distributions and Redemptions."
No assurance may be given that the Limited Partners will be able to participate
in the redemption program.
RISK FACTORS
An investment in Units involves various risks. Prospective investors,
therefore, should consider the following factors, in addition to others
discussed in this Prospectus, before making a decision to purchase Units:
A. RISKS OF EQUIPMENT OWNERSHIP AND LEASING
1. LESSEES MAY DEFAULT OR BECOME BANKRUPT. Default by a lessee or
bankruptcy of a lessee may result in Equipment being returned to the Partnership
at a time when the General Partner may be unable to arrange for the re-leasing
or sale of such Equipment. This will result in the loss of anticipated revenues
from the leasing of such Equipment and the inability to recover the
Partnership's investment in such Equipment. In addition, a default by or
bankruptcy of a lessee may result in loss of revenue from the leasing of such
Equipment and the incurring of litigation costs to the Partnership which may not
be recovered from the lessee. Such a default or bankruptcy may result in reduced
distributions to Limited Partners.
2. THERE MAY BE INSUFFICIENT REVENUE TO MEET DEBT SERVICE AND MAKE
DISTRIBUTIONS WHEN LEVERAGE IS USED. The use of borrowed funds as anticipated
by the Partnership will cause the risk of loss to the Limited Partners to be
greater because fixed payment obligations must be met regardless of the amount
of revenues. If debt service payments are not paid when due and the lender
forecloses on the debt, the Partnership may sustain the loss of its equity
investment in the Equipment used to secure the debt. A foreclosure by a lender
may also result in adverse tax consequences to the Limited Partners. The General
Partner intends to borrow the maximum of 40.0% of Gross Proceeds ($10,000,000 if
the Maximum of $25,000,000 of Units is sold).
If and to the extent the Partnership utilizes borrowing, a significant
proportion of the Partnership's revenues from the leasing and sale of Equipment
will be reserved for repayment of debt. The use of financing may reduce the cash
otherwise available for Partnership distributions until the debt has been
repaid, and may reduce total cash flow over a substantial portion of the
Partnership's operating life. Further, if and to the extent the Partnership
utilizes borrowings, the interest rates paid by it may be higher than interest
rates paid by established equipment leasing companies with established credit
ratings. As a result, the Partnership may be required to charge its lessees
higher monthly rentals than would be charged by a lessor with a lower cost of
borrowing. The Partnership has not entered into any agreements to obtain such
financing, and it is not presently possible to ascertain the availability or
terms of such financing.
If a portion of the Partnership's debt is cross-collateralized (i.e.,
secured by a lien upon Equipment other than that acquired directly with the
proceeds of the debt), upon default by a lessee the lender may be in a position
to accelerate the debt secured by the cross-collateralized Equipment.
3. DEFAULT BY LESSEE MAY AFFECT PARTNERSHIP'S LOANS. The terms of
Partnership loans may permit the lender to accelerate the due date of such loans
upon default by lessees of leases used to secure such loans. In the event of
such acceleration, the lender would be in a position to foreclose upon the
Equipment securing the loan unless the Partnership repaid the entire unpaid
balance, which the Partnership is unlikely to be able to do unless it could
promptly (i) cure the lease default with other revenues or reserve funds,
11
(ii) obtain possession of and re-lease the related Equipment and refinance the
accelerated obligation, or (iii) obtain other financing until such re-lease and
refinancing could be arranged. Foreclosure by a lender or premature sale of
Equipment may result in financial loss to the Partnership and adverse tax
consequences to its Limited Partners, including recapture of all depreciation
deductions previously claimed.
4. EQUIPMENT MAY RAPIDLY DECLINE IN VALUE AND THE GENERAL PARTNER MAY BE
UNABLE TO OBTAIN SIGNIFICANT RESIDUAL VALUE FOR THE PARTNERSHIP EQUIPMENT. The
Equipment purchased by the Partnership may rapidly decline in value. There can
be no assurance that the Partnership will be able to obtain residual values
sufficient to return Capital Contributions to Limited Partners. The residual
values ultimately realized will depend, among other factors, upon (a) the
standards observed by lessees in maintaining the Equipment; (b) the General
Partner's ability to effectively remarket the Equipment; (c) the cost of
comparable new Equipment; (d) technological obsolescence of the Equipment; (e)
the demand for used Equipment; (f) general economic and business conditions, as
well as such conditions and changes within the telecommunications industry
affecting leases which might reduce the demand for leased equipment generally;
and (g) competition. Most of these factors are beyond the control of the General
Partner. Upon the sale of the equipment at the end of a lease, Private Programs
operated by the General Partner received a nominal price, usually less than ten
percent (10%) of the cost of the equipment.
5. CHANGES IN TECHNOLOGY MAY RESULT IN OBSOLESCENCE OF EQUIPMENT. The
success of the Partnership may depend, among other factors, upon technological
changes and the ability of the General Partner to upgrade the Equipment to avoid
obsolescence. The inability due to technological obsolescence to renew leases or
enter into new leases or to sell Equipment after the expiration of the initial
term of a lease may result in the loss of anticipated revenues, the reduction of
residual values, and the inability to recover the Partnership's Investment in
Program Assets.
6. ECONOMIC AND BUSINESS FACTORS BEYOND THE CONTROL OF THE GENERAL PARTNER
INCREASE THE RISK OF THE LEASING BUSINESS. The equipment leasing business is
subject to many economic and business factors that are beyond the control of the
General Partner. In addition to risks discussed specifically below, such factors
include: (a) economic and business conditions generally and within the
telecommunications industry, including but not limited to, inflation, recession,
fluctuation of interest rates and availability of financing; (b) increases in
operating expenses; (c) changes in tax laws or accounting rules or in other laws
or governmental regulations relating to matters affecting the ownership,
leasing, use or operation of Equipment; and (d) the viability of equipment
manufacturers and lessees. Any one or more of the risks may cause cost increases
relating to the leasing of Equipment which cannot be offset by increased leasing
revenues.
7. REDUCED REVENUES MAY RESULT FROM POSSIBLE LACK OF DEMAND FOR
EQUIPMENT. Insufficient demand for equipment leasing may not permit the
Partnership to keep all of its Equipment fully leased at rental rates which,
after payment of operating expenses and debt service on Partnership borrowing,
will provide, together with any anticipated sale proceeds or residual value, an
acceptable rate of return on the Partnership's investment in such Equipment.
8. INABILITY TO RENEGOTIATE EXPIRED LEASES. Because the configuration of
Equipment may be user-specific, the Partnership may be at a disadvantage when
negotiating with lessees for the extension of leases or the purchase of
Equipment by lessees at the expiration of leases.
9. POOR MARKET CONDITIONS AT TIME OF LIQUIDATION MAY DELAY OR IMPAIR
SATISFACTORY LIQUIDATION. At the beginning of liquidation of the Partnership's
assets, it is contemplated that the Partnership will have a substantial portion
of its assets (including a portion of the returns earned on prior leases)
invested in Equipment and subject to the interest of borrowers, and, therefore,
at risk. A weak market for Equipment, lease financing or lease portfolio sales
at that time may have an adverse affect on the Limited Partner's overall return
on investment, and may delay or impair the ability of the Partnership to return
the Limited Partners' original investment and to pay a return on that
investment.
12
10. THE PARTNERSHIP MUST COMPETE WITH OTHER LEASING COMPANIES AND WITH
OTHER FINANCING INSTITUTIONS. The equipment leasing industry is highly
competitive, offering users alternatives to the purchase of nearly every type of
equipment. The Partnership will be in competition with equipment manufacturers,
equipment distributors, equipment managers, leasing companies, financial
institutions and other parties engaged in leasing, managing, marketing,
remarketing or financing equipment. Many of these competitors have significantly
greater financial resources than the Partnership and may have greater experience
than the General Partner.
11. POSSIBLE FAILURE OF LEASES OF EQUIPMENT LOCATED IN FOREIGN
COUNTRIES. The Partnership may enter into leases with United States companies
for Equipment to be located in foreign countries. In such cases, the laws of
such foreign countries may control the disposition of leased Equipment, and it
is possible that the Partnership may not be able to gain possession of the
Equipment upon default of such leases, resulting in loss to the Partnership.
B. PARTNERSHIP AND BUSINESS RISKS
1. CONFLICTS OF INTEREST BETWEEN RELATED PARTIES. There are conflicts of
interest between the Partnership, the General Partner, and various affiliates of
the General Partner. The Partnership has and will enter into contractual
relationships with the General Partner and affiliates of the General Partner
involving the payment of compensation and commissions. The Partnership will
compete with the General Partner and its affiliates in the business of equipment
leasing and for management time and services. These conflicts may affect the
success of the Partnership. See "Conflicts of Interest."
2. RISK OF GENERAL PARTNER'S CREDIT. The General Partner's credit
agreement for its own operating line requires the General Partner to maintain
minimum stockholders' equity and to maintain an interest coverage ratio of 1.1
at year end. The General Partner was in violation of these covenants at December
31, 1996. The General Partner's bank amended the credit agreement to reduce the
stockholders' equity requirement. The bank waived the interest coverage ratio at
December 31, 1996. It is likely that the General Partner will be in violation of
the interest coverage ratio on December 31, 1997, and, if so, there can be no
assurance that the bank will waive the violation of the interest coverage ratio.
Although the General Partner is now in compliance with the covenant requiring
minimum stockholders' equity, there can be no assurance that the General Partner
will not in the future be in violation of this covenant. Adverse operating
results of the General Partner could cause continued non-compliance with these
covenants, in which event the General Partner's bank could immediately
accelerate the maturity of the entire outstanding balance under the credit
agreement or deny or restrict the General Partner's access to funds under the
credit agreement, thus materially and adversely affecting the General Partner's
financial condition and continuing business operations.
3. FINANCIAL CONDITION OF THE GENERAL PARTNER. During the years ended
December 31, 1995 and 1996, the General Partner incurred net losses of $393,720
and $836,556, respectively. During the first nine months of 1997, the General
Partner has incurred net losses of $182,122. The General Partner's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain refinancing as may be
required, and ultimately to attain profitable operations. The General Partner
anticipates that existing capital resources, cash flows from operations, and
financing from the General Partner's parent, will be adequate to satisfy the
General Partner's minimum capital requirements and liquidity needs for the next
twelve months. As the general partner of TIF IX and TIF X the General Partner is
contingently liable for the debts and obligations of TIF IX and TIF X. If the
General Partner is called upon to satisfy the debts of TIF IX and TIF X the
General Partner's financial condition would be significantly weakened, thereby
affecting the General Partner's ability to serve the Partnership. The General
Partner's plans for future growth and profitability anticipate the need for
completion of this Offering in order to generate fee income. No assurance can be
provided that this Offering will be completed as planned or that the General
Partner continue as a going concern during the life of the Partnership. See
"Financial Statements of the Partnership and the General Partner."
13
4. LESSEES OF EQUIPMENT ARE UNSPECIFIED AND CANNOT BE ASSESSED BY
INVESTORS. No Equipment has been identified for acquisition or acquired by the
Partnership. There can be no assurance when, or if, funds available for the
acquisition of Equipment will be fully invested in Equipment. Purchasers of
Units will not have an opportunity prior to making their investment to evaluate
for themselves Equipment to be acquired by the Partnership, the seller of such
Equipment, the actual leasing arrangements for such Equipment, the
creditworthiness of the lessees of such Equipment or any related risks. No
assurance can be given that the General Partner will be able to obtain leases
which will achieve the investment objectives of the Partnership.
5. THE PARTNERSHIP HAS NO OPERATING HISTORY. The Partnership is
newly-formed and has no operating history. Purchasers of Units cannot
investigate the business of the Partnership and must rely (a) upon the
representations in this prospectus as to the business the Partnership expects to
conduct, and (b) upon the experience of the General Partner. See "Prior
Experience of the General Partner and Affiliates."
6. FRONT END FEES AND EXPENSE REIMBURSEMENT. A significant portion (18.5%,
see "Estimated Use of Proceeds") of Investors' capital contributions will be
paid to the General Partner, the Managing Sales Agent and others as Front End
Fees regardless of whether Limited Partners will receive a return of their
investment. As a result, fewer funds will be available to the Partnership for
the acquisition of Equipment. Further, during the Operating Phase, the General
Partner will receive reimbursement for its expenses, thus making less cash
available for working capital, distributions to Limited Partners and investment
in additional Equipment.
7. LIMITED PARTNERS MAY NOT RECEIVE A RETURN AND MAY NOT RECEIVE THEIR
INVESTMENT BACK. Limited Partners may not receive their original investment
back, in which case Limited Partners will not have received a return of their
investment. Limited Partners may receive a return of their investment, but will
not receive a return on their investment until the Limited Partners have
received more than the amount invested. There is no assurance the Limited
Partners will receive a return on their investment or that they will receive
their original investment back from the Partnership. Cash Distributions made
during the Operating Phase may include a return of the Limited Partners' own
money.
8. LACK OF DIVERSIFICATION. The Partnership intends to invest primarily in
telecommunications equipment. Accordingly, there may not be diversity in the
type of Equipment owned by the Partnership. The sale of only the minimum number
of Units will result in limited or no diversification. In addition, the ability
of the Partnership to acquire Equipment at an attractive cost, the availability
of Equipment for purchase and the amount of capital at the disposal of the
Partnership will affect the amount of diversity of Equipment acquired by the
Partnership. The profitability of the Partnership may, therefore, be affected by
the lack of diversification of Equipment and lessees.
9. EMERGING GROWTH COMPANIES MAY BE WEAK LESSEES. The Partnership may
enter into leases with lessees that are emerging growth companies that have not
had substantial operating histories. Emerging growth companies may be
particularly susceptible to fluctuations in the general business environment,
which may impact their ability to operate their businesses and make their lease
payments. Leases with emerging growth companies, therefore, may involve greater
risk to the Partnership than leases with more established lessees.
10. THERE MAY BE LIMITED DIVERSIFICATION OF LESSEES. If the Partnership
sells only 1,200 Units ($1,200,000), its ability to diversify its investments in
Equipment and its lessees (and, therefore, its ability to achieve spreading of
risks) may thus be limited. Even if the Partnership sells more than 1,200 Units,
the amount of its available funds may permit investment in only a limited amount
of equipment. See "Acquisition Policies and Procedures" under "Investment
Objectives and Policies." Furthermore, since there is no limitation on the
amount which the Partnership may invest in any one equipment transaction, it
would be possible for the Partnership to invest all of its available funds in a
single transaction.
14
11. NO PUBLIC MARKET FOR UNITS AND NO RIGHT TO REDEMPTION. There is not
now any market for Units, and it is not anticipated that an active market will
ever develop. Accordingly, Limited Partners will not be able to liquidate their
investments in the event of an emergency or otherwise, and Units may not be
readily accepted as collateral for a loan. A Partnership Unit may be transferred
only after certain requirements are satisfied, and transferees may become
Limited Partners only with the consent of the General Partner, which consent may
be granted or withheld at the sole discretion of the General Partner. Although
the Partnership may agree to redeem Units under certain limited circumstances by
repurchasing them from Limited Partners, there is no requirement that it do so.
See "Cash Distributions and Redemptions."
12. COST OF INSTALLATION AND REMOVAL OF TELECOMMUNICATIONS EQUIPMENT MAY
LIMIT PARTNERSHIP'S REMEDIES ON DEFAULT OF LESSEE. Since telecommunications
equipment purchased by the Partnership will be installed at a specific
lessee-user's facility, the cost of both installation and removal of such leased
equipment may be significant relative to the cost and leasing revenues of such
Equipment. Such installation costs make it more difficult to exercise the
Partnership's remedy of repossession in the case of a default by a lessee,
particularly in light of the expense of exercising such remedy in relation to
the value of used telecommunications equipment.
13. FINANCING MAY NOT BE AVAILABLE TO THE PARTNERSHIP, THEREBY LIMITING THE
AMOUNT OF EQUIPMENT THE PARTNERSHIP CAN ACQUIRE. The money market conditions
that exist at the time the Partnership will be seeking to obtain financing of
Equipment could make financing difficult or costly to obtain. The Partnership
may be forced to finance the purchase of Equipment using only the cash proceeds
from this offering, with little or no borrowings. This would make it more
difficult for the Partnership to achieve the diversification of lessees which it
is seeking, would impair its ability to spread the risk of unproductive
investments over numerous items of Equipment, and would decrease interest and
depreciation deductions available to Partners. Limited availability of financing
may also adversely affect the ability of the Partnership to sell Partnership
Equipment when a sale is determined to be in the Partnership's best interests
and may affect the terms of such sale.
14. GOVERNMENT REGULATION OF EQUIPMENT MAY NEGATIVELY AFFECT BUSINESS OF
THE PARTNERSHIP. The use, maintenance and ownership of the type of
telecommunication equipment the Partnership will acquire is subject to
regulation by federal, state and local authorities, which may impose
restrictions and financial burdens on the Partnership's ownership and operation
of Equipment and, accordingly, affect the profitability of the Partnership.
Changes in government regulations or industry standards or deregulation may also
affect the ownership, operation and sale of, and demand for, Equipment.
15. LIMITED PARTNERS MAY HAVE AN OBLIGATION TO REPAY CERTAIN
DISTRIBUTIONS. In general, under the Iowa Limited Partnership Act (the "Iowa
Act"), Limited Partners are liable to the Partnership for a period of one year
following the return of any part of their original funds invested in the
Partnership (their "Capital Contributions") and may be required to repay to the
Partnership, with interest, any such return made to them within the prior year
if the Partnership does not have other assets sufficient to satisfy the claims
of creditors who extended credit to the Partnership or whose claims arose prior
to such return. In addition, if a Limited Partner receives a return of his
Capital Contribution in violation of the Partnership Agreement or of the Iowa
Act, such Limited Partner may be liable for up to six years for the amount of
the Capital Contribution wrongfully returned.
16. RISKS OF JOINT VENTURES WITH OTHER ENTITIES. Some of the Partnership's
Equipment may be owned by joint ventures between the Partnership and the seller
of the Equipment or another third party, such as a leasing company or user of
the Equipment. An investment in a joint venture which owns Equipment, instead of
investing directly in the Equipment itself, may under certain circumstances
involve risks not otherwise present, including, for example, the possibility
that the co-venturer might become bankrupt, that the co-venturer may have
economic or business interests or goals which become inconsistent with those of
the Partnership, the possibility of an impasse if no co-venturer has controlling
interest, that while one joint venturer may buy equipment from the other joint
venturer in the event of a sale, it may not have the
15
resources to do so, or that the co-venturer may be in a position to take action
contrary to the Partnership's instructions or policies.
17. INVESTORS CANNOT TAKE PART IN MANAGEMENT OF THE PARTNERSHIP AND MUST
RELY SOLELY ON THE GENERAL PARTNER. All decisions with respect to the
management of the Partnership and its assets, including major decisions
involving the acquisition, leasing, re-leasing and sale of Equipment will be
made exclusively by the General Partner. Limited Partners will have no right or
power to take part in the management of the Partnership. Accordingly, no person
should purchase Units unless such person is willing to entrust all aspects of
the management of the Partnership to the General Partner, and has evaluated the
General Partner's capabilities to perform such functions. See "Management" and
"Summary of the Limited Partnership Agreement." In addition, the General Partner
will have numerous conflicts of interest in managing the business of the
Partnership. See "Conflicts of Interest." If the General Partner becomes unable
to manage the affairs of the Partnership for any reason unrelated to the
Partnership, including adverse changes in the General Partner's business or
condition, dissolution of the Partnership could result at a time when such
dissolution would be adverse to the interests of the Limited Partners.
C. FEDERAL INCOME TAX RISKS
1. THE STATUS OF THE PARTNERSHIP AS A PARTNERSHIP FOR TAX PURPOSES MAY BE
CHALLENGED. The availability of any tax benefits of investing in the
Partnership and the after-tax yield of an investment in the Partnership depends
upon its classification as a partnership for federal income tax purposes, rather
than as an association taxable as a corporation. The General Partner of the
Partnership has not requested, and does not intend to request, a ruling from the
Internal Revenue Service that it will be classified as a partnership for federal
income tax purposes. In the absence of such a ruling, there can be no assurance
that the Partnership will not constitute an association taxable as a
corporation. The Partnership will rely upon the opinion of Bradley & Riley,
P.C., its counsel ("Counsel"), as to its partnership tax status. Unlike a tax
ruling, an opinion of counsel only represents such counsel's best legal
judgment, and has no binding effect or official status of any kind, and no
assurance can be given that the conclusions reached in said opinion would be
sustained by a court if contested. See "Partnership Tax Status" under "Tax
Consequences."
2. ADVERSE TAX CONSEQUENCES WILL RESULT IF PARTNERSHIP IS TREATED AS
"PUBLICLY TRADED". The Revenue Act of 1987 contains numerous provisions that
have an adverse impact on any "publicly traded" partnerships, including the
taxation of certain "publicly traded" partnerships as corporations. The
treatment of the Partnership by the IRS as a publicly traded partnership will
have significant adverse effects on investments. See "Tax
Consequences--'Publicly Traded' Partnerships."
3. LIMITED PARTNERS' TAX LIABILITY MAY EXCEED DISTRIBUTIONS TO LIMITED
PARTNERS. The Partnership intends to make Operating Distributions on a monthly
basis. See "Cash Distributions and Redemptions." Each Limited Partner will be
liable for the payment of income taxes on such Limited Partner's distributive
share of the Partnership's Net Income. This is true regardless of the amount of
distributions to the Limited Partner for that taxable year. See generally "Tax
Consequences," "Partnership Allocations" under "Summary of the Limited
Partnership Agreement," and Article XII of the Partnership Agreement attached as
Exhibit A.
4. CHALLENGES TO STATUS OF THE PARTNERSHIP AS OWNER OF EQUIPMENT AND TO
STATUS OF LEASES. The availability of certain tax benefits of investing in the
Partnership depends upon the treatment of the Partnership as the owner of the
Equipment and the treatment of leases as true leases for federal income tax
purposes. Because the Partnership has not entered into any leases and has not
negotiated the terms of any leases, no opinion of Counsel can be given
concerning the treatment of the Partnership as the owner of the Equipment and
the treatment of leases as true leases for federal income tax purposes.
Accordingly, no assurance can be given that the Internal Revenue Service may not
challenge successfully the status of any particular lease as a true lease,
asserting that purchase of the Equipment by the Partnership and the lease of the
Equipment to the lessee merely constitute steps in a secured financing
transaction. In such event,
16
the Partnership would not be entitled to claim certain deductions, including
depreciation deductions. For a further discussion of this risk, see
"Characterization of Partnership's Leases as Leases for Federal Income Tax
Purposes" under "Tax Consequences."
5. IRS CHALLENGE TO TAX DEDUCTIONS WOULD DIMINISH TAX BENEFITS. The return
from investment in the Partnership and, indirectly, in Equipment, would be
diminished if various tax benefits were disallowed. There can be no assurance
that the Internal Revenue Service would not challenge (a) the Partnership's
inclusion of the Acquisition Fee in the basis of the Equipment, (b) the manner
in which Organization and Offering Expenses are deducted or amortized, (c) the
current deduction of fees paid to the General Partner out of Operating
Distributions, or (d) the period over which depreciation deductions may be
claimed by the Partnership.
6. EMPLOYEE BENEFIT PLANS AND OTHER TAX EXEMPT ENTITIES THAT INVEST IN THE
PARTNERSHIP MAY BE TAXED ON UNRELATED BUSINESS INCOME. Employee benefit plans
(as defined in "Employee Benefit Plans") and other tax exempt entities are
taxable on all "unrelated business income" in excess of $1,000 during any fiscal
year. Most of each Qualified Plan's distributive share of the Partnership's Net
Income will constitute "unrelated business income." See "Investment by Employee
Benefit Plans" under "Tax Consequences." Therefore, an Employee Benefit Plan
that purchases Units will likely be required to report a portion of its pro rata
share of the Partnership's Net Income as "unrelated business income."
7. LIMITED PARTNERS MAY BE SUBJECT TO CERTAIN TAXES. The investment in the
Partnership or the Partnership's acquisition, ownership, leasing, operation or
sale of Equipment may affect a Partner's liability for the "alternative minimum
tax." Additionally, as a result of the Partnership's ownership or operation of
Equipment, Limited Partners may now or in the future be subject to state or
local income taxes in jurisdictions in which they are residents and also in
jurisdictions in which they are non-residents. See "Alternative Minimum
Tax--Non-Corporate Taxpayers" under "Tax Consequences;" "Alternative Minimum
Tax--Corporate Taxpayers" under "Tax Consequences;" and "State Income Tax
Consequences" under "Tax Consequences."
INVESTOR SUITABILITY STANDARDS
Investors (including assignees) are subject to certain suitability standards
established by the Partnership. To verify that an investor satisfies such
standards, the General Partner will rely upon the representations made by such
investor. The General Partner requires each broker-dealer selling Units on
behalf of the General Partner to make every reasonable effort to assure that
those persons being offered or sold Units are suitable and appropriate in light
of such person's age, educational level, knowledge of investment, investment
objectives and other pertinent factors.
1. SUBSTANTIAL MEANS AND NET WORTH. An investment in Units is a long-term
investment suitable only for investors who have no need for liquidity in this
investment and who have adequate means of providing for their current needs and
contingencies. Units generally will be sold to an investor only if the investor
represents in writing in the Subscription Agreement (Exhibit B to this
Prospectus) that the investor either: (i) has a net worth (exclusive of home,
home furnishings and automobiles) of at least $45,000 and expects to have, for
the current taxable year, gross income from all sources in excess of $45,000; or
(ii) has a net worth (exclusive of home, home furnishings and automobiles) of at
least $150,000. Investors residing in certain states are subject to additional
suitability standards set forth below and in the Subscription Agreement. The
Partnership requires each investor to make the representation referred to above
as part of its effort to assure that each investor meets the minimum standards.
The Partnership would assert the representation as evidence that it used
reasonable effort to ensure compliance with the requirements of North American
Securities Administrators Association, Inc. and as evidence that the investor
making such representation met the minimum standards.
2. ABILITY AND WILLINGNESS TO ASSUME RISKS. The determination of whether a
purchase of Units is suitable for a particular investor will depend upon, among
other things, the investment objectives and
17
policies of the investor and the willingness and financial ability of each
investor to assume such risks as the lack of a market for the Units and the
resulting long-term nature of such an investment.
3. ABILITY TO HOLD UNITS FOR AN EXTENDED PERIOD OF TIME. An investment in
Units is suitable only for an investor who has adequate financial means to make
such investment on a long-term basis and who is prepared to bear the economic
risks of investment in Units for a lengthy and indefinite period of time.
Limited Partners will not have the right to withdraw or receive any return of
their Capital Contributions (as defined in this Prospectus--see "Glossary")
except under the limited circumstances of redemption and return of uninvested
net proceeds. In the case of redemption, after December 31, 1999, Limited
Partners may request the General Partner to redeem their Units. Neither the
General Partner nor the Partnership is required to redeem Units or to repurchase
Units from any Limited Partner, but if the General Partner determines a
redemption to be in the best interest of the Partnership, it may, in its
discretion, redeem a Limited Partner's Unit, provided not more than 1.0% of the
total Units may be redeemed in any year and not more than 5.0% of the total
Units may be redeemed over the life of the Partnership. See "Cash Distributions
and Redemptions." There are restrictions on the transferability and resale of
Units imposed by the laws of certain states, by federal income tax laws and by
limitations imposed by the General Partner in order to avoid adverse
consequences under federal income tax laws. The General Partner will discourage,
and intends to prevent, the creation of an active market for Units. See
"Transferability of Units" under "Summary of the Limited Partnership Agreement"
and "No Public Market for Units and No Right to Redemption" under "Risk
Factors." With respect to uninvested Net Proceeds, the Partnership must return
to the Limited Partners in proportion to their respective Capital Contributions
any Net Proceeds (except for necessary operating capital) not invested or
committed for Investment in Program Assets within two years after the Effective
Date. See "Temporary Investments; Return of Uninvested Net Proceeds" under
"Investment Objectives and Policies." Accordingly, a Limited Partner may not be
able to liquidate his investment in the event of an emergency or for any other
reason.
4. EMPLOYEE BENEFIT PLANS. In the case of an investor who is a trustee of
an employee benefit plan, the net worth standards and the annual gross income
standards are applicable to the trust forming part of such plan or to the
employer sponsoring such plan. In the case of an investor who is investing as a
trustee or custodian of an Individual Retirement Account ("IRA"), the net worth
standards and the annual gross income standards are applicable to the individual
for whose benefit the IRA has been established or, in the case of a spousal IRA,
the employed spouse of the individual for whose benefit the IRA has been
established. Because employee benefit plans and IRAs are fiduciary accounts, the
financial suitability standards must be satisfied by the beneficiaries of such
accounts, except where the donors of funds for investment are the fiduciaries of
the accounts.
5. MINIMUM INVESTMENT. The Minimum number of Units an investor may
purchase is 2 Units ($2,000).
6. ADDITIONAL REQUIREMENTS.
a. Investors who reside in foreign countries (whether U.S. citizens or
non-resident aliens) will not be admitted to the Partnership.
b. Regulatory authorities in the states shown below have established
suitability standards that are stricter or different than those set forth
above. Investors in any of these states will be required to satisfy the
standards described below in addition to the standards established by the
Partnership. The laws of certain states may provide that a Limited Partner
may transfer Units only to persons who meet similar suitability standards.
The Partnership may require assurance that such standards are met.
c. Because of the limited transferability and the relative lack of
liquidity of Units, and because the Limited Partners would be subject to
adverse tax results if the Partnership were treated as publicly traded, the
Partnership requires all investors to represent that the purchase of Units
is for investment purposes and not for resale. The Partnership will rely
upon this representation as evidence that the
18
Partnership is not publicly traded and as evidence that the investor
purchased Units as an investment, with no intention to resell the Units.
IT SHOULD NOT BE ASSUMED BY REASON OF THE LISTING OF A PARTICULAR STATE
BELOW THAT THE PARTNERSHIP IS AUTHORIZED TO SELL UNITS IN THAT STATE.
CALIFORNIA
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
In the case of sales to California trusts or other California fiduciary
accounts, including IRA accounts and employee benefit plans, the Partnership's
suitability standards must be met by the beneficiary of the fiduciary account;
except where the donor of funds to such account is the fiduciary of the account,
in which case the standard may be met by the fiduciary.
MINNESOTA
The minimum investment of initial and subsequent investors in the
Partnership shall be 3 Units ($3,000) except that the minimum investment of an
IRA/Keogh Plan shall be 2 Units ($2,000).
NEBRASKA
The minimum investment of initial and subsequent investors in the
Partnership shall be 5 Units ($5,000) except that the minimum investment of an
IRA/Keogh Plan shall be 2 Units ($2,000).
TEXAS
Each Texas investor must have a net worth (or joint net worth with his or
her spouse) (exclusive of home, home furnishings and automobiles) of at least
ten times the amount of his investment. In addition, each Texas investor must
have a net worth (exclusive of home, home furnishings and automobiles)(or joint
net worth with his or her spouse) of $45,000 and current taxable annual income
of $45,000 or a net worth of $150,000 (exclusive of home, home furnishings and
automobiles).
THE SUITABILITY STANDARDS DISCUSSED ABOVE REPRESENT MINIMUM SUITABILITY
STANDARDS FOR PROSPECTIVE INVESTORS. EACH PROSPECTIVE INVESTOR SHOULD DETERMINE
WHETHER AN INVESTMENT IN UNITS IS APPROPRIATE IN SUCH INVESTOR'S PARTICULAR
CIRCUMSTANCES. THE GENERAL PARTNER HAS THE UNCONDITIONAL RIGHT TO REJECT ANY
SUBSCRIPTION.
19
ESTIMATED USE OF PROCEEDS
The following table sets forth the General Partner's best estimate of the
use of proceeds from the sale of the minimum Units ($1,200,000) and the maximum
Units ($25,000,000) offered hereby. The dollar amounts in the table are
estimates only. Because the dollar amounts cannot be precisely calculated at the
present time, actual use of the proceeds may vary from the estimates shown. As
shown below, it is projected that 80.5% of the Gross Proceeds will be used to
acquire Program Assets, assuming 40.0% leverage. See Footnote 3 to the following
table.
ESTIMATED USE OF GROSS OFFERING PROCEEDS
-----------------------------------------------------
MINIMUM OFFERING MAXIMUM OFFERING
------------------------- --------------------------
AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------------ ----------- ------------- -----------
Gross Proceeds............................................... $ 1,200,000 100.0% $ 25,000,000 100.0%
Expenses: Managing Sales Agent Fee and Selected Selling
Agents Commissions......................................... $ (108,000) (9.0)% $ (2,250,000) (9.0)%
Total Organization and Offering Expenses(2)
(other than 9.0% Managing Sales Agent Fee and Selected
Selling Agents Commissions)................................ $ (42,000) (3.5)% $ (875,000) (3.5)%
Acquisition Fees Attributable to Offering Proceeds and
borrowings(3).............................................. $ (72,058) (6.0)% $ (1,501,191) (6.0)%
------------ ----- ------------- -----
Public Offering Expense...................................... $ (222,058) (18.5)% $ (4,626,191) (18.5)%
Working Capital Reserves(4).................................. $ (12,000) (1.0)% $ (250,000) (1.0)%
Net Proceeds Available for Investment in Program Assets(5)... $ 965,942 80.5% $ 20,123,809 80.5%
------------ ----- ------------- -----
- ------------------------
(1) All percentages shown in the table above are percentages of Gross Offering
Proceeds.
(2) The different amounts of expenses at the minimum and maximum levels reflect
that certain expenses incurred by the General Partner will not be paid by
the Partnership if only the minimum offering is sold. See "Plan of
Distribution" and "Organizational and Offering Phase" under "Compensation of
the General Partner and Affiliates.
(3) Acquisition Fees represent 5.0% of the gross amount of Investment in Program
Assets, including the portion of Program Assets acquired with borrowed
funds. The Acquisition Fees included in the table above are computed on the
gross amounts of Investment in Program Assets that could be purchased using
Net Proceeds and 40.0% leverage. For purposes of this table, bank borrowings
are assumed to be equal to 40.0% of the Gross Proceeds of the Offering less
an estimated 1.0% loan origination fee. See "Acquisition Phase" under
"Compensation of the General Partner and Affiliates. In addition to the
Acquisition Fees to be paid upon the initial purchase of Program Assets
using Net Proceeds and borrowed funds, Acquisition Fees will paid on the
initial acquisition of Program Assets acquired using Cash Flow. Such
Acquisition Fees will be paid from Cash Flow, and are limited. See
"Operating and Liquidating Phase" in the following Table
(4) The General Partner will maintain adequate working capital reserves
estimated to be 1.0% of the Gross Proceeds. See "Working Capital Reserves"
under "Investment Objectives and Policies.
(5) The term "Investment in Program Assets" includes funds (not exceeding 3%)
set aside as working capital reserves. If working capital reserves are
included the amount of Net Proceeds estimated to be available from Gross
Proceeds for Investment in Program Assets then the amounts are $977,942
(81.5%) at the Minimum Offering and $20,373,809 (81.5%) at the Maximum
Offering. The table does not include Acquisition Expenses because the
General Partner will pay all Acquisition Expenses out of its Acquisition
Fee.
20
The investment criteria that the General Partner will employ will remain the
same regardless of the number of Units sold. If the Partnership is unable to
obtain debt financing, only Net Proceeds Available for Program Assets will be
used to purchase Program Assets.
COMPENSATION OF THE GENERAL PARTNER AND AFFILIATES
This section describes the types and estimated maximum amounts of
compensation and distributions to be paid by the Partnership to the General
Partner and its Affiliates. Such compensation will not constitute all of the
expenses to be paid by the Partnership. No services will be provided by the
General Partner or its Affiliates to the Partnership for which the Partnership
will compensate the General Partner or its Affiliates other than those listed in
this table.
Compensation and distributions to be paid to the General Partner and its
Affiliates were not determined by, and do not reflect, arm's-length
negotiations. Other than as set forth below, the Partnership Agreement prohibits
the payment to the General Partner or its Affiliates of any fees or compensation
in connection with the formation of the Partnership, the offering and sale of
Units, the operations of the Partnership and the acquisition, leasing,
management, re-leasing and sale of Equipment and Equipment subject to leases.
Where there are ceilings on certain categories of fees or expenses, any fees
which are in excess of the ceilings may not be recovered by reclassifying them
under a different category.
The following table shows in an abbreviated format the estimated amounts and
types of compensation and distribution to be paid to the General Partner and its
Affiliates:
AMOUNT IF AMOUNT IF
PERCENT OF MINIMUM MAXIMUM
GROSS NUMBER OF NUMBER OF
ENTITY RECEIVING COMPENSATION TYPE OF COMPENSATION PROCEEDS UNITS SOLD UNITS SOLD
- ------------------------------------------ ----------------------------- ------------- ----------- ------------
Berthel Fisher & Company
Financial Services, Inc.(1)............. Managing Sales Agent Fee and 9.0% $ 108,000 $ 2,250,000
Selected Sales Agents
Commissions
Vendors and Service Providers............. Accountable Organization 3.5% $ 42,000 $ 875,000
Expenses of the Offering
General Partner........................... Acquisition Fee 4.1% $ 49,429( (4) $ 1,029,762(2)(4)
6.0% $ 72,058( (4) $ 1,501,191(3)(4)
General Partner........................... Management Fee -- (5) (5)
General Partner........................... Re-Leasing Fee -- (6) (6)
General Partner........................... General Partner Expense -- (7) (7)
Reimbursement
General Partner........................... Partnership Interest -- (8) (8)
General Partner........................... Interest on Loans -- (9) (9)
- ------------------------
(1) Commissions received by the Managing Sales Agent will be reduced by Selected
Sales Agents Commissions paid to other broker dealers that serve as Selected
Sales Agents.
(2) Five percent (5.0%) of the purchase price of Program Assets, if Program
Assets are acquired with proceeds only, using no borrowings.
(3) Five percent (5.0%) of the purchase price of Program Assets if Program
Assets are purchased with proceeds and maximum borrowings of 40.0% of Gross
Proceeds.
21
(4) It is not possible to estimate Acquisition Fees that will be paid in
connection with reinvestment activities.
(5) Two percent (2.0%) of Gross Rental Payments and loan and other payments
received on account of financing activities. Not determinable at this time.
(6) Subject to certain limitations, the General Partner will be paid a fee of
2.0% of gross rental payments derived from the re-lease of Equipment. Not
determinable at this time. See "Operating and Liquidating Phase" under
"Compensation of the General Partner and Affiliates."
(7) The lesser of actual expenses or the amount the Partnership would be
required to pay to non-affiliated persons for comparable services in the
same geographical area. Not determinable at this time. Actual General
Partner Expense Reimbursements for the previous public programs sponsored by
the General Partner, including amounts through September 30, 1997 for TIF IX
and TIF X, are shown in the following table. The amount shown for 1998 for
TIF XI is the amount proposed to be reimbursed, but there can be no
guarantee that the reimbursement will not be greater than or less than the
amount shown.
TIF IX TIF X TIF XI
--------- --------- ---------
1991......................................................... $ 4,200 -- --
1992......................................................... $ 53,724 -- --
1993......................................................... $ 72,368 $ 27,624 --
1994......................................................... $ 74,988 $ 92,919 --
1995......................................................... $ 82,307 $ 85,800 --
1996......................................................... $ 74,775 $ 73,500 --
1997......................................................... $ 66,822 $ 66,822 --
1998......................................................... -- -- $ 84,000
(8) General Partner will receive its share of distributions to Partners to the
extent of its capital contribution. After all Limited Partners have received
return of their original investments plus a return of 9.6% of Adjusted
Capital Contributions per annum during the Operating Phase, and no less than
an 8.0% annual, cumulative, compounded daily, distribution based on their
Adjusted Capital Contribution, the General Partner will receive 20.0% of all
remaining Liquidation Distributions. Not determinable at this time.
(9) The General Partner will receive interest on loans, if any, made by the
General Partner to the Partnership. Not determinable at this time.
22
The following Table sets forth in narrative fashion the types and estimated
amounts of compensation and distributions to be paid to the General Partner and
its Affiliates:
ENTITY RECEIVING COMPENSATION TYPE AND AMOUNT OF COMPENSATION
- ------------------------------------------ ---------------------------------------------------------------------
ORGANIZATION AND OFFERING PHASE
Berthel Fisher & Company
Financial Services, Inc. ("Financial
Services" or the "Managing Sales
Agent")................................. Managing Sales Agent Fee and Broker-Dealer Commissions. Financial
Services, as Managing Sales Agent, will receive a fee of 9.0% of
Gross Proceeds. The Managing Sales Agent will, in turn, pay the
Selected Sales Agent Fee of 6.0% of Gross Proceeds (6.5% to Selected
Sales Agents who sell more than $1,000,000 of Units). It is
anticipated that Units will be sold primarily by Selected Sales
Agents. However, if all Units were sold by the Managing Sales Agent,
it would receive $108,000 if the minimum 1,200 Units were sold and
$2,250,000 if the maximum 25,000 Units were sold. Financial Services
may contract with or employ certain registered brokers or dealers who
will receive certain compensation for wholesaling activities
performed in connection with the offering of the Units through
broker-dealers. The amount of such compensation will be paid by
Financial Services from the Managing Sales Agent Fee, and when added
to sales commissions payable to broker-dealers, will not exceed 9.0%
of the gross offering proceeds.
Financial Services ("Managing Sales
Agent")................................. Reimbursement of Expenses. The Partnership will pay accountable
expenses in connection with the Offering (up to 3.5% of Gross
Proceeds, $42,000 if the minimum 1,200 Units were sold and $875,000
if the maximum 25,000 Units were sold).
ACQUISITION PHASE
General Partner........................... Acquisition Fee. The General Partner will be compensated for services
performed in connection with the analysis of assets available to the
Partnership, the selection of such assets and the acquisition
thereof, including obtaining lessees for the Equipment, and
negotiating and concluding lease agreements, and also for services
performed in connection with the placement of financings by the
Partnership. As compensation for such services, the General Partner
will receive a fee equal to 5.0% of the purchase price of Equipment
acquired by the Partnership, or Equipment leased to customers by
manufacturers, the financing for which is provided by the Partnership
and of the amount of financings placed by the Partnership. This
compensation will not be paid until the Equipment is acquired or the
financings completed. The General Partner will pay all Acquisition
Expenses out of its Acquisition fee. If only Net Proceeds available
for the
23
ENTITY RECEIVING COMPENSATION TYPE AND AMOUNT OF COMPENSATION
- ------------------------------------------ ---------------------------------------------------------------------
acquisition of Equipment and financings is utilized, the Acquisition
Fee will be approximately $49,429 if the Minimum Units are sold and
$1,029,762 if the Maximum Units are sold. If the maximum amount of
loan proceeds (40.0% of the Gross Proceeds of the Offering) is
utilized together with the Net Proceeds, the Acquisition Fee will be
approximately $72,058 if the Minimum Units are sold and $1,501,191 if
the Maximum Units are sold.(1)
OPERATING AND LIQUIDATING PHASE
General Partner........................... Management Fee. As compensation for managing the operations of the
Partnership, the General Partner will receive a fee equal to 2.0% of
the Gross Rental Payments, loan payments and other payments received
by the Partnership on account of its leasing and financing
activities. This fee will not be paid on a current basis if the
Partnership has not paid the Limited Partners Operating Distributions
equal to 9.6% of Adjusted Capital Contributions for the year. In such
case, the fee will be accrued as a debt of the Partnership payable
out of future revenues.
General Partner........................... General Partner's Expense Reimbursement. To the extent funds are
available, the General Partner will be reimbursed for expenses of the
Partnership and for administrative services necessary for the prudent
operation of the Partnership. The amount of such reimbursement will
be the General Partner's cost or the amount the Partnership would be
required to pay to nonaffiliated persons for comparable services
rendered in the same geographical area.(2)
General Partner........................... Partnership Interest. The General Partner will have a present and
continuing interest in each item of income, gain, loss, deduction,
credit, tax preference, and distributions of Cash Available for
Distribution based upon the General Partner's capital contribution of
$10,000 (the equivalent of 10 Units). After satisfaction of
Partnership liabilities and after the Limited Partners have received
a return of 100.0% of their original investment in the Partnership
(their Adjusted Capital Contributions) plus a 9.6% annual return on
their Adjusted Capital Contributions during the Operating Phase and
no less than an 8.0% annual, cumulative, compounded daily,
distribution based on their Adjusted Capital Contributions, the
General Partner is entitled to receive 20.0% of any remaining
Liquidating Distributions of the Partnership. The amount of such
interest is not determinable at this time.
General Partner........................... Re-leasing Services. As compensation for providing re-leasing
services to the Partnership, the General Partner will receive a fee
equal to the lesser of the competitive rate for comparable services
for similar equipment or 2.0% of the gross rental
24
ENTITY RECEIVING COMPENSATION TYPE AND AMOUNT OF COMPENSATION
- ------------------------------------------ ---------------------------------------------------------------------
payments derived from the re-lease of such equipment after the time
that the re-lease has been consummated as a result of the efforts of
the General Partner. The General Partner will not be paid for
re-leasing services where Equipment is re-leased to a previous lessee
of such Equipment or to an affiliate of such previous lessee. The
General Partner has and will maintain adequate staff to render such
re-leasing services and will render substantial re-leasing service in
connection with each re-lease of Equipment. Such payment for services
shall be paid as each rental payment is made over the term of the
lease. This fee will not be paid on a current basis if the
Partnership has not paid the Limited Partners Operating Distributions
equal to 9.6% of Adjusted Capital Contributions for the year. In such
case, the fee will be accrued as a debt of the Partnership payable
out of future revenues.
General Partner........................... Interest on Loans to the Partnership. If the General Partner makes
loans to the Partnership in accordance with the Partnership Agreement
to enable it to repair, recondition or reconfigure, and in certain
circumstances, acquire Equipment, the General Partner may be paid
interest on such loans at an interest rate which does not exceed the
rate which would be charged by unaffiliated lending institutions on
comparable loans for the same purpose. No points or prepayment
penalties will be charged to the Partnership with respect to any such
loans. Loans to the General Partner or Affiliates from the
Partnership are prohibited. The amount of interest payable to the
General Partner is not determinable at this time.
General Partner........................... Acquisition Fee. The General Partner will be paid Acquisition Fees in
connection with the initial acquisition of Program Assets utilizing
Cash Flow. For a description of services performed in connection with
the payment of an Acquisition Fee, see "Acquisition Fee" under
"Acquisition Phase" above. Such fee will be equal to 5.0% of Program
Assets acquired by the Partnership utilizing Cash Flow. The amount
payable is not determinable at this time. However, the amount of
these Acquisition Fees is limited so that the total amount of all
Acquisition Fees paid, together with all of the Front End Fees (other
than Acquisition Fees) paid, does not exceed that percentage of the
Gross Proceeds equal to 100% less the percentage of Capital
Contributions the General Partner has committed to Investment in
Program Assets as described in footnote 1, below.(1)
- ------------------------
(1) The Acquisition Fee will be the total of all commissions and fees which, to
the knowledge of the General Partner, will be paid by all parties to all
parties in connection with the initial purchase of Equipment or placement of
financings by the Partnership. The Acquisition Fee will not be paid until
the Equipment is purchased by the Partnership (or by the General Partner as
nominee) or until the completion of financings. Included in the computation
of such fees or commissions will be any commission, selection fee,
nonrecurring management fee, or any fee of a similar nature, however
25
designated. See "Cash Distributions and Redemptions" and "Conflicts of
Interest." As required by Guidelines promulgated by NASAA, the General
Partner has committed a percentage of Capital Contributions to Investment in
Program Assets which is equal to the greater of (a) 80.0% of the Capital
Contributions reduced by .0625% for each 1.0% of indebtedness encumbering
Program Assets; or (b) 75.0% of Capital Contributions. The percent of
indebtedness encumbering Program Assets is calculated by dividing the amount
of indebtedness by the Purchase Price of Equipment, excluding Front End
Fees. The resulting quotient is then multiplied by .0625% to determine the
percentage to be deducted from 80.0%. The Partnership shall not pay,
directly or indirectly, a commission or fee (except within the limits stated
above) to a Sponsor in connection with the reinvestment or distribution of
Cash Available for Distribution or of the proceeds of the resale, exchange,
or refinancing of Program Assets.
(2) Monthly reimbursement to the General Partner for administrative services to
the Partnership (at the lesser of the cost or the amount the Partnership
would be required to pay to non-affiliated persons for comparable
administrative services in the same geographic area), including but not
limited to salaries paid to employees of the General Partner working on
Partnership business, record keeping, mailings to Limited Partners and an
allocable portion of computer time and expense. Reimbursement for costs of
goods and materials will be only for goods and materials obtained from
independent third parties. The reimbursement will be for expenses which are
necessary for the prudent operation of the Partnership, and will not be for
time expended by Controlling Persons of the General Partner or its
Affiliates. In addition, any general or administrative overhead incurred by
the General Partner in connection with the administration of the Partnership
which is not directly attributable to the rendering of services authorized
by applicable state law shall not be charged to the Partnership. Such
general or administrative overhead includes, but is not limited to,
salaries, travel expenses and other items generally falling under the
category of overhead. No payment will be made for services for which the
General Partner or any of its Affiliates are entitled to compensation by way
of a separate fee. The costs reimbursed to the General Partner and its
Affiliates will be the subject of a Special Report. See "Cash Distributions
and Redemptions."
26
CONFLICTS OF INTEREST
The Partnership is subject to various conflicts of interest arising out of
its relationship with the General Partner and its Affiliates. However, the
General Partner is accountable to the Limited Partners and the Partnership as a
fiduciary and, therefore, must exercise good faith and integrity with respect to
Partnership affairs. See "Fiduciary Responsibility of the General Partner." Such
conflicts of interest include, but are not limited to, the following:
1. PREDETERMINED CONDITIONS. Substantially all of the terms of an
investment in Units have been determined by the General Partner prior to the
admission of the Limited Partners into the Partnership and are not the result of
arm's-length negotiations. Such terms include the (i) types of Equipment to be
acquired by the Partnership; (ii) general terms of acquisition of Equipment;
(iii) amount of contributions to the capital of the Partnership by the General
Partner and Limited Partners; (iv) allocation of Partnership profits, losses and
distributions; and (v) compensation to be paid by the Partnership to the General
Partner and its Affiliates. The General Partner has no procedures to resolve
this conflict.
2. EFFECT OF LEVERAGE ON COMPENSATION ARRANGEMENTS. The General Partner
will attempt to finance the purchase price of all Equipment of the Partnership
with Partnership borrowings equal to 40.0% of the Gross Proceeds of the
Offering. Because Acquisition Fees are based upon the purchase price of
Equipment acquired by the Partnership and the amount of financings placed by the
Partnership, it is in the best interest of the General Partner to employ the
maximum amount of debt, even though the increased risks of such debt financing
might not be in the best interests of the Limited Partners. To resolve this
conflict the General Partner will utilize debt financing that has terms that are
reasonable and commensurate with the best interests of the Partnership. If such
financing is not available when financing is sought, leverage will not be used
or will be deferred until such financing is available. The General Partner has
adopted no other procedures to resolve this conflict.
3. TRANSACTIONS WITH THE PARTNERSHIP. The General Partner will perform
various services for the Partnership in connection with the acquisition,
leasing, management, re-leasing and sale of Equipment, and will receive, in
consideration therefor, various forms of compensation. The selection of the
General Partner to perform the services was not a disinterested decision, and
the terms and conditions for the performance of such services and the amount and
terms of such compensation were not determined in arm's-length negotiations.
There are no specific procedures to resolve this conflict.
During the offering of the Units, the General Partner may acquire certain
Equipment on behalf of the Partnership which will be transferred to the
Partnership after the Closing Date of the offering. To resolve this conflict,
the Partnership will acquire Equipment from the General Partner only at the
General Partner's cost, and the Partnership will not acquire Equipment from the
General Partner or its Affiliates, other than Equipment purchased by the General
Partner on a temporary (i.e., generally not in excess of six months) basis for
the Partnership.
The Partnership Agreement imposes various constraints on the General Partner
in its dealings with the Partnership. These constraints include restrictions
which prohibit the General Partner from (i) entering into contracts with the
Partnership which bind the Partnership after expulsion of the General Partner,
(ii) receiving a give-up or rebate from the Partnership, (iii) entering into
leases or sales agreements with the Partnership except as specifically provided
herein (see "Equipment Acquisitions"), (iv) participating in any reciprocal
business arrangement which would circumvent guidelines adopted by NASAA, or (v)
using the funds or assets of the Partnership in any manner except for the
exclusive benefit of the Partnership. See Section 16.3 of Exhibit A, Agreement
of Limited Partnership. Moreover, the General Partner will be subject to a
fiduciary duty to the Partnership in its performance of services and in
evaluating the capabilities, services and compensation of other persons
rendering services to the Partnership. See "Equipment Acquisitions" and
"Fiduciary Responsibility of the General Partner."
27
Under certain limited circumstances, the Partnership may sell assets to the
General Partner to effect a liquidation of the Partnership. Such a transaction
is governed by and subject to the limitations set forth in Section 16.8 of the
Partnership Agreement, and will be consummated in the absence of a secondary
market for Program Assets at the end of the term of the Partnership. The
purchase price of such assets will be the greater of two independent appraisals
of the fair market value of the assets, and the sale must be approved by sixty
percent (60%) of the votes entitled to be cast by the Limited Partners.
4. COMPENSATION PAYABLE TO THE GENERAL PARTNER. The fees payable by the
Partnership to the General Partner have been determined unilaterally by the
General Partner and are not the result of arm's-length negotiations. Because the
General Partner is entitled to receive certain compensation from the Partnership
in connection with the acquisition and management of Equipment and financings,
the interests of the General Partner may at times be inconsistent with the
interests of the Limited Partners. See "Compensation of the General Partner and
Affiliates." For example, it may be in the General Partner's interest to
reinvest available cash in higher-yield (and possibly higher risk) leases,
rather than making early distributions to Limited Partners because the General
Partner has a 20.0% interest in the Liquidating Distributions of the
Partnership. Further, it may be in the General Partner's interest to declare the
commencement of the Liquidating Phase prior to the expiration of five years for
the purpose of reducing the payment of Operating Distributions to the Limited
Partners and decreasing the aggregate amounts that must be paid to Limited
Partners prior to payment of the General Partner's 20.0% interest in Liquidating
Distributions. In such circumstances, the interest of the General Partner in
continuing the Partnership and receiving annual management fees may conflict
with the interests of the Limited Partners in maximizing their investment
returns. Other than the fiduciary duty of the General Partner, there are no
procedures to resolve this conflict.
5. COMPETITION WITH THE GENERAL PARTNER AND AFFILIATES. The General
Partner is engaged directly for its own account in the business of acquiring and
leasing equipment. The General Partner serves as the general partner of
Telecommunications Income Fund IX, L. P. ("TIF IX") and Telecommunications
Income Fund X, L.P. ("TIF X"), publicly owned limited partnerships that are
engaged in the equipment leasing business. All of the net proceeds of TIF IX and
TIF X have been invested in partnership assets.
The General Partner may acquire, lease, finance and sell equipment, and
interests therein for TIF IX, TIF X, for its own account and for unaffiliated
third parties. The General Partner or other Affiliates may operate as general
partners for entities, such as TIF IX or TIF X that are not yet formed. See
"Prior Experience of the General Partner and Affiliates."
The General Partner or its Affiliates may in the future form and sponsor
public and private equipment leasing programs ("Future Programs"), some of which
may have investment objectives that are the same as, or similar to, those of the
Partnership's and which may be in a position to acquire the same equipment at
the same time as the Partnership. In seeking to acquire, lease, re-lease and
sell its Equipment, the Partnership may be in competition with TIF IX, TIF X and
Future Programs.
The Partnership Agreement does not prohibit the General Partner and its
Affiliates from competing with the Partnership for equipment acquisition,
financing, refinancing, leasing and re-leasing opportunities on its or their
behalf. The General Partner is not obligated to present to the Partnership
particular equipment acquisition, financing, leasing and re-leasing
opportunities that come to its attention, even if such opportunities are of a
character that might be suitable for the Partnership.
If the General Partner, TIF IX, TIF X, the Partnership or any Future
Programs advised, managed or controlled by the General Partner have, at the same
time, available for sale or re-lease, equipment (whether or not subject to
existing leases) of a particular type, and the supply of equipment of the type
exceeds the demand, the General Partner will try to arrange for the sale or
re-lease of items of equipment to be made in the order in which the underlying
lease terms expired and the items of equipment became available for sale or
re-sale, or, if the leases expire simultaneously, the order in which the leases
took effect.
28
The following guidelines will be utilized by the General Partner to resolve
conflicts regarding the acquisition of Equipment when the General Partner and/or
two or more partnerships (including the Partnership), entities, or transactions
affiliated with or managed by the General Partner have funds available to
acquire and lease the same types of equipment. In such situations, the General
Partner will analyze the equipment already purchased by, and the investment
objectives of, each party involved, and will determine which party will purchase
the equipment or provide the financing based upon such factors, among others, as
(i) the amount of cash available to each party for such acquisition and the
length of time such funds have been available, (ii) the current and long-term
liabilities of each party, (iii) the effect of such acquisition on the
diversification of each party's equipment portfolio, (iv) the estimated income
tax consequences to the investors in each party from such acquisition and their
respective needs, and (v) the cash distribution objectives of each party. If
after analyzing the foregoing and any other appropriate factors, the General
Partner determines that such acquisition would be equally suitable for more than
one party, then the General Partner shall purchase such equipment for the
parties on the basis of rotation with the order of priority determined by the
date each such party was formed. In any event, the General Partner is
accountable to the Partnership as a fiduciary and consequently is under a
fiduciary duty to exercise good faith and integrity in conducting the
Partnership's affairs, and to conduct such affairs in a manner consistent with
the best interest of the Partnership. See "Fiduciary Responsibility of the
General Partner."
The General Partner anticipates that, from the date of this Prospectus
through the end of the period in which the Partnership has funds available for
investment, it may organize one or more Future Programs that will acquire
Equipment for lease to unaffiliated third parties or acquire Equipment subject
to existing leases. In addition, the General Partner anticipates that it and its
Affiliates will enter into agreements to acquire and sell equipment for their
own accounts or for unaffiliated third parties during this period. In this
regard, the General Partner may, for its own account, enter into agreements to
act as an independent equipment manager with respect to lease portfolios owned
by certain unaffiliated limited partnerships and other entities and the General
Partner will receive compensation for such services. The Partnership may, from
time to time during the Operating Phase, acquire all or a portion of such lease
portfolios in accordance with the procedures established by the General Partner,
generally, for acquiring existing lease portfolios. See "Acquisition Policies
and Procedures" under "Investment Objectives and Policies." Except as
specifically set forth above, there are no procedures for resolving the
conflicts described in this section.
6. COMPETITION FOR MANAGEMENT TIME AND SERVICES. The Partnership will not
have separate management, but will rely instead on the General Partner for the
management and administration of the Partnership and its assets. The General
Partner believes that it has or can attract sufficient personnel to discharge
all of its responsibilities to the Partnership. The General Partner may have
conflicts of interest in allocating management time, services or functions
between the Partnership and other entities, including, but not limited to the
General Partner's own business, and other existing and future programs for which
the General Partner may provide services. The officers and directors of the
General Partner will devote such time and will direct their employees to devote
such time to the affairs of the Partnership as the General Partner, in its sole
discretion, determines to be necessary for the conduct of the business of the
Partnership. However, the General Partner has not adopted any procedures to
resolve the conflict described in this Section.
7. OTHER RELATIONSHIPS WITH MANUFACTURERS, LESSEES, LENDERS AND
MANAGERS. The General Partner may have ongoing relationships with
manufacturers, lessees, lessors or managers of Equipment and with brokers,
lenders and others. Such relationships could influence the General Partner to
take actions, or forebear from taking actions, which an independent general
partner might not take or forebear from taking. An affiliate of the General
Partner owns a 6.2% interest in and the President of the General Partner serves
as a director of Intellicall, Inc., a manufacturer of telecommunications
equipment. Accordingly, the General Partner has a conflict of interest that may
result in the General Partner making credit and leasing decisions to benefit
Intellicall, Inc. The General Partner has not adopted any procedures to resolve
the conflict described in this Section.
29
8. DETERMINATION OF RESERVES. The amount of distributions from the
Partnership is subject, among other matters, to the discretion of the General
Partner in establishing and maintaining the appropriate level of operating and
working capital reserves for the Partnership. Since the amount of working
capital reserves (estimated to be 1.0% of the Gross Proceeds) will affect the
potential liability of the General Partner to Partnership creditors, the General
Partner may be considered to have a conflict of interest in determining the
allocations to the Partnership's Reserve Account. The General Partner has not
adopted any procedures to resolve the conflict described in this Section.
9. HONORING REDEMPTION REQUESTS. If the General Partner redeems any Units
it intends to use Cash Available for Distribution. A conflict could arise if
sufficient funds exist only to either (i) redeem Units for which redemption
requests have been received and approved or (ii) take its Management Fee in a
given year. The General Partner has not adopted any procedures to resolve the
conflict described in this Section.
10. LACK OF SEPARATE REPRESENTATION. The Partnership, the Initial Limited
Partner and the General Partner are not represented by separate counsel. The
attorneys who perform services for the Partnership will also perform services
for the General Partner, certain of the General Partner's Affiliates, and other
partnerships or ventures that the General Partner or its Affiliates have and may
sponsor. In order to resolve any dispute regarding representation, should a
dispute arise between the Partnership and the General Partner, the General
Partner anticipates it will retain separate attorneys and other experts to
represent the Partnership in such matter.
11. EXCLUSIVE AGREEMENTS. There are no exclusive agreements between the
General Partner and the Partnership, and such agreements are prohibited.
12. DISTRIBUTION OF UNITS; MANAGING SALES AGENT. Berthel Fisher & Company
Financial Services, Inc., the Managing Sales Agent, is an Affiliate of the
General Partner. Because of the Managing Sales Agent's affiliation with the
General Partner, the review and investigation by such firm of the Partnership
and of the information provided in this Prospectus will not have the benefit of
a review and investigation by an independent securities firm in the capacity of
a Managing Sales Agent. No procedures have been followed to address this
conflict.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary and,
consequently, must exercise good faith and integrity in conducting the
Partnership's affairs. Some courts have held that a limited partner may
institute legal action on behalf of itself or all other similarly situated
limited partners (a class action) or on behalf of a partnership (a partnership
derivative action) to recover damages from a general partner or from third
parties. Certain cases decided by the federal courts also may be construed to
support the right of a limited partner to bring such actions under SEC Rule
10b-5 for the recovery of damages (including losses incurred in connection with
the purchase or sale of a partnership interest) resulting from a breach by a
general partner of its fiduciary duty. Also, where an employee benefit plan has
acquired Units, case law applying the fiduciary duty concepts of ERISA to an
insurance company in connection with a general account insurance contract could
be viewed to apply equally to the General Partner. This is a developing and
changing area of the law. Therefore, Limited Partners who have questions
concerning the fiduciary duties of the General Partner should consult their own
counsel as to the status of the law at such time.
The General Partner has fiduciary responsibility for the safekeeping and use
of all funds and assets of the Partnership, whether or not in its immediate
possession or control, and will not employ, or permit another to employ, such
funds or assets in any manner except for the exclusive benefit of the
Partnership.
The General Partner and its Affiliates performing services for the
Partnership may not be liable to the Partnership or the Limited Partners for
errors in judgment or other acts or omissions which do not amount to fraud,
negligence, breach of fiduciary duty or misconduct. However, in an action by
Limited Partners
30
against the General Partner for breach of fiduciary duty, courts have held that
the General Partner must prove its innocence by clear and convincing proof that
it acted in good faith, with honesty and with full and fair disclosure of
relevant information. If an action for breach of fiduciary duty was filed
against the General Partner, the General Partner would claim as a defense that
its conduct was fair and reasonable, and that there was, in fact, no breach of
fiduciary duty. In certain situations, the General Partner would claim as a
defense that the Limited Partner claiming breach of fiduciary duty delayed too
long in filing a lawsuit. This defense is based upon statutory provisions
limiting the time during which a lawsuit may be filed and upon certain common
law rights that prevent the bringing of old claims.
The Partnership Agreement provides that the General Partner or its
Affiliates performing services for the Partnership will be indemnified by the
Partnership for any liabilities incurred by them arising from acts performed, or
omitted to be performed, by them in connection with the activities of the
Partnership or in dealing with third parties on behalf of the Partnership in
good faith, except for acts or omissions which constitute fraud, negligence,
breach of fiduciary duty or misconduct. See "Summary of the Limited Partnership
Agreement--Exculpation and Indemnification of the General Partner." Therefore,
the Limited Partners may have a more limited right of action against the General
Partner and its Affiliates than they would have absent such provisions in the
Partnership Agreement. Further, a successful claim for indemnification could
deplete the Partnership's assets and reduce the level of distributions made to
the Limited Partners. Under current law, the General Partner would not be
considered to be an ERISA fiduciary. However, if the General Partner were
considered to be an ERISA fiduciary with respect to the assets of the
Partnership, any exculpation or indemnification provision which relieves the
General Partner from liability for breach of its fiduciary duty would be void
and of no effect. Although the Partnership Agreement provides for
indemnification as discussed in this paragraph, the Partnership Agreement does
not otherwise modify the state law fiduciary duty standards applicable to the
General Partner. INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE REGISTRANT, THE REGISTRANT HAS BEEN INFORMED THAT IN THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION, INDEMNIFICATION FOR LIABILITIES
ARISING UNDER THE SECURITIES ACT OF 1933 IS AGAINST PUBLIC POLICY AND,
THEREFORE, IS UNENFORCEABLE.
The General Partner or any of its Affiliates, and any person acting as a
broker-dealer, will not be indemnified against any liability, loss or damage
incurred by reason of any act performed or omitted to be performed by them in
good faith in connection with the activities of the Partnership or in dealing
with third parties on behalf of the Partnership, involving allegations that
federal or state securities laws were violated, unless such lawsuits alleging
such claims are successfully defended and a court approves indemnification of
litigation costs, or unless such lawsuits are dismissed with prejudice on the
merits or unless such lawsuits are settled and a court approves the settlement
and indemnification. The General Partner will apprise the court of the position
of the SEC with respect to indemnification before seeking court approval for
indemnification, whether such claims are litigated, dismissed or settled.
The Partnership Agreement provides that the Partnership will not incur the
cost of that portion of any insurance that insures any party against any
liability the indemnification for which is prohibited by the Partnership
Agreement.
Notwithstanding the fiduciary relationship, the General Partner has broad
discretionary powers to manage the affairs of the Partnership under the terms of
the Partnership Agreement. Generally, actions taken by the General Partner are
not subject to vote or review by the Limited Partners, except to the limited
extent provided in the Partnership Agreement. See "Summary of the Limited
Partnership Agreement."
31
TAX MATTERS
A. BRIEF SUMMARY OF MATERIAL TAX CONSEQUENCES OF INVESTMENT
The following is a brief summary of some of the major tax consequences
discussed in more detail in this section of this Confidential Memorandum. An
Investor should not rely solely on this brief summary of the tax consequences of
an investment in the Partnership but should review the entire section entitled
"Tax Consequences" and consult with the Investor's own tax advisers and counsel
before making an investment decision.
No ruling has been filed with the Internal Revenue Service (the "IRS")
requesting that the Partnership be classified as a partnership for tax purposes.
The Partnership is relying upon the opinion of Bradley & Riley, P.C.
("Counsel"), 100 First Street, S.W., Cedar Rapids, Iowa, that the Partnership
will be classified as a partnership for tax purposes. If the IRS determines that
the entity is not a partnership for tax purposes, an Investor would experience a
substantial reduction in yield.
If the IRS determines that the Partnership is a "publicly traded
partnership", the Partnership will be treated like a corporation for tax
purposes with the result that the yield to the Investor on his or her investment
will be substantially reduced. Based on representations by the General Partner
and applicable IRS Regulations, Counsel has rendered an opinion that it is more
likely than not that the Partnership will not be treated as a publicly traded
partnership.
Based on the current published Regulations and Rulings by the IRS, it is the
opinion of Counsel that an investment by a Limited Partner in the Partnership
will be considered a passive activity. The result is that if an individual,
trust, estate, personal service corporation or closely held corporation suffers
a loss from an investment in the Partnership, such loss would only be deducted
against passive income.
Investment by employee benefit plans, including individual retirement
accounts or other tax-exempt entities, in the Partnership may result in
additional reporting requirements and may result in the tax exempt entity paying
tax on the income earned from its investment in the Partnership.
B. TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
for persons considering an investment in the Partnership. This summary is based
upon the Internal Revenue Code (the "Code"), rules and regulations promulgated
thereunder and existing interpretations thereof, which regulations and
interpretations are subject to change at any time. The following summary
discusses the material aspects of the federal income tax consequences that could
affect an investment in the Partnership. No assurance can be provided that any
deductions or other federal income tax advantages that are herein described or
that a prospective Investor in the Partnership may consider available will in
fact be allowed by the IRS.
The tax opinion rendered by Counsel is based upon the facts described in
this Confidential Memorandum and upon the facts as they have been represented by
the General Partner to Counsel or determined by Counsel as of the date of the
opinion. Any alteration of the facts may adversely affect the opinion rendered.
Furthermore, the opinion is based upon existing law and applicable current and
proposed Treasury Regulations, current published administrative positions of the
IRS contained in Revenue Rulings and Revenue Procedures, and judicial decisions,
all of which are subject to change either prospectively or retroactively.
Counsel has not opined as to the characterization of leases as true leases
because the Partnership has not entered into and has not negotiated any leases,
and the determination as to whether a lease is a true lease or some other form
of transaction for tax purposes is dependent upon the terms of each transaction.
Subject to the foregoing and to certain conditions set forth herein, Counsel has
rendered
32
its opinion that all material tax consequences of an investment in the
Partnership more likely than not will be realized.
1. PARTNERSHIP TAX STATUS. The ability of an Investor to realize tax
benefits from investing in a limited partnership depends upon its classification
as a partnership for federal income tax purposes, rather than as an association
taxable as a corporation.
The Partnership is relying upon the opinion of Counsel as to its partnership
tax status. Unlike a tax ruling, an opinion of Counsel represents only such
Counsel's best legal judgment, and has no binding effect or official status of
any kind, and no assurance can be given that the conclusions reached in said
opinion would be sustained by a court if contested.
On December 18, 1996 the IRS issued final regulations under Regulation
Section301.7701. The regulations allow an entity to elect to be taxed as a
corporation or as a partnership for tax purposes. Under Regulation
Section301.7701-2(c), a business entity with two or more members that is not
classified as a corporation under certain sections of Regulation
Section301.7701-2(b) (for example, an entity organized as a corporation under
Federal or State statutes or a publicly traded partnership under Section 7704 of
the Code) will be classified as a partnership. Regulation Section301.7701-3
provides that an entity can file an election, if it wishes to select a
classification different from the default classification. If the entity has two
or more members and it is not classified as a corporation under
Section301.7701-2(b), its default classification is a partnership. Therefore,
the effect of the regulation is that the entity should, for tax purposes, be
treated as a partnership for tax purposes provided it is not a publicly-traded
partnership under the Internal Revenue Code. See "Publicly Traded Partnerships."
It is the opinion of Counsel that, pursuant to existing law and Treasury
Regulations (specifically Sections 301.7701-2 and 301.7701-3) and provided the
Partnership is organized and operated in accordance with the provisions of the
Agreement of Limited Partnership, the Partnership will be treated as a
partnership, as defined in Sections 7701(a)(2) and 761(a) of the Code, for
federal income tax purposes and will not be taxable as a corporation provided
that the Partnership is not classified as a publicly-traded partnership under
Section 7704 of the Code.
If the Partnership were classified as an association taxable as a
corporation for any reason, including being treated as a publicly traded
partnership, it would be subject to federal income tax on its taxable income at
regular corporate tax rates. The Limited Partners would not be entitled to take
into account their distributive Share of the Partnership's deductions or losses,
if any, and would be subject to tax on their Share of the Partnership's income
to the extent distributed either as dividends from current or accumulated
earnings and profits or, if in excess of the tax basis of their interests, as
capital gain. Classification of the Partnership as an association taxable as a
corporation would result in a substantial reduction in yield and after-tax cash
flow, if any, to a Limited Partner.
2. "PUBLICLY TRADED" PARTNERSHIPS. Although it is the opinion of counsel
the Partnership will be classified as a partnership for federal income tax
purposes under Section 7701 of the Code, the provisions of Section 7704 of the
Code provide rules establishing the circumstances in which a partnership will be
classified as a "publicly traded" partnership ("PTP") and nonetheless treated as
a corporation for federal income tax purposes. There are two (2) sections of the
Code that affect the taxation of PTPs. Section 7704 of the Code contains
provisions that will, if applicable, tax certain "publicly traded" partnerships
as corporations. Section 469(k) of the Code provides that net income from a PTP
will not be considered passive income that can offset passive losses from other
activities. Income from a PTP is treated like portfolio income that cannot be
used to offset losses from passive activities. Each partner who holds an
interest in a PTP must treat any loss from the partnership separately from any
income or loss from other PTPs. Suspended losses from a PTP may be offset only
against future income of that PTP unless and until there has been a complete
disposition of that PTP.
33
Section 7704(b) and Section 469(k) of the Code define the term "publicly
traded partnership" to mean any partnership if (1) interests in such partnership
are traded on an established securities market, or (2) interests in such
partnership are readily tradable on a secondary market (or the substantial
equivalent thereof).
Under Treasury Regulation section 1.7704-1, an established securities market
means a national securities exchange registered under Section 6 of the
Securities Exchange Act of 1934, national securities exchange exempt under
Section 6 of the Securities Exchange Act of 1934 because of limited volume, a
foreign exchange regulated under requirements analogous to those applicable to
the Securities Exchange Act of 1934, a regional or local exchange or an
interdealer quotation system that regularly disseminates firm buy and sell
quotations by independent brokers. A secondary market (or the substantial
equivalent of a secondary market) will be deemed to exist if, taking into
account all of the facts and circumstances, the partners are readily able to
buy, sell, or exchange their partnership interests in a manner that is
comparable, economically, to trading on an established securities market.
Interests in a partnership are readily tradable on a secondary market or the
substantial equivalent thereof if (i) the interests are regularly quoted by any
person, such as a broker or dealer, making a market in the interests; (ii) any
person regularly makes available to the public bid or offer quotes with respect
to interest in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) the
holder of an interest in a partnership has a readily available, regular and
ongoing opportunity to sell or exchange such interest through a public means of
obtaining or providing information of offers to buy, sell or exchange interests;
or (iv) prospective buyers and sellers otherwise have the opportunity to buy,
sell or exchange interests in a time frame and with the regularity and
continuity that is comparable to that described in (i), (ii), or (iii).
Treasury Regulation section 1.7704-1(e), (f), and (g) list certain types of
limited transfers ("Exempt Transfers") that will be disregarded in determining
whether a partnership is publicly traded. In addition to providing for these
Exempt Transfers, the Regulations state that partnership interests will not be
deemed "readily tradable on a secondary market" (or the substantial equivalent
thereof) if the "two percent safe harbor" provided for under Section 1.7704-1(j)
is satisfied. The two percent safe harbor provides that a secondary market or
its equivalent will not exist if the sum of the percentage interests in
partnership capital or profits transferred (including purchases by the limited
partnership of its own interests) during the partnership's taxable year does not
exceed 2.0% of the total interests in partnership capital or profits. Exempt
Transfers do not count towards the 2.0% ceiling. The total interest in
partnership capital or profits are determined by reference to all outstanding
interests in the partnership unless the General Partners or any person related
to the General Partners own, in the aggregate, more than ten percent (10%) of
the outstanding interests in partnership capital or profits at any one time
during the taxable year, in which event the total interests in partnership
capital or profits are determined without reference to the interests owned by
such persons.
Exempt transfers are (1) private transfers as defined in the regulations;
(2) transfers pursuant to redemptions and repurchase agreements meeting certain
requirements as specified in the regulations; and (3) transfers pursuant to the
qualified matching service as defined under Treasury Regulation section
1.7704-1(a). The qualified matching service exclusion will not apply if the sum
of the percentage interests in the partnership capital and profits transferred
during the taxable year of the partnership exceeds 10% of the total interests in
the partnership. The regulations contain certain other conditions to prevent a
qualified matching service from operating on a secondary market or the
substantial equivalent thereof. The Partnership intends that should any trading
of interests in the Partnership occur through a qualified matching service that
the Partnership will monitor Unit trading to attempt to comply with the
qualified matching service provision, and further, the Partnership will apply
limitations on the percentage of Units that can be validly traded under a
qualified matching service.
The General Partner has represented to Counsel that (i) the Partnership will
not list Units for trading or otherwise encourage or condone the establishment
of a market for Units, (ii) the General Partner does
34
not expect Units to be readily tradeable on a secondary market, based upon its
experience with other limited partnerships, and (iii) the General Partner will
not consent to the assignment, redemption or other disposition of Units if, in
the opinion of Counsel to the Partnership, the sum of the percentage interests
in Partnership capital or profits assigned, redeemed or otherwise disposed of
during a Partnership taxable year after such assignment, redemption or other
disposition exceeds 2.0% of the total interest in Partnership capital or
profits, excluding Exempt Transfers. Based upon these representations, it is the
opinion of Counsel that the Partnership will not be treated as "publicly traded
partnership."
While the General Partner will use its best efforts to limit the type and
number of transfers of Units to those that will allow the Partnership to remain
within the 2.0% safe harbor, the General Partner cannot guarantee that the
Partnership will satisfy this safe harbor during each of its taxable years. It
is conceivable that transfers of Units could occur that would cause the
Partnership to fall outside the safe harbor. No assurances can be offered that
if the amount and type of trading in the Units were to fall outside the safe
harbor, the IRS would not maintain that the Partnership should be treated as a
PTP.
Section 7704(c) of the Code provides that an entity that would otherwise be
treated as a PTP under Section 7704(a) will not be treated as a PTP if more than
90% of the entity's gross income consists of qualifying income. Qualifying
income is defined under Section 7704(d) as including interest, dividends, gains
from the sale or disposition of a capital asset (or property described in
Section 1231(b)) held for the production of income described in subparagraphs of
Paragraph 1 of Section 7704(d). However, Section 7704(c)(3) provides that the
exception for a publicly traded entity having more than 90% of its gross income
as qualifying income does not apply to any partnership that would be a
"regulated investment company" described in Section 851(a) of the Code if such
partnership were a domestic corporation.
Because the Partnership will be engaged in the leasing of personal property
which is not one of the types of qualifying income described under Section
7704(d) of the Code, the exception under Section 7704(c) of the Code would not
appear available to the Partnership.
Based upon the undertaking of the General Partner to prohibit any transfer
of Units that would cause the Partnership to fall outside the 2.0% safe harbor
provided in the Regulations, Counsel is of the opinion that the Partnership will
not be a "publicly traded partnership" within the meaning of Section 7704, and,
consequently, Section 7704 will not alter the Partnership's treatment as a
partnership, rather than as an association taxable as a corporation, for federal
income tax purposes.
3. GENERAL PRINCIPLES OF PARTNERSHIP TAXATION. A limited partnership is
required to file a Partnership information tax return each year (Form 1065). The
limited partnership as a legal separate entity does not pay income taxes on its
income for federal income tax purposes. Each Limited Partner will report on that
Partner's income tax return their distributive share (as determined under the
Partnership Agreement) of all terms of the Partnership's income, gain, loss,
deduction, credit and tax preferences, whether or not cash is distributed to the
Partner. The amount of any loss currently deductible by a Limited Partner will
be limited to the Partner's adjusted basis for the Partner's Units in the
Partnership and the amount that the Partner is treated as having "at-risk" under
applicable tax rules. See "At-Risk Rules." A Limited Partner may be subject to
tax if the Partnership has income or gain even though a cash distribution is not
made by the Limited Partnership.
As a general rule, the adjusted tax basis for a Limited Partner in Units in
the Partnership will be the Partner's Capital Contribution increased by the
share of Partnership Net Income and gain and other items described in Section
705(a)(1) of the Code and reduced (but not below zero) by the Partner's share of
Partnership distributions of money and other property, expenses, losses, and
other items described in Section 705(a)(2) and (3) of the Code. A Limited
Partner would also be entitled to increase basis by the Partnership's qualifying
nonrecourse liabilities (nonrecourse liabilities would be Partnership
liabilities for which no Partner or person related to a Partner bears the income
risk of such liabilities). However, it is not anticipated that the Partnership
will incur qualifying nonrecourse liabilities and thus Limited Partners should
assume their basis in the Partnership will not be increased by any Partnership
liabilities. Other
35
liabilities (recourse) incurred by the Partnership will not increase a Limited
Partner's basis in the Partnership but will generally increase the General
Partner's basis.
Distributions of money by the Partnership to a Limited Partner will
constitute a return of capital (and not taxable income) to the Limited Partner
to the extent of the Limited Partner's adjusted tax basis in the Units. The term
"money" includes marketable securities, with marketable securities to be taken
into account at fair market value. Marketable securities is broadly defined
under Section 731(c) of the Code and includes common trust funds, a regulated
investment company, a financial instrument that is readily convertible into
money or marketable securities and other investments in entities that hold
marketable securities. A return of capital will reduce a Limited Partner's
adjusted tax basis for the Units in the Partnership. If a Limited Partner's
adjusted tax basis for Units in the Partnership should be reduced to zero, the
Partner's share of any cash distributions for any year will generally be taxable
to the Partner as though it were a gain on the sale or exchange of property.
Nonliquidating distribution of property other than money to a Limited
Partner will reduce the Limited Partner's interest in the basis of the limited
partnership by an amount equal to the limited partnership's basis in such
property provided, however, that the adjusted basis cannot be reduced below
zero. A Limited Partner's tax basis in property distributed will be equal to the
reduction in the Limited Partner's basis in the limited partnership. A reduction
in a Limited Partner's share of indebtedness attributable to Units held by the
limited partnership will be treated as a distribution of money.
Expenses and losses of the Partnership will, subject to the Limited Partner
satisfying the "at-risk" rules, be deductible by a Limited Partner only to the
extent of the adjusted tax basis of the Limited Partner in the Units. Any loss
unavailable as a current deduction because of insufficient tax basis is allowed
as a deduction at the end of the first succeeding taxable year that the Limited
Partner's tax basis exceeds zero. Further, any losses will most likely be
considered a passive loss and deductible only to the extent of the Limited
Partner's passive income, if any. See "At-Risk Rules" under "Tax Consequences"
and "Limitation on Deductibility of Losses from Passive Activities" under "Tax
Consequences." Further, deductions or losses incurred by the Limited Partnership
and passed through to the Limited Partners are subject to rules limiting the
deduction of such as miscellaneous itemized deductions. See "Investment Expense"
under "Tax Consequences."
4. INCOME AND DISTRIBUTIONS. The Partnership intends to make Operating
Distributions on a monthly basis but only to the extent the Present Value of the
Partnership's Lease Portfolio exceeds the amount of the Net Proceeds of the
offering (less any Liquidating Distributions or distributions of capital to the
Limited Partners). See "Cash Distributions and Redemptions." If distributions to
a Limited Partner for a taxable year are less than the amount of the taxes
payable by such Limited Partner on such Limited Partner's distributive share of
the Partnership's Net Income for that taxable year, the Limited Partner will
still be responsible for the payment of income taxes on such Limited Partner's
distributive share of the Partnership's Net Income. See generally "General
Principles of Partnership Taxation" under "Tax Consequences."
5. AT-RISK RULES. Section 465 of the Code provides that activities engaged
in as a trade or business or for the production of income are subject to the
at-risk rules of Section 465 of the Code. Under Section 465 of the Code, a
Limited Partner's (other than corporations that are not closely held (i.e.,
closely held corporations are defined as corporations in which five or fewer
shareholders own directly or indirectly more than 50% of the stock other than
certain leasing companies)) deduction for that Partner's share of Partnership
expenses or losses for a tax year is limited to the amount "at risk" with
respect to the activity as of the close of such year. Except as discussed below,
a Limited Partner is considered to be at risk on the sum of (i) amounts of money
contributed to the Partnership, (ii) the adjusted basis of other property
contributed to the Limited Partnership, (iii) income generated by the
Partnership, and (iv) amounts borrowed by the Limited Partner or the Limited
Partnership where the Limited Partner is personally liable for repayment.
Borrowings by the Partnership, whether recourse or nonrecourse, will not
increase a
36
Partner's amount of risk. A Limited Partner will be considered to be at risk on
borrowings for the purchase of a Partnership Unit only if and to the extent the
Limited Partner is personally liable for repayment or the borrowings are fully
secured by the Limited Partner's personal assets (other than the Limited
Partner's unit in the Partnership) and subject to the limitation that the
borrowings are not borrowed from a person with an interest in the Partnership or
a person related to such a person.
A Limited Partner's amount at risk will be reduced by losses allowed as
deductions and cash distributions made by the Partnership. Distributions to a
Limited Partner will generally reduce the amount considered at risk. The
"at-risk" rules provide that the amount of any distribution received by a
Limited Partner or any other reduction in the Limited Partner's amount at risk,
after the amount of risk is reduced to zero, will be treated as ordinary income
but only to the extent of losses previously claimed. Thus, if the Partnership
makes a distribution to a Limited Partner that exceeds the Limited Partner's
adjusted basis in the Units in the Partnership, the Limited Partner will have
ordinary income.
If in a year a Limited Partner has a loss from the Partnership, the effect
of Section 465(a) of the Code is to permit deduction of such loss up to the
aggregate amount the Limited Partner has at risk on the last day of the taxable
year. If the amount at risk exceeds the loss, the amount deemed at risk in
subsequent years is reduced under Section 465(b)(5) by the amount of losses
claimed in previous years and increased by additional at-risk amounts
contributed. If the amount of loss exceeds the at-risk amount, the excess loss
is held in a suspense account and treated as a deduction in the first succeeding
taxable year that the taxpayer is at risk. The carryover loss is then added to
the deductions allowable for such year but is limited at the end of such year by
the amount then at risk. Under proposed Section 1.465-2(b) of the Regulations
there is no limitation on the number of years to which such deductions may be
carried.
In addition to the "at-risk" rules discussed above, Section 704(d) provides
that a Limited Partner's distributive share of loss is allowed as a deduction
only to the extent of the adjusted basis of the Limited Partner at the end of
the year in which the loss is incurred. If a Limited Partner's distributive
Share of loss items exceeds the Limited Partner's basis, as adjusted for Capital
Contributions, distributions, the Limited Partner's Share of any income items
and changes in the Limited Partner's Share of liabilities, then only a portion
of each loss item is allowed, based upon the portion that each bears to the
total of all loss items. Excess losses that are not currently allowed may be
carried forward indefinitely until such Limited Partner has sufficient basis to
permit the deduction.
6. LIMITATION ON DEDUCTIBILITY OF LOSSES FROM PASSIVE ACTIVITIES. Section
469 of the Code limits the deductibility of losses from "passive activities"
which are incurred by individuals and certain estates and trusts, personal
service corporations or closely held corporations. There is no limitation on the
deductibility of losses from "passive activities" for corporations taxed under
Subchapter C that are not personal service corporations or closely held
corporations.
The passive loss rules under Section 469 generally do not allow individuals
to use losses and credits from "passive activities" to offset income from
nonpassive activities, including wages, salaries, active business income and
portfolio income such as interest, dividends, royalties or gains from
disposition of assets producing "portfolio income" or held for investment.
Passive activities include investments in entities such as limited
partnerships, business trusts, partnerships and S corporations if the entity is
engaged in the active conduct of a trade or business and the investor does not
materially participate in the operation or activities of the entity. The general
rule is that passive losses or credits may only offset income from other passive
activities unless the investor disposes of his or her entire investment in the
activity at which time the investor may deduct any suspended passive activity
losses against nonpassive income.
Passive activity by definition under the Code includes any rental activity,
except for certain taxpayers engaging in the rental of real estate. A rental
activity means any activity where payments are principally for the use of
tangible property. Because the activity of the Limited Partnership will be the
leasing of tangible
37
personal property, the activity should be considered a passive activity under
Section 469 of the Code. Accordingly, the Limited Partnership's net income or
net loss from the rental activity would be considered income or loss from a
passive activity. Losses attributable to the Limited Partners may generally be
deducted only against income or gains attributable to other passive activities.
Any interest income earned by the Partnership on escrow accounts or other
money market accounts will be portfolio income allocable to the Limited Partners
based on the provisions of the Partnership Agreement. Any dividends on stocks
acquired by the Partnership would be considered portfolio income as well as the
gains on the sale of those stocks. In addition, to the extent certain of the
leases may not be characterized as true leases for federal tax purposes, as
discussed in "Characterization of Partnership's Leases as Leases for Federal
Income Tax Purposes," a portion of the payments received from such leases may be
considered interest income which would be treated as portfolio income allocable
to the Limited Partners. To the extent such income is treated as portfolio
income, such income will not be offset by passive losses from the Partnership's
passive activities.
The Partnership will be required to allocate expenses, overhead expenses
(including Management Fees and Acquisition Fees) and interest expense between
its passive activities and its portfolio income activities. Any Net Losses of
the Partnership allocable to a Limited Partner arising from rental activities
will be passive losses. These passive losses will be currently deductible only
to the extent of a Limited Partner's passive income from other passive
activities. All "passive losses" which are not currently deductible by the
Limited Partner may be carried over to succeeding taxable years and may be
applied against passive income. Passive losses which are not deducted and thus
carried over to a future year may as a general rule be deducted by the Limited
Partner on disposition of the interest in the Partnership. Portfolio income will
not offset losses from a passive activity.
Gain or loss realized by a Limited Partner on disposition of his or her
interest in the Limited Partnership will be treated as passive income or loss.
Upon a fully taxable disposition of a Limited Partner's entire interest in the
Limited Partnership to an unrelated party, the Limited Partner may deduct any
loss incurred on the disposition, any suspended loss from the Limited
Partnership from prior years and current year loss.
7. ALLOCATION OF PARTNERSHIP NET INCOME OR NET LOSS. In general, the
allocation of overall taxable income or loss of the Partnership among the
Partners, as well as any item of income, gain, loss or deduction will be
controlled by the Partnership Agreement, unless the allocation is found not to
have "substantial economic effect" under Section 704(b)(2) of the Code.
An allocation will generally be found to have substantial economic effect if
it is consistent with the underlying economic arrangement among the Partners and
reflects the manner in which the economic benefits and burdens are shared by the
Partners. If an allocation does not have substantial economic effect, a
Partner's share will be determined in accordance with his or her interest in the
Limited Partnership, taking into account all the facts and circumstances. In
such event, (i) the taxable income allocable to the Limited Partners might be
increased and any losses and credits allocable to them might be decreased, and
(ii) the Limited Partner's shares of nonrecourse Limited Partnership
liabilities, if any, includable in the adjusted tax basis of their Units might
be reduced.
The IRS has promulgated and amended Section 704(b) Regulations on numerous
occasions relating to the determination of a Partner's distributive share of
Partnership income, gains, losses, deductions and credits. The Regulations, in
general, provide that Partnership allocations do not have "economic effect"
unless the following provisions are included in the Partnership Agreement: (1)
partner's capital accounts must be maintained in accordance with the
Regulations; (2) upon liquidation of the Partnership, liquidating distributions
must be made in accordance with positive capital account balances; and (3) a
partner is required to contribute capital to the Partnership equal to any
deficit capital account balance following liquidation of the partner's interest
in the Partnership. The Partnership Agreement does not include the
38
third provision. The Regulations provide an alternate test for economic effect
if the Partnership Agreement contains a "qualified income offset." The
Partnership Agreement attempts to comply with this alternate test as well as the
other applicable requirements of the Regulations. The Partnership Agreement
provides that those Partners who have or would have, as a result of an
allocation of losses, deficit capital accounts in excess of their Units in the
Limited Partnership shall be allocated income as rapidly as possible so as to
reduce such deficit Capital Account balances to zero. The result could be an
acceleration in the income allocated to Limited Partners. To the extent
allocations fail to qualify for the alternate test for economic effect, the
allocations in the Partnership Agreement will be governed by the Partner's
interests in the Limited Partnership, taking into account all the facts and
circumstances.
The Regulations provide that where capital accounts are maintained in
accordance with the rules of the Regulations and liquidating distributions are
to be made in accordance with positive capital account balances, the partner's
interests in the partnership each year generally will be determined by comparing
the manner in which distributions (and contributions) would be made if all
partnership property were sold at book value and the partnership were liquidated
immediately prior to the taxable year, with the manner in which distributions
and contributions would be made if the sale of partnership property at book
value and liquidation occurred at the end of the taxable year. Allocations made
under this rule generally would be similar to those provided in the Partnership
Agreement, although there is no assurance the IRS would not be successful in
reallocating Limited Partnership income or loss in a different manner with the
result that the share of income of Limited Partners might be increased or their
share of losses decreased.
It is the opinion of Counsel that the allocation of Net Income or Net Loss,
among the Partners as set forth in the Partnership Agreement more likely than
not will be recognized under the regulations under Section 704(b) of the Code
because the allocation has substantial economic effect or will be considered to
be in accordance with the Partner's interests in the Partnership under the
Regulations. The regulations under Section 704(b) of the Code provide that the
allocation established under the Partnership will be accepted for tax purposes
if certain standards set forth in the regulations for such distribution are
satisfied. If the IRS were to contend successfully that such allocations have no
substantial economic effect, then the Partnership's Net Income or Net Loss will
be allocated among the Partners on the basis of each Partner's interest in the
Partnership, determined by taking into account all facts and circumstances.
8. ALLOCATIONS AMONG LIMITED PARTNERS. Section 706(d) of the Code
prohibits retroactive allocations of profits, losses and other items of a
partnership among its partners. Generally, a partner's share of such items must
be determined by taking into account his or her varying interest in the
partnership during any taxable period, and a partner may not be allocated a
share of partnership items that are attributable to any period during which he
or she was not a partner. Accordingly, each Limited Partner's share of
allocation of profits, losses and other separable reportable items of the
Partnership will depend on his or her interest in the Partnership and when he or
she became a Limited Partner.
9. CHARACTERIZATION OF PARTNERSHIP'S LEASES AS LEASES FOR FEDERAL INCOME
TAX PURPOSES. The availability to Limited Partners of the tax benefits
associated with the Partnership's ownership of the Equipment, particularly
depreciation, depends upon the Partnership being treated as the owner of the
Equipment for tax purposes and upon the classification of the Partnership's
leases ("Lease" or "Leases") as true leases for tax purposes. To be treated as
the owner of leased Equipment for tax purposes, the Partnership must possess the
benefits and burdens of ownership of the property and be considered the
equitable owner of the property for tax purposes. If the Partnership's
transaction with the other party on the Equipment is held to be a mere financing
arrangement and/or a purchase, the Partnership would not be deemed the owner of
the Equipment for tax purposes and thus not entitled to the tax benefits of
ownership.
The determination of who is the equitable owner is based on many factors.
The characterization of transactions as leases, conditional sales or financings
has been addressed in a number of court decisions. However, the courts have not
identified one factor as being determinative of whether the lessor or lessee of
the property is to be treated as the owner. Judicial decisions and IRS
pronouncements have made it clear
39
that the characterization of leases for tax purposes is a question which must be
decided on the basis of weighting of many factors.
Counsel is of the opinion that the Limited Partnership should be treated as
the equitable owner of the Equipment other than Equipment subject to financings
(i.e., leases intended for security). Counsel's opinion is based on the current
status of the tax law and, in part, on the following representations of the
General Partner with respect to such properties; (i) legal title to, and
possession of the properties will be transferred to the Limited Partnership;
(ii) the Limited Partnership's purchase price of a property will not exceed its
fair market value; (iii) leases for properties will be in the form of leases;
(iv) the Limited Partnership will treat such leases as leases for federal income
tax purposes; (v) the rents to be paid pursuant to such leases will be
commercially reasonably; (vi) the exercise price for any purchase option for any
property or portion thereof will not be less than the fair market value or the
anticipated fair market value on the option exercise date, and no offset to the
exercise price of any purchase option will be allowed for any lease payments;
and (vii) each property should have a useful life beyond the term of its lease
and a significant value at the termination of its lease. However, as discussed
herein, the characterization of a transaction as a lease or some other type of
ownership is based on many factors that the IRS and the courts may review and
conclude result in the conclusion that the transaction is not a lease for tax
purposes.
Should a lease be characterized as a sale, financing or refinancing
transaction for federal income tax purposes, a portion of the income of the
Partnership in respect of such lease would be ordinary gain or interest income,
without any offset for depreciation deductions. This characterization would
generally result in increased amounts of taxable income in the initial years of
such lease because of the loss of depreciation deductions. Further, the income
or losses from the leases may be treated as portfolio income or losses under the
passive loss rules.
The law governing the characterization of transactions as leases is
complicated and is in a state of change. Furthermore, for federal income tax
purposes, lease characterization is made on a property-by-property basis based
on an analysis of many factors, including lease payments, the lease purchase
option and the fair market value of the property at the time the opinion is
exercised. Accordingly, there can be no assurance that the status of the
Partnership as the owner of the property under the lease for tax purposes will
not be challenged successfully by the IRS.
10. DEPRECIATION DEDUCTIONS ON EQUIPMENT. Under Section 168 of the Code,
the Partnership may claim an annual deduction (called "depreciation") on
property that the Partnership was required to capitalize because the property
had a useful life of more than one year. Under the current depreciation rules,
the system or method of computing the annual depreciation deduction is called
the Modified Accelerated Cost Recovery System ("MACRS"). MACRS authorizes an
annual depreciation deduction for the exhaustion, wear and tear and obsolescence
of property used in a trade or business or held for the production of income.
Under MACRS, eligible personal property ("recovery property") may be depreciated
over recovery periods of between 3 and 20 years. A 200.0% declining balance
method of depreciation can be used, or, if the taxpayer elects, the
straight-line method of depreciation may be elected. The 200.0% declining
balance method may be used for 3, 5, 7 and 10-year class property, switching to
the straight-line method at that time to maximize the depreciation allowance.
The useful lives of the items of Equipment that the Partnership intends to
purchase and lease will generally be either five or seven years but may be
longer.
The Partnership intends to elect to use the MACRS depreciation method of
depreciation and not the straight-line depreciation method.
Under the provisions of the Code, personal property placed in service or
disposed of during a taxable year is treated as placed in service or disposed of
at the midpoint of such year. The Partnership's first taxable year of operations
may be less than 12 months. In this case, the Partnership's depreciation
deductions for its first year of operations would be reduced to reflect the
number of months of Partnership operations.
40
Section 168(g) of the Code provides that any tangible property which is used
during the taxable year predominantly outside the United States must be
depreciated by using the straight line method over the property's class life or
12 years if the property has no class life. While it is not likely, the
Partnership may lease Equipment for use outside the United States by foreign
lessees.
Section 168(g) of the Code provides that, in the case of a lease of tangible
property (other than real property) to the extent such property is financed by
obligations exempt from tax under Section 103 of the Code or property leased to
a tax-exempt entity, depreciation deductions under MACRS are not available, and
depreciation must be computed on a straight-line basis over the property's class
life (as used prior to the adoption of MACRS) or 125.0% of the lease term, if
longer. Special rules are provided, however, for "qualified technological
equipment." If a lease of "qualified technological equipment" to a tax-exempt
entity has a term of five years or less, the recovery period is five (5) years.
"Qualified technological equipment" includes "any computer or computer
peripheral equipment," "high-technology telephone station equipment installed on
the customer's premises," and "high-technology medical equipment."
Equipment may be leased to private tax-exempt entities in which case the
depreciation shall be under the alternative depreciation system of Section
168(g). Such Equipment may, however, qualify as "qualified technological
equipment" and be subject to leases of five years or less. In this case, such
Equipment will qualify for depreciation under MACRS.
If during any taxable year, the aggregate basis of property placed in
service by a Limited Partner, directly and indirectly through the Partnership,
during the last three months of such taxable year exceed 40.0% of the aggregate
basis of property placed in service during such taxable year by the Limited
Partner, the mid-quarter convention will be applicable to all property placed in
service during such taxable year by the Limited Partner. The mid-quarter
convention treats all property placed in service during any quarter of a taxable
year (or disposed of during any quarter of a taxable year) as placed in service
(or disposed of) on the midpoint of such quarter.
11. DEDUCTION OF MANAGEMENT AND OTHER FEES TO THE GENERAL PARTNER. The
Partnership will pay fees to the General Partner and others related to the
General Partner for acquiring Equipment, management, administrative and
organizational services performed for the Partnership. Some of these fees and
costs will be payable out of the proceeds of the offering and may be substantial
in amount. The IRS may challenge some or all of the deductions for fees payable
to the General Partner or related parties, or any other party, and may challenge
such deductions based upon the payment being excessive, based upon a
recharacterization of the payment, or based upon the payment being to a Partner
in its capacity as a Partner rather than in some other capacity. Because such
recharacterization depends on various facts and circumstances which may be
viewed subjectively, counsel can give no assurance that the IRS may not
recharacterize certain fees in whole or in part. If the IRS were to
recharacterize such fees, it could result in all or a portion of such fees
having to be amortized over some longer period or being treated as a
nondeductible capital expenditure.
Start-up costs of creating or investigating the creation of an active trade
or business cannot be currently deducted. However, start-up costs may be
capitalized and amortized under Section 195 of the Code if they would have been
deductible if incurred in connection with the operation of an existing business
in the same field. Start-up costs are amortizable over a period of no less than
60 months beginning in the month in which the business begins if an amortization
election is made for the year in which the business begins. The Limited
Partnership intends to amortize its start-up costs, if any, over a 60-month
period.
The Limited Partnership's purchase price of Equipment will be capitalized
and recovered through cost recovery deductions. In addition, Acquisition Fees
paid in connection with the Limited Partnership's portfolio of assets will be
either capitalized as a cost of the Equipment and recovered through cost
recovery deductions to the extent allowable or capitalized and amortized in the
discretion of the General
41
Partner. Acquisition fees payable to obtain financing by the Limited Partnership
will be amortized over the term of such financing.
The Partnership may accrue and deduct the Management Fee in a year prior to
its payment. The IRS may contend that the Management Fee should not be deducted
until paid if the liability or amount thereof cannot be determined with
reasonable accuracy. The IRS may challenge the Management Fee as being excessive
or based upon the payment being to a Partner in its capacity as a Partner rather
than for services rendered. No assurance can be given that the IRS will not be
successful in this contention.
12. ORGANIZATION AND SYNDICATION COSTS. Legal, accounting and other
similar types of start-up expenses have been incurred in the organization of the
Partnership and in the promotion and sale of the Units. Organization expenses
are costs which are incident to the creation of the Partnership, such as legal
and accounting fees for services incident to the organization of the Partnership
and filing fees. Syndication expenses are those connected with the issuing and
marketing of Units, including fees paid as commissions to brokers selling the
Units and legal, accounting and printing costs with respect to the offering,
including the preparation of the offering memorandum. Organization expenses will
be capitalized and amortized over a 60-month period. Syndication expenses must
be capitalized (become a nondeductible capital expenditure) and are not subject
to amortization. The Partnership will be reimbursing the General Partner for
certain organization expenses (those incident to the creation of the
Partnership). Based on a review of the nature of these expenses and consistent
with the discussion hereinbefore stated, it is the opinion of Counsel that such
expenses (organization expenses versus syndication expenses which are
nondeductible capital expenditures) more likely than not will be treated as
organization expenses for income tax purposes and, as such, will be capitalized
and amortized over a five year period. There can be no assurances that the IRS
will not contend that some of the organizational costs will not be deemed to be
syndication costs, thereby rendering such costs nonamortizable.
13. SALE OR OTHER DISPOSITION OF EQUIPMENT. If the Equipment is acquired
and held by the Partnership for more than one year and is not acquired and held
for sale in the ordinary course of a trade or business of the Partnership, any
profit or loss which may be realized by the Partnership on the sale of Equipment
will be treated as "Section 1231" gain or loss under the Code (except to the
extent of depreciation recapture as described below). Section 1231 gain or loss
from the Partnership would be combined with any other Section 1231 gain or loss
incurred by a Limited Partner in that year. Generally, if a taxpayer has a net
Section 1231 gain, it will be treated as a capital gain, and if he has a net
Section 1231 loss, it will be treated as an ordinary loss. However, a taxpayer's
Section 1231 gain is treated as ordinary income to the extent of "nonrecaptured
net Section 1231 losses," if any. Nonrecaptured net Section 1231 losses are
defined as the aggregate net Section 1231 losses reported by a taxpayer as
ordinary losses in the five most recent prior years, less the portion of such
losses already taken into account in converting Section 1231 capital gain into
ordinary income.
Gain recognized (amount realized over the adjusted basis in the property) on
the disposition of depreciable personal property like the Equipment or, with
respect to a Partner's share of such deduction, upon disposition of the
Partner's Units is generally subject to "recapture" and taxed as ordinary income
(instead of capital gain) under Section 1245 of the Code to the extent of the
depreciation deductions taken with respect to such property. Also amounts
treated as subject to the depreciation recapture rules (to the extent of
realized gain) must be recognized in the year of disposition, even if the
taxpayer has sold the property on an installment sale basis and may not receive
cash for the purchase price of the equipment in the year of sale.
The use of the installment method has been repealed for sellers of personal
property when a seller regularly sells or otherwise disposes of such property on
an installment basis. If the Partnership is determined by the IRS to be engaged
in the regular disposition of personal property, the seller will be required to
report the full gain in the year of sale even though all the actual cash payable
on the sale has not been received. This characterization is possible during the
Liquidating Phase of the Partnership.
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14. SECTION 754. Because of the additional administrative responsibilities
caused by allowing an adjustment in basis, the Partnership does not intend to
file an election under Section 754 of the Code to adjust the basis of the
Partnership's Equipment in the case of a transfer (including death of any
Limited Partner) of a Unit or Units, although the General Partner reserves the
right to do so.
15. SALE OR OTHER DISPOSITION OF UNITS. Although no public market for the
Units exists nor is none expected to develop, a Partner who sells his or her
Units will generally realize short-term or long-term capital taxable gain or
loss measured by the difference between the selling price and the adjusted tax
basis of his or her Units. Gain or loss realized on the sale or redemption of
Units by a Limited Partner who is not a "dealer" in securities and who has held
such Units for more than eighteen months, generally will be long-term capital
gain or loss, as the case may be. Under recently passed tax legislation, the
maximum tax rate applicable to long term capital gain is 20.0% for individuals
(a 10% rate applies to gains for taxpayers in the 15% tax bracket). However, the
proceeds of a sale or redemption will be taxed at ordinary income rates to the
extent of the portion of potential depreciation recapture, substantially
appreciated inventory, and unrealized receivables attributable to the Unit.
The amount of gain recognized by a Partner in the sale or other disposition
of his or her Units, or the tax attributable to such gain, may exceed the cash,
if any, available from the sale or disposition. Any excess tax liability will
have to be paid by the Partner from sources other than the Limited Partnership.
Any Partner selling or exchanging a Unit must notify the Partnership of the
transfer. Any Partner who fails to notify the Limited Partnership will be
subject to penalties. The Limited Partnership will be required to file annual
reports with the IRS describing all such transfers. Once the Partnership has
been so notified, it must report to the IRS, and to the transferor and
transferee of such Unit, certain information relating to the transfer which the
IRS may prescribe by regulations.
A Partner who transfers his or her Units during a taxable year must include
in his or her personal return his or her share of taxable income or loss of the
Limited Partnership for the portion of the taxable year of the Limited
Partnership during which he or she owned the transferred Units.
Under Section 708(b)(1)(B) of the Code, the Partnership would be considered
terminated if, within a 12-month period, there is a sale or exchange of 50.0% or
more of the total interest in Partnership capital and profits. While this is not
expected to occur, if such a termination was to occur, there could be a loss of
certain tax benefits.
16. METHOD OF ACCOUNTING AND TAXABLE YEAR. The Partnership, as required
under the Code, will utilize the accrual method of accounting and its taxable
year will be the calendar year. In general, under the accrual method of
accounting, income is includable for the year in which it is earned and
expenditures are deductible for the year in which the liability for the
expenditure arises. There are, however, a number of exceptions to these rules
that may affect the timing of income or deductions of the Limited Partnership.
Further, the Internal Revenue Service has broad discretion under Section 446(b)
of the Code to determine that a taxpayer's method of accounting does not
"clearly reflect income" and to require the taxpayer to use a different
accounting method.
17. FOREIGN TAX CREDIT. The Partnership may be subject to foreign taxes if
the Partnership leases Equipment to foreign lessees. Foreign taxes paid by the
Partnership and allocable to a Limited Partner may be creditable against a
Limited Partner's federal income tax liability.
18. INVESTMENT INTEREST. Section 163(d) of the Code limits the
deductibility of interest on Partnerships borrowed to acquire or carry
investment assets ("Investment Interest"). Interest incurred by a taxpayer is
generally deductible only to the extent of net investment income. However,
interest incurred to carry a "passive investment" is treated as a passive
activity expense and not as investment interest. Most of the interest, if any,
incurred by a Limited Partner to acquire or carry his Partnership Units will be
treated as passive activity expense and not as investment interest. As a passive
activity expense, such interest is
43
deductible only to the extent of the Limited Partner's passive income from the
Partnership or other passive activities.
19. INVESTMENT EXPENSES. As a general rule, investment expenses and other
miscellaneous itemized deductions of an individual are deductible only to the
extent that such expenses exceed 2.0% of the individual's adjusted gross income.
Investment expenses may be subject to further reduction as an itemized deduction
if an individual's income exceeds certain levels. While most of the expenses and
deductions realized from the Partnership should not be subject to this
limitation since they are attributable to property held for the production of
rent, the Partnership's organization and syndication expenses could be
considered investment expenses that are not attributable to the production of
rent. Depending upon a Limited Partner's individual circumstances (this total
miscellaneous deduction must exceed 2.0% of his Adjusted Gross Income), a
Limited Partner's allocable share of such expenses could be nondeductible. In
any case, such expenses would only provide a current tax benefit to a Limited
Partner who itemizes his deductions.
20. INTEREST RELATING TO TAX EXEMPT INCOME. Section 265(a)(2) of the Code
disallows any deduction for interest on indebtedness of a taxpayer or a related
person incurred to purchase or for the purpose of continuing to carry a tax
exempt investment. The IRS announced in Rev. Proc. 72-18 that the prescribed
purpose will be deemed to exist with respect to indebtedness incurred to finance
a "portfolio investment." The Rev. Proc also provides that, while a
partnership's purpose in incurring indebtedness will be attributed to its
general partner, a limited partnership interest will be regarded as a "portfolio
investment." Thus, in the case of a Limited Partner owning tax exempt
obligations, it is possible that the IRS might take the position that his
allocable portion of any Partnership interest expense, or any interest expense
incurred by him to purchase or carry a Unit or Units, should be viewed as
incurred by him to continue carrying tax exempt obligations, and that such
Limited Partner should not be allowed to deduct all or a portion of such
interest. It is not known whether Rev. Proc. 72-18, if applicable, would be
upheld as valid by the courts.
21. ALTERNATIVE MINIMUM TAX. In addition to the regular income tax, the
Code imposes an alternative minimum tax ("AMT") on both corporate and
noncorporate taxpayers. Each Partner must take into account his or her share of
the Limited Partnership's items in computing his or her AMT. The AMT for
noncorporate taxpayers is equal to the excess (if any) of (i) 26.0% of the first
$175,000 (or $87,500 in the case of married taxpayers filing separately) of the
"alternative minimum taxable income" that exceeds an "exemption amount" ($33,750
for an individual and $45,000 for a joint return) and 28% of any additional
alternative minimum taxable income over (ii) the tax computed under the usual
method (less certain tax credits). The "exemption amount" is reduced by 25 cents
for each $1 by which alternative minimum taxable income exceeds $150,000 for a
joint return, $112,500 for a single individual and $75,000 for estates, trusts
and married persons filing separately.
"Alternative minimum taxable income" is the taxpayer's taxable income
computed with certain adjustments and increased by the amount of items of tax
preference. For property placed in service on or prior to December 31, 1998, for
alternative minimum tax purposes, depreciation is computed under the alternative
system of Code Section 168(g), except that depreciation is computed using the
150.0% declining balance method. The recovery period under Section 168(g) is the
property's class life, which generally will be longer than the MACRS recovery
period. For property placed in service after December 31, 1998, the alternative
minimum tax depreciation will be computed using the same lives as used for
regular tax purposes but with the 150% declining balance method of depreciation.
Most miscellaneous itemized deductions are not deductible or are limited in
determining alternative minimum taxable income. Losses from nonparticipatory
business activities are not deductible. While Investment Interest is deductible
only to the extent of net investment income. Net investment income is computed
without regard to income and expenses from nonparticipatory business activities,
such as the Partnership.
44
All tax credits, other than foreign tax credits, do not reduce an
individual's alternative minimum tax. Noncorporate Limited Partners with large
investment or other tax credit carryforwards could lose the full benefit of such
credits if the alternative minimum tax exceeds his "regular tax" as reduced by
the credits.
Minimum tax paid in one year may be carried forward (but not back)
indefinitely as a credit against regular tax liability. The credit may not be
used, however, to offset any future minimum tax liability. The credit is the
amount of the taxpayer's adjusted net minimum tax imposed for all prior taxable
years beginning after 1986, over the amount allowable as a credit for all such
prior taxable years. The adjusted net minimum tax is the taxpayer's minimum tax
reduced by the amount that would have been the taxpayer's minimum tax had only
certain preferences been taken into account.
A noncorporate Limited Partner's liability for the alternative minimum tax
is a complex determination and depends on his overall tax situation. For a
noncorporate Limited Partner with substantial tax preferences, the alternative
minimum tax could reduce the after-tax economic benefits of an investment in the
Partnership.
The corporate alternative minimum tax is equal to the excess (if any) of (i)
20.0% of the amount by which the "alternative minimum taxable income" exceeds
$40,000, over (ii) the tax computed under the usual method (less certain tax
credits). The $40,000 "exemption amount" is reduced by 25 cents for each $1 by
which alternative minimum taxable income exceeds $150,000. The corporate
alternative minimum tax will not apply to small business corporations for tax
years beginning after 1997. A corporation is considered a small business
corporation if it has average gross receipts of no greater than $5.0 million for
three consecutive years, beginning with the taxable year beginning after
December 31, 1994.
The "alternative minimum taxable income" is the corporation's taxable income
computed with certain adjustments and increased by the amount of items of tax
preference. For property placed in service prior to December 31, 1998 for which
an election is made to depreciate under the 200.0% declining balance method, the
amount allowed as a deduction in computing alternative minimum taxable income is
the depreciation computed under the 150.0% declining balance method over the
class life of such property or 12 years for property with no class life. Either
of these periods may be longer than the property's regular tax recovery period.
For property placed in service after December 31, 1998, the 150% declining
balance method shall be applicable but the class life shall be the same class
life as used for regular depreciation purposes.
Minimum tax paid in one year may be carried forward (but not back)
indefinitely as a credit against regular tax liability. The credit may not be
used, however, to offset any future minimum tax liability.
A corporate Limited Partner's liability for the alternative minimum tax is a
complex determination and depends on its overall tax situation. For a corporate
Limited Partner with substantial tax preferences, the alternative minimum tax
could materially reduce the after-tax economic benefits of an investment in the
Partnership.
22. PROFIT MOTIVE. Under Section 183 of the Code, if the Partnership lacks
a profit or income motive (other than tax purposes) in acquiring and leasing the
Equipment, substantially all of a Limited Partner's losses, if any, attributable
to an investment in the Partnership for any year would be disallowed as a
deduction. There is a presumption under Section 183 of the Code that an activity
is engaged in for profit if the gross income from the activity exceeds
deductions attributable to the activity in three or more of the five consecutive
taxable years ending with the current taxable year. There is no certainty that
the Partnership will have income sufficient to entitle it to the benefit of this
presumption. Accordingly, the Partnership (and perhaps each Partner) may have to
demonstrate that the Partnership's activities are engaged in for profit. There
is no specific standards applicable in determining whether the Partnership has
the requested profit objective. The General Partner has represented that the
Partnership will be operated for purposes of providing an economic profit to the
Limited Partners without regard to any tax benefits of an investment in the
Partnership. Based on such representations and the anticipated business
activities of
45
the Partnership, counsel is of the opinion that it is more likely than not that
the Partnership will be able to satisfy the profit motive requirements.
23. TAX PROCEDURES AND PENALTIES. Based on current provisions of the Code,
the tax treatment of items of the Partnership's income and loss will be
determined at the Partnership level and not at the individual level of each
Limited Partner. The tax return of the Partnership may be subject to audit,
which audit would be conducted at the Partnership level. Adjustments resulting
from an audit of the Partnership may result in an audit of an individual Limited
Partner's personal returns and could result in adjustments not only to the
Partnership items but also adjustments to nonpartnership items. A Limited
Partner would be liable for any interest on tax deficiencies resulting from an
adjustment to the Partnership's tax return. Interest relating to certain items
(such as certain deficiencies relating to valuation overstatements, the at-risk
rules, and certain accounting methods or other matters) accrues at 120.0% of the
statutory rate. Interest due on tax deficiencies is nondeductible. SEE Tax
Legislation for recent developments on audit adjustment.
A penalty will be assessed for each month a fraction thereof (up to a
maximum of five months) that a Partnership return is filed late or incomplete.
The monthly penalty is $50 per partner in the Partnership. Section 6662 of the
Code imposes a civil penalty of 20.0% of any portion of an underpayment of tax
which is attributable to (1) negligence or disregard of rules or regulations,
(2) a substantial understatement of income tax, (3) a substantial valuation
overstatement, (4) a substantial overstatement of pension liabilities, and (5) a
substantial estate or gift tax valuation understatement and valuation
misstatements in connection with Section 482 transactions. Interest from the tax
return filing date will accrue on this penalty where it is applied. In
particular, a substantial understatement of income tax will exist if the amount
of the understatement exceeds the greater of 10.0% of the correct amount of tax
or $5,000 ($10,000 in the case of most corporations). The penalty will not apply
to a substantial understatement with respect to an item if (i) substantial
authority supported the taxpayer's treatment of such item, (ii) the relevant
facts concerning the treatment of the item were adequately disclosed on the
taxpayer's return, or (iii) the IRS waives the penalty where there was
reasonable cause for the understatement, and the taxpayer acted in good faith.
However, in the case of any item attributable to a "tax shelter," exception (i)
above will be available only if, in addition to meeting the requirements of that
exception, the taxpayer reasonably believed that his treatment was more likely
than not the proper treatment, and exception (ii) is not available at all. The
definition of "tax shelter" for this purpose includes a plan or arrangement the
principal purpose of which is the avoidance or evasion of federal income tax.
The General Partner does not expect the Partnership will be considered a "tax
shelter."
24. INVESTMENT BY EMPLOYEE BENEFIT PLANS AND OTHER TAX EXEMPT
ENTITIES. Each otherwise tax-exempt Limited Partner (i.e., Employee Benefit
Plan) is subject to tax on its unrelated business income, and must file a tax
return reporting such income. To the extent a tax-exempt Limited Partner is
allocated unrelated business income from the Partnership, it generally will be
subject to the same provisions as taxable Limited Partners with respect to
reporting and paying tax (including estimated tax) on such income. If the tax-
exempt Limited Partner is a trust (such as a profit-sharing trust, plan for a
self-employed individual or IRA), the tax rates would be the rates applicable to
trusts (including alternative minimum tax). If the tax-exempt Limited Partner is
not a trust, it would be subject to corporate tax rates (including alternative
minimum tax).
"Unrelated business income" is the gross income derived by an exempt
organization from any unrelated trade or business regularly carried on by it or
by a partnership of which it is a member. Specific deductions which are directly
connected with the carrying on of such trade or business, computed with
modifications, are allowed. Since the Partnership carries on a trade or
business, a tax-exempt Limited Partner will be considered to be regularly
carrying on the trade or business of the Partnership and any income produced by
the Partnership will be unrelated business income to the tax-exempt Limited
Partners to which it is allocated, unless such income is specifically exempted
from such classification.
46
The Partnership will be engaged in leasing tangible personal property.
Income from leasing personal property is not specifically exempted from being
characterized as "unrelated business income." Thus, each tax-exempt Limited
Partner's distributive share of Partnership Net Income from the Partnership
Leases will constitute "unrelated business income." A portion of any additional
gain on the disposition of the Equipment may be "unrelated business income" if
such Equipment were disposed of within the 12 months prior to the repayment of
any loan or financing incurred to finance the repair or reconditioning of such
Equipment. The General Partner anticipates that most of the Partnership's Net
Income allocable to a tax-exempt Limited Partner will be "unrelated business
income."
Each tax-exempt Limited Partner is allowed, in the aggregate, a $1,000
annual exemption from tax on its unrelated business income.
The receipt of unrelated business income by a tax-exempt entity generally
has no effect on that entity's tax-exempt status or on the exemption from tax of
its other income. However, for certain types of tax-exempt entities, the receipt
of any unrelated business income may have extremely adverse consequences. For
example, for charitable remainder trusts (defined under Code Section 664), the
receipt of any such taxable income during a taxable year will result in the
taxation of all of the trust's income from all sources for such year.
Accordingly, for these and other reasons, each prospective tax-exempt Limited
Partner is urged to consult its own advisor regarding the possible repercussions
of an investment in the Partnership.
Tax-exempt Limited Partners may also generally be subject to state and local
taxation on their unrelated business income. Tax-exempt Limited Partners should
consult with their own tax advisors concerning the applicability and impact of
state and local tax laws.
25. PARTNERSHIP WILL NOT REGISTER AS A TAX SHELTER WITH THE INTERNAL
REVENUE SERVICE. Persons responsible for organizing certain defined investments
(the General Partner) are required to register their promotions with the IRS,
whether or not considered "abusive," if considered a "tax shelter" under IRS
guidelines.
Temporary regulations under Section 6111 of the Code define a "tax shelter"
for tax shelter registration purposes as an investment (1) with respect to which
a person could reasonably infer that the tax shelter ratio for any investor may
be greater than two to one as of the close of any of the first five (5) years
ending after the date on which the investment is offered for sale and (2) that
is either (a) required to be registered under a federal or state law regarding
securities, (b) sold pursuant to an exemption from registration requiring the
filing of a notice with a federal or state agency regulating the offering or
sale of securities or, (c) a "substantial investment," defined as an investment
whose aggregate amount offered for sale to investors exceeds $250,000 and that
five (5) or more investors are expected. Based upon these regulations, the
Partnership will not register as a tax shelter.
26. TAX LEGISLATION. It is impossible to predict with any degree of
certainty what new tax proposals may be forthcoming, whether any such proposals
are likely to have an effect upon the income tax treatment presently associated
with an investment in the Partnership, or what the effective date might be of
any legislation that may be derived from such proposals. Potential investors are
urged to consider ongoing developments in this uncertain area and to consult
their own tax advisors in assessing the risks of investment in the Partnership.
27. STATE INCOME TAX CONSEQUENCES. In addition to the federal income tax
consequences described above, prospective Limited Partners should consider
potential state and local tax consequences of an investment in the Equipment.
The Partnership itself may be subject to state income taxes in states in which
the Partnership owns Equipment or is engaged in business. Moreover, a Limited
Partner's share of Net Income or Net Loss attributable to his investment in the
Equipment generally will be required to be included in determining his
reportable income for state or local tax purposes in the jurisdiction in which
he is a resident. In addition, certain other states in which the Equipment is
leased may impose a tax on nonresident Limited Partners determined with
reference to their pro rata shares of income derived from
47
such state. To the extent that a nonresident Limited Partner pays tax to a state
by virtue of Equipment owned within that state, he may be entitled to a
deduction or credit against tax owed to his state of residence with respect to
the same income. In sum, a Limited Partner may be subject to income, estate or
inheritance tax, or both, and may be required to file tax returns in states and
localities where Equipment is leased, as well as in the state or locality of his
residence. It is possible that some states or localities where the leased
property will be located will require that the Partnership withhold state or
local taxes on the income allocated (or distributions made) to Limited Partners.
The Partnership is authorized to withhold from amounts otherwise distributed to
Limited Partners such amounts as the General Partner determines is necessary or
appropriate to satisfy the Partnership's state or local tax obligations.
Congress has recently passed and the President has signed the Taxpayer
Relief Act of 1997 (TRA of 1997). The new tax legislation contains many new
provisions that affect an investment in the Partnership, including the
provisions described in tax materials on the new capital gains tax provisions
and revisions in the alternative minimum tax computation. The TRA of 1997 allows
a large partnership (partnerships that had 100 or more partners in the preceding
year) to elect special simplified tax reporting rules in determining the
treatment of a large number of distribution items from the partnership level.
Also, under the TRA of 1997, partnership adjustments for electing large
partnerships resulting from an audit generally will take effect and flow through
to the partners for the year in which the adjustment takes place rather than
going back to any prior year. The Partnership, in lieu of flowing through the
adjustment to the Partners, may elect to pay an imputed underpayment on the net
adjustment at the highest tax rate for the taxable years under audit. The
Partnership is responsible for interest and penalties that result from a
partnership adjustment and any payment made by the Partnership is nondeductible.
These provisions are effective for tax years beginning after December 31, 1997.
Because the new partnership provisions have only been enacted and no regulations
have been issued, the Partnership has not determined whether the election should
be made by the Partnership.
Limited Partners should consult their own tax advisors as to the state and
local tax consequences of an investment in the Partnership. No opinion has been
or will be rendered by Tax Counsel on matters of state or local tax law.
EMPLOYEE BENEFIT PLANS
Qualified retirement plans, pension, profit-sharing and stock bonus plans
(including Keogh plans) and individual retirement accounts (collectively,
"Retirement Plans") are generally exempt from federal income taxation. However,
if these Retirement Plans have "unrelated business taxable income" (determined
in accordance with Sections 511-514 of the Code) that exceeds $1,000 during any
taxable year, the amount in excess of $1,000 for a year is taxable. A Retirement
Plan that invests in the Partnership will constitute an unrelated trade or
business for the retirement plan. Because the Partnership's business will
primarily consist of leasing personal property, each investment by a Retirement
Plan in the Partnership will cause the Retirement Plan to have unrelated
business taxable income, which will include (1) the Plan's share of the
Partnership's taxable income from rents under the Equipment leases; and (2) the
gain, if any, on disposition of the Equipment, but only to the extent the
Equipment is "debt-financed" during the 12 month period preceding its sale or is
deemed to be held primarily for sale to customers in the ordinary course of
business. See "Sale or Other Disposition of Equipment" under "Tax Consequences."
In calculating its unrelated business taxable income, however, a Retirement Plan
may also take into account its share of the Partnership's deductions, including
depreciation, applicable to leased Equipment.
Fiduciaries of Retirement Plans must also consider whether underlying assets
of the Partnership will be deemed to be assets of any Retirement Plan which
invests in the Partnership ("plan assets"). If the assets of the Partnership
were to be classified as "plan assets," the General Partner would become a
fiduciary to any investing Retirement Plan and, among other things, would be
subject to all of the conditions, restrictions and prohibitions set forth in
Part IV, Subtitle B, Title I, of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of the Code.
48
Under ERISA, when a Retirement Plan invests in securities (within the
meaning of ERISA Section 3(20)) of a corporation or partnership, the Retirement
Plan's assets will generally include only the securities it acquires and does
not solely by reason of such investment, include the underlying assets of the
corporation or partnership. On November 13, 1986, the Department of Labor
promulgated a regulation at 29 C.F.R. 2510.3-101 (the "Regulation") which stated
the above rule and set out several categories of exceptions to the rule, i.e.,
categories of entities, or interests therein, with respect to which certain
Retirement Plan investments would create "plan assets." The General Partner
believes that the Regulation's exceptions do not apply to the Partnership and
that, consequently, the general rule applies so that, when a Retirement Plan
purchases one or more Units in the Partnership, the Retirement Plan's assets
will not include the assets of the Partnership.
The Regulation provides that, where a Retirement Plan invests in a security
that is a "publicly offered security," the underlying assets of the issuer will
not be deemed to be "plan assets" of the investing Retirement Plan solely on
account of the Retirement Plan's investment. The Regulation provides generally
that a security will be deemed to be a "publicly offered security" if it is (1)
part of a class of securities that is widely held; (2) freely transferable; and
(3) either (a) part of a class of securities registered under the Securities
Exchange Act of 1934, or (b) sold to a Retirement Plan as part of a public
offering registered under the Securities Act of 1933 and part of a class of
securities registered under the Securities Exchange Act of 1934 within 120 days
after the end of the fiscal year of the issuer in which the public offering
occurred.
Based on the information from the representations of the General Partner
discussed below, it is the opinion of Counsel to the Partnership that the
Partnership's Units should constitute "publicly offered securities." First, the
General Partner has represented that it is highly likely that substantially more
than 100 independent investors will purchase and hold Units in the Partnership,
and the Regulation states that, when 100 or more investors independent of the
issuer and of one another purchase a class of securities, the class will be
deemed to be widely held. Second, the General Partner has represented that the
Partnership's offering of Units is or will be registered under the Securities
Act of 1933, and that the General Partner intends to register the Units in the
Partnership under the Securities Exchange Act of 1934 within 120 days after the
end of the fiscal year of the Partnership in which its offering of Units
terminates. Third, although whether a security is freely transferable is a
factual determination, the limitations on the assignment of Units and
substitution of Limited Partners contained in Article XIII of the Partnership
Agreement, with the possible exception discussed below, fall within the scope of
certain restrictions enumerated in the Regulation that ordinarily will not
affect a determination that securities are freely transferable when the minimum
investment is $10,000 or less. Section 13.1.4 of the Partnership Agreement
contains a provision (the "PTP Restriction") that prohibits the assignment or
other transfer of Units without the General Partner's written consent if the
General Partner determines in good faith that (1) such transfer might result in
a change in the status of the Partnership to a publicly traded partnership
within the meaning of Section 7704 of the Code, as currently or hereafter
interpreted by the Internal Revenue Service in rulings, regulations or other
publications, or by the courts, and (2) such status would have a material
adverse impact on the Limited Partners or their assignees. In order to prevent
the Partnership from being classified as a publicly traded partnership, the
General Partner has represented that it intends to prohibit transfers of Units
to the extent necessary to comply with the safe harbors contained in IRS Notice
88-75, under which certain levels of trading are permissible. See "'Publicly
Traded' Partnerships" under "Tax Consequences." Section (b)(4)(iii) of the
Regulation permits restrictions that prohibit any transfer or assignment that
would result in a reclassification of the entity for federal income tax
purposes. In Advisory Opinion 89-14A dated August 2, 1989, the Department of
Labor expressed its opinion that a restriction against transfer of partnership
interests that is drafted to avoid reclassification of a partnership as a
publicly traded partnership would qualify as the type of restriction
contemplated by that Section of the Regulation. Therefore, the PTP Restriction
should not, absent unusual circumstances, affect the Units being freely
transferable within the meaning of the Regulation.
49
Notwithstanding the above, because of ERISA a Retirement Plan fiduciary
deciding whether to invest in the Partnership, in addition to other factors,
should consider (1) whether the investment satisfies the diversification
requirements of ERISA Section 404(a)(1)(C); (2) whether the investment is
prudent (considering the compensation structure of the Partnership, that the
Partnership's Equipment investments have not been selected as of the date of
this Prospectus, and that there may never be a market in which the Retirement
Plan can sell or otherwise dispose of Units); (3) whether the investment is made
solely in the interest of the Retirement Plan's participants; (4) whether the
investment complies with the Retirement Plan's needs for liquidity; and (5)
whether the investment would constitute a transaction prohibited under ERISA
Section 406 and Section 4975 of the Code.
Because of possible violation of prohibited transaction rules under ERISA
and the Code, the fiduciaries of a Retirement Plan should never purchase Units
with assets of a Retirement Plan if the General Partner, the Managing Sales
Agent, any Selected Sales Agents or any of their Affiliates perform or have any
such investment powers with respect to those assets, unless an exemption from
the prohibited transaction rules applies with respect to such purchase.
ERISA and, in some cases, the Code require that the assets of a Retirement
Plan be valued at their fair market value as of the close of each Plan year. It
may not be possible to value the Units adequately from year to year, since there
may not be a market for them and appreciation or depreciation of Partnership
Equipment may not be independently shown in the value of the Units until the
Partnership sells or otherwise disposes of the Equipment.
MANAGEMENT
THE PARTNERSHIP
The Partnership is an Iowa limited partnership formed on August 26, 1997.
THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner of the Partnership is Berthel Fisher & Company Leasing,
Inc., an Iowa corporation that has been in operation since 1988. Its business
and executive offices are located at 100 Second Street, SE, Cedar Rapids, Iowa
52401, telephone (319) 365-2506. More than 99% of the voting stock of the
General Partner is owned by Berthel Fisher & Company ("Berthel Fisher"). Berthel
Fisher, a financial services holding company, was formed in 1985 as an Iowa
corporation to hold the stock of Berthel Fisher & Company Financial Services,
Inc. ("Financial Services"), a broker-dealer registered with the National
Association of Securities Dealers, Inc. Financial Services, an affiliate of the
General Partner, will act as the Managing Sales Agent for this Offering.
The General Partner was formed as a subsidiary of Berthel Fisher in 1988 to
engage in the business of acquiring, financing, leasing and selling equipment,
primarily in the telecommunications and pay telephone industry. Other operations
of the General Partner include lease brokerage activities and lease financing
services. Since 1988, the General Partner has expanded its leasing activities to
other types of equipment. The General Partner also serves as general partner for
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications Income
Fund X, L.P. ("TIF X"), and it has been active in the leasing business for its
own account. The General Partner provided and negotiated leases sold to eight
other partnerships ("Private Programs"), the general partners of which were
subsidiary corporations of Berthel Fisher. All of the Private Programs have
completed operations and distributed their assets. See "Financial Statements of
the Partnership and the General Partner."
Since its inception, over $147,000,000 of lease and finance transactions
have been originated by the General Partner for its own portfolio and for the
portfolios of its Affiliates. Financial Services, as managing dealer, has sold
and placed approximately $46,689,250 of participation in equipment leasing
programs to both individual and institutional investors through two publicly
offered limited partnerships and eight
50
Private Programs. The General Partner and/or its Affiliates are currently
managing the equipment and leases placed in the two publicly offered limited
partnerships and its own portfolio of leases. See "Information Regarding Certain
Private Programs" under "Prior Experience of the General Partner and
Affiliates." Please refer to "Exhibit C--Tabular Information Concerning Prior
Transactions."
The General Partner will have day-to-day operating responsibility for the
Partnership and will make all decisions regarding acquisition, financing,
refinancing, leasing and sale of Equipment and other Program Assets. The day to
day affairs of the General Partner are handled by Nancy Lowenberg, Vice
President and Chief Operating Officer of the General Partner, with active
involvement of the Board of Directors. Each Director has been elected by the
General Partner's parent company, Berthel Fisher. The current members of the
Board of Directors are Thomas J. Berthel, Ronald O. Brendengen, Nancy Lowenberg,
Emmett J. Scherrman, Von Elbert and James W. Noyce. Berthel Fisher provides
certain management services to Leasing. Members of the General Partner's Board
of Directors have had experience in various phases of acquiring, financing,
leasing and selling equipment, and in managing and advising investment programs
with objectives similar to those of the Partnership.
Under the Partnership Agreement, the Limited Partners owning a majority of
the outstanding Units have the right to admit a successor general partner upon
the withdrawal, resignation, removal, bankruptcy, dissolution or liquidation of
the General Partner. See "Summary of the Limited Partnership Agreement."
The services and functions to be performed by the General Partner for the
Partnership include locating, evaluating and negotiating the terms of Equipment
leases and financings; negotiating and servicing Partnership debt obligations;
invoicing and collecting lease revenues from lessees; inspecting the Equipment;
maintaining liaison with and general supervision of lessees; administration of
leases to assure that Equipment is being properly operated and maintained;
supervising maintenance to be performed by third parties; monitoring performance
by the Partnership and by lessees of their obligations under Equipment leases;
maintaining liaison and communication with the Limited Partners and providing
them with reports as described under "Reports to Limited Partners"; and all
administrative functions associated with the operations of the Partnership. The
General Partner will also arrange for and oversee the marketing of Units through
the Managing Sales Agent and the Selected Sales Agents. The General Partner will
be reimbursed by the Partnership for organizational and offering expenses. In
addition, the Partnership will reimburse the General Partner for certain
out-of-pocket costs and expenses. See "Compensation of the General Partner and
Affiliates."
EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The officers and directors of the General Partner are:
Thomas J. Berthel (age 45)--Mr. Berthel is the President and a director of
the General Partner. He served as President from 1988 to 1993, and was
re-elected as President in 1996. He has been a director since 1988. Mr. Berthel
also serves as the President and a Director of Berthel Fisher & Company, a
financial services holding company formed in 1985 as an Iowa corporation to hold
the stock of Berthel Fisher & Company Financial Services, Inc. ("Financial
Services"), the Managing Sales Agent. He has held both of those positions since
1985. Mr. Berthel served as President of Financial Services until June, 1993. He
presently serves as Chief Executive Officer and as a Director of Financial
Services and Leasing. Mr. Berthel is also President and a Director of Berthel
Fisher & Company Management Corp. (a real estate holding company), T. J. Berthel
Enterprises, Inc. (general partner of a limited partnership that invests in
securities) and Berthel Fisher & Company Planning Inc. ("Planning") (a
registered investment advisor). Planning is the trust advisor of Berthel Growth
& Income Trust I, a business development organized under the Investment Company
Act of 1940. In November, 1995, Mr. Berthel was elected a director of
Intellicall, Inc., a publicly traded company.
Mr. Berthel holds a bachelor's degree from St. Ambrose College in Davenport,
Iowa (1974). He also holds a Master's degree in Business Administration from the
University of Iowa in Iowa City, Iowa (1993).
51
From 1974 to 1982, Mr. Berthel was President and majority shareholder of
Insurance Planning Services Corporation in Maquoketa, Iowa, which was engaged in
the operation of a securities and insurance business. Mr. Berthel holds a
Financial and Operation Principal license issued by the National Association of
Securities Dealers, Inc. He is also a Certified Life Underwriter.
Nancy Lowenberg (age 38)--Ms. Lowenberg is Vice President and Chief
Operating Officer of the General Partner, a position she has held since January
2, 1997. From 1982 to December 1996, Ms. Lowenberg was employed by Firstar Bank
Iowa, N.A., in Cedar Rapids, since 1986 as Vice President Commercial Loans for
Iowa. As Vice President Commercial Loans, she served as relationship manager of
62 accounts with approximately $70,000,000 of committed credit, with
responsibility for annual review and maintenance of existing accounts and
business development. Ms. Lowenberg received her Bachelor of Science
Agricultural Business with a minor in Finance in 1981 from Iowa State
University, Ames, Iowa.
Ronald O. Brendengen (age 43)--Mr. Brendengen is the Treasurer, Chief
Financial Officer and a Director (1988 to present) of the General Partner. He
was elected to his current offices in October, 1996. He has previously served as
Secretary (1994-March, 1995), Treasurer (1988-August, 1995) and Chief Financial
Officer (1994-August, 1995) of the General Partner. He served as Controller
(1985-1993), Treasurer (1987-present), Chief Financial Officer, Secretary and a
Director (1987-present) of Berthel Fisher & Company, the parent company of the
General Partner. Mr. Brendengen serves as the Treasurer, Chief Financial Officer
and a Director of Berthel Fisher & Company Planning, Inc. He also serves in
various offices and as a Director of each subsidiary of Berthel Fisher &
Company. Mr. Brendengen holds a certified public accounting certificate and
worked in public accounting during 1984 and 1985. Mr. Brendengen attended the
University of Iowa before receiving a bachelor's degree in Accounting and
Business Administration with a minor in Economics from Mt. Mercy College, Cedar
Rapids, Iowa, in 1978.
Leslie D. Smith (age 49) is the Secretary (March, 1995-present) of the
General Partner. Mr. Smith serves as the Secretary and a Director of Berthel
Fisher & Company Planning, Inc., the trust advisor of Berthel Growth & Income
Trust I. In 1994 Mr. Smith was named General Counsel of Berthel Fisher &
Company, parent company of the General Partner. Mr. Smith was awarded his B.A.
in Economics in 1976 from Iowa Wesleyan College, Mount Pleasant, Iowa, and his
J.D. in 1980 from the University of Dayton School of Law, Dayton, Ohio. Mr.
Smith was employed as an Associate Attorney and as a Senior Attorney for Life
Investors Inc., Cedar Rapids, Iowa, from 1981 through 1985. At Life Investors
Inc., Mr. Smith was responsible for managing mortgage and real estate
transactions. From 1985 to 1990 Mr. Smith was General Counsel for LeaseAmerica
Corporation, Cedar Rapids, Iowa. In that capacity, Mr. Smith performed all
duties generally associated with the position of General Counsel. From 1990 to
1992, Mr. Smith was Operations Counsel for General Electric Capital Corporation,
and was responsible for managing the legal department of a GECC division located
in Cedar Rapids, Iowa. From 1993 to 1994, Mr. Smith was employed as Associate
General Counsel for Gateway 2000, Inc., in North Sioux City, South Dakota.
DIRECTORS OF THE GENERAL PARTNER
The Directors of the General Partner are elected annually. Thomas J.
Berthel, Nancy Lowenberg and Ronald O. Brendengen, who are executive officers of
the General Partner, also serve as directors of the General Partner.
Biographical information with respect to each of them is set forth above. The
remaining directors of the General Partner are listed below, together with
certain pertinent information concerning each of them.
Emmett J. Scherrman (age 65) was elected a Director of the General Partner
in August, 1995. Mr. Scherrman graduated in 1953 from Loras College with a B.A.
in accounting, and served at the U.S. Army Finance School, Fr. Benjamin
Harrison, from 1953 to 1955. Mr. Scherrman served as President (1977 to 1987)
and Chairman of the Board and Chief Executive Officer (1987 to 1990) of
LeaseAmerica Corporation, Cedar Rapids, Iowa. Since his retirement from
LeaseAmerica Corporation in 1990, Mr. Scherrman has served as a consultant to
Brenton Bank and Trust Company, Cedar Rapids, Iowa, from
52
1992 to present. Mr. Scherrman currently serves as a Director of Brenton Bank
and Trust Company; Treasurer and Director of Oak Hill Engineering, Inc;
Chairman, Board of Trustees, Mount Mercy College; and Treasurer and Member of
the Board of Trustees, Mercy Medical Center.
Von Elbert (age 58) was elected Director of the General Partner in October,
1996. He has served as a Director of Berthel Fisher & Company, the parent of the
General Partner, since May, 1991. From 1978 to 1988, Mr. Elbert was the
President of TLS, Co., a data processing company. From 1988 to 1996, Mr. Elbert
served as the Vice President, Treasurer and Chief Financial Officer of Galt Sand
Company, a manufacturer of wearing apparel. Mr Elbert also serves as a director
of Hawkeye Bank of Cedar Rapids. Mr. Elbert received his BBA degree from the
University of Iowa in 1962.
James W. Noyce (age 42) was elected Director of the General Partner in
September, 1997. Mr. Noyce has been employed by FBL Financial Group, Inc. since
1985. He presently serves as Chief Financial Officer of FBL Financial Group,
Inc. (and its affiliates, including Farm Bureau Life Insurance Company), a
position he has held since December, 1995. Prior to December, 1995, he served
FBL Financial Group, Inc. in various capacities, including, from 1991 to
December, 1995, as Vice President and Controller. Mr. Noyce graduated in 1978
with a Bachelor of Science and Business Administration (BSBA) in Actuarial
Science and Accounting from Drake University College of Business.
OPERATION OF THE GENERAL PARTNER
As of September 30, 1997, the General Partner employed seven persons. The
General Partner receives management and consulting services from its Officers
and Directors and from employees of Berthel Fisher & Company, the General
Partner's parent. The General Partner will hire additional employees as the need
arises. During the fiscal years ended December 31, 1995, and December 31, 1996,
the revenue from no one customer of the General Partner accounted for greater
than 10.0% of total revenue.
The General Partner is the lessee with respect to office space that it
vacated in early 1997. The General Partner will continue to be responsible for
payment of rent on this space of approximately $4,500 per month until December
31, 2000. Although the General Partner is seeking to sub-lease the space to a
third party, it has been unsuccessful to date. The General Partner's offices are
now located in Cedar Rapids, Iowa, in premises containing approximately 700
square feet. The premises are leased by the General Partner from an Affiliate,
which has agreed to permit the General Partner to use the space until it has
found a sub-lessee for the space it previously occupied. After the General
Partner sub-leases the previous space, the Affiliate will begin charging rental
of not more than $2,000 per month.
As of the date of this prospectus, the General Partner is not engaged in
litigation other than litigation in the normal course of its business.
PRIOR EXPERIENCE OF THE GENERAL PARTNER AND AFFILIATES
GENERAL
The General Partner currently serves as the general partner of two public
programs, Telecommunications Income Fund IX, L.P. ("TIF IX") and
Telecommunications Income Fund X, L.P. ("TIF X"). Affiliates of the General
Partner have served as general partners of Telecommunications Limited
Partnerships No. 1-No. 8 (the "Private Programs"). All of the Private Programs
are now terminated. The General Partner and all of its affiliates who served as
general partners of the Private Programs are all subsidiaries of Berthel Fisher
& Company ("Berthel Fisher"). The General Partner and the affiliates who served
as general partners of the Private Programs are referred to collectively as the
"Leasing Affiliates."
The Leasing Affiliates are (or were, in the case of the terminated Private
Programs) engaged primarily in the business of acquiring and leasing capital
assets, primarily telecommunications equipment. The
53
General Partner has been in operation since 1988. The Leasing Affiliates have
been engaged in business beginning at various dates since 1986. Berthel Fisher
has two other subsidiaries that are engaged in the business of securities
brokerage and real estate ownership and management. Another subsidiary is
registered with the Securities and Exchange Commission as an investment advisor
and with the Commodities Futures Trading Association as a commodity trader and
now serves as the investment advisor to Berthel Growth & Income Trust I, a
publicly held business development company. All of the subsidiaries of Berthel
Fisher are Iowa corporations.
Substantially all of the current business of TIF IX and TIF X is conducted,
and substantially all of the other Leasing Affiliates' business was conducted,
on a full payout lease basis, in which the non-cancelable rental payments due
during the initial term of the lease are sufficient to recover the Purchase
Price of Equipment. Many of the lease contracts of TIF IX and TIF X have fair
market value purchase options that grant the underlying lessees the right to
purchase the equipment at the end of the lease contracts.
Mr. Thomas J. Berthel also served as a general partner of each of the
Private Programs. The General Partner did not act as the general partner for any
of the Private Programs. The General Partner did, however, earn management fees
and/or sales commissions from certain of the Private Programs.
The Private Programs raised a total of $7,070,000 of equity from 447
investors and purchased equipment costing $9,514,000. TIF IX raised a total of
$17,001,750 of equity from 1,211 investors and has purchased equipment costing
$47,778,000. TIF X raised a total of $22,617,500 of equity from 1,639 investors
and has purchased equipment costing $41,376,000.
The following table sets forth information regarding the eight Private
Programs and the two publicly offered programs organized by the Leasing
Affiliates to date.
ORIGINAL
EQUIPMENT DATE DATE
NAME OF TRANSACTION COST STARTED TERMINATED
- -------------------------------------------------------------------------- ------------- --------- -----------
Telecommunications Limited Partnership No. 1.............................. $ 1,249,000 12/31/86 10/31/94
Telecommunications Limited Partnership No. 2.............................. 1,856,000 12/31/87 09/30/94
Telecommunications Limited Partnership No. 3.............................. 552,000 03/04/88 09/04/92
Telecommunications Limited Partnership No. 4.............................. 527,000 05/03/88 10/20/92
Telecommunications Limited Partnership No. 5.............................. 1,372,000 02/28/89 12/31/94
Telecommunications Limited Partnership No. 6.............................. 805,000 07/14/89 12/31/94
Telecommunications Limited Partnership No. 7.............................. 1,325,000 02/21/90 09/30/94
Telecommunications Limited Partnership No. 8.............................. 1,828,000 02/07/91 09/30/94
Telecommunications Income Fund IX, L.P.................................... 16,554,266 10/30/91
Telecommunications Income Fund X, L.P..................................... 26,316,015 08/27/93
All of the Private Programs are terminated. TIF IX and TIF X are currently
in operation and have fully utilized all investor funds to acquire equipment.
Information as to cash distributions to investors made by the Private Programs,
TIF IX and TIF X and certain additional information concerning the Private
Programs, TIF IX and TIF X may be found in "Exhibit 'C'--Tabular Information
Concerning Prior Transactions." As noted in Table III of Exhibit C, certain of
the Private Programs show deficiencies at year end after cash distributions and
special items. These deficiencies were funded with prior year's cash flow or
from reserves, as noted in footnotes to Table III of Exhibit C. Persons who
invest in Units in the Partnership will not have any ownership interest in any
of the Private Programs, TIF IX or TIF X as a result of such investment.
DIFFERENCES BETWEEN THE PARTNERSHIP AND OTHER PUBLIC AND PRIVATE PROGRAMS
In each of the Private Programs, cash flow in excess of working capital
reserves was distributed to investors instead of being reinvested in Equipment.
This differs significantly from the Partnership's plan
54
for distribution. See "Plan of Distribution." In other respects, except as
stated in this section and in "Information Regarding Certain Private Programs"
under "Prior Experience of the General Partner and Affiliates," the investment
objectives of the Private Programs are not significantly different from the
investment objectives of the Partnership. The investment objectives of TIF IX
and TIF X are very similar to those of the Partnership. See "Investment
Objectives and Policies."
Like the Partnership, the Private Programs, TIF IX and TIF X invested
primarily in equipment that was leased pursuant to Full Payout Leases. Unlike
the Partnership, however, the Private Programs provide for distributions to
investors to include a return of principal and interest, as if the investment
had been amortized over the life of the Private Program. The intention of the
Partnership is not to return capital during the Operating Phase.
INFORMATION REGARDING PRIVATE PROGRAMS
The Private Programs used straight line depreciation with asset lives of
seven to ten years. Most of the Private Programs were intended to be liquidated
after approximately five years, which is a shorter period than the period
selected for depreciation of assets. Since the Private Programs utilized Full
Payout Leases, at the expiration of leases the Private Programs had recovered
through rentals the cost of equipment that had been subject to a lease. Upon the
sale of equipment at the end of a lease, the Private Programs received a nominal
price, usually less than ten percent (10.0%) of the cost of the equipment. Since
depreciation in the Private Programs was taken over a longer period (7 to 10
years) than the life of the lease (3 to 5 years), the residual value of the
equipment at the expiration of a lease was generally less than the adjusted
basis of the equipment. Accordingly, upon the sale of equipment at the end of a
lease, the Private Programs experienced a loss for tax purposes. These losses
were generally ordinary losses, not capital losses. Utilization by the Private
Programs of straight line depreciation over seven to ten years resulted in
increasing the taxable operating results of the Private Programs, which resulted
in increasing the limited partners' tax liability during the years of operation.
Generally, in the year of termination and liquidation of a Private Program, the
operating results generated passive tax losses to be used by a limited partner
to offset passive income, and to the extent such losses exceeded passive income,
to offset (to the extent of a limited partner's basis) other income of the
limited partner.
THE UNAUDITED INFORMATION PRESENTED IN THIS SECTION AND IN THE TABLES
INCLUDED AS EXHIBIT C REPRESENTS THE HISTORICAL EXPERIENCE OF THE PRIVATE
PROGRAMS. INVESTORS IN THE PARTNERSHIP SHOULD NOT ASSUME THAT THEY WILL
EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY THE INVESTORS IN
ANY PRIVATE PROGRAM.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Partnership intends to use the Net Proceeds from the sale of Units
primarily to purchase Equipment for lease to creditworthy third parties. The
Partnership will not operate the Equipment. The Partnership will acquire a
variety of types of capital equipment, but it will emphasize the acquisition of
telecommunications equipment. Telecommunications equipment acquired by the
Partnership may consist primarily of pay telephones, call processing systems and
related equipment
The principal investment objective of the Partnership is to obtain the
maximum available economic return from its Investment in Program Assets. Except
when the General Partner acquires Equipment in its own name for the benefit of
the Partnership, the Partnership will not acquire Equipment from or lease
Equipment to Affiliates. Accordingly, the Partnership intends to purchase
Equipment, to lease such Equipment to unaffiliated third parties and to sell (or
re-lease) such Equipment, all with a view toward:
a. generating Cash Flow during its Operating Phase, in order to make
distributions to Limited Partners of ongoing Operating Distributions (See
"Cash Distributions and Redemptions"), which, to the extent available, will
be made on a monthly basis;
55
b. during the Operating Phase, reinvesting undistributed Cash Flow from
operations in additional Equipment for lease to increase the amount of
Partnership assets; and
c. maximizing the residual values of Equipment upon sale and providing
cash distributions to the Partners from sales as Liquidating Distributions.
The General Partner shall commit a percentage of Capital Contributions to
Investment in Program Assets which is equal to the greater of (a) 80.0% of the
Capital Contributions reduced by .0625% for each 1.0% of indebtedness
encumbering Program Assets; or (b) 75.0% of Capital Contributions. The percent
of indebtedness encumbering Program Assets is calculated by dividing the amount
of indebtedness by the Purchase Price of Equipment, excluding the Front End
Fees. The resulting quotient is then multiplied by .0625% to determine the
percentage to be deducted from 80.0%. AFTER DEDUCTION OF ALL FRONT END FEES TO
BE PAID FROM GROSS PROCEEDS, ESTABLISHING A RESERVE AND ASSUMING THE PARTNERSHIP
BORROWS THE MAXIMUM (40.0% OF GROSS PROCEEDS), IT IS ESTIMATED THAT 80.5% OF THE
LIMITED PARTNERS' INVESTMENT WILL BE AVAILABLE AS NET PROCEEDS FOR INVESTMENT BY
THE PARTNERSHIP. SEE "ESTIMATED USE OF PROCEEDS."
To facilitate leasing arrangements, the Partnership may enter into lease
commitments with third parties prior to entering into actual leases so that
appropriate and adequate security filings can be completed and to enable such
third parties to plan for equipment installation. These commitments may involve
the taking by the Partnership of security interests in property other than the
Equipment. The Partnership may collect commitment fees in connection with the
giving of lease commitments. Lease commitments will operate in much the same way
as loan commitments, with the Partnership committing to a third party to lease
equipment having certain maximum values.
In addition to acquiring Equipment to be leased, the Partnership will also
acquire Equipment subject to existing leases, in which case the Partnership will
acquire title to the Equipment and the lessor's interest in the lease. In
limited circumstances, the Partnership will enter into financing arrangements
which will involve making secured loans to or other debt arrangements with
unaffiliated third parties. These financings will be completed only if such
financings are advantageous to the Partnership and will include cases where
lease transactions with those third parties would result in unfavorable tax
treatment. Such loans will generally be securitized with a first security
interest in equipment. Both the number and size of such financings will be
limited.
Leases entered into by the Partnership contain provisions requiring lessees
to remove Equipment and ship it to the Partnership at the end of the lease.
Accordingly, the Equipment generally has more value to the Lessee than to others
in the secondary market. Residual values of Equipment will be maximized by
endeavoring to sell the Equipment to the Lessee at the highest possible price.
If a Lessee does not purchase the Equipment, the Partnership generally will sell
the Equipment on the secondary market to buyers who customarily acquire used
Equipment.
The General Partner does not have the power to amend the investment
objectives of the Partnership without the vote of the Limited Partners.
The Partnership does not intend to acquire Equipment in transactions which
would enable Limited Partners to defer from taxation income from sources other
than the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY SPECIFIC LEVEL OF CASH DISTRIBUTIONS OR
ANY OTHER OF THE INVESTMENT OBJECTIVES OF THE PARTNERSHIP CAN OR WILL BE
ATTAINED.
56
TYPES OF EQUIPMENT TO BE ACQUIRED
1. TELECOMMUNICATIONS EQUIPMENT. The Partnership intends to utilize a
significant portion of available funds to acquire telecommunications Equipment
from a variety of manufacturers. Similar Equipment will be purchased from third
parties in sale and lease-back arrangements.
Telecommunications Equipment acquired by the Partnership will consist
primarily of advanced technology pay telephones and call processing systems used
in such facilities as hotels, hospitals, colleges and universities, and
correctional institutions.
The pay telephones to be acquired by the Partnership have the built-in
capability to perform electronic functions associated with placing a pay
telephone call, using advanced microprocessor technology located within the
telephone housing. Both the pay telephones and the call processing systems that
the Partnership will acquire utilize systems designed to provide private pay
telephone operators with access to certain non-coin pay telephone revenues,
which constitute the majority of pay telephone revenues. These systems are also
utilized in call processing systems to allow hotels and other owners to
participate in revenues from users' calls that are billed to calling cards or
credit cards.
2. OTHER CAPITAL EQUIPMENT. Although the Partnership will concentrate its
equipment acquisitions in telecommunications equipment it will also acquire
other types of equipment that meet the investment objectives of the Partnership.
Such equipment may include, without limitation, medical equipment, office
equipment and computers. The Partnership will only obtain Equipment that the
General Partner has experience in leasing. The General Partner anticipates that
Equipment other than telecommunications Equipment will make up less than a
majority of the Partnership's lease portfolio. Generally, the General Partner
will acquire Equipment other than telecommunications Equipment only if lease
opportunities for telecommunications Equipment which meet the Partnership's
criteria are not available or if the General Partner believes that a particular
leasing opportunity for other capital Equipment will enhance the Partnership's
lease portfolio.
There can be no assurance as to the ultimate composition of the
Partnership's actual portfolio, as there is no way of anticipating what types of
leasing opportunities will be available on reasonable terms at the times the
Partnership is ready to invest its funds. The General Partner may, in accordance
with its best business judgment, vary the Partnership's lease portfolio. The
Partnership may acquire both new and used Equipment. The Partnership intends to
expend a greater portion of its funds on new Equipment, although no assurance
can be given that such an objective will be achieved.
3. SECURED TRANSACTIONS; VENDOR LEASING PROGRAMS. Although the General
Partner does not anticipate that it will occur frequently, from time to time the
General Partner may find it to be more advantageous to the Partnership to enter
into a secured sales transaction rather than a lease. In such cases the
Partnership will purchase Equipment for resale to a third party on a secured
basis. Further, the Partnership may participate in a manufacturer's vendor
leasing program, pursuant to which the Partnership would provide financing with
respect to Equipment leased directly by the manufacturer to third parties.
TELECOMMUNICATIONS INDUSTRY IN GENERAL
The General Partner intends to lease a significant portion of the
Partnership's assets to businesses involved in the private pay telephone
industry. This industry was spurred in 1984 by the decision of the Federal
Communications Commission to authorize the private ownership of pay telephones
and the regulation of private pay telephones by states. State regulation permits
private pay telephones to be placed in public areas and commercial
establishments such as hotels, airports, stores, shopping centers and service
stations. The owners of private pay telephones collect all monies deposited in
the telephones, pay line charges and are responsible for installation,
maintenance and repair.
The General Partner also intends to place a significant portion of the
Partnership's assets in call processing systems that will be installed in hotels
and similar businesses. The use of call processing systems
57
permits hotels and other similar facilities to own telephone equipment and
participate in credit card and calling card revenues. Such systems give the
owner control over all forms of call rating and provides consolidated reporting
on call activity. The call processing systems that the Partnership will acquire
utilize built-in operator systems designed to allow hotels and other owners to
participate in revenues from users' calls billed to calling cards or credit
cards.
TELECOMMUNICATIONS EQUIPMENT MARKET FACTORS
The General Partner anticipates that most of the Partnership's leasing
activity for telecommunications Equipment will consist of leasing new Equipment
to first users and remarketing such Equipment to such users after the term of
the initial lease.
Because a specific configuration of pay telephone equipment or call
processing equipment may to some extent be most useful to the initial user and
the cost of remarketing such Equipment as used Equipment may be substantial, the
Partnership will endeavor to renegotiate the terms of any expiring lease. The
Partnership's leases will generally provide for the lessee to bear the expense
of removal of Equipment at the end of the lease term and the expense of shipment
of the Equipment to the Partnership. In addition to these costs, lessees
analyzing the cost of replacing Equipment would normally consider the cost of
purchasing new equipment and the cost of installing new equipment. Accordingly,
the General Partner expects lessees to desire to renegotiate leases because to
do so will generally be in the best interest of the lessee. This is particularly
true since the telecommunications equipment to be leased by the Partnership can
be upgraded to take advantage of most technological advances. The General
Partner believes that leases can be renegotiated on terms that are generally
favorable to the Partnership. If leases cannot be renegotiated, the General
Partner will remarket the used Equipment through conventional means and by
utilizing its contacts with others in the industry.
TELECOMMUNICATIONS EQUIPMENT RESIDUAL VALUES
The market value of pay telephones and call processing systems at the end of
a lease term (their "residual value") will depend upon many factors, including
the rate of Equipment obsolescence, technological advances, regulatory and
telecommunications industry standards, general business conditions and
intervening inflation or deflation.
Telecommunications technology and the integration of computer components
into and with telecommunications equipment has developed rapidly in recent years
and is expected to continue to do so. Technological advances and the
introduction of foreign-manufactured telephone equipment have resulted in
reductions in the cost of telecommunications equipment, and such reductions may
continue. See "The General Partner May Be Unable to Obtain Significant Residual
Value for the Partnership Equipment" under "Risk Factors" and "Changes in
Technology May Result in Obsolescence of Equipment" under "Risk Factors."
Prospective lessees of telecommunications Equipment choose specific
Equipment based primarily on its price relative to its performance and their
particular requirements. The introduction of improved models, the broadening of
user applications and the need for greater flexibility of usage and capacity
have resulted in upgrading of Equipment. The General Partner cannot predict
whether or not a secondary market will develop for pay telephones and call
processing systems.
Physical deterioration has not been a significant factor affecting the value
of used pay telephones or call processing systems. However, a significant factor
which may affect the residual value of Equipment owned by the Partnership is the
condition of the Equipment at the time of re-lease or sale, which depends in
part upon the proper maintenance of the Equipment while in service. The General
Partner will endeavor to lease Equipment owned by the Partnership to lessees
that will maintain it in such a manner that the condition of the Equipment at
the end of the lease will be comparable to Equipment of comparable usage in the
industry.
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It is impossible to predict the extent to which developments during the next
ten years in the technology and pricing of telecommunications equipment will
cause erosion in the value of existing models of such Equipment.
ACQUISITION POLICIES AND PROCEDURES
The Partnership will generally invest only in Equipment that lessees have
committed to lease from the Partnership, or that is subject to existing leases
to third parties. Consequently, in most cases the selection of Equipment will be
determined by the requirements of the potential lessee. See "Leases" below.
There is no limitation on the amount which the Partnership may invest in any
one Equipment transaction. Consequently, it would be possible for the
Partnership to invest all of its available funds in a single transaction. The
General Partner, however, does not intend for the Partnership to do so. Because
there can be no assurance as to the number of Units to be sold in the
Partnership, or the availability of lease opportunities to the Partnership, the
General Partner cannot predict what diversity of leases will ultimately be
obtained by the Partnership. Moreover, during the Operating Phase the General
Partner intends to reinvest most undistributed Partnership Cash Flow in
additional Equipment.
In order to reduce the effect of changes in the business conditions of
specific lessees, the Partnership will seek to diversify its lease portfolio by
leasing to a variety of lessees in various locations throughout the United
States and, to a limited degree, to lessees organized and based in the United
States who may have Equipment located outside the United States. The
Partnership's ability to achieve such diversification will be dependent, in
part, on the number of Units sold.
Used Equipment purchased by the Partnership will likely be acquired from
current users (which may be the proposed lessees) at a price that will not
exceed the fair market value of such Equipment. New Equipment purchased by the
Partnership will likely be acquired from manufacturers, authorized dealers, or
the proposed lessees, either by contracting with them directly or by purchasing
rights under previously existing purchase agreements.
The Partnership will acquire Equipment with varying degrees of warranty
protection. Used Equipment may no longer have warranty protection by the time it
is acquired by the Partnership. New Equipment normally will carry the standard
warranties offered by the manufacturer.
When necessary, the General Partner intends to arrange through the
manufacturers or through various service organizations to provide for the
installation, maintenance, modification and removal of Equipment.
The General Partner may purchase Equipment on behalf of the Partnership in
its own name for the purpose of facilitating the acquisition and ownership of
such Equipment by the Partnership. The General Partner may hold title to such
Equipment on a temporary basis, which will generally be six months or less.
Equipment acquired from the General Partner is subject to the following
restrictions:
a. The price payable by the Partnership to the General Partner for
Equipment may not exceed the sum of the price originally paid by the General
Partner and the amount of all out-of-pocket costs incurred by the General
Partner (including interest paid on any funds borrowed to finance the
acquisition of such Equipment) in connection with the acquisition and
ownership of the Equipment;
b. The General Partner will not receive any benefit from the sale of
Equipment to the Partnership other than the amounts set forth in paragraph
(a) above; and
c. The transaction must be in the best interests of the Partnership.
Any Equipment purchased by the General Partner on behalf of the Partnership
shall be acquired in the manner and subject to the restrictions described in the
preceding paragraphs. Except for the Acquisition Fees described in "Compensation
of the General Partner and Affiliates," no commission of
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any kind will be paid to the General Partner or its Affiliates in connection
with the acquisition of such Equipment.
Although the General Partner does not now anticipate doing so, the General
Partner may invest in a joint venture between the Partnership and the seller of
Equipment or another third party. The joint venture would own and lease the
Equipment. Before entering into such a transaction, the General Partner will
consider various factors, including, without limitation:
a. The economic stability of the co-venturer, and the possibility that
the co-venturer would become bankrupt or experience other financial
difficulties;
b. The possibility that the co-venturer may have economic or business
interests or goals inconsistent with those of the Partnership;
c. The possibility of an impasse if no co-venturer has controlling
interest;
d. Whether or not the Partnership has controlling interest, and if not,
what safeguards exist to limit the risk of loss to the Partnership.
In addition, the General Partner will consider all of the factors normally
considered when making a decision regarding leases.
TEMPORARY INVESTMENTS; RETURN OF UNINVESTED NET PROCEEDS
All Net Proceeds from the sale of Units in the Partnership will be
temporarily invested in (and undistributed Cash Flow may be invested in) United
States government securities (including, but not limited to, short-term Treasury
Bills and Treasury Notes), securities issued or guaranteed by United States
government agencies, certificates of deposit and time or demand deposits in
state or national banks, money market funds, securities issued or guaranteed by
states or municipalities, bank repurchase agreements, bankers' acceptances,
savings and loan association deposits, commercial paper, secured equipment lease
lines of credit, and other investments with appropriately scheduled maturities
or other similar types of investments which will be held by the Partnership for
a period generally not exceeding one year from the date of purchase and will be
available for the general use of the Partnership. See "Estimated Use of
Proceeds." The foregoing notwithstanding, the Partnership does not intend to
pursue a policy which would make it subject to the Investment Company Act of
1940, and the Partnership's temporary investments as described above will be
limited accordingly. Although the Net Proceeds from the sale of Units may be
used for any Partnership purpose, Net Proceeds will not be used to pay operating
expenses of the Partnership unless all available revenues from the operation of
the Partnership have first been applied to pay such expenses.
Any Net Proceeds (except for necessary operating capital) not invested or
committed for Investment in Program Assets within two years after the Effective
Date will be returned, without interest, to the Limited Partners in proportion
to their respective Capital Contributions. Any such funds will include a return
of the proportionate share of the Organization and Offering Expenses and of any
Selling Commissions paid to Affiliates of the General Partner. Interest earned
on such funds will be retained for the benefit of the Partnership, not for the
benefit of the General Partner. The following categories of Net Proceeds will be
deemed to be "invested or committed for investment": (i) funds previously
expended or set aside as reserves in connection with the acquisition of
Equipment or for other Partnership purposes, and (ii) funds to be disbursed in
the future under the provisions of agreements relating to the acquisition of
Equipment or other Partnership matters.
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LEASES
1. GENERAL INFORMATION. The specific provisions of the leases to be
entered into by the Partnership will depend upon a variety of factors, including
(i) the type and intended use of the Equipment covered by the lease, (ii) the
business, operations and creditworthiness of the lessee, (iii) regulatory
considerations, (iv) the tax consequences of given lease provisions, and (v) the
accounting treatment of the lease sought by the lessee.
While the General Partner anticipates that most Equipment acquired by the
Partnership will be leased to lessees located in the United States, the
Partnership may enter into leases with United States companies for equipment
located in a foreign country. The General Partner has not determined whether or
not it will enter into leases for equipment located outside of the United
States. It's consideration of a policy in this regard is very preliminary. If
the Partnership were to enter into leases of Equipment located in foreign
countries, it would do so only after careful consideration of such factors as
concentration of leases outside of the United States, the financial strength of
prospective lessees, whether or not the General Partner has previous
satisfactory business relationships with the prospective lessee, the laws of
such foreign country and the stability of business and government structures in
the particular foreign country.
The leases the Partnership will generally acquire or enter into will be
leases with terms between 36 and 60 months, with noncancellable rental payments
due during the initial term of the lease sufficient to recover the Purchase
Price of the subject Equipment ("Full Payout Leases"). Generally, the Equipment
purchased for lease will be leased pursuant to or subject to leases which are
Full Payout Leases. The General Partner expects the Full Payout Leases to
produce Gross Rental Payments sufficient to recover any overhead and financing
costs associated with the acquisition of Equipment and to provide the
Partnership with a return on its investment.
The return to the Partnership under a given lease will depend upon several
factors, such as the amount of the rental and other payments required to be made
by the lessee under the lease, the expenses required to be borne by the lessee
under the lease and the value of the leased Equipment (for re-lease or sale) at
the expiration of the lease term.
The General Partner anticipates that its leases generally will provide that
the lessee will: (i) pay rent and other payments without deduction or offset of
any kind, (ii) bear the risk of loss of the leased Equipment, (iii) pay sales,
property, use or similar taxes relating to the lease or use of the Equipment,
(iv) indemnify the Partnership against any liability resulting from any act or
omission of the lessee or its agents, (v) maintain the Equipment in good working
condition during the term of the lease, and (vi) not assign or sublease the
Equipment without the prior written consent of the General Partner. Most leases
will grant to the lessee an option to purchase the leased equipment at the end
of the term at fair market value.
The General Partner anticipates that the Partnership's leases will generally
require lessees to maintain (i) casualty insurance in an amount equal to the
market value of the leased Equipment or a specified amount set forth in the
lease (which at times may be less than the market value of the Equipment), and
(ii) liability insurance (naming the Partnership as an additional insured) in an
amount consistent with industry standards.
Following the expiration of a lease entered into by the Partnership, the
Partnership may modify, extend or renew the lease with the existing lessee,
lease the Equipment to a new lessee, or sell the Equipment.
The terms and conditions of each lease will be determined by negotiation and
may impose substantial obligations upon the Partnership. Although the
Partnership will normally require the lessee to install the Equipment,
installation expenses will generally be included in the cost of Equipment.
Furthermore, the obligation to install Equipment may in some cases be assumed by
the Partnership. In such cases, the Partnership will enter into separate
agreements with manufacturers or independent organizations to
61
provide installation services, and the cost of installation will be considered
by the Partnership when determining the lease rate. All leases will require
lessees to maintain the Equipment.
2. LEASE AND LESSEE REVIEW PROCEDURES. The General Partner has established
standards and procedures for the review of potential lessees. Following a
thorough review, a credit decision will be made by the General Partner. If the
decision is positive, the General Partner will prepare lease documents to be
forwarded to the applicant. The Partnership will generally make direct payment
for the leased Equipment to the manufacturer or vendor. The Partnership may
obtain personal guarantees or other forms of credit enhancements.
3. PORTFOLIO ACQUISITIONS. Although it is unlikely, the Partnership may
acquire existing lease portfolios for investment. Before acquiring a lease
portfolio the General Partner will conduct a thorough financial and documentary
review.
The General Partner may require personal and/or corporate guarantees from
the vendor of the portfolio. Occasionally, as additional collateral, the General
Partner may require that the leases and underlying Equipment be purchased with
full recourse to the vendor of the lease portfolio. The General Partner may also
require credit enhancements which could include, among other items, certificates
of deposit, letters of credit, mortgages on real estate or liens on other
property.
FINANCING
The Partnership expects to incur debt to finance the purchase of a
substantial portion of its Equipment, and, in so doing, expects to be able to
acquire Equipment having values substantially in excess of the Limited Partners'
investment. Such leveraging will permit the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, should increase
both its lease revenues and its federal income tax deductions above what they
would be without such leveraging. However, such tax deductions may be subject to
"at risk" and other limitations described under "Tax Consequences."
The General Partner presently anticipates that aggregate borrowings of the
Partnership will be approximately 40.0% of the Gross Proceeds of the Offering.
The aggregate amount of the Partnership's outstanding debt will not exceed, at
any time, 40.0% of the Gross Proceeds of the Offering. If 40.0% of Gross
Proceeds is borrowed, borrowings will equal approximately 49.1% of Net Proceeds.
This amount of borrowings will enhance the Partnership's ability to make
Operating Distributions, provided that (i) the funds can be borrowed on
reasonable terms, and (ii) equipment can be leased on terms sufficiently
favorable to permit a reasonable profit to be made after servicing the debt.
However, this amount of borrowing may negatively impact the Partnership's
ability to make Operating Distributions if lessees default on leases and the
Partnership is unable to re-lease the Equipment in a timely manner on favorable
terms. See "There May Be Insufficient Revenue to Meet Debt Service When Leverage
is Used" under "Risk Factors."
Although there is no limit on the amount of debt that may be incurred in
connection with the acquisition of any single item of Equipment the Partnership
intends to limit the amount of such debt to the extent necessary to maintain its
status as owner of such Equipment for federal income tax purposes. The amount
borrowed by the Partnership will depend in part upon the type of lease, the
lease term, the type of Equipment, the credit of the lessee, the availability of
financing, prevailing interest rates, and acquisition costs incurred by the
Partnership. The Partnership intends to be flexible in the degree of leverage it
employs and anticipates that it will employ less leverage at times when
prevailing interest rates are relatively high and more leverage at times when
prevailing interest rates are relatively low. To the extent that such a strategy
is successful, it would serve to maximize the return to the Partners. There can
be no assurance that credit will at all times be available to the Partnership in
the amount desired or on terms considered reasonable by the General Partner.
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The Partnership may purchase Equipment without incurring any debt. If the
Partnership purchases an item of Equipment without leverage and thereafter
suitable financing becomes available, it may finance such Equipment at any time.
The Partnership intends to take such action to the extent practicable and,
through the fifth anniversary of the Partnership's Closing Date, to invest up to
100.0% of the proceeds from such financings in additional items of Equipment.
To the extent practicable, the Partnership will borrow funds at interest
rates fixed at the time of borrowing. However, the Partnership is likely to
borrow substantial funds at rates which vary with the "prime" or "base" rate,
particularly when borrowing on an interim basis or when interest rates are
trending downward. Since base rentals under most leases will be fixed during the
terms of such leases, a rise in the "prime" or "base" rate would increase
borrowing costs and reduce the amount of the Partnership's income and cash
available for distribution.
The General Partner anticipates that the interest rates on any loans keyed
to the "prime" or "base" rate will range from one-half of 1.0% to 3.0% over the
"prime" or "base" rate, depending on a number of factors, including the
creditworthiness of the lessee, whether the debt is recourse or non-recourse,
the terms of the lease and the amount borrowed as a percentage of the Purchase
Price of the subject Equipment.
The General Partner anticipates that borrowings by the Partnership will
generally be secured by the grant of a security interest in Equipment and in
rental income.
Financing for the Partnership will generally be obtained on a recourse
basis. Recourse debt means, in the context of the business to be conducted by
the Partnership, that the lender can look to the general credit and all of the
assets of the Partnership (including all Equipment to the extent not subject to
a prior encumbrance) and the assets of the General Partner, but may not look for
repayment to any Limited Partner's assets other than his interest in the
Partnership. To the extent recourse debt is incurred, no increase in the Limited
Partners' tax basis would be achieved, because liability for recourse debt is
attributable only to the General Partner.
Although the exact terms and conditions of Partnership borrowings cannot be
predicted, the General Partner anticipates that the due date of such loan would
be accelerated upon default by the lessee with respect to the lease securing a
lease-specific loan obligation or upon default by the Partnership with respect
to the related indebtedness. In the event of acceleration, the lender would be
in a position to foreclose upon the Equipment securing the loan unless the
Partnership repaid the entire unpaid balance, which the Partnership is unlikely
to be able to do unless it could promptly (i) cure the lease default with other
revenues or reserve funds, (ii) obtain possession of and re-lease the related
Equipment and refinance the accelerated obligation, or (iii) obtain interim
financing until such re-lease and refinancing could be arranged. Foreclosure by
a lender or premature sale of Equipment may result in financial loss to the
Partnership and adverse tax consequences to its Limited Partners, including
recapture of all depreciation deductions previously claimed. If any portion of
Partnership debt is cross-collateralized, the lender may, in the event of
default, be in a position to accelerate the debt secured by all the
cross-collateralized Equipment. See "There May Be Insufficient Revenue to Meet
Debt Service When Leverage is Used" and "Default by Lessee May Affect
Partnership's Loans" under "Risk Factors" for a discussion of this and other
risks of Partnership borrowings.
Loan agreements may require that the Partnership maintain certain reserves
or compensating balances and may impose other obligations upon the Partnership.
Moreover, because a significant proportion of the Partnership's revenues from
the leasing and sale of Equipment will be reserved for repayment of debt, the
use of financing may reduce the cash otherwise available for Partnership
distributions until the debt has been repaid, and may reduce total cash flow
over a substantial portion of the Partnership's operating life.
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To obtain funds for working capital purposes, the Partnership may establish
a line of credit with a bank or other lender or borrow on a temporary basis from
the General Partner or its Affiliates.
Although not required to do so, the General Partner and any of its
Affiliates may make loans to the Partnership on a short-term basis in order to
facilitate Equipment acquisitions. If the General Partner or one of its
Affiliates borrows money for the specific purpose of making a short-term loan to
the Partnership, the General Partner or the Affiliate may not charge interest to
the Partnership in excess of its own interest cost on such borrowing. If the
General Partner or an Affiliate makes a short-term loan to the Partnership
without making a specific borrowing for the purpose, the General Partner or the
Affiliate may not charge interest at a rate greater than the interest rate
charged by unrelated lenders on a comparable loan for the same purpose in the
same geographic area, without reference to the General Partner's or any
Affiliate's financial abilities or guarantees. In no event will the Partnership
be required to pay interest on any such loan at an annual rate more than 3.0%
over the base rate on corporate loans posted by at least 75% of the nation's 30
largest banks, published as the prime rate in the Wall Street Journal.
All payments of principal and interest on any financing provided by the
General Partner or any of its Affiliates shall be due and payable within 12
months after the date of the loan.
Neither the General Partner nor any Affiliate may receive points or other
financial charges or fees in any amount in respect of any loans to the
Partnership, although the General Partner's compensation (specifically,
Acquisition Fees and Management Fee) may be increased as an indirect result of
such loans being used to acquire additional Equipment.
If the General Partner or any of its Affiliates purchases Equipment in its
own name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser will be entitled to receive interest on the funds
expended for such purpose on behalf of the Partnership. Interest on any such
temporary purchases will not be in excess of the interest rates charged (without
reference to the General Partner's or such Affiliate's financial abilities or
guarantees) by unrelated lenders on a comparable loan for the same purpose in
the same geographic area and will not exceed the General Partner's or Affiliates
cost of funds.
Any borrowings from the General Partner or its Affiliates incurred for
Partnership organization and offering expenses will be non-interest bearing and
will be repaid out of offering proceeds (but not in excess of amounts permitted
as described in this Prospectus) if the Partnership's minimum offering of Units
is successfully completed.
The Partnership may at any time borrow funds to acquire Equipment or to
repair, recondition or reconfigure the Equipment, if the General Partner, in its
sole discretion, deems such repair, reconditioning or reconfiguration necessary
or desirable to enable the Partnership to re-lease or sell such Equipment. The
General Partner and its Affiliates are prohibited from borrowing from the
Partnership.
WORKING CAPITAL RESERVES
The General Partner anticipates that the Partnership will establish and
maintain minimum working capital reserves for the Partnership in the amount of
1.0% of Gross Proceeds, or at a higher level if the General Partner deems
appropriate. Such working capital reserves will be augmented from revenues
derived from Partnership operations. Funds allocated to such reserves will be
available for operating and maintenance expenses, capital expenditures, repairs,
replacements, contingencies, lessee defaults and other costs and expenditures
relating to Equipment.
SALES OF LEASE RECEIVABLES AND RESIDUAL VALUES
From time to time, the General Partner may receive offers from persons
desiring to purchase the future rental income under certain of the leases in the
Partnership's Lease Portfolio ("lease receivables"). If the General Partner
decides to accept such an offer on behalf of the Partnership, the Partnership
will sell
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the lease receivables to unaffiliated third parties that may include
institutional investors. The sale price of the lease receivable will be
determined on the basis of the aggregate present value of all rent payments to
become due under the subject leases discounted at a discount rate as negotiated
by the parties. The proceeds from such sales will generally be reinvested in
Equipment if the transaction occurs during the Operating Phase, but the General
Partner may decide, in its sole discretion, to distribute all or a portion of
such proceeds to the Limited Partners as Liquidating Distributions; provided,
however, that in such case sufficient cash will be distributed to the Limited
Partners to pay state and federal income tax, if any, created by such sale.
The General Partner may also sell the residual values of the Equipment or a
portion thereof to unaffiliated third parties. The General Partner will
determine the residual values of the Equipment, which will be discounted to its
present value at the time of sale. The entire sales proceeds (less the expenses
incurred by the General Partner relating to such sale) will be invested in
additional Equipment or the General Partner may decide, in its sole discretion,
to distribute all or a portion of such sales proceeds to the Limited Partners as
Liquidating Distributions; provided, however, that sufficient cash will be
distributed to the Limited Partners to pay state and federal income tax, if any,
created by such sale.
SALE OF EQUIPMENT
The General Partner will have the authority to sell, exchange or otherwise
dispose of Equipment on behalf of the Partnership. In considering whether to
hold or sell particular Equipment, the General Partner will evaluate, among
other things (i) the current and potential Partnership earnings from the
Equipment, (ii) conditions in the market for lease and sale of the Equipment and
the future outlook for such market, and (iii) the tax consequences of selling
rather than continuing to lease the Equipment. See "Reduced Revenues May Result
From Possible Lack of Demand for Equipment" under "Risk Factors" and
"Telecommunications Equipment Residual Values" above.
In general, the General Partner anticipates that the Partnership will hold
Equipment for approximately three and one-half to five years from the date of
acquisition. However, unforeseen circumstances might cause the General Partner
to elect to sell certain Equipment at an earlier or later time. Subject to
prevailing market conditions and other factors, the General Partner will have
complete discretion in determining the time, terms and conditions of the sale of
Equipment by the Partnership in the ordinary course of business, including in
connection with the Partnership's liquidation. See "Competition with the General
Partner and Affiliates" and "Transactions with the Partnership" under "Conflicts
of Interest." Payment of resale fees on liquidation of Equipment is prohibited.
If any income results from the sale of Equipment, the General Partner will
make a diligent effort to generate cash for distribution so that Limited
Partners are able to pay state and federal income tax on their share of income
resulting from such sale (assuming a combined federal and state income tax rate
for Limited Partners of 40.0% in 1997 and the years thereafter).
The General Partner anticipates that most sales of Equipment will be for
cash, although it may determine that it is in the best interests of the
Partnership to make an installment sale or to provide other purchase-money
financing. The terms of such purchase-money financing will require payment in
full in no more than twelve months. The proceeds of any sale or other
disposition of Equipment (including any disposition resulting from the total or
partial destruction of Equipment) will first be used or set aside by the General
Partner to pay all expenses related to the disposition, including leasing
commissions. The remaining proceeds may be used or set aside for such other
Partnership purposes as the General Partner deems appropriate. The Partnership
may invest available Partnership cash in additional Equipment at any time during
the Partnership's Operating Phase (up to five years from the Closing Date).
Partnership receipts from operations will be distributed as described under
"Cash Distributions and Redemptions."
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DEMAND FOR EQUIPMENT
The economic return from an investment in the Partnership will depend in
large part upon the future demand for Equipment acquired by the Partnership.
This future demand will affect the future lease rates for Equipment, the
availability of financing and the prices at which the Partnership will
ultimately be able to sell Equipment.
The demand for Equipment in general, and used Equipment in particular, may
be affected by a number of factors, including such factors as general business
conditions, conditions in the credit markets, market conditions which may reduce
or increase the supply of new Equipment, technological developments,
improvements by manufacturers, and legislative and regulatory changes affecting
the costs and benefits of owning or operating Equipment.
EQUIPMENT ACQUISITIONS
Before and during the offering of the Units, the General Partner, on behalf
of the Partnership, may acquire and lease Equipment or enter into agreements to
acquire and lease Equipment.
After the Initial Admission Date, the General Partner will transfer to the
Partnership such acquired Equipment, if any, and all of its rights and
obligations under all leases concerning such acquired Equipment. The
consideration for such transfer shall be the payment by the Partnership to the
General Partner of an amount equal to the General Partner's cost of the
Equipment, which shall include the reasonable, necessary and actual expenses
incurred by the General Partner, as determined in accordance with generally
accepted accounting principles, in holding title to equipment on a temporary or
interim basis. The General Partner will receive and hold for the benefit of the
Partnership all lease payments made on Equipment leases during the period from
the acquisition of the acquired Equipment until its transfer to the Partnership.
Any lease payments made to the General Partner during the holding period on such
acquired Equipment ultimately transferred to the Partnership will be offset by
the General Partner's cost plus carrying charges, and then remitted to the
Partnership. Equipment acquired by the General Partner for transfer to the
Partnership will generally not be held by the General Partner for more than six
months.
For convenience in the acquisition of Equipment, during the offering of the
Units and during the organization phase the General Partner may continue to
acquire and lease Equipment for the benefit of the Partnership. Such Equipment
will be transferred to the Partnership on the same terms as set forth in the
preceding paragraph.
The Partnership shall not acquire equipment from a limited or general
partnership, joint venture, unincorporated association or similar organization
in which the General Partner has an interest, other than the General Partner.
The Partnership may not acquire Equipment in exchange for Units.
See "Investment Objectives and Policies," "Conflicts of Interest" and
"Fiduciary Responsibility of the General Partner" for a discussion of some
concerns relating to the Partnership's purchase of Equipment.
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT
The rights and obligations of the Partners in the Partnership will be
governed by a limited partnership agreement ("Partnership Agreement") in the
form attached to this Prospectus as Exhibit A.
Certain provisions of the Partnership Agreement have been described
elsewhere in this Prospectus. With regard to compensation to be paid to the
General Partner, see "Compensation of the General Partner and Affiliates;" with
regard to various transactions and relationships between the Partnership and the
General Partner, see "Conflicts of Interest;" with regard to the management of
the Partnership, see "Management;" with regard to reports to be furnished to
Limited Partners, see "Reports to Limited Partners;" and with regard to
distributions of cash to the Partners and the rules governing redemption of
Units by the Partnership, see "Cash Distributions and Redemptions."
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The Limited Partners do not have a right to receive appraisal or dissenters'
rights.
The following briefly summarizes all material provisions of the Partnership
Agreement which are not referred to below as being described elsewhere in this
Prospectus. All statements made below and elsewhere in this Prospectus relating
to the Partnership Agreement do not purport to be complete and are qualified in
their entirety by reference to the form of Partnership Agreement attached to
this Prospectus as Exhibit A.
PARTNERSHIP CAPITAL
Capital Contributions by Partners to the Partnership will consist of: (i)
the $10,000 contributed by the General Partner, which will be treated as if the
General Partner had purchased 10 Units; and (ii) the sums to be contributed by
the Limited Partners for their Units in the Partnership ($1,000 per Unit).
Except for interest earned on a Limited Partner's subscription monies held in
escrow which will be paid to the Limited Partner at the time of the first
distribution to the Limited Partner), no Limited Partner will be entitled to
interest on his Capital Contribution or on his Capital Account. Except as
described under "Temporary Investments; Return of Uninvested Net Proceeds" under
"Investment Objectives and Policies" and "Cash Distributions and Redemptions,"
no Limited Partner will have the right to withdraw or to receive any return of
his Capital Contribution, and no Limited Partner is entitled to receive property
other than cash in return for a Capital Contribution. The price of $1,000 per
Unit was arbitrarily set by the General Partner.
PARTNERSHIP ALLOCATIONS
1. GENERAL. Payments of Operating Distributions and allocations of Net
Income and Net Loss will be governed by the provisions of Articles XI and XII of
the Partnership Agreement. These provisions are complex and should be reviewed
with care by prospective investors. See "Cash Distributions and Redemptions."
2. ALLOCATION OF NET LOSS AND NET INCOME. Any Partnership Net Loss at the
end of a taxable year will be allocated to the Partners to the extent of their
positive Capital Accounts. Any additional Partnership Net Loss will be allocated
to the General Partner. Any Partnership Net Income will first be allocated to
Partners with negative Capital Accounts in proportion to, and to the extent of,
such negative Capital Accounts. Except as provided below, any Partnership Net
Income will then be allocated to the Partners. During the Liquidating Phase of
the Partnership, Net Income earned that results in Partnership assets to be
distributed 80.0% to the Limited Partners and 20.0% to the General Partner will
be allocated 80.0% to the Limited Partners and 20.0% to the General Partner.
Net Income or Net Loss allocated to the Limited Partners (and to the General
Partner to the extent of its $10,000 contribution (10 Units)) will be
apportioned among them based on the number of Units held and on the number of
days within the fiscal year that they were Limited Partners.
VOTING RIGHTS OF LIMITED PARTNERS
The Limited Partners will not be able to participate in the management or
control of the Partnership. However, Limited Partners holding a majority of the
outstanding Units of the Partnership, without the necessity of concurrence by
the General Partner, may vote to (i) amend the Partnership Agreement, (ii)
remove the General Partner and elect a successor, (iii) dissolve the
Partnership, and (iv) approve or disapprove any proposal by the General Partner
to sell all or substantially all of the assets of the Partnership outside the
ordinary course of the Partnership's business. A sale of substantially all of
the Partnership's assets will be considered to be a sale of "all or
substantially all of the assets of the Partnership outside the ordinary course
of the Partnership's business" if the Equipment being sold is being sold other
than as part of the orderly liquidation and winding up of the Partnership, but
this definition does not include a sale of lease receivables or residual values
unless the sale at issue constitutes all or substantially all of the
Partnership's assets.
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Any amendment to the Partnership Agreement that modifies the compensation or
distributions to which the General Partner is entitled, or which increases the
duties of the General Partner, requires the consent of the General Partner. In
addition, no amendment may be made to the Partnership Agreement which alters the
rights of a Terminated Partner to receive fees and payments, or adversely
affects the status of the Partnership as a partnership for federal tax purposes.
Without the concurrence of Partners holding a majority of the outstanding
Units, the General Partner may not (i) amend the Partnership Agreement, except
for those amendments that do not affect the rights of the Limited Partners, (ii)
withdraw as General Partner, (iii) appoint a new general partner, (iv) sell all
or substantially all of the assets of the Partnership outside the ordinary
course of the Partnership's business, (v) dissolve the Partnership other than in
accordance with the provisions of the Partnership Agreement, or (vi) transfer
the General Partner's interest in the Partnership except as provided in the
Partnership Agreement.
The Partnership Agreement provides that Limited Partners owning 10.0% of the
Units may call a meeting to propose a vote on matters on which the Limited
Partners may vote. A majority of the votes entitled to be cast will be required
to pass any such proposal.
Limited Partners and their designated representatives will be permitted
access to all records of the Partners at the principal place of business of the
Partnership upon reasonable notice and during reasonable business hours, and
will have the right to make copies thereof at their own expense. Upon written
request, without restriction, a Limited Partner may, in person or by mail,
obtain a list of the names and addresses of all of the Limited Partners of the
Partnership for any purpose.
LIABILITY OF PARTNERS TO THIRD PARTIES
The General Partner will be liable for all general obligations of the
Partnership to the extent not paid by the Partnership. However, the General
Partner may provide in any Partnership contract that the General Partner will
have no individual liability for Partnership obligations (i.e., that such
obligations are to be "non-recourse" obligations).
The Partnership Agreement provides that, except as provided by law, no
Limited Partner will be personally liable for the obligations of the Partnership
beyond the amount committed by such Limited Partner to the capital of the
Partnership. However, there is a risk that the Limited Partners may become
personally liable for certain Partnership obligations if they act so as to take
part in the control of the Partnership business. Moreover, if the Partnership is
unable to meet its obligations, the Limited Partners might be obligated to
return, with interest, certain cash distributions previously received by them.
See "Limited Partners May Have an Obligation to Repay Certain Distributions"
under "Risk Factors."
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement provides that the General Partner or its
Affiliates performing services on behalf of the Partnership will not be liable
to the Partnership or the Limited Partners for any act performed or omitted to
be performed by them in connection with the activities of the Partnership or in
dealing with third parties on behalf of the Partnership if the General Partner,
in good faith, determined that such course of conduct was in the best interest
of the Partnership, and such act or omission does not constitute fraud,
negligence, breach of fiduciary duty or misconduct. The Partnership Agreement
provides that the General Partner, or its Affiliates performing services on
behalf of the Partnership will be indemnified by the Partnership for any
liabilities incurred by them arising from acts performed or omitted to be
performed by them that were determined in good faith by the General Partner to
have been in the best interest of the Partnership in connection with the
activities of the Partnership or in dealing with third parties on behalf of the
Partnership. The indemnification shall include attorneys' fees (which may be
paid as incurred subject to certain restrictions) and any amounts expended in
the investigation or settlement of any claims, except for
68
claims with respect to acts or omissions which constitute fraud, negligence,
breach of fiduciary duty or misconduct.
The General Partner or any of its Affiliates and any person acting as a
broker-dealer who performs services on behalf of the Partnership, or in
connection with its business, will not be indemnified against any liability,
loss or damage incurred by them in connection with any claim or settlement
alleging federal or state securities law violations, unless such lawsuits
alleging such claims are successfully defended and a court approves
indemnification of litigation costs, or unless such lawsuits are dismissed with
prejudice on the merits, or unless such lawsuits are settled and a court
approves the settlement and the indemnification. The General Partner will
apprise the court of the positions of the SEC and State Administrators with
respect to indemnification before seeking court approval for indemnification,
whether such claims are litigated, dismissed or settled.
Advances of attorneys' fees and costs will not be permitted for
indemnification suits unless the action relates to the performance of duties or
services by the General Partner or its Affiliates on behalf of the Partnership,
or in connection with the Partnership's business, the claim against which
indemnification is sought is not made by a Limited Partner and the indemnified
party undertakes to repay within 90 days the advanced funds to the Partnership
in cases in which they would not be entitled to indemnification. Advances of
attorneys' fees will not be permitted for an indemnification suit unless, prior
to receiving such advances, the General Partner obtains an opinion of
independent legal counsel that indemnification will be appropriate. If it is
later determined that indemnification was not appropriate, the General Partner
must repay any advances received by it, with interest.
The Partnership Agreement provides that the Partnership will not incur the
cost of that portion of any insurance which insures any party against any
liability, the indemnification of which is prohibited by the Partnership
Agreement.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Article XVII of the Partnership Agreement grants Limited Partners the right
to remove the General Partner and elect a successor General Partner, provided
the successor General Partner is admitted to the Partnership effective
immediately prior to the effective date of the removal of the General Partner.
Such action may be taken without concurrence by the General Partner as long as
approval is obtained from Limited Partners owning a majority of the outstanding
Units. Also, Limited Partners owning a majority of the outstanding Units may
admit a successor general partner upon the resignation or withdrawal of the
General Partner.
DISSOLUTION AND LIQUIDATION
The Partnership will be dissolved on December 31, 2012, or earlier upon the
occurrence of any of the following events: (i) the vote by Limited Partners
holding a majority of the Units then outstanding in favor of any proposal to
dissolve the Partnership in accordance with the Partnership Agreement; (ii) the
withdrawal, bankruptcy, or dissolution and liquidation or other cessation to
exist as a legal entity of the General Partner (unless any successor General
Partner elected in accordance with the provisions of the Partnership Agreement
elects to continue the business of the Partnership); (iii) the final
distribution of all Liquidating Distributions among the Limited Partners
pursuant to the Partnership Agreement; or (iv) the other sale or disposition of
all or substantially all of the assets of the Partnership without the subsequent
use of disposition proceeds for Investment in Program Assets.
Upon the dissolution of the Partnership, the General Partner will liquidate
the Partnership's assets and distribute the proceeds thereof in accordance with
the provisions of the Partnership Agreement.
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AMENDMENT
Subject to the voting rights granted to the Limited Partners in paragraph
17.2 of the Partnership Agreement, and the restrictions on the General Partner's
voting rights in Paragraph 16.3.20 of the Partnership Agreement, the General
Partner may amend the Partnership Agreement without the consent or vote of any
of the Limited Partners (i) to reflect the addition or substitution of Limited
Partners or the reduction of the Capital Accounts upon the return of capital to
Partners, (ii) to add to the representations, duties or obligations of the
General Partner or its Affiliates, or surrender any right or power granted to
the General Partner or its Affiliates therein, for the benefit of the Limited
Partners, (iii) to cure any ambiguity, correct or supplement any provision
therein, or add any other provisions with respect to matters or questions
arising under the Partnership Agreement which will not be inconsistent with the
provisions of the Partnership Agreement, (iv) to delete or add any provision
from or to the Partnership Agreement requested to be so deleted or added by the
staff of the SEC or by a state regulatory agency, the deletion or addition of
which provision is deemed by such staff or regulatory agency to be for the
benefit or protection of the Limited Partners, (v) to modify any provision of
the Partnership Agreement, if, in the opinion of counsel to the Partnership and
the General Partner, such modification is necessary to cause the allocations
contained in Article XII of the Partnership Agreement to have "substantial
economic effect" in accordance with any regulations relating to Section 704 of
the Code or any other statutory provision or regulation relating to such
allocations, and (vi) to modify any provision of the Partnership Agreement, if,
in the opinion of counsel to the Partnership and General Partner, such
modification is necessary to cause the Partnership not to be characterized as a
"publicly traded" partnership for federal income tax purposes. The General
Partner may not under Paragraph 16.1.12 of the Partnership Agreement amend the
Partnership Agreement to modify voting rights of the Limited Partners.
APPOINTMENT OF THE GENERAL PARTNER AS ATTORNEY-IN-FACT
Each purchaser of Units will irrevocably constitute and appoint the General
Partner his true and lawful attorney-in-fact, with power and authority to act in
his name and on his behalf to execute, acknowledge and file such instruments as
the General Partner determines to be necessary or appropriate to implement the
provisions of the Partnership Agreement.
PRINCIPAL OFFICE OF THE PARTNERSHIP
The principal business office of the Partnership is located at 100 Second
Street, SE, Cedar Rapids, Iowa 52401, (319) 365-2506, unless changed by the
General Partner. The business of the Partnership also may be conducted at such
additional places as the General Partner may determine.
APPLICABLE LAW
The Partnership Agreement will be construed and enforced in accordance with
the laws of the State of Iowa.
TRANSFERABILITY OF UNITS
Limited Partners will have the right to assign one or more Units by a duly
executed written instrument of assignment in a form satisfactory to the General
Partner in accordance with the provisions of the Partnership Agreement. See, in
particular, Article XIII of the Partnership Agreement.
As a result of adverse tax consequences that would result if the Partnership
were characterized as "publicly traded" (see "Tax Consequences"), the General
Partner will not allow transfers of Units if, in the opinion of Counsel to the
Partnership, such transfer would result in the Partnership being characterized
as a "publicly traded" partnership for federal income tax purposes.
In addition, the General Partner will not allow transfers of Units if, in
the opinion of Counsel to the Partnership, such transfer would result in the
assets of the Partnership being considered by law to be assets
70
of employee benefit plans investing in Units and therefore subjecting those
assets to the fiduciary standards of ERISA. Further, as a general rule, the
General Partner will not permit transfers except in infrequent and compelling
situations as determined in its sole and absolute discretion, and only if
following such transfer at least 75.0% of the outstanding Units are held by
persons who are not either Employee Benefit Plans or IRAs.
In those circumstances where the General Partner allows a transfer, an
Assignee will be entitled to receive distributions from the Partnership
attributable to the Units acquired by reason of an assignment from and after the
effective date of the assignment of such Units to him. Moreover, the Partnership
and the General Partner will be entitled to treat the assignor of such Units as
the absolute owner thereof in all respects and will incur no liability for
allocations of income, loss or distributions, or transmittal of reports and
notices required to be given to Limited Partners or their assignees hereunder,
which are made in good faith to such assignor, until such time as the written
instrument of assignment has been received by the Partnership and the effective
date of the assignment of Units has passed. Unless the General Partner, the
assignor and the Assignee otherwise agree, the effective date of an assignment
of Units will be the later of the first day of the month next succeeding the
date on which the Partnership obtains the instrument of assignment that complies
with the requirements of the Partnership Agreement, provided the other
conditions to such assignment becoming effective are satisfied.
Any assignment of Units must be in compliance with all applicable rules of
governmental authorities, including the registration and suitability provisions
of applicable state securities laws. Any assignment of Units in contravention of
any of the provisions of the Partnership Agreement will be void and ineffectual
and will not bind or be recognized by the Partnership.
An Assignee of Units may become a Substitute Limited Partner in the place of
the assignor upon compliance with the requirements of Article XIV of the
Partnership Agreement. Any Substitute Limited Partner must agree to be bound by
the provisions of the Partnership Agreement. The General Partner will cause the
Partnership Agreement to be amended to reflect the substitution of Limited
Partners at least once each calendar quarter.
All costs and expenses incurred by the Partnership in connection with an
assignment of Units, including a transfer fee to the General Partner, are
required to be paid by the assigning Limited Partner provided that such transfer
fee will not exceed the lesser of $150 or the actual, necessary and reasonable
expenses of such transfer.
The General Partner may buy and sell Units in the Partnership for its own
account, provided that any Units purchased by the General Partner will not be
purchased with a view toward resale and will not be counted in determining
whether the Partnership has raised the minimum Gross Proceeds of $1,200,000.
There is no maximum number of Units the General Partner may purchase. Except as
provided in Paragraph 18.5 of the Partnership Agreement, which limits the voting
rights of the General Partner as to Units owned by the General Partner, the
General Partner will, with respect to any Units owned by it, enjoy all of the
rights and be subject to all of the obligations and duties of a Limited Partner.
See "Cash Distributions and Redemptions--Redemption of Units." Neither the
General Partner nor the Partnership may be required to purchase or redeem Units.
ROLL-UP PROTECTION
The Partnership (and the General Partner) has no intent to engage in any
transaction involving the acquisition, merger, conversion into a corporation or
other form of business organization or consolidation, either directly or
indirectly, of the Partnership with any other entity ("Roll-Up"). The
Partnership Agreement sets forth certain restrictions in regard to a Roll-Up.
Initially, the Partnership Agreement requires that an appraisal of all
Partnership assets shall be obtained from an Independent Expert in connection
with a proposed Roll-Up. Additionally, the Partnership Agreement provides
certain rights to Limited Partners who vote "no" in connection with a proposed
Roll-Up that provides such Limited Partners the choice of: (i) accepting the
securities of the Roll-Up Entity offered in the proposed Roll-Up;
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or (ii) one of the following: (a) remaining as Limited Partners in the
Partnership and preserving their interests therein on the same terms and
conditions as existed previously (If a significant number of Limited Partners
elect to accept the securities of the Roll-Up Entity, the effect on investors
who elect to remain as Limited Partners may be a substantial dilution of their
claim to assets and their voting rights.); or (b) receiving cash in an amount
equal to such Limited Partners' pro-rata share of the appraised value of the net
assets of the Partnership. The Partnership Agreement also restricts the ability
of the Partnership to engage in a Roll-Up that would adversely affect the
democracy rights and voting rights of the Limited Partners or that would
materially frustrate the accumulation of shares by any purchaser of the
securities of a Roll-Up Entity. The Partnership Agreement also restricts the
ability of the Partnership to participate in a proposed Roll-Up in which the
Limited Partners' rights of access to records would be less than currently
provided under the Partnership Agreement, or that would require the Partnership
to bear the costs of a proposed Roll-Up that is not approved by the Limited
Partners.
CASH DISTRIBUTIONS AND REDEMPTIONS
CASH DISTRIBUTIONS
1. ALLOCATION OF DISTRIBUTIONS, PROFITS AND LOSSES. A Partner's share of
profits, losses and Operating Distributions to Partners (distributions of up to
9.6% annually made during the Operating Phase) will be based upon the amount of
each Partner's Adjusted Capital Contribution (a Partner's Capital Contribution,
reduced by all payments to the Partner that qualify as a Liquidating
Distribution or return of capital) and each Limited Partner's Admission Date
(the date a Limited Partner is admitted to the Partnership). Separate Capital
Accounts (accounts for record and income tax purposes) will be kept for each
Partner. Accordingly, Limited Partners who invest the same amount in the
Partnership but make such investments on different dates will be allocated
different shares of Partnership profits and losses and receive different amounts
of cash distributions.
2. OPERATING DISTRIBUTIONS. To the extent there is Cash Flow (generally,
cash provided from operations less cash used to pay expenses and debt payments,
to establish reserves or to pay for capital improvements and replacements), the
Partnership intends to make Operating Distributions during the Operating Phase
(the period beginning with the date the Partnership's registration statement is
effective with the SEC and ending with the date the Partnership commences
liquidation). Operating Distributions will be made monthly during the Operating
Phase and, to the extent made, will be in the following order of priority:
a. GENERAL PARTNER'S EXPENSE REIMBURSEMENT. The General Partner shall
be reimbursed on a monthly basis for the administrative services it provides
to the Partnership. The expenses reimbursed shall be the lesser of the
General Partner's cost or the amount the Partnership would be required to
pay for comparable administrative services provided in the same geographic
area by persons who are not Affiliates of the General Partner. The expenses
reimbursement shall include, but not be limited to, salaries paid to
employees of the General Partner working on Partnership business, record
keeping, mailings to Limited Partners and an allocable portion of computer
time and expense, telephone and supplies. Reimbursement for costs of goods
and materials will be only for goods and materials obtained from independent
third parties. The reimbursement will be for expenses which are necessary
for the prudent operation of the Partnership. There is no dollar limitation
on the amount of expenses that may be reimbursed to the General Partner.
There will be no reimbursement for time expended by Controlling Persons of
the General Partner or its Affiliates. The costs reimbursed to the General
Partner and its Affiliates will be the subject of a "Special Report"
prepared by independent certified public accountants;
b. OPERATING DISTRIBUTION. To the extent there is additional Cash
Flow, Partners will receive Operating Distributions to Partners during the
Operating Phase only. Such distributions will be up to 9.6% annually
(payable in monthly distributions of up to .8% to each Partner), calculated
on the
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Partner's Adjusted Capital Contribution (a Partner's Capital Contribution,
reduced by all payments to the Partner that qualify as a Liquidating
Distribution or return of capital); and
c. MANAGEMENT FEE. Of the Gross Rental Payments, loan payments and
other payments received by the Partnership each year on account of its
leasing and financing activities, 2.0% will be paid to the General Partner
as a Management Fee (the management fee paid to the General Partner, see
"Compensation of the General Partner and Affiliates"). The fee will be
payable on a monthly basis, subject to reduction in certain circumstances,
as described below. The fee will not be paid on a current basis (but will
accrue and accumulate) if the Partnership has not (i) made Operating
Distributions to the Limited Partners equal to 9.6% annually of their
Adjusted Capital Contributions for the portion of the year to the date of
the proposed payment, and (ii) paid the General Partner's expenses (amounts
paid to cover the General Partner's expenses, see "Cash Distributions and
Redemption") for the year.
To the extent funds are not distributed to the Partners during the Operating
Phase, the Partnership will reinvest funds received by it in additional
Equipment for lease, which is expected to increase the Partnership's portfolio
of assets. Reinvestment of proceeds resulting from the sale or refinancing of
Equipment may take place only if sufficient cash will be distributed to pay
state and federal income tax (assuming Partners are in a 40.0% tax bracket)
created by the sale or refinancing of such Equipment. There can be no assurance,
however, that Limited Partners will receive the return of their full investment
at the time all Equipment is sold and the Partnership is terminated. See
"Conflicts of Interest."
All Partnership Cash Available for Distribution not distributed as Operating
Distributions will be reinvested in Program Assets unless the General Partner
decides to make an earlier distribution of Partnership Cash Flow (which, if made
to Limited Partners, would then be treated as Liquidating Distributions if such
distribution were in excess of the 9.6% return discussed above). Payment by the
Partnership of commissions on any such distribution is prohibited.
3. DISTRIBUTIONS ON LIQUIDATION AND WINDING UP. The Partnership will cease
reinvesting in Program Assets and will not enter into additional leases during
the Liquidating Phase. The Liquidating Phase shall begin at any time after three
and one-half years following the Closing Date (or earlier if the General Partner
determines it to be in the Partnership's best interest), but no later than the
fifth anniversary of the Closing Date of the offering. During the Liquidating
Phase, the Partnership will proceed with all due and deliberate speed and care
to wind up the Partnership's affairs and to convert all of the Partnership's
assets into cash. Operating Distributions will not be paid during the
Liquidating Phase.
During the Liquidating Phase, amounts available to be distributed among the
Partners after satisfaction of all Partnership liabilities and obligations
and/or the provision of reserves for future or contingent Partnership
liabilities will be distributed in order of priority as follows (and, with
respect to items "Third" and "Sixth", will constitute "Liquidating
Distributions"):
First, payment of the General Partner's expense reimbursement;
Second, payment to the Partners, to the extent necessary to pay to the
Partners during the term of their investment in the Partnership, Operating
Distributions of 8.0% annually (on a cumulative, compounded daily basis) on
their Adjusted Capital Contributions. The computation of each Partner's 8.0%
annual cumulative return is illustrated by the following example: On a
Partner's $2,500 investment, a $250 distribution in year one would result in
a $50 reduction in the Partner's Adjusted Capital Contribution, leaving an
Adjusted Capital Contribution of $2,450 upon which the 8.0% return would be
calculated in year two. The $50 reduction consists of $50 in distributions
in excess of that required to satisfy the 8.0% cumulative return
requirement. A $250 distribution in year two would result in a $54 reduction
in the Partner's Adjusted Capital Contribution, leaving an Adjusted Capital
Contribution of $2,396 upon which the 8.0% return would be calculated in
year three;
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Third, payment to the Partners of 100.0% of their Adjusted Capital
Contributions to the Partnership;
Fourth, payment to the Partners to the extent they have not received,
during the term of their investment in the Partnership, distributions
totaling 9.6% annually (calculated only through the end of the Operating
Phase), non-compounded, on their Adjusted Capital Contributions (as
calculated from time to time);
Fifth, payment to the General Partner of any unpaid arrearages in its
Management Fee subject to reduction in certain circumstances as described
herein; and
Sixth, payment of any remaining amounts will be made 80.0% to the
Limited Partners and 20.0% to the General Partner; provided, however, the
General Partner will not receive its share of these remaining amounts until
such time as the Limited Partners have received Operating Distributions and
Liquidating Distributions equal to their Capital Contributions plus 9.6%
annually (calculated only through the end of the Operating Phase)
non-compounded, on their Adjusted Capital Contributions.
For a more complete description of the cash payments which may be made to
the Limited Partners, see Article XI of the Partnership Agreement.
4. OTHER IMPORTANT INFORMATION REGARDING DISTRIBUTIONS. Investors should
take note of the following:
a. EXPENSE REIMBURSEMENTS. Direct Partnership administrative expenses
will be paid directly by the Partnership. Expenses incurred by the General
Partner that are properly allocable to the Partnership and direct expenses
advanced by the General Partner on behalf of the Partnership will be
reimbursed by the Partnership to the General Partner. See "Compensation of
the General Partner and Affiliates."
b. NO EQUIPMENT ACQUIRED. The Partnership has not acquired any
Equipment or leases as of the date of this Prospectus. Accordingly, no
assurance may be given that the Limited Partners will realize the returns
discussed above.
c. DISTRIBUTIONS MAY BE TREATED EITHER AS A RETURN "ON" INVESTORS'
CAPITAL OR AS A RETURN "OF" INVESTORS' CAPITAL. The General Partner plans
to pay Operating Distributions monthly during the Operating Phase. Operating
Distributions will equal 9.6% of each Partner's Adjusted Capital
Contributions annually to the extent the Partnership has Cash Flow for such
purposes, as described in 2(b) above. Because the payment of Operating
Distributions is dependent upon Cash Flow, there is no guarantee that the
Partnership will pay Operating Distributions of 9.6% of each Partner's
Adjusted Capital Contribution, or of any amount, annually, or ever. The
General Partner intends that Operating Distributions will normally be a
return "on" Partners' capital and will treat them as such. Distributions
during the Operating Phase will exceed 9.6% annually only if the General
Partner determines that the Partnership has funds that the General Partner
believes cannot prudently be invested either in additional Equipment for
lease or in financings, in which case such excess will be treated as a
return "of" the Partners' original investment. It is possible, but not
likely, that such excess distributions will occur. Generally, the General
Partner intends that a return "of" Partners' original investment will occur
only during the Liquidation Phase and only after Partners have received the
distributions discussed in the Second and Fourth paragraphs under section 3,
above. Ultimately, however, Partners will not know whether they have
received a return "of" their investment and/or a return "on" their
investment until the Partnership is finally liquidated. Partners will have
received a return "of" their Capital Contributions only when they have
received distributions equal to their Capital Contributions. Any
distributions in excess of each Partner's Capital Contribution will be a
return "on" capital.
d. NO IN KIND DISTRIBUTIONS. The Partnership will not make
distributions in kind to any Partner.
e. CONTINUED MANAGEMENT FEES. If the Partnership sells lease
receivables to an unaffiliated third party, the purchasing party may request
or require that the Partnership continue to manage those leases and
Equipment as a condition to the sale, and such party will pay fees to the
Partnership
74
for such management. See "Sale of Lease Receivables and Residual Values"
under "Investment Objectives and Policies." Fees paid to the Partnership by
such party shall be the property of the Partnership. However, if the General
Partner continues to provide the Partnership with services with respect to
the Equipment underlying such lease receivables sold, the General Partner
will continue to receive from the Partnership its Management Fee as a
percentage of the Gross Rental Payments on such lease receivables sold.
Notwithstanding the foregoing, the General Partner will not receive a
Management Fee on an annual basis in an amount greater than the amount the
General Partner is entitled to receive as a percentage of Gross Rental
Payments on the Equipment leases under the terms of the Partnership
Agreement.
REDEMPTION OF UNITS
At anytime after December 31, 1999, a Limited Partner or his successor has
the right to make a written request to the Partnership for redemption of all or
any portion of the Limited Partner's Units. However, a Limited Partner must
request the redemption of all of his Units if he will retain fewer than two
Units. The redemption will only be made to the extent permitted by applicable
laws and regulations and if, in the opinion of the General Partner it is in the
best interest of the Partnership. The General Partner will redeem Units (if at
all) only in extenuating circumstances. The Partnership Agreement prohibits the
General Partner from redeeming over the life of the Partnership more than 5.0%
of the total Units initially issued, or in any given year more than 1.0% of the
total Units initially issued. The General Partner will not allow redemptions of
Partnership Units if, in the opinion of counsel to the Partnership, such
redemptions could result in the Partnership being characterized as a "publicly
traded" partnership. See "Publicly Traded Partnerships" under "Tax
Consequences."
The General Partner will, in its sole discretion, decide whether a
redemption is in the best interest of the Partnership and whether the
circumstances surrounding the redemption are extenuating. The General Partner is
not required to provide any reason for the denial of a redemption request. To
the extent the General Partner determines to honor any requests, the General
Partner will honor acceptable requests for redemptions in the order received by
the General Partner per quarter. Any requests denied may be resubmitted in a
later quarter. Only in extenuating circumstances will a later request be honored
over an earlier one received in a quarter. The General Partner must accept or
deny a written request for redemption of Units within a reasonable time after
receipt of the request. If such request is accepted by the General Partner, the
General Partner will provide written notice of its acceptance of the request for
redemption. Such notice will state the redemption price determined by the
General Partner.
The redemption price per Unit will equal the Redemption Value of Investor's
Units tendered by the Limited Partners as determined under the Partnership
Agreement as of the last day of the fiscal quarter prior to the quarter during
which the redemption request is received. The Redemption Value of Investor's
Units means the investor's Capital Account valued by the General Partner as of
the last day of the fiscal quarter prior to the quarter during which the
redemption request is received. Upon receipt of such notice, the Limited Partner
must immediately tender the Units and the Partnership will pay the redemption
price for the tendered Units within 60 days after the end of the quarter in
which the redemption request was received by the Partnership, provided that a
Limited Partner may withdraw its request for redemption of its Units within 30
days of its receipt of written notice of the General Partner's acceptance of its
request for redemption.
The General Partner intends to use excess Cash Flow as the source of funds
for any redemptions. The Partnership will not maintain reserves for the
redemption of Units. Therefore, the ability of the Partnership at any time to
redeem Units will depend upon, among other things, the availability of excess
Cash Available for Distribution, the number of Limited Partners requesting
redemption, the potential dilution of the remaining Limited Partners, and the
potential adverse tax consequences to the Partnership. See "Conflicts of
Interest." Accordingly, no assurance may be given that the Limited Partners will
be able to participate in the redemption program.
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Upon any redemption or repurchase by the Partnership, the tendered Units
will be canceled and will no longer be deemed to represent interests in the
Partnership, and the interests of the Limited Partners (including the person
whose Units were redeemed) will thereupon be adjusted accordingly. Neither the
General Partner nor any of its Affiliates may participate in this redemption
program.
Gain or loss realized on the redemption of Units by a Limited Partner who is
not a "dealer" in securities and who has held such Units for more than one year,
generally will be long-term capital gain or loss, as the case may be, under
present tax laws. However, the proceeds of a sale or redemption will be taxed at
ordinary income rates to the extent of the portion of potential depreciation
recapture, substantially appreciated inventory and unrealized receivables
attributable to the Unit.
LIQUIDATION POLICIES
Subject to prevailing market conditions and other factors, the General
Partner intends to cause the Partnership to begin to dispose of all of its
Program Assets no sooner than three and one-half years and no later than five
years after the Closing Date. During the Operating Phase, the General Partner
may sell the residual values of the Equipment or a portion thereof. Upon such
sale, the General Partner may reinvest the sales proceeds therefrom (less the
expenses incurred by the General Partner relating to such sale) in additional
Program Assets or, in its sole discretion, distribute all or a portion of such
sales proceeds to the Limited Partners as Operating Distributions; provided,
however, that in either case, sufficient cash is distributed to the Limited
Partners to pay state and federal income tax, if any, created by such sale of
the Equipment. See "Sales of Lease Receivables and Residual Values" under
"Investment Objectives and Policies." Program Assets may be sold at any time if
sold in the ordinary course of business, or, if not in the ordinary course of
business, if in the judgment of the General
Partner and of the holders of a majority of the outstanding Units, it is in
the best interests of the Partnership to do so. However, the General Partner may
at any time cause the Partnership to dispose of all or substantially all of its
Program Assets in connection with the winding up and liquidation of the
Partnership. The determination of whether particular Program Assets should be
sold or otherwise disposed of will be made after consideration of relevant
factors (including, but not limited to, prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow, and federal income tax considerations) with a view
toward achieving the principal investment objectives of the Partnership.
As partial payment for Equipment sold, the Partnership may receive purchase
money obligations secured by liens on such Equipment. Except in the case of
sales in the ordinary course of business, no purchase money arrangement shall
have a term in excess of twelve months. The amount of such obligations will not
constitute funds available for distribution to Partners until and to the extent
the obligations are converted into cash, sold or disposed of in some other
manner. See also "Tax Consequences" for a discussion of the tax treatment of any
such purchase money obligations.
REPORTS TO LIMITED PARTNERS
The General Partner will mail to each Limited Partner the following reports
pertaining to Partnership operation during each fiscal year:
a QUARTERLY REPORT. A report of Equipment acquisitions made during
each quarter shall be sent to all Limited Partners within sixty (60) days
following the end of each quarter, until the proceeds of the offering are
fully invested or returned to the Limited Partners. Such reports shall
include, by way of illustration and not limitation, a statement of the
actual purchase price of Equipment, including terms of the purchase, a
statement of the total amount of cash expended by the Partnership to acquire
such items of Equipment (including and itemizing all commissions, fees,
expenses and the name of each payee), and a statement of the amount of
proceeds in the Partnership which remain unexpended or uncommitted.
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b TAX INFORMATION. Within 75 days after the end of each fiscal year,
all financial information regarding the Partnership necessary for use by the
Limited Partners in preparing their federal income tax returns; and
c ANNUAL REPORT. Within one hundred twenty (120) days after the end of
each fiscal year, an annual report containing: (i) a balance sheet as of the
end of the fiscal year and statements of income, partners' equity, and a
cash flow statement, for the year then ended, all of which shall be prepared
in accordance with generally accepted accounting principles and accompanied
by a report of independent auditor, and (ii) a breakdown of distributions to
Limited Partners for the period covered thereby separately identifying
distributions from: (1) cash flow from operations during the period (2) cash
flow from operations during a prior period which had been held as reserves,
(3) proceeds from disposition of Program Assets, and (4) reserves from the
gross proceeds of the offering originally obtained from the Limited
Partners.
For each piece of equipment acquired by the Partnership that individually
represents at least ten percent (10.0%) of the Partnership's total Investment in
Program Assets, the General
Partner shall include a status report as part of the annual report, which
status report shall indicate: (i) condition of the Equipment, (ii) how the
Equipment is being utilized as of the end of year (leased, operated, held for
lease, repair or sale), (iii) remaining term of leases, (iv) projected use of
the Equipment for next year (renew lease, lease, retire, or sell), and (v) such
other information relevant to the value or utilization of the Equipment as the
General Partner deems appropriate. The status report shall describe the method
used or basis for valuation.
Financial information contained in all reports to Limited Partners will be
prepared on an accrual basis of accounting in accordance with generally accepted
accounting principles and will include, where applicable, a reconciliation to
the information furnished to Limited Partners for federal income tax purposes.
The audited financial statements contained in the annual report will be
accompanied by a report of the firm of independent public accountants selected
by the General Partner.
Each annual and quarterly report will also contain a special report on
Equipment acquisitions made during the period covered by the report, including
(1) a description of each item of Equipment purchased, (2) a description of any
lease arrangements made with respect thereto and of each lessee, (3) the actual
purchase price and terms, (4) the amount of cash expended from Capital
Contributions to acquire each item of Equipment, and (5) the amount of Capital
Contributions which then remains unexpended, if any, stated in terms of both
dollar amount and percentage of the total amount of Capital Contributions
derived from the sale of the Partnership's Units. Similar reports will be
included for any additional Equipment acquired through reinvestment of
Partnership cash.
The General Partner will retain copies of all reports distributed to Limited
Partners. The Limited Partners will be permitted to examine all records of the
Partnership at the General Partner's offices upon reasonable notice during
reasonable business hours, and may make copies of such records at their own
expense.
MAINTENANCE OF RECORDS
The General Partner will maintain a record of any information it obtains
that indicates a Limited Partner meets the suitability standards employed in
connection with the offer and sale of Units and a representation of the Limited
Partner that he is purchasing for his own account. Such information will be
obtained from Limited Partners through the use of the Subscription Agreement
signed by each Limited Partner, which sets forth the prescribed suitability
standards in full and in which the Limited Partner represents that he meets such
suitability standards and is purchasing for his own account. However,
Subscription Agreements will not be the exclusive method of determining investor
suitability. Where the General Partner, the Managing Sales Agent or any Selected
Sales Agent has reason to believe that a Subscription Agreement does not assure
investor suitability, other methods of determining such suitability will be
employed.
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CAPITALIZATION
The capitalization of the Partnership as of the date of this Prospectus and
as adjusted to give effect to the sale of the minimum and maximum number of
Units available for sale is as follows:
AS OF DATE AS ADJUSTED AS ADJUSTED
OF FOR 1,200, FOR 25,000,
PROSPECTUS UNITS SOLD UNITS SOLD
------------ ------------ -------------
Long-Term Indebtedness:
Equipment Debt.................................. -- (1) (1)
General Partner's Capital
Contribution.................................... $ 10,000 $ 10,000 $ 10,000
Limited Partners'
Capital Contributions
($1,000 per Unit)(2)(3)......................... $ 1,000 $ 1,200,000 $ 25,000,000
- ------------------------
(1) In addition to the Capital Contributions of the Partners, the Partnership
intends to obtain additional funds for Investment in Program Assets through
incurring substantial secured indebtedness in connection with the
acquisition of Equipment. The principal amount of such indebtedness cannot
now be determined, but is limited to 40.0% of the Gross Proceeds of the
Offering. See "Investment Objectives and Policies."
(2) The amounts given are at $1,000 per Unit and before deduction of Front End
Fees.
(3) The amounts given include one Unit ($1,000) which has been purchased by the
Partnership's Initial Limited Partner in connection with the Partnership's
organization.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis provides information the General
Partner believes is relevant to an assessment and understanding of the
Partnership's operations and financial condition. This discussion should be read
in conjunction with the financial statement and related notes of the Partnership
appearing elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
As reflected under "Capitalization," the Partnership currently has limited
funds, since the capital anticipated to be raised by the Partnership through its
public offering of Units was not available on the date of this Prospectus. The
Partnership plans to raise funds from investors by means of this offering of
Units. Upon the sale of the minimum number of Units offered hereby (1,200
Units), the Partnership will invest the funds from the sale of such Units, as
well as funds raised from sales of additional Units, together with proceeds of
bank loans, in Program Assets. The application of funds toward the acquisition
of Program Assets will result in a decrease in cash. The effect of the decrease
in the Partnership's cash will, in the General Partner's view, be offset by the
income expected to be produced by Program Assets, including the leasing of
Equipment and the anticipated residual value of Equipment upon sale. The General
Partner anticipates that Partnership revenue sufficient to pay operating
expenses and provide cash distributions to Limited Partners will be derived from
the lease payments paid to the Partnership by Equipment lessees. There is no
assurance the Partnership will actually realize rental income or the residual
value of Equipment upon sale. In addition to borrowing to finance the
acquisition of Equipment, the Partnership may borrow funds for the purpose of
repairing, reconditioning and reconfiguring Equipment.
The General Partner plans to borrow an amount equal to up to 40.0% of the
Gross Proceeds of the Offering to finance Program Assets acquisition. The use of
borrowed funds will increase the capital resources available to the Partnership
and the amount of Program Assets the Partnership can acquire. The General
Partner anticipates borrowing funds at an interest rate lower than the effective
yield on leases. The use of borrowed funds to acquire Program Assets will result
in interest charges, which the General Partner believes will be offset by the
income expected to be produced by leasing the Equipment.
The Partnership does not have a commitment from a lender, and it is likely
that some Equipment will be acquired prior to obtaining loans. Although it is
likely that borrowed funds will be available to the Partnership, it is possible
that the interest rates available to the Partnership will not be attractive. In
that case, the Partnership may be precluded from borrowing funds or it may be
required to borrow at higher than anticipated rates. In either case, the result
will be a negative effect on the Partnership's cashflow, profitability, and
distributions.
The Partnership intends to establish initial working capital reserves of no
less than 1.0% of the Gross Proceeds, an amount which the General Partner
anticipates to be sufficient to satisfy general liquidity requirements to cover
operating costs of Equipment and the maintenance and refurbishment of Equipment.
See "Estimated Use of Proceeds." Thereafter, the General Partner intends to
maintain working capital reserves at a level it deems appropriate (but not below
1.0% of Gross Proceeds) from revenues derived from Partnership operations. See
"Financing" under "Investment Objectives and Policies."
As of the date of this Prospectus, the Partnership has not acquired any
Equipment and has not made any commitments to acquire Equipment. As a result,
the Partnership has no commitment for capital expenditures except the expenses
of this offering. The Partnership's capital needs are expected to undergo major
changes during its initial two years of operations as a result of the completion
of its public offering of Units and the acquisition of Equipment. Thereafter,
except for reinvestment of cash in additional Program Assets, the Partnership's
capital needs and resources are expected to be relatively stable over the
Partnership's operating period.
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For financial information with respect to the Partnership and the General
Partner, see "Financial Statements of the Partnership and the General Partner."
OPERATIONS
The Partnership has not yet commenced operations in accordance with the
investment objectives and policies described herein. See "Investment Objectives
and Policies." During the period of ownership of Equipment, the Partnership's
operations will consist principally of the ownership and leasing of Equipment.
After acquiring Equipment, the most significant events which will have an impact
on the Partnership's revenues will be those associated with the changes in
demand for the types of Equipment acquired by the Partnership and other economic
risks associated with the ownership and operation of Equipment. These risks
include decreases in the interest rates charged to potential lessees for the
acquisition of capital equipment, which may decrease the availability of leasing
opportunities. For a more detailed description of such uncertainties, see "Risk
Factors."
PLAN OF DISTRIBUTION
INTRODUCTION
Subject to the conditions set forth in this Prospectus, the Partnership is
offering an aggregate of up to 25,000 Units of limited partnership interest. A
minimum of 1,200 Units ($1,200,000) in the Partnership is being offered, with a
maximum of 25,000 Units ($25,000,000). Units are offered at a price of $1,000
per Unit. The minimum investment by a Limited Partner is two Units ($2,000).
Additional Units may be purchased in increments of $1,000. The General Partner
will not accept any subscription for a fractional interest in a Unit. The
General Partner may terminate the offering at any time for any reason.
BROKER-DEALERS AND THE SELLING AGREEMENTS
Units are being offered for sale by certain broker-dealers (the Managing
Sales Agent and Selected Sales Agents), all of whom are members of the NASD. The
broker-dealers are not obligated to purchase any Units, but are required only to
do their best to offer and sell Units on behalf of the Partnership. There is no
assurance that any of the Units will be sold. The offering will be managed by
the Managing Sales Agent (Berthel Fisher & Company Financial Services, Inc.), an
Affiliate of the General Partner. If the Partnership's minimum offering is
successfully completed, the Partnership will pay to the Managing Sales Agent a
Selling Commission of 9.0% of the total Units sold. The Managing Sales Agent
will in turn pay Selling Commissions to each Selected Sales Agent of 6.0% of the
Units sold through them (6.5% to Selected Sales Agents who sell more than
$1,000,000). The Partnership will pay accountable Organization and Offering
Expenses not to exceed 3.5% of Gross Proceeds.
The Managing Sales Agent may reallow from its Selling Commission to certain
Selected Sales Agents reimbursements for certain expenses incurred in their
selling efforts.
The total amount of all items of compensation from whatever source payable
to underwriters, broker/ dealers, or affiliates thereof, which are deemed to be
in connection with or related to the distribution of the offering shall not
exceed 10.0% of the Gross Proceeds. Mr. Berthel, the President of the parent
company of both the General Partner and the Managing Sales Agent (an Affiliate
of the General Partner), and certain employees of the Managing Sales Agent, will
participate in the activities related to the distribution of the Offering, and
will be paid from the Managing Sales Agent's sales commissions.
The Managing Sales Agent may offer desk-top gift items not exceeding $50 in
value as a sales incentive to registered representatives who sell a certain
number of Units. The Managing Sales Agent intends to comply with the provisions
of Rule 2810(b)(4)(E) of the Conduct Rules of the NASD with respect to any
incentive sales and bonus programs. In connection with any such sales and bonus
program either, (1) no person associated with a member of the NASD shall receive
non-cash compensation from a
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party other than the NASD member with which the person is associated, unless the
aggregate value of all such items given by the non-NASD member to the associated
person during the year will not exceed $100, (2) the non-cash compensation items
to be made available in connection with the Offering will be paid for by the
Managing Sales Agent, without reimbursement for such amounts by any other party,
either directly, or by increased compensation to the NASD member firm in
connection with the Offering.
The Selling Agreement provides that the General Partner and the Partnership
shall indemnify the participating broker/dealers against any losses, claims,
damages or liabilities arising out of (i) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus, any supplemental
literature or any blue sky application; or (ii) the omission or alleged omission
to state in the Prospectus or in any supplemental literature or in any blue sky
application a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Selling Agreement further provides that the
participating broker-dealers shall indemnify the General Partner and the
Partnership to the extent provided above and in addition, for the failure of the
participating broker-dealers to comply with the provisions of the Selling
Agreement which relate to the manner in which the Units are sold by such
participating broker-dealers.
Notwithstanding the foregoing, the Selling Agreement provides that the
participating broker-dealers will not be indemnified by the Partnership against
any liability, loss or damage incurred by them in connection with any claim or
settlement alleging federal or state securities law violations, unless such
lawsuits alleging such claims are successfully defended and a court approves
indemnification of litigation costs, or unless such lawsuits are dismissed with
prejudice on the merits, or unless such lawsuits are settled and a court
approves the settlement and the indemnification. The General Partner will
apprise the court of the positions of the SEC with respect to indemnification
before seeking court approval for indemnification, whether such claims are
litigated, dismissed or settled. Furthermore, the Selling Agreement provides
that the General Partner and Partnership shall not be required to indemnify the
participating broker/dealer, and the participating broker/dealer shall not be
required to indemnify the General Partner and the Partnership to the extent such
loss, claim, damage or liability arises out of or is based upon an alleged
untrue statement or alleged omission based upon written information furnished by
one party to another party.
THE OFFERING OF UNITS
The offering of Units in the Partnership will commence as soon as
practicable after the Effective Date, and will terminate on the Closing Date
(unless terminated earlier at the election of the General Partner or upon the
sale of all Units available for sale). The Closing Date is initially designated
to be one year from the Effective Date. However, if the Minimum Offering is
achieved and the General Partner renews registration with the SEC and with the
various state agencies, the offering period may be extended for up to an
additional year.
ADMISSION OF LIMITED PARTNERS
If, at any time within one year after the date of this Prospectus,
acceptable subscriptions for at least 1,200 Units have been received on behalf
of the Partnership, the General Partner may (but is not required to) arrange for
the Partnership to commence admitting subscribers as Limited Partners of the
Partnership, as of the Initial Admission Date. The Initial Admission Date shall
be a date not later than fifteen (15) days after the release by First National
Bank Iowa, Cedar Rapids, Iowa (the "Escrow Agent") of the proceeds of the sale
of Units. The General Partner anticipates that the Initial Admission Date will
not be later than one year after the Effective Date of this Prospectus, assuming
at least 1,200 Units have been sold by that date. After the Initial Admission
Date, subscribers will be admitted to the Partnership on a daily basis until the
Closing Date. Each day that the General Partner admits subscribers after the
Initial Admission Date will be an Admission Date. To be admitted to the
Partnership, an investor's completed Subscription
81
Agreement, together with subscription funds, must be received by the General
Partner and approved by the General Partner.
Prior to the Initial Admission Date an investor will receive interest on his
subscription from the date his subscription funds clear until the date he is
admitted as a Limited Partner at the rate earned on the funds held by the Escrow
Agent. Such interest will be payable by the Partnership at the time the first
monthly distribution is made to such newly admitted Limited Partner.
Subscription funds will be paid directly to the Partnership after the Initial
Admission Date. An investor will be allocated distributions, if any, and income
or loss from the Partnership, as of the date of such investor's admission into
the Partnership. Investors will not be admitted into the Partnership unless and
until the Minimum Offering is achieved and there is a release of funds in the
escrow account to the Partnership. Any proceeds of the offering not invested or
committed for investment within two years from the Effective Date (except for
necessary operating capital) will be distributed pro rata to the Limited
Partners as return of Capital Contributions. Any such returned proceeds will
include a return of the proportionate share of the Organization and Offering
Expenses, and of any Selling Commissions paid to Affiliates of the General
Partner.
CANCELLATION OF OFFERING
The offering of Units in the Partnership will be canceled automatically if
acceptable subscriptions for at least 1,200 Units are not received on behalf of
the Partnership within one year after the Effective Date. In addition, the
General Partner may, in its discretion, cancel the offering of Units at any time
prior to the Initial Admission Date, even if subscriptions for 1,200 or more
Units have already been received on behalf of the Partnership, and may cancel
the offering as to any then unsold Units at any time after the Initial Admission
Date.
If the offering of Units in the Partnership is canceled, no remaining unsold
Units in the Partnership will be sold, and all subscription payments received
from subscribers who have not been admitted as Limited Partners will be promptly
returned to them. See "Payment for Units" below.
SUBSCRIPTION FOR UNITS
Each prospective investor who meets the qualifications described under
"Investor Suitability Standards" must deliver to the Managing Sales Agent a
completed, dated and executed copy of the Subscription Agreement included with
this Prospectus, and a check made out as set forth in the Subscription Agreement
in the amount of $1,000 for each Unit to be purchased. Until the Minimum number
of Units has been sold, Subscribers' checks will be transmitted by the Managing
Sales Agent directly to the Escrow Agent within the time constraints provided
for in the Managing Sales Agent Agreement and the Selected Sales Agent
Agreement. Thereafter, checks will be delivered by the Managing Sales Agent
directly to the General Partner.
Prospective investors that are not natural persons may be required to
deliver evidence of their authority to subscribe for Units or opinions of
counsel as to their authority to subscribe for Units and the binding effect of
their subscriptions. Investors who submit subscriptions will not be permitted to
terminate or withdraw their subscriptions without the prior consent of the
General Partner.
Additional execution copies of the Subscription Agreement are available from
the Managing Sales Agent.
The General Partner has the right to reject an investor's subscription for
any reason whatsoever, including but not limited to the investor's failure to
satisfy the suitability standards described under "Investor Suitability
Standards." If a prospective investor's subscription is rejected by the General
Partner, the General Partner generally will notify him of that fact within 30
days after receiving his subscription. Any subscription not so rejected will be
accepted, subject to the right of the General Partner in its
82
discretion to cancel or terminate the offering of Units at any time. Amounts
paid by an investor whose subscription is rejected will be returned promptly to
him without any interest thereon.
The Managing Sales Agent or Select Sales Agent shall send each Investor a
confirmation of his or her purchase. A sale of Units to an Investor may not be
completed until at least five business days after the date a prospective
Investor receives a final prospectus. All prospective Investors shall have the
right to receive a refund of their investment for a period of five business days
after the date the prospective Investor receives a final prospectus. A request
for a refund may be made in any fashion but, if made other than in an originally
signed and written communication, must be confirmed with such a communication
within 15 business days after the date a final prospectus is received.
Each Limited Partner will be entitled, with respect to each Unit sold to him
by the Partnership, to the same distributive share of income and loss and cash
distributions as all other Limited Partners admitted on the same Admission Date
as such Limited Partner, without regard to the date on which he subscribed for
the purchase of Units or the date on which his subscription payment was
received. Investors who purchase Units earlier will generally receive a greater
allocation of income, loss and distributions for the year in which they invest
than persons who purchase Units later in such year. See "Partnership
Allocations" under "Summary of the Partnership Agreement."
The General Partner and its Affiliates may purchase Units. However, such
Units will not be included for purposes of determining whether the Minimum
Offering has been reached. Any purchase of Units by the General Partner and its
Affiliates will be for investment purposes only and such purchases will not be
made with a view toward resale.
PAYMENT FOR UNITS
By executing and delivering a Subscription Agreement, each investor who
subscribes for the purchase of Units will agree to make a Capital Contribution
of $1,000 for each Unit subscribed for. At the time the Subscription Agreement
is executed and delivered, such investor must deliver with the Subscription
Agreement a check in the full amount of the required payment for the Units for
which such investor is subscribing.
Until the minimum Gross Proceeds of $1,200,000 have been raised, payments
made by subscribers will be deposited directly into an interest-bearing escrow
account with First National Bank Iowa, Cedar Rapids, Iowa, (the "Escrow Agent").
If the offering is terminated before the Closing Date or if the minimum number
of Units is not sold, subscription payments received from subscribers will be
promptly returned to them, together with any interest earned thereon. If a
subscriber's subscription is rejected by the Partnership after the Initial
Closing, all subscription money received from that subscriber will be returned
to the subscriber no more than 30 days after receipt by the Partnership of the
subscriber's subscription. Once submitted, subscriptions may not be terminated
or withdrawn by subscribers without the prior written consent of the General
Partner, which will be granted or withheld in its sole discretion.
Prior to use as provided in this Prospectus, the Net Proceeds of the
offering will be temporarily invested in (and undistributed Cash Flow may be
invested in) United States government securities (including, but not limited to,
short-term Treasury Bills and Treasury Notes), securities issued or guaranteed
by United States government agencies, certificates of deposit and time or demand
deposits in state or national banks, money market funds, securities issued or
guaranteed by states or municipalities, bank repurchase agreements, bankers'
acceptances, savings and loan association deposits, deposits with members of the
Federal Home Loan Bank System or the Federal Savings and Loan Insurance
Corporation, commercial paper, secured equipment, lease lines of credit, or
other similar types of investments which will be held by the Partnership
generally not exceeding one year from the date of purchase, and other
investments with appropriately scheduled maturities. The foregoing
notwithstanding, the Partnership does not intend to pursue a policy which would
make it subject to the Investment Company Act of 1940, and the Partnership's
investments prior to the use of Net Proceeds as described above will be limited
accordingly.
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SUMMARY OF PROMOTIONAL AND SALES MATERIAL
In addition to and apart from this Prospectus, the Partnership will utilize
certain supplemental sales material in connection with its offering of Units
except in states that do not permit the use of such supplemental materials. This
material will include an investor brochure describing Telecommunications Income
Fund XI, L.P. and certain features of this Offering. The General Partner,
Managing Sales Agent and Selected Sales Agents will also respond to questions
from prospective investors. A question-and-answer booklet, a speech for public
seminars, an invitation to attend public seminars, letters to prospective
investors, mailing cards, public advertisements and audio-visual materials may
be used by the General Partner, Managing Sales Agent and Selected Sales Agents.
Other materials relating to the offering may be made available by the
Partnership to the Managing Sales Agent and Selected Sales Agents for their
internal use.
The offering of Units is made only by means of this Prospectus. Except as
described in the preceding paragraph, the Partnership has not authorized the use
of any other supplemental materials in connection with this Offering. Although
the information contained in the sales material to be used in connection with
this Offering does not conflict with any of the information contained in this
Prospectus, such materials do not purport to be complete, and should not be
considered as part of this Prospectus or the Registration Statement of which
this Prospectus is a part, or as incorporated in this Prospectus or said
Registration Statement by reference, or as forming the basis of the Offering of
the Units which are offered hereby.
EXPERTS
The balance sheet of Telecommunications Income Fund XI, L.P. at August 27,
1997, appearing in this Prospectus and Registration Statement has been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and is
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The balance sheet of Berthel Fisher & Company Leasing, Inc., the General
Partner, at December 31, 1996, appearing in this Prospectus and Registration
Statement has been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Units offered hereby will be passed upon for the
Partnership by Bradley & Riley, P.C., 100 First Street, SW, Cedar Rapids, Iowa,
counsel for the Partnership, the General Partner and the Managing Sales Agent.
Bradley & Riley, P.C. has acted and will act as general counsel to the
Partnership and the General Partner and its Affiliates in connection with other
matters. See "Conflicts of Interest."
ADDITIONAL INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto that the Partnership
has filed with the SEC in Washington, D.C., under the Securities Act, and to
which reference is hereby made. Certain parts of the Registration Statement and
Exhibits are omitted from this Prospectus in accordance with the rules and
regulations of the SEC. The Registration Statement (and the exhibits and
schedules thereto), as well as such reports and other information filed by the
Company with the Commission, may be inspected and copied at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Room 1400, 75 Park Place, New York, New York 10007 and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549 at
prescribed rates. Such information can also be reviewed through the Commission's
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR") which is
publicly available through the Commission's Web Site on the Internet
(http:\\www.sec.gov).
84
TELECOMMUNICATIONS INCOME FUND XI, L.P.
FINANCIAL STATEMENTS OF THE
PARTNERSHIP AND THE GENERAL PARTNER
85
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
TELECOMMUNICATIONS INCOME FUND XI, L.P.:
Independent Auditors' Report............................................................................. 93
Balance Sheet as of August 27, 1997...................................................................... 94
Notes to Balance Sheet................................................................................... 95
BERTHEL FISHER & COMPANY LEASING, INC. (GENERAL PARTNER):
Independent Auditors' Report............................................................................. 96
Balance Sheet as of December 31, 1996.................................................................... 97
Notes to Balance Sheet................................................................................... 98
Balance Sheet as of September 30, 1997 (unaudited)....................................................... 112
Notes to Balance Sheet (unaudited)....................................................................... 113
Note: A potential investor will not be purchasing any interest in Berthel Fisher
& Company Leasing, Inc. (the "General Partner") if such investor chooses to
invest in Telecommunications Income Fund XI, L.P.
86
INDEPENDENT AUDITORS' REPORT
The Partners
Telecommunications Income Fund XI, L.P.
We have audited the accompanying balance sheet of Telecommunications Income
Fund XI, L.P. (an Iowa limited partnership) as of August 27, 1997. This balance
sheet is the responsibility of the Partnership's management. Our responsibility
is to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Telecommunications Income Fund XI,
L.P. at August 27, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
September 4, 1997
87
TELECOMMUNICATIONS INCOME FUND XI, L.P.
(AN IOWA LIMITED PARTNERSHIP)
BALANCE SHEET
AUGUST 27, 1997
ASSETS--Cash....................................................................... $ 11,000
---------
---------
COMMITMENTS (Note 2)
PARTNERS' EQUITY (Note 3):
Partners' equity--25,010 units authorized........................................
General Partner--10 units issued and outstanding................................. $ 10,000
Initial limited partner--1 unit issued and outstanding........................... 1,000
---------
$ 11,000
---------
---------
See notes to balance sheet.
88
TELECOMMUNICATIONS INCOME FUND XI, L.P.
(AN IOWA LIMITED PARTNERSHIP)
NOTES TO BALANCE SHEET
AUGUST 27, 1997
1. ORGANIZATION AND PROPOSED OPERATIONS
Telecommunications Income Fund XI, L.P. (the "Partnership") was formed on
August 26, 1997 under the Iowa Limited Partnership Act. The General Partner of
the Partnership is Berthel Fisher & Company Leasing, Inc. (the "General
Partner"), an Iowa corporation. The Partnership intends to offer for sale a
minimum of 1,200 and a maximum of 25,000 units of limited partnership interest
("Units") at a price per unit of $1,000.
Upon completion of the offering described above, the Partnership intends to
acquire primarily telecommunications equipment for lease to unaffiliated third
parties. No later than five years after the closing date of the offering (or
earlier if the General Partner determines it to be in the Partnership's best
interest), the Partnership will cease reinvestment in equipment and leases and
will begin the orderly liquidation of Partnership assets. The Partnership must
dissolve on December 31, 2012, or earlier upon the occurrence of certain events.
As of August 27, 1997, the Partnership had no operations. Partners' equity
consists of initial capital contributions made by the General Partner and the
initial limited partner.
2. COMMITMENTS
The accompanying balance sheet does not include legal, accounting and other
organizational and offering costs which will become liabilities of the
Partnership when at least the minimum number of Units are sold. Such amounts are
limited to 3.5% of the gross offering proceeds under the partnership agreement
with the General Partner.
3. AGREEMENT OF LIMITED PARTNERSHIP
The Partnership was formed pursuant to an Agreement of Limited Partnership
dated as of August 26, 1997 (the "Agreement"). The Agreement outlines capital
contributions to be made by the partners and the allocation of cash
distributions, net income and net loss to the partners. Capital contributions by
the partners to the Partnership will consist of the $10,000 contributed by the
General Partner and the amounts contributed by limited partners for the purchase
of their Units ($1,000 per unit).
4. RELATED PARTY TRANSACTIONS
It is anticipated that the Partnership will enter into certain agreements
and transactions with related parties, primarily the General Partner and its
affiliates, including, but not limited to, sales commissions, offering expenses,
equipment acquisition fees, management fees, and operating expense
reimbursements.
89
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Berthel Fisher & Company Leasing, Inc.
We have audited the accompanying consolidated balance sheet of Berthel
Fisher & Company Leasing, Inc. (a wholly-owned subsidiary of Berthel Fisher &
Company, Inc.) as of December 31, 1996. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Berthel Fisher & Company Leasing,
Inc. at December 31, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
March 18, 1997
90
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS (Note 5):
Cash and cash equivalents.................................................... $ 342,726
Notes receivable (Note 2).................................................... 6,530,354
Net investment in direct financing leases (Note 2)........................... 9,850,360
Allowance for possible loan and lease losses (Note 3)........................ (412,916)
----------
Notes receivable and direct financing leases, net............................ 15,967,798
Equipment under operating leases, less accumulated depreciation of $50,517... 277,964
Due from affiliates.......................................................... 30,930
Investments in:
Limited partnerships (Notes 4 and 12)...................................... 153,771
Not readily marketable securities, at cost................................. 250,477
Furniture and equipment, less accumulated depreciation of $120,200........... 222,853
Deferred income taxes (Note 6)............................................... 515,911
Deferred costs, less accumulated amortization of $158,924 (Notes 5 and 11)... 635,194
Other assets................................................................. 331,702
----------
TOTAL.......................................................................... $18,729,326
----------
----------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDER'S EQUITY (DEFICIT)
LIABILITIES:
Line-of-credit agreement (Note 5)............................................ $9,276,031
Trade accounts payable....................................................... 158,227
Due to affiliates............................................................ 102,038
Accrued expenses............................................................. 228,014
Lease security deposits...................................................... 374,876
Notes payable (Note 5)....................................................... 2,310,805
Subordinated debentures (Note 5)............................................. 725,000
Subordinated notes payable (Note 5).......................................... 2,995,522
Subordinated debenture payable to parent (Note 5)............................ 2,000,000
----------
Total liabilities........................................................ 18,170,513
----------
COMMITMENTS AND CONTINGENCIES (Note 12)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (Note 7)........................ 722,905
----------
STOCKHOLDER'S EQUITY (DEFICIT):
Series A preferred stock, no par value--authorized shares, issued and
outstanding 30,341 shares (Note 8) ($424,774 liquidation value, convertible
into 26,548 shares of Class A common stock)................................ 422,835
Class A common stock, no par value--authorized 1,000,000 shares, issued and
outstanding 400,000 shares................................................. 1,000
Common stock warrants (Note 9)............................................... 66,694
Accumulated deficit.......................................................... (654,611)
----------
Total stockholder's equity (deficit)..................................... (164,092)
----------
TOTAL.......................................................................... $18,729,326
----------
----------
See notes to consolidated balance sheet.
91
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS--Berthel Fisher & Company Leasing,
Inc. (the "Company") is a wholly-owned subsidiary of Berthel Fisher & Company,
Inc. The Company finances, through direct financing leases or notes receivables,
telecommunications, agricultural, and general equipment throughout the United
States. The financing agreements with individual customers can be large in
relation to the portfolio as a whole and certain agreements exceed 10% of the
Company's direct financing lease and note receivable portfolio (see Note 2). The
leases may be sold to other entities or retained by the Company for its own
portfolio.
During 1994, the Company formed a wholly-owned subsidiary, Communications
Finance Corporation. All of the assets and liabilities of Communications Finance
Corporation have been assumed by the Company. The Company intends to keep
Communications Finance Corporation as a shell for use in future financing
transactions.
BASIS OF PRESENTATION--The accompanying balance sheet has been prepared on
the basis that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The balance sheet does not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
During the years ended December 31, 1995 and 1996, the Company incurred net
losses of $393,720 and $836,556, respectively. Also, the Company's line of
credit agreement is cancelable upon 90 day notice from the lender. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
refinancing as may be required, and ultimately to attain profitable operations.
The Company anticipates that existing capital resources, cash flows from
operations, and financing from the Company's parent, will be adequate to satisfy
the Company's minimum capital requirements for the next twelve months.
The Company's plans and forecasts for future growth and profitability,
however, anticipate the need for additional capital through a preferred equity
financing and the sponsorship of another public limited partnership from which
the Company will generate fee income. See Note 14 as to the Company's current
preferred stock offering. No assurance can be provided that such offerings will
be completed as planned.
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ significantly from those estimated.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for possible loan and
lease losses and the estimated unguaranteed residual values of the Company's
leased equipment.
Most of the Company's leases and finance contracts are with customers that
are in the entrepreneurial stage and, therefore, are highly leveraged and
require lease or other financing in place of or to supplement financing from
banks. Although the Company attempts to mitigate its credit risk through the use
of a
92
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
variety of commercial credit reporting agencies when processing the applications
of its customers, failure of the Company's customers to make scheduled payments
under their equipment leases and finance contracts could have a material
near-term impact on the allowance for possible lease and loan losses.
Realization of residual values depends on many factors, several of which are
not within the Company's control, including general market conditions at the
time of the original lease contract's expiration, whether there has been unusual
wear and tear on, or use of, the equipment, the cost of comparable new
equipment, the extent, if any, to which the equipment has become technologically
or economically obsolete during the contract term and the effects of any
additional or amended government regulations. These factors, among others, could
have a material near-term impact on the estimated unguaranteed residual values.
CERTAIN RISK CONCENTRATIONS--The Company's direct financing leases and notes
receivables are concentrated in the telecommunications industry, primarily pay
telephones, representing approximately 42% of the Company's direct finance lease
and notes receivable portfolio at December 31, 1996. During 1996, the Company
also significantly expanded its financing in the ATM industry which represents
approximately 22% of the Company's direct finance lease and notes receivable
portfolio at December 31, 1996.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
NOTES RECEIVABLE--Notes receivable are carried at the principal balance
outstanding. Interest income on notes receivable is accrued based on principal
amounts outstanding.
NET INVESTMENT IN DIRECT FINANCING LEASES--The Company's primary activity
consists of leasing telecommunications and other types of equipment, under
direct financing leases, generally over a period of three to five years. At the
time of closing a direct financing lease, the Company records the gross lease
contract receivable, an estimated unguaranteed residual value and unearned lease
income. The unearned lease income represents the excess of the gross lease
receivable plus the estimated unguaranteed residual value over the carrying
value of the equipment leased. In addition, the Company capitalizes all initial
direct costs associated with originating the direct financing lease. The
unearned income and initial direct costs are amortized to income over the lease
term so as to produce a constant periodic rate of return on the net investment
in the lease. Lessees are responsible for all taxes, insurance and maintenance
costs.
The realization of the estimated unguaranteed residual value of leased
equipment depends on the value of the leased equipment at the end of the lease
term and is not a part of the contractual agreement with the lessee. Estimated
unguaranteed residual values are based on estimates of amounts historically
realized by the Company for similar equipment and are periodically reviewed by
management for possible impairment.
Certain of the Company's leases are accounted for as operating leases for
income tax purposes.
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES--The Company performs credit
evaluations prior to approval of a lease or finance contract. As with all direct
financing leases, the Company continues to own the equipment under lease. The
Company will generally obtain a security interest in future revenues generated
from each site in which the equipment is physically located and in the equipment
under a finance contract. Subsequently, the creditworthiness of the customer and
the value of the underlying assets are monitored on an ongoing basis. The
Company maintains an allowance for possible loan and lease
93
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses which could arise should customers become unable to discharge their
obligations under the agreements. The allowance for possible loan and lease
losses is maintained at a level deemed appropriate by management to provide for
known and inherent risks in the portfolio. The allowance is based upon a
continuing review of past loan and lease loss experience, current economic
conditions, and the underlying asset value. The consideration of such future
potential losses also includes an evaluation for other than temporary declines
in value of the underlying leased assets. Leases and notes receivable which are
deemed uncollectible are charged off and deducted from the allowance. The
provision for possible loan and lease losses and recoveries are added to the
allowance.
EQUIPMENT UNDER OPERATING LEASES--Equipment leased under operating leases is
stated at cost less accumulated depreciation. The equipment is depreciated using
the straight-line method over the estimated useful lives of the assets (five
years) to the estimated residual value of the equipment at the end of the lease
term. Estimated residual values are based on estimates of amounts historically
realized by the Company for similar equipment and are periodically reviewed by
management for possible impairment.
INVESTMENTS--The Company accounts for its general partnership interests in
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications Income
Fund X, L.P. ("TIF X") under the equity method of accounting. Under the equity
method of accounting, the Company initially records its investment at cost and
subsequently adjusts the carrying value of its investments for its pro rata
share of earnings or losses.
The Company also owns equity interests in two entities over which it does
not have the ability to exert significant influence over the operations of such
entities; therefore, such investments are accounted for at cost.
Should these investments experience a decline in value that is other than
temporary, the Company will recognize a loss in its consolidated statements of
operations to reflect such a decline. As these investments are not readily
marketable, no market value can be readily determined.
FURNITURE AND EQUIPMENT--Furniture and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, depreciation is
computed by the straight-line method over the estimated useful lives of the
assets (generally five to ten years). The Company uses accelerated methods in
computing depreciation for income tax purposes.
DEFERRED INCOME TAXES--The provision for deferred income taxes is based on
an asset and liability approach. Deferred tax assets or liabilities are computed
based on the difference between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. Deferred income tax
expense or credit is based on the changes in the asset or liability from period
to period including the effect of enacted tax rate changes.
DEFERRED COSTS--Deferred costs consist of organization costs incurred with
the formation of Security Finance Corporation and financing costs incurred in
connection with the issuance of subordinated debentures and notes payable and
certain other long-term debt. Deferred organization costs were amortized over a
five-year period. Deferred financing costs are being amortized over the life of
the related obligation, which ranges from three to eight years.
94
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK ISSUANCE COSTS--The costs incurred in connection with the issuance of
redeemable Class B nonvoting convertible stock have been deducted from the
proceeds. Such amounts are being amortized by a charge to retained earnings over
a period of ten years, at which time the carrying value of stock will be equal
to its cash redemption value (see Note 7).
SALE OF DIRECT FINANCE LEASES--The Company at times sells future direct
financing lease payments, on a limited recourse basis, to lenders in return for
a cash payment. In the case of default by the lessee, the lender has a first
lien on the underlying leased equipment. In the event the sale or re-lease
proceeds from the underlying equipment do not satisfy the remaining lessee's
obligation to the lender, the Company is responsible for a predetermined amount
of that obligation. When the sale of direct finance leases occurs, proceeds from
the sale, less the net book value of direct finance leases sold and an estimated
loss allowance, are recorded as a component of gain on early termination of
leases.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS--In 1996 the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" related to Berthel Fisher & Company, Inc.'s stock
option plans. This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted the disclosure option under this standard and continues to
recognize stock-based compensation to employees under the intrinsic value
method. The adoption of this standard did not impact results of operations,
financial position or cash flows.
The Company will adopt SFAS No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996. SFAS No. 125 provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings
based on whether control has been transferred. The adoption of this standard is
not expected to have a material impact on results of operations, financial
position, or cash flows.
2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES
Notes receivable are comprised of the following:
DECEMBER 31,
1996
------------
Notes receivable, collateralized primarily by telephone equipment and related
site agreements, 13.9% to 16.5%, maturing through December 2000............... $6,530,354
------------
------------
95
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES (CONTINUED)
The Company's net investment in direct financing leases consists of the
following:
DECEMBER 31,
1996
-------------
Minimum lease payments receivable.............................................. $ 11,526,828
Estimated unguaranteed residual values......................................... 954,502
Unamortized initial direct costs............................................... 236,910
Unearned income................................................................ (2,867,880)
-------------
Net investment in direct financing leases.................................... $ 9,850,360
-------------
-------------
The balance of direct financing leases sold with recourse that remain
uncollected at December 31, 1996 was $4,269,468.
At December 31, 1996, future minimum lease payments to be received under the
direct financing leases and the estimated unguaranteed residuals to be realized
at the expiration of the direct financing leases are as follows:
ESTIMATED
MINIMUM UNGUARANTEED
LEASE PAYMENTS RESIDUAL
RECEIVABLE VALUES
-------------- --------------
Year ending December 31:
1997....................................................... $ 3,887,957 $ 36,354
1998....................................................... 2,702,486 240,887
1999....................................................... 2,150,673 76,055
2000....................................................... 1,828,501 167,010
2001....................................................... 957,211 434,196
-------------- --------------
$ 11,526,828 $ 954,502
-------------- --------------
-------------- --------------
The Company and certain affiliates purchase a substantial portion of
telecommunications equipment for lease from Intellicall, Inc., a publicly-held
company. The Company's parent is an investor in a limited partnership which owns
approximately 7% of the outstanding common stock of Intellicall, Inc. In
addition, a principal stockholder of the Company's parent is also an investor in
this limited partnership.
The Company leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate, provides financing and
investment advisory services or for which the Company or its affiliates have an
ownership interest. The Company also leases equipment to certain companies in
which certain directors own a controlling interest. The Company's net investment
in direct financing leases with these companies approximated $1,253,000 at
December 31, 1996.
3. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The allowance for loan and lease losses consisted of a specific allowance
for a lease of $100,000 at December 31, 1996 and a general unallocated allowance
of $312,916 at December 31, 1996.
96
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
3. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES (CONTINUED)
On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This bankruptcy petition was dismissed on May 22, 1996 and, in
connection therewith, the Company exercised its right to manage the assets
leased to UTS. The net investment in the leases at the time the assets were
repossessed was approximately $432,000. This equipment is currently being
operated for the Company under a short-term management agreement. The Company,
TIF IX, TIF X and UTS have also been named in a lawsuit, filed by another
creditor of UTS. The creditor is claiming $360,000 in compensatory damages and
$350,000 in punitive damages. Management believes the lawsuit is without merit
and intends to vigorously defend it. Based on offers to purchase the pay
telephone equipment and an expected settlement offer related to the lawsuit to
avoid protracted litigation costs, the Company expects to incur a loss upon the
sale or re-lease of this equipment. Management has charged $324,000 to the
provision for possible loan and lease losses for the expected loss. Due to the
uncertainty of the fair market value of the equipment and the outcome of the
litigation, there can be no assurances that the ultimate loss will not exceed
$324,000. The Company's net investment in the equipment, net of the specific
allowance, has been reclassified to equipment under operating leases pending its
ultimate sale or re-lease under a direct finance lease.
On October 31, 1996, a lessee of the Company, Soil Recovery Services, Inc.
("SRS"), had an involuntary Petition for Relief under Chapter 7 of the U.S.
Bankruptcy Code filed against it. This was converted to a voluntary Chapter 11
on November 25, 1996. At the time the first petition was filed, SRS had various
leases with the Company that had a net investment totaling $256,500 and
represented 1.4% of the Company's total net investment in leases and finance
contracts. A specific allowance for losses of $100,000 has been established
through a charge to the provision for possible loan and lease losses based on
estimates of the fair value of the equipment under lease.
During the fourth quarter of 1996, management of the Company provided a
specific allowance for a lease with a certain customer for which the Company had
not been receiving lease payments. Management is actively working with such
customer to arrange for a sale of the assets under lease. A charge of $50,000
was recorded to the provision for possible loan and lease losses representing
management's best estimate of the loss on the expected sale of the equipment.
Also, due to the uncertainty as to the timing and amount of future payments from
such customer and as to the sale of the assets under lease, the Company
reclassified its net investment in the lease at December 31, 1996 of $144,972,
net of the specific allowance, to equipment leased under operating leases.
97
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
4. INVESTMENTS IN LIMITED PARTNERSHIPS
The Company is the general partner of Telecommunications Income Fund IX,
L.P. ("TIF IX"). TIF IX is a limited partnership which raised approximately $17
million through a best-efforts public offering of its limited partnership units.
At December 31, 1996, the Company's investment in TIF IX consisted of its
allocated general partnership interest, unreimbursed costs incurred by the
Company in connection with the public offering and temporary loans made to the
partnership. Pursuant to the partnership agreement, TIF IX reimbursed the
Company for offering and promotional expenses incurred up to 4% of the capital
raised. The unreimbursed costs are being amortized on a straight-line basis over
a 55-month period which approximates the period of anticipated future revenues
from TIF IX. As of December 31, 1996, the unamortized balance of these
unreimbursed costs aggregated $33,482.
The Company is the general partner of Telecommunications Income Fund X, L.P.
("TIF X"). TIF X is a limited partnership which raised approximately $22.6
million through a best-efforts public offering of its limited partnership units.
At December 31, 1996, the Company's investment in TIF X consisted of its
allocated general partnership interest, unreimbursed costs incurred by the
Company in connection with the public offering and temporary loans made to the
partnership. Pursuant to the partnership agreement, TIF X will reimburse the
Company for offering and promotional expenses incurred up to 4% of the capital
raised. As of December 31, 1996, there were no unreimbursed costs.
Combined summarized financial information for TIF IX and TIF X is as
follows:
DECEMBER 31,
1996
-------------
Assets:
Net investment in direct financing leases.................................... $ 33,330,000
Other assets................................................................. 3,573,000
-------------
Total assets............................................................... $ 36,903,000
-------------
-------------
Liabilities and partners' equity
Liabilities:
Notes payable, guaranteed by the Company (Note 12)........................... $ 5,900,000
Other liabilities............................................................ 1,485,000
-------------
Total liabilities.......................................................... 7,385,000
-------------
Partners' equity:
General partner.............................................................. 22,000
Limited partners............................................................. 29,559,000
Other equity................................................................. (63,000)
-------------
Total partners' equity..................................................... 29,518,000
-------------
Total liabilities and partners' equity..................................... $ 36,903,000
-------------
-------------
98
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
4. INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
YEAR ENDED
DECEMBER 31,
1996
-------------
Income from direct financing leases............................................ $ 6,070,000
Other revenue.................................................................. 924,000
Provision for possible losses.................................................. (1,671,000)
Impairment loss on equipment................................................... (971,000)
Expenses....................................................................... (3,148,000)
-------------
Net income................................................................... $ 1,204,000
-------------
-------------
Income allowable to the Company................................................ $ 680
-------------
-------------
Net income per partnership unit:
TIF IX....................................................................... $ 14.83
TIF X........................................................................ $ 2.17
The Company receives a management fee equal to 5% of the amount of gross
rental payments received by TIF IX and TIF X. During the year ended December 31,
1996, gross fees aggregated $702,266. The Company, in turn, pays 50% of these
fees to its parent. In addition, the Company is reimbursed for certain other
costs under administrative services agreements. Amounts received by the Company
pursuant to these agreements amounted to $147,000, for the year ended December
31, 1996.
TIF IX leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate of the Company, provides
financing and investment advisory services. TIF IX's net investment in direct
financing leases with these companies approximated $447,000 at December 31,
1996.
TIF X leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate of the Company, provides
financing and investment advisory services. TIF X's net investment in direct
financing leases with these companies approximated $2,815,000 at December 31,
1996.
5. CREDIT ARRANGEMENTS
The Company obtains a portion of its financing under a line-of-credit
agreement with a bank. The amount available to borrow under the line-of-credit
is limited to 75% of its qualified accounts, as defined in the agreement
(primarily leases and notes receivable), but, in no case, can exceed $11
million. The line-of-credit bears interest at prime plus 1.7% and is
collateralized by substantially all of the Company's assets. The line-of-credit
agreement is guaranteed by the Company's parent and a major stockholder of the
Company's parent. The agreement expires on November 30, 1997 and management
expects, based on discussions with the lender, to renew the agreement. The
agreement is also cancelable by the lender after giving a 90-day notice. The
average interest rate on amounts outstanding at December 31, 1996 under the
line-of-credit agreement was 9.95%.
The loan agreement contains various restrictive covenants which, among
others, restrict dividend payments except to Class B shareholders and Series A
preferred shareholders and requires the Company to maintain certain financial
ratios including a total liabilities to tangible net worth ratio of not greater
than 3.0, a minimum tangible net worth of $650,000 and an interest coverage
ratio of 1.1. As of
99
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
5. CREDIT ARRANGEMENTS (CONTINUED)
December 31, 1996 the Company was in violation of its minimum tangible net worth
and interest coverage ratio. The Company has obtained amendments to such
covenants from the lender for 1996 which permits compliance. The covenants for
1997 are a leverage ratio of not greater than 2.5, a minimum stockholders'
equity (including redeemable stock) of $490,000 plus the net proceeds of any
equity offering and an interest coverage ratio of 1.2. As discussed in Note 14,
the Company plans to sell up to $2 million of preferred stock in 1997 through an
exempt offering. The Company also has plans to sponsor another limited
partnership in 1997 which is expected to generate fee income to the Company. As
such, the Company expects to be in compliance with the covenants throughout
1997. The Company does not anticipate any problems with the sale of these
securities in 1997, however, an alternative plan is in place should any problems
occur with respect to the sale of these securities. The alternative plan is to
reduce the management fees paid to the parent to maintain compliance with the
Company's covenants.
Notes payable consists of the following:
DECEMBER 31,
1996
------------
Collateral trust bonds issued by Berthel Fisher & Company Leasing, Inc., 9% to
12%, due through 1997......................................................... $ 20,017
Installment loan agreements with banks, 7.75% to 11%, maturing through 2000 with
subjective acceleration clauses,collateralized by net investment in certain
direct financing leases, certain agreements are also guaranteed by the
Company's parent.............................................................. 2,273,632
Capital lease obligations, 5.37%, due through 2000.............................. 17,156
------------
Notes payable................................................................. $2,310,805
------------
------------
Subordinated debt consists of the following:
DECEMBER 31,
1996
------------
Uncollateralized subordinated debenture payable to parent, floating interest
rate, maturing in 2005........................................................ $2,000,000
Uncollateralized subordinated notes payable, 9.5% to 10%, maturing in 2001 and
2004.......................................................................... 2,995,522
Uncollateralized subordinated debentures, 11% to 12%, maturing through 1998..... 725,000
------------
Total subordinated debt....................................................... $5,720,522
------------
------------
The collateral trust bonds issued by Berthel Fisher & Company Leasing, Inc.
are collateralized by certain equipment leases and are redeemable by the bond
holder at any time after one year from the date of issuance subject to certain
limitations as defined in the agreements, including a maximum redemption in any
one year of 5% of the total principal balance outstanding.
The subordinated note payable and debenture to parent bear interest at prime
plus 3% (11.5% at December 31, 1996), adjusted semi-annually, with a minimum
interest rate of 6% and a maximum rate of
100
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
5. CREDIT ARRANGEMENTS (CONTINUED)
12%. In October 1995, the Company and its parent restructured $2,000,000 of the
subordinated note payable to the Company's parent into a subordinated debenture.
Under the restructured debenture, the maturity date was extended to December 31,
2005; the debenture was contractually subordinated to the subordinated notes
payable and to collateralized debt; and the Company's parent was issued warrants
for the purchase of 118,875 shares of common stock of the Company at $16.82 per
share, exercisable through October 5, 2000. No value was attributed to the
warrant by the Company since the warrant's exercise price was equal to the
estimated fair value of the Company's common stock at date of issuance.
The annual maturities of notes payable and subordinated debt at December 31,
1996 are as follows:
Year ending December 31:
1997....................................... $ 1,089,509
1998....................................... 1,206,943
1999....................................... 338,019
2000....................................... 330,088
2001....................................... 2,111,246
Thereafter................................. 2,955,522
-------------
Total.................................... $ 8,031,327
-------------
-------------
6. INCOME TAXES
The results of the Company's operations are included in the consolidated tax
returns of Berthel Fisher & Company, Inc. The entities included in the
consolidated returns have adopted the policy of allocating income tax expense or
benefit based upon the pro rata contribution of taxable operating income or
losses. Generally, this allocation results in profitable companies recognizing a
tax provision as if the individual company filed a separate return and loss
companies recognizing benefits to the extent their losses contribute to reduce
consolidated taxes. Deferred income taxes have been established by each member
of the consolidated group based upon the temporary differences within the
entity. In certain states, the Company files separate income tax returns. Based
on the parent's consolidated tax position, management believes it is more likely
than not that the Company's deferred income tax asset will be recoverable.
101
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
6. INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's net
deferred income tax asset are as follows:
DECEMBER 31,
1996
------------
Gross deferred income tax liabilities:
Direct financing leases....................................................... $ (500,000)
Unamortized costs associated with limited partnerships........................ (25,000)
Furniture and equipment....................................................... 0
------------
Total....................................................................... (525,000)
------------
------------
Gross deferred income tax assets:
Alternative minimum tax carryforward.......................................... 84,000
Allowance for possible loan and lease losses.................................. 149,000
Net operating loss carryforward............................................... 800,000
Other......................................................................... 7,911
------------
Total....................................................................... 1,040,911
------------
Net deferred income tax asset............................................... $ 515,911
------------
------------
At December 31, 1996, the Company's net operating loss carryforward
aggregates $2,250,000 and expires in 2010.
7. REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK
The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes each
year, up to a maximum of $1.20 per share. The Class B nonvoting convertible
stock is convertible on a one-for-one basis up to a maximum of 20% of the Class
A common stock of the Company after conversion. The stock is redeemable at $10
per share for a 30-day period after the tenth anniversary of the issuance date
(April, 1990 to September, 1991) at the option of the holder. Shares which are
not redeemed during that time are automatically converted to Class A common
stock on a one-for-one basis. The following summarizes the amounts pertaining to
the Class B nonvoting convertible stock:
DECEMBER 31,
1996
------------
Redeemable Class B nonvoting convertible stock (no par value-authorized 100,000
shares, issued and outstanding 75,500 shares), at redemption or liquidation
value......................................................................... $ 755,000
Unamortized stock issuance costs................................................ (32,095)
------------
Class B nonvoting convertible stock........................................... $ 722,905
------------
------------
102
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
8. PREFERRED STOCK
Each share of the Series A preferred stock is entitled to cumulative annual
dividends of 8% payable, if as and when declared by the Board of Directors,
quarterly. Unpaid dividends will accumulate and be payable prior to the payment
of dividends on the Company's Class A common stock. The preferred stock is
redeemable at any time at the option of the Company, on not less than 30 days
written notice to registered holders. The redemption price shall be $14.70 per
share if redeemed during 1997, $14.56 per share if redeemed during 1998, $14.42
per share if redeemed during 1999, $14.28 per share if redeemed during 2000,
$14.14 per share if redeemed during 2001, and $14.00 per share if redeemed
thereafter, plus, in each case, accumulated unpaid dividends. Unless previously
redeemed by the Company, the holders of the preferred stock are entitled at any
time to convert each share into .875 shares of Class A common stock. The
preferred stock is not entitled to vote on any matter except where the Iowa
Corporation Act requires voting as a class, in which case each share of stock
shall be entitled to one vote per share on those matters where the preferred
stock is voting as a class. The preferred stock is entitled to a preference on
liquidation equal to $14.00 per share, plus accumulated unpaid dividends.
9. COMMON STOCK WARRANTS
The Company's common stock warrant activity is summarized as follows:
EXPIRATION EXERCISE NUMBER
DATE PRICE OUTSTANDING
----------- ----------- -----------
Issued to the parent in 1995 in connection with the
subordinated note payable restructuring................ 2000 $ 16.82 118,875
Issued in 1996 in connection with the subordinated notes
payable offering....................................... 2001-2004 16.00 33,011
Issued in 1996 in connection with the preferred
stock/warrant offering:
A Warrant.............................................. 1998 12.00 30,341
B Warrant.............................................. 1999 14.00 30,341
-----------
Balance at December 31, 1996............................. 212,568
-----------
-----------
10. PROFIT SHARING PLAN
The Company participates in a qualified profit sharing plan under Internal
Revenue Code Section 401(a), including a qualified cash or deferred arrangement
under Section 401(k), sponsored by Berthel Fisher & Company Financial Services,
Inc. Under the terms of the plan, each participant may elect to defer
compensation from 2% to 15%. A matching contribution equal to 50% of the
deferred compensation of all eligible participants will be made by the employer
up to 4% of each participant's total compensation. The employee contributions to
the plan are fully vested and employer contributions vest over five years. The
Company's contribution for the year ended December 31, 1996, aggregated $14,927.
11. MANAGEMENT AND SERVICES AGREEMENTS
In addition to the agreements described in Note 4, the Company also has an
unwritten, month-to-month agreement with its parent in which the Company's
parent provides management services at a
103
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
11. MANAGEMENT AND SERVICES AGREEMENTS (CONTINUED)
monthly rate of $17,500 during 1996. In addition, during 1993, the Company paid
its parent $50,000 to provide consulting services relating to TIF X for such
items as lease documentation, lease approvals, debt structuring and portfolio
liquidation. This payment is being amortized to expense over five years, the
estimated life of the operating phase of TIF X.
The Company, from time to time, will engage the services of Berthel Fisher &
Company Financial Services, Inc., a broker-dealer wholly owned by the Company's
parent. In addition, the Company reimburses Berthel Fisher & Company Financial
Services, Inc. for operating expenses incurred on its behalf, including certain
expenses related to the administrative services agreements discussed in Note 4.
The Company also enters into other arrangements with the parent or its
affiliates. Following are the amounts paid by the Company to Berthel Fisher &
Company or its affiliates related to these arrangements:
YEAR ENDED
DECEMBER 31,
1996
------------
Issuance costs paid (and capitalized) in connection with subordinated notes
payable offering.............................................................. $ 223,070
Operating expense reimbursements................................................ 50,173
12. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable for all debts of TIF IX and X as the
general partner.
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF IX. The line-of-credit agreement allows TIF IX to
borrow the lesser of $6.25 million, or 32% of its qualified accounts, as defined
in the agreement. The balance outstanding under this line-of-credit was
$1,060,490 at December 31, 1996. The agreement matures on November 30, 1997, is
cancelable by the lender after giving a 90-day notice and is collateralized by
substantially all assets of TIF IX. The note is also guaranteed by the Company's
parent and a principal stockholder of the Company's parent.
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF X. The line-of-credit agreement allows TIF X to
borrow the lesser of $7.25 million, or 32% (40% as of November 1996) of its
qualified accounts, as defined in the agreement. The balance outstanding under
this line-of-credit was $2,607,911 at December 31, 1996. The agreement matures
on November 30, 1997, is cancelable by the lender after giving a 90-day notice
and is collateralized by substantially all assets of TIF X. The note is also
guaranteed by the Company's parent and a principal stockholder of the Company's
parent.
The Company also has guaranteed amounts outstanding under installment loan
agreements of TIF IX and TIF X totaling $2,231,510 at December 31, 1996. The
agreements are collateralized by certain direct financing leases and a second
interest in all assets of TIF IX and TIF X.
In December 1995 the Company entered into a lease agreement for office
space. The lease term began January 1, 1996 and expires December 30, 2000. Rent
is $58,368 per year under the agreement.
104
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by
the Company based on valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for lease
contracts. The carrying amount for financial instruments included among cash and
cash equivalents, due from affiliates, line-of-credit agreement, and other
short-term payables approximates their fair value because of the short maturity
of those instruments or the variable interest rate feature of the instruments.
The estimated fair value of other significant financial instruments are based
principally on discounted future cash flows at rates commensurate with the
credit, interest rate and prepayment risk involved.
The estimated fair values of the Company's other significant financial
instruments are as follows:
DECEMBER 31,
1996
--------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
Notes receivable.................................................. $ 6,530,354 $ 6,489,812
Notes payable..................................................... 2,310,805 2,284,873
Subordinated debt................................................. 5,720,522 5,945,762
14. CURRENT OFFERING
The Company has a private placement best efforts offering in process at
December 31, 1996 for the issuance of $2 million of Class A preferred stock and
warrants. The Company issued $424,774 of preferred stock and $60,682 of warrants
to its parent at December 31, 1996 in exchange for the conversion of the
subordinated note payable to parent of $264,980 and the contribution of
restricted stock of a public company with an estimated fair value of $220,477.
There can be no assurance that the Company will complete the sale of these
securities.
*****
105
BERTHEL FISHER & COMPANY LEASING, INC.
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
ASSETS:
Cash and cash equivalents.................................................... $ 2,871
Notes receivable............................................................. 4,930,226
Net investment in direct financing leases (Note 3)........................... 8,296,247
Allowance for possible loan and lease losses (Note 4)........................ (380,087)
----------
Notes receivable and direct financing leases, net............................ $12,846,368
Equipment under operating lease, less accumulated depreciation of $23,352.... 706,009
Due from affiliates.......................................................... 38,512
Investments in:
Limited partnerships (Note 5).............................................. 123,650
Not readily marketable securities, at cost................................. 975,482
Furniture and equipment, less accumulated depreciation of $153,162........... 211,330
Deferred income taxes........................................................ 602,555
Deferred costs, less accumulated amortization of $274,815.................... 519,217
Other assets................................................................. 444,393
----------
TOTAL.......................................................................... $16,470,405
----------
----------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDER'S EQUITY
LIABILITIES:
Line of credit agreement (Note 6)............................................ $6,647,582
Due to affiliates............................................................ 67,362
Accrued expenses............................................................. 197,790
Dividends payable............................................................ 29,277
Lease security deposits...................................................... 387,656
Notes payable (Note 6)....................................................... 1,669,590
Subordinated debentures (Note 6)............................................. 725,000
Subordinated notes payable (Note 6).......................................... 2,996,303
Subordinated debenture payable to parent (Note 6)............................ 2,000,000
----------
Total Liabilities.......................................................... $14,720,560
----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (NOTE 8)........................ 728,923
----------
STOCKHOLDER'S EQUITY:
Series A preferred stock, no par value-authorized 125,000 shares, issued and
outstanding 125,000 shares (Note 9) ($1,750,000 liquidation value,
convertible into 109,375 shares of Class A common stock)................... 1,603,080
Class A common stock, no par value-authorized 3,000,000 shares, issued and
outstanding 403,900 shares................................................. 63,400
Common stock warrants........................................................ 256,002
Retained earnings (accumulated deficit)...................................... (901,560)
----------
Total stockholder's equity................................................. 1,020,922
----------
TOTAL.......................................................................... $16,470,405
----------
----------
See accompanying notes.
106
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO BALANCE SHEET
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited balance sheet has been prepared in accordance
with generally accepted accounting principles for interim financial information
and with Article 10 and Regulation S-X. Accordingly, it does not include all of
the information and footnotes required by generally accepted accounting
principle 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. For further information, refer to the
balance sheet and footnotes thereto as of December 31, 1996. This balance sheet
should be read in conjunction with the Company's annual report on Form 10-KSB
filed with the Securities and Exchange Commission for the year ended December
31, 1996.
2. ORGANIZATION
Berthel Fisher & Company Leasing, Inc. (the "Company") is a wholly-owned
subsidiary of Berthel Fisher & Company, (the "Parent"). During the year ended
December 31, 1994, the Company formed a wholly-owned subsidiary, Communications
Finance Corporation. All of the assets and liabilities of Communications Finance
Corporation have been assumed by the Company. The Company intends to keep
Communications Finance Corporation as a shell for use in future financing
transactions.
The Company is the general partner in two limited partnerships,
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications Income
Fund X, L.P. ("TIF X"). The Company accounts for its general partnership
interests in TIF IX and TIF X under the equity method of accounting. (See Note
5).
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in direct financing leases at September 30,
1997 consists of:
Minimum lease payments receivable............................... $9,260,716
Estimated unguaranteed residual values.......................... 987,243
Unamortorized initial direct costs.............................. 206,073
Unearned income................................................. (2,157,785)
----------
$8,296,247
4. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The change in the allowance for possible loan and lease losses for the nine
months ended September 30, 1997 is as follows:
Balance at beginning of year...................................... $ 412,916
Provision......................................................... 41,002
Charge offs....................................................... (81,208)
Recoveries........................................................ 7,377
---------
$ 380,087
107
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO BALANCE SHEET (CONTINUED)
(UNAUDITED)
4. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES (CONTINUED)
The allowance for loan and lease losses consists of a specific allowance for
a lease of $100,000 and a general unallocated allowance of $280,087 at September
30, 1997. The general unallocated allowance for possible loan and lease losses
expressed as a percent of the total portfolio is as follows:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1996
- ------------------- ------------------- -------------------
2.1% 1.9% 2.4%
The Company has obtained the right to repossess the equipment under lease
with Soil Recovery Services ("SRS") which lease represents the specific reserve
at September 30, 1997. Management has received an indication of interest from a
third party to purchase the equipment associated with the SRS lease. At
December, 1996, this equipment was valued at $156,000. Management's best current
estimate of the re-sale value of this equipment is $156,000.
On May 6, 1996, a lessee of the company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This petition was dismissed on May 22, 1996, and, in connection
therewith, the Company exercised its right to manage the assets leased to UTS.
The Company had also been named in a lawsuit filed by another creditor of UTS.
Due to the uncertainty of the fair market value of the equipment and the outcome
of the litigation, management charged $324,000 to the provision for loan and
lease losses in 1996. The equipment has been sold with no further loss to the
Company. The Company negotiated a settlement with the creditor and the suit has
been dismissed. As a part of the settlement, the Company has agreed to bear the
cost of an audit of the equipment and management of the equipment from May,
1996, through February, 1997. As of September, 1997, the audit has not been
completed, however the Company does not anticipate any further loss or cost
associated with the equipment.
In March, 1997, the Company foreclosed on a lease with Coastal
Communications. The net investment in this lease ($545,189) has been
reclassified as equipment under operating lease. The Company entered into a
management agreement with a pay phone operator to manage the equipment with the
intent to purchase. The Company has not yet reached a definitive agreement
regarding the purchase. Until all negotiations are finalized, it is not possible
to determine what amount of loss, if any, will be incurred. Management believes
the Company's loss reserve is sufficient to cover any potential loss with
respect to the equipment.
5. INVESTMENT IN LIMITED PARTNERSHIPS
Combined summarized income statement information for TIF IX and TIF X is as
follows:
NINE MONTHS ENDED SEPTEMBER
30
----------------------------
1997 1996
------------- -------------
Income from direct financing leases............................. $ 3,905,657 $ 4,601,900
Other revenue................................................... 663,589 422,784
Provision for possible losses................................... (124,288) (989,097)
Expenses........................................................ (1,898,018) (2,409,052)
------------- -------------
Net income...................................................... $ 2,546,940 $ 1,626,535
------------- -------------
------------- -------------
Net income per partnership unit:
TIF IX........................................................ $ 19.46 $ 15.03
TIF X......................................................... $ 13.61 $ 6.68
108
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO BALANCE SHEET (CONTINUED)
(UNAUDITED)
6. CREDIT ARRANGEMENTS
The Company has a note payable consisting of a line-of-credit agreement with
a bank. The amount available to borrow under the line-of-credit is limited to
75% of its qualified accounts (primarily leases and notes receivable), but in no
case can exceed $11 million. The line-of-credit bears interest at prime plus
1.76% and is collateralized by substantially all of the Company's assets. The
line-of-credit agreement is guaranteed by the Company's Parent and a major
stockholder of the Company's Parent. The agreement originally expired on
November 30, 1997, and has been extended to April 30, 1998, and is cancelable by
the lender after giving a 90 day notice. The loan agreement contains various
restrictive covenants including, among others, covenants that restrict dividend
payments except to Class B and Series A preferred stockholders and requires the
Company to maintain certain financial ratios including a total liabilities to
tangible net worth ratio, as defined in the agreement, of not greater than 2.5,
a minimum stockholders' equity (including redeemable stock) of $1,050,000, plus
the net proceeds of any equity offering and an annual interest coverage ratio of
1.2. As of September 30, 1997, the Company was in compliance with all covenant
requirements. The Company, however, expects to be in violation of the annual
interest coverage ratio at year end and expects to obtain a waiver of the
requirement from the lender based on the recent renewal of the agreement with
the lender.
Notes payable at September 30, 1997, consists of:
Installment loan agreements with banks, 7.75% to 11%, maturing
through 2000 with subjective acceleration clauses,
collateralized by net investment in certain direct financing
leases, certain agreements are also guaranteed by the
Company's Parent.............................................. $1,655,855
Capital lease obligations, 5.37%, due through 2000.............. 13,735
---------
Notes payable................................................. $1,669,590
Subordinated debt consists of the following:
Uncollateralized subordinated debenture payable to Parent,
floating interest rate, maturing in 2005.................... $2,000,000
Uncollateralized subordinated notes payable, 9.5% to 10%,
maturing in 2001 and 2004................................... 2,996,303
Uncollateralized subordinated debentures, 11% to 12% maturing
through 1998................................................ 725,000
---------
Total subordinated debt....................................... $5,721,303
---------
---------
7. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable for all debts of TIF IX and TIF X as the
general partner.
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF IX. The line-of-credit agreement allows TIF IX to
borrow the lesser of $6.25 million or 32% of its qualified accounts, as defined
in the agreement. The balance outstanding under this line-of-credit was $683,418
at September 30, 1997. The agreement is collateralized by substantially all
assets of TIF IX. The note is also guaranteed by the Company's Parent and a
principal stockholder of the Company's Parent. The Partnership has extended the
agreement with the lender through April 30, 1998. The agreement was amended with
the bank and reduced the line-of-credit to the lesser of $2.0 million, or 32% of
the Partnership's Qualified Accounts. The minimum interest charge was also
reduced to $3,000 per month.
109
BERTHEL FISHER & COMPANY LEASING, INC.
NOTES TO BALANCE SHEET (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF X. The line-of-credit agreement allows TIF X to
borrow the lesser of $7.25 million or 40% of its qualified accounts, as defined
in the agreement. The balance outstanding under this line-of-credit was
$4,022,792 at September 30, 1997. The agreement is collateralized by
substantially all assets of TIF X. The note is also guaranteed by the Company's
Parent and a principal stockholder of the Company's Parent. The Partnership has
extended the agreement through April 30, 1998. The only modification was to
reduce the borrowing amount to the lesser of $6 million, or 40% of the
Partnership's Qualified Accounts, as defined by the agreement.
The Company has also guaranteed amounts outstanding under installment loan
agreements of TIF X totaling $790,865 at September 30, 1997. The agreements are
collateralized by certain direct financing leases and a second interest in all
assets of TIF X.
8. CLASS B NONVOTING CONVERTIBLE STOCK
The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes each
year, up to a maximum of $1.20 per share. The Class B nonvoting convertible is
convertible on a one-for-one basis up to a maximum of 20% of the Class A common
stock of the Company after conversion. The stock is redeemable at $10 per share
for a 30-day period after the tenth anniversary of the issuance date (April,
1990 to September, 1991) at the option of the holder. Shares which are not
redeemed during that time are automatically converted to Class A common stock on
a one-for-one basis.
The following summarizes the amounts pertaining to the Class B nonvoting
convertible stock as set forth in the balance sheets at September 30, 1997:
Class B nonvoting convertible stock (no par value-authorized
100,000 shares, issued and outstanding 75,500 shares) at
redemption or liquidation value................................. $ 755,000
Unamortized stock issuance costs.................................. (26,077)
---------
$ 728,923
9. PREFERRED STOCK
Each share of the Series A preferred stock is entitled to cumulative annual
dividends of 8% payable, if as and when declared by the Board of Directors,
quarterly. Unpaid dividends will accumulate and be payable prior to the payment
of dividends on the Company's Class A common stock. The preferred stock is
callable at any time at the option of the Company, on not less than 30 days
written notice to registered holders. The redemption price shall be $14.70 per
share if redeemed during 1997, $14.56 per share if redeemed during 1998, $14.42
per share if redeemed during 1999, $14.28 per share if redeemed during 2000,
$14.14 per share if redeemed during 2001, and $14.00 per share if redeemed
thereafter, plus, in each case, accumulated unpaid dividends. Unless previously
redeemed by the Company, the holders of the preferred stock are entitled at any
time to convert each share into .875 shares of Class A common stock. The
preferred stock is not entitled to vote on any matter except where the Iowa
Corporation Act requires voting as a class, in which case each share of stock
shall be entitled to one vote per share on those matters where the preferred
stock is voting as a class. The preferred stock is entitled to a preference on
liquidation equal to $14.00 per share, plus accumulated unpaid dividends. The
Company has sold $2,000,000 of this offering at September 30, 1997, out of a
total offered amount of $2,000,000.
110
GLOSSARY
As used in this Prospectus, the following definitions of terms are
applicable:
"Acquisition Expenses" means expenses including, but not limited to, legal
fees and expenses, travel and communication expenses, costs of appraisals,
accounting fees and expenses, and miscellaneous expenses relating to selection
and acquisition of Program Assets, whether or not the Program Assets are
acquired.
"Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase or manufacture of Equipment
acquired by or financings placed by the Partnership. Included in the computation
of such fees or commissions shall be any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee, or any fee of a
similar nature, however designated. See Paragraph 9.2.4 of the Partnership
Agreement.
"Adjusted Capital Contribution" of a Limited Partner as of any date means
the Capital Contribution of the Limited Partner, less the total amount of all
payments made as Liquidating Distribution or as a return of capital to the
Limited Partner and to prior holders of such Limited Partner's Units prior to or
on such date pursuant to Paragraphs 11.4.3 or 11.5 of the Partnership Agreement.
"Admission Date" means any date on which subscribers for Units offered
pursuant to this Prospectus are admitted to the Partnership as Limited Partners.
"Affiliate" means (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10.0% or more of the outstanding voting securities of such
other person, (iii) any officer, director or partner of such person, and (iv) if
such other person is an officer, director or partner, any company for which such
person acts in such capacity.
"Assignee" means a person who is shown in the Partnership's records as
having acquired a beneficial interest in one or more Units by assignment from a
Limited Partner.
"Book Value of the Partnership" means the book value of the Partnership's
assets less liabilities, as computed for federal income tax purposes.
"Capital Account" means the account established and maintained for each
Partner in accordance with federal income tax accounting principles, including
specifically Section 704 of the Code and the regulations thereunder.
"Capital Contribution" means with respect to the General Partner, the
$10,000 contributed by it to the capital of the Partnership. With respect to
each Limited Partner, Capital Contribution means the cash contributed to the
capital of the Partnership by such Limited Partner for the Units ($1,000 per
Unit) sold or issued to him by the Partnership, which amount will be attributed
to, and will be considered to be a Capital Contribution of any subsequent
Assignee of such Units.
"Cash Available for Distribution" means Cash Flow plus cash funds available
for distribution from Partnership reserves, less amounts set aside for
restoration or creation of reserves as determined by the General Partner in its
sole discretion.
"Cash Flow" means all cash funds provided from operations, without deduction
for depreciation, but after deducting cash funds used to pay all expenses and
debt payments or pay for capital improvements and replacements (other than cash
funds withdrawn from reserves).
"Closing Date" means the date upon which the offering of Units terminates,
which is intended to be no later than one year after the Effective Date;
provided that if the Minimum Offering has been achieved and registration is
renewed with the applicable federal and state agencies, the General Partner may
extend the offering period and postpone the Closing Date for up to an additional
year (i.e., two years) from the Effective Date.
111
"Code" means the Internal Revenue Code of 1986, as amended, or corresponding
provisions of subsequent revenue laws.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of equipment which is
reasonable, customary and competitive in light of the size, type and location of
the equipment.
"Controlling Person" means any officer, director, executive manager, senior
manager or equity holder of 5.0% or more of the General Partner or its
Affiliates, or any person having the power to direct or cause direction of the
General Partner or its Affiliates, whether through the ownership of voting
securities, by contract, or otherwise.
"Effective Date" means the date on which the offering is declared effective
by the SEC.
"Equipment" includes all types of equipment and other personal property that
may be purchased directly or indirectly by the Partnership, as generally
described in the Prospectus under the caption "Investment Objectives and
Policies," and includes property which is rehabilitated or reconfigured for re-
lease or sale.
"Escrow Agent" means First National Bank Iowa, Cedar Rapids, Iowa, or any
banking institution that serves as escrow agent for the Capital Contributions
prior to the Partnership achieving the Minimum Offering.
"Front End Fees" means the fees and expenses paid by any party for any
services rendered during the Partnership's organizational or acquisition phase
including Organization and Offering Expenses, Acquisition Fees, Acquisition
Expenses, and any other similar fees, however designated. Front End Fees shall
not include any Acquisition Fees or Acquisition Expenses paid by a manufacturer
of Equipment to any of its employees unless such employees are Affiliates of the
General Partner.
"Full Payout Lease" means, with respect to Equipment, a lease under which
the non-cancelable rental payments due during the initial term of the lease
(excluding any option periods) are sufficient to recover the Purchase Price of
Equipment.
"General Partner" means Berthel Fisher & Company Leasing, Inc., an Iowa
corporation, or any additional or successor general partner of the Partnership.
"Gross Proceeds" means the aggregate amount of the original Capital
Contributions of all Limited Partners.
"Gross Rental Payments" received by the Partnership means the aggregate
amount of gross lease payments received by the Partnership, including receipts
classified as contract receivable payments in accordance with generally accepted
accounting principles.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and who is qualified to perform such
work.
"Initial Admission Date" means the date on which subscribers for the minimum
(1,200 Units) have been first admitted to the Partnership as Limited Partners,
which date shall be not later than fifteen (15) days after the release by the
Escrow Agent of the proceeds of the sale of Units.
"Interest" means the entire ownership interest of a Partner in the
Partnership at any particular time, including the right of such Partner to any
and all benefits, including fees, to which such Partner may be entitled under
the terms of the Partnership Agreement together with the obligations of such
Partner to comply with the terms of this Partnership Agreement.
112
"Investment in Program Assets" means the amount of Capital Contributions
actually paid or allocated to the purchase, manufacture or renovation of
Equipment or other Program Assets acquired by the Partnership, including the
purchase of Equipment, working capital reserves allocable thereto (except that
working capital reserves in excess of 3.0% shall not be included), and other
cash payments such as interest and taxes but excluding Front End Fees.
"IRS" means the Internal Revenue Service.
"Lease Portfolio" includes all Partnership cash and cash equivalents, all
Equipment and leases thereof, all financing transactions, and all other
Partnership assets and securities.
"Limited Partner" refers to any person who is admitted to the Partnership as
a Limited Partner or a Substitute Limited Partner.
"Liquidating Distributions" means distributions to the Partners which, with
respect to any year, are in excess of the Operating Distributions for such year,
and distributions pursuant to Section 11.4 of the Partnership Agreement.
"Liquidating Phase" of the Partnership means the period beginning no later
than the fifth anniversary of the Closing Date, or such earlier time as the
General Partner determines is in the best interests of the Limited Partners, and
continuing until the assets of the Partnership are liquidated, the liabilities
of the Partnership are satisfied and the distribution of the Liquidating
Distributions to the Partners is completed.
"Management Fee" means the fee paid to the General Partner for managing the
operations of the Partnership. The Management Fee will be paid, of course, only
if the General Partner actually serves in the capacity of General Partner and
performs the services required to be performed by the General Partner.
"Minimum Offering" consists of subscriptions for 1,200 Units accepted by the
General Partner, and payment received by the Escrow Agent of $1,200,000 for such
Units.
"NASAA" means the North American Securities Administrators Association, Inc.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Disposition Proceeds" means the proceeds realized by the Partnership
from the sale, refinancing or other disposition of Program Assets, including
insurance proceeds or lessee indemnity payments arising from the loss or
destruction of Equipment, less all Partnership liabilities.
"Net Income" or "Net Loss" means the net income or net loss of the
Partnership, as determined for federal income tax purposes under the accrual
method of accounting.
"Net Proceeds" means the total of Gross Proceeds reduced by Organization and
Offering Expenses, Selling Commissions and Acquisition Fees payable by the
Partnership.
"Net Worth" means the excess of total assets over total liabilities as
determined by generally accepted accounting principles, except that if any of
such assets have been depreciated, then the amount of deprecation relative to
any particular asset may be added to the depreciated cost of such asset to
compute total assets. The amount of depreciation may be added only to the extent
that the amount resulting after adding such depreciation does not exceed the
fair market value of such asset.
"1986 Tax Act" means the Tax Reform Act of 1986.
"1987 Tax Act" means the Revenue Act of 1987.
"Operating Distributions" means those distributions during the Operating
Phase described under the caption "Cash Distributions and Redemptions."
"Operating Distributions to Partners" consists of that component of
Operating Distributions equal to an annual distribution of up to 9.6% (payable
in monthly distributions of up to approximately .8% to each
113
Partner) calculated on each Partner's Adjusted Capital Contribution based upon
the number of months that such Partner was admitted to the Partnership.
"Operating Phase" of the Partnership means the period beginning on the
Effective Date and ending upon the commencement of the Liquidating Phase.
"Organization and Offering Expenses" means expenses incurred in connection
with formation of the Partnership and preparing the Partnership for registration
and subsequently offering and distributing it to the public, including sales
commissions paid to brokers or dealers in connection with the distribution of
Interests and all advertising expenses except advertising expenses related to
the leasing of Equipment. See Paragraph 9.2.3 of the Partnership Agreement.
"Partners" refers collectively to the General Partner and the Limited
Partners. Reference to a "Partner" refers to any one of the Partners.
"Partnership" refers to the limited partnership governed by the Partnership
Agreement.
"Partnership Agreement" means the Agreement of Limited Partnership of
Telecommunications Income Fund XI, L.P., as it may be amended from time to time.
"Person" means any natural person, partnership, corporation, association or
other legal entity.
"Present Value of the Partnership's Lease Portfolio" includes all
Partnership noncancellable lease payments receivable on all existing Partnership
leases (considered without regard to any renewals or extensions thereof)
discounted to their present value at an interest rate of 8.0% plus all
Partnership cash and the fair market value of all other Partnership securities
or assets. The Present Value of the Partnership's Lease Portfolio will be
determined annually by an independent accounting firm.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in equipment. The Partnership is a Program.
"Program Interest" means the limited partnership unit or other indicia of
ownership in a Program.
"Program Assets" means Equipment and other tangible and intangible assets,
including, without limitation, secured loans and other financings, furniture,
fixtures and leasehold improvements, directly or indirectly acquired, owned,
leased, sold or financed by the Program.
"Prospectus" means the final prospectus in the Registration Statement filed
with the SEC on Form S-1, as amended, with respect to the Units offered for
sale, as such Prospectus may be supplemented from time to time.
"Purchase Price of Equipment" means the price paid upon the purchase or sale
of a particular item of Equipment, including the amount of Acquisition Fees and
all liens and mortgages on the Equipment, but excluding points and prepaid
interest.
"Redemption Value of Investor's Units" means the investor's Capital Account
valued by the General Partner as of the last day of the fiscal quarter prior to
the quarter during which a redemption request is received.
"Roll Up" means a transaction involving the acquisition, merger, conversion,
or consolidation either directly or indirectly of the Partnership and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(a) a transaction involving securities of a Program that have been for
at least twelve months listed on a national securities exchange or traded
through the National Association of Securities Dealers Automated Quotation
National Market System; or
114
(b) a transaction involving the conversion to corporate, trust or
association form of only the Partnership if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(1) Limited Partners' voting rights;
(2) the term of existence of the Partnership;
(3) Sponsor compensation; or
(4) The Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust, or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"SEC" mean the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Commission" means any commission paid by the Partnership to the
Managing Sales Agent and Selected Sales Agents for their services in marketing
Units as described in "Compensation of the General Partner and Affiliates."
"Special Report" means that report required by the NASAA Equipment Leasing
Guidelines, Section V.G.1.(c), as in effect on the date hereof, which is an
annual report by independent certified public accountants of the breakdown and
allocation of the costs reimbursed to the General Partner or its Affiliates.
Such report shall at a minimum provide a review of the time records of
individual employees, the costs of whose services were reimbursed, and a review
of the specific nature of the work performed by each such employee. The
information required by such report may be contained in the annual report sent
to Limited Partners by the Partnership.
"Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership or any person who will manage or
participate in the management of the Partnership and any Affiliate of any such
person. Sponsor does not include a person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Substitute Limited Partner" means any person who complies with the
requirements of the Partnership Agreement to become a Substitute Limited Partner
of the Partnership and is admitted to the Partnership as a Limited Partner.
"Terminated Partner" means a General Partner who withdraws, is removed,
becomes bankrupt, is dissolved and liquidated or otherwise ceases to exist.
"Unit" means a Limited Partner's interest attributable to each Capital
Contribution of $1,000 to the Partnership.
115
EXHIBIT A
AGREEMENT OF LIMITED PARTNERSHIP
OF
TELECOMMUNICATIONS INCOME FUND XI, L.P.
TELECOMMUNICATIONS INCOME FUND XI, L.P.
INDEX TO PARTNERSHIP AGREEMENT
ARTICLE PAGE
- --------- ---------
I DEFINED TERMS.................................................................................. A-1
II NAME OF PARTNERSHIP............................................................................ A-6
III TERM OF PARTNERSHIP............................................................................ A-6
IV BUSINESS AND PURPOSES.......................................................................... A-6
V PRINCIPAL PLACE OF BUSINESS.................................................................... A-7
VI NAMES AND ADDRESSES OF PARTNERS................................................................ A-7
VII CAPITAL CONTRIBUTIONS.......................................................................... A-7
VIII STATUS OF LIMITED PARTNERS..................................................................... A-9
IX COMPENSATION TO THE GENERAL PARTNER AND SELLING COMMISSIONS TO THE BROKER-DEALERS.............. A-9
X PARTNERSHIP EXPENSES........................................................................... A-11
XI DISTRIBUTIONS.................................................................................. A-12
XII ALLOCATIONS OF INCOME OR LOSS.................................................................. A-15
XIII ASSIGNMENT OF PARTNERSHIP UNITS................................................................ A-15
XIV SUBSTITUTE LIMITED PARTNERS.................................................................... A-16
XV BOOKS, RECORDS, ACCOUNTING AND REPORTS......................................................... A-17
XVI RIGHTS, AUTHORITY AND POWERS OF THE GENERAL PARTNER............................................ A-20
XVII RIGHTS, POWERS AND VOTING RIGHTS OF THE LIMITED PARTNERS....................................... A-27
XVIII WITHDRAWAL, REMOVAL, BANKRUPTCY OR DISSOLUTION AND LIQUIDATION OF GENERAL PARTNER AND TRANSFER
OF GENERAL PARTNER'S INTERESTS............................................................... A-29
XIX REDEMPTION OF PARTNERSHIP UNITS................................................................ A-30
XX CERTAIN TRANSACTIONS........................................................................... A-31
XXI DISSOLUTION AND TERMINATION OF THE PARTNERSHIP................................................. A-31
XXII SPECIAL POWER OF ATTORNEY...................................................................... A-32
XXIII EXCULPATION AND INDEMNIFICATION................................................................ A-33
XXIV MISCELLANEOUS.................................................................................. A-34
A-i
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
("Agreement") dated December 18, 1997, by and among BERTHEL FISHER & COMPANY
LEASING, INC., an Iowa corporation, as General Partner ("General Partner"),
THOMAS J. BERTHEL, an individual, as the initial limited partner ("Initial
Limited Partner") and the Limited Partners admitted to the Partnership pursuant
to Articles VII and XIV, to establish and form a partnership (the "Partnership")
under the Iowa Limited Partnership Act. The parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
As used herein, the following terms will have the following meanings:
"Acquisition Expenses" means expenses including, but not limited to, legal
fees and expenses, travel and communication expenses, costs of appraisals,
accounting fees and expenses, and miscellaneous expenses relating to selection
and acquisition of Program Assets, whether or not the Program Assets are
acquired.
"Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase or manufacture of Equipment
acquired by or financings placed by the Partnership. Included in the computation
of such fees or commissions shall be any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee, or any fee of a
similar nature, however designated. See Section 9.2.4 hereof.
"Adjusted Capital Contribution" of a Partner as of any date means the
Capital Contribution of the Partner, less the total amount of all payments made
as Liquidating Distribution or as a return of capital to the Partner and to
prior holders of such Partner's partnership interest prior to or on such date
pursuant to Sections 11.4.3 or 11.5 hereof.
"Admission Date" means any date on which subscribers for Units offered
pursuant to this Prospectus are admitted to the Partnership as Limited Partners.
"Affiliate" means (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10.0% or more of the outstanding voting securities of such
other person, (iii) any officer, director or partner of such person, and (iv) if
such other person is an officer, director or partner, any company for which such
person acts in such capacity.
"Assignee" means a person who is shown in the Partnership's records as
having acquired a beneficial interest in one or more Units by assignment from a
Limited Partner.
"Book Value of the Partnership" means the book value of the Partnership's
assets less liabilities, as computed for federal income tax purposes.
"Capital Account" means the account established and maintained for each
Partner in accordance with federal income tax accounting principles, including
specifically Section 704 of the Code and the regulations thereunder.
"Capital Contribution" means with respect to the General Partner, the
$10,000 contributed by it to the capital of the Partnership. With respect to
each Limited Partner, Capital Contribution means the cash contributed to the
capital of the Partnership by such Limited Partner for the Units ($1,000 per
Unit) sold or issued to him by the Partnership, which amount will be attributed
to, and will be considered to be a Capital Contribution of any subsequent
Assignee of such Units.
"Cash Available for Distribution" means Cash Flow plus cash funds available
for distribution from Partnership reserves, less amounts set aside for
restoration or creation of reserves as determined by the General Partner in its
sole discretion.
A-1
"Cash Flow" means all cash funds provided from operations, without deduction
for depreciation, but after deducting cash funds used to pay all expenses and
debt payments or pay for capital improvements and replacements (other than cash
funds withdrawn from reserves).
"Closing Date" means the date upon which the offering of Units terminates,
which is intended to be no later than one year after the Effective Date;
provided that if the Minimum Offering has been achieved and registration is
renewed with the applicable federal and state agencies, the General Partner may
extend the offering period and postpone the Closing Date for up to an additional
year (i.e., two years) from the Effective Date.
"Code" means the Internal Revenue Code of 1986, as amended, or corresponding
provisions of subsequent revenue laws.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of equipment which is
reasonable, customary and competitive in light of the size, type and location of
the equipment.
"Controlling Person" means any officer, director, executive manager, senior
manager or equity holder of 5.0% or more of the General Partner or its
Affiliates, or any person having the power to direct or cause direction of the
General Partner or its Affiliates, whether through the ownership of voting
securities, by contract, or otherwise.
"Effective Date" means the date on which the offering is declared effective
by the SEC.
"Equipment" includes all types of equipment and other personal property that
may be purchased directly or indirectly by the Partnership, as generally
described in the Prospectus under the caption "Investment Objectives and
Policies," and includes property which is rehabilitated or reconfigured for re-
lease or sale.
"Escrow Agent" means First National Bank Iowa, Cedar Rapids, Iowa or any
other banking institution that serves as escrow agent for the Capital
Contributions prior to the Partnership achieving the Minimum Offering.
"Front End Fees" means the fees and expenses paid by any party for any
services rendered during the Partnership's organizational or acquisition phase
including Organization and Offering Expenses, Acquisition Fees, Acquisition
Expenses, and any other similar fees, however designated. Front End Fees shall
not include any Acquisition Fees or Acquisition Expenses paid by a manufacturer
of Equipment to any of its employees unless such employees are Affiliates of the
General Partner.
"Full Payout Lease" means, with respect to Equipment, a lease under which
the non-cancelable rental payments due during the initial term of the lease
(excluding any option periods) are sufficient to recover the Purchase Price of
Equipment.
"General Partner" means Berthel Fisher & Company Leasing, Inc., an Iowa
corporation, or any additional or successor general partner of the Partnership.
"Gross Proceeds" means the aggregate amount of the original Capital
Contributions of all Limited Partners.
"Gross Rental Payments" received by the Partnership means the aggregate
amount of gross lease payments received by the Partnership, including receipts
classified as contract receivable payments in accordance with generally accepted
accounting principles.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and who is qualified to perform such
work.
A-2
"Initial Admission Date" means the date on which subscribers for the minimum
(1,200 Units) have been first admitted to the Partnership as Limited Partners,
which date shall be not later than fifteen (15) days after the release by the
Escrow Agent of the proceeds of the sale of Units.
"Interest" means the entire ownership interest of a Partner in the
Partnership at any particular time, including the right of such Partner to any
and all benefits, including fees, to which such Partner may be entitled under
the terms of this Partnership Agreement together with the obligations of such
Partner to comply with the terms of this Partnership Agreement.
"Investment in Program Assets" means the amount of Capital Contributions
actually paid or allocated to the purchase, manufacture or renovation of
Equipment or other Program Assets acquired by the Partnership, including the
purchase of Equipment, working capital reserves allocable thereto (except that
working capital reserves in excess of 3.0% shall not be included), and other
cash payments such as interest and taxes but excluding Front End Fees.
"IRS" means the Internal Revenue Service.
"Lease Portfolio" includes all Partnership cash and cash equivalents, all
Equipment and leases thereof, all financing transactions, and all other
Partnership assets and securities.
"Limited Partner" refers to any person who is admitted to the Partnership as
a Limited Partner or a Substitute Limited Partner.
"Liquidating Distributions" means distributions to the Partners which, with
respect to any year, are in excess of the Operating Distributions for such year,
and distributions pursuant to Section 11.4 hereof.
"Liquidating Phase" of the Partnership means the period beginning no later
than the fifth anniversary of the Closing Date, or such earlier time as the
General Partner determines is in the best interests of the Limited Partners, and
continuing until the assets of the Partnership are liquidated, the liabilities
of the Partnership are satisfied and the distribution of the Liquidating
Distributions to the Partners is completed.
"Management Fee" means the fee paid to the General Partner for managing the
operations of the Partnership. The Management Fee will be paid, of course, only
if the General Partner actually serves in the capacity of General Partner and
performs the services required to be performed by the General Partner.
"Minimum Offering" consists of subscriptions for 1,200 Units accepted by the
General Partner, and payment received by the Escrow Agent of $1,200,000 for such
Units.
"NASAA" means the North American Securities Administrators Association, Inc.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Disposition Proceeds" means the proceeds realized by the Partnership
from the sale, refinancing or other disposition of Program Assets, including
insurance proceeds or lessee indemnity payments arising from the loss or
destruction of Equipment, less all Partnership liabilities.
"Net Income" or "Net Loss" means the net income or net loss of the
Partnership, as determined for federal income tax purposes under the accrual
method of accounting.
"Net Proceeds" means the total of Gross Proceeds reduced by Organization and
Offering Expenses, Selling Commissions and Acquisition Fees payable by the
Partnership.
"Net Worth" means the excess of total assets over total liabilities as
determined by generally accepted accounting principles, except that if any of
such assets have been depreciated, then the amount of deprecation relative to
any particular asset may be added to the depreciated cost of such asset to
compute total assets. The amount of depreciation may be added only to the extent
that the amount resulting after adding such depreciation does not exceed the
fair market value of such asset.
A-3
"Operating Distributions" means those distributions during the Operating
Phase described under the caption "Cash Distributions and Redemptions."
"Operating Phase" of the Partnership means the period beginning on the
Effective Date and ending upon the commencement of the Liquidating Phase.
"Operating Distributions to Partners" consists of that component of
Operating Distributions equal to an annual distribution of up to 9.6% (payable
in monthly distributions of up to approximately .8% to each Partner) calculated
on each Partner's Adjusted Capital Contribution based upon the number of months
that such Partner was admitted to the Partnership.
"Organization and Offering Expenses" means expenses incurred in connection
with formation of the Partnership and preparing the Partnership for registration
and subsequently offering and distributing it to the public, including sales
commissions paid to brokers or dealers in connection with the distribution of
Interests and all advertising expenses except advertising expenses related to
the leasing of Equipment. See Section 9.2.3 hereof.
"Partners" refers collectively to the General Partner and the Limited
Partners. Reference to a "Partner" refers to any one of the Partners.
"Partnership" refers to the limited partnership governed by this Partnership
Agreement.
"Partnership Agreement" means this Agreement of Limited Partnership of
Telecommunications Income Fund XI, L.P., as it may be amended or amended and
restated from time to time.
"Person" means any natural person, partnership, corporation, association or
other legal entity.
"Present Value of the Partnership's Lease Portfolio" includes all
Partnership noncancellable lease payments receivable on all existing Partnership
leases (considered without regard to any renewals or extensions thereof)
discounted to their present value at an interest rate of 8.0% plus all
Partnership cash and the fair market value of all other Partnership securities
or assets. The Present Value of the Partnership's Lease Portfolio will be
determined annually by an independent accounting firm.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in equipment. The Partnership is a Program.
"Program Assets" means Equipment and other tangible and intangible assets,
including, without limitation, secured loans and other financings, furniture,
fixtures and leasehold improvements, directly or indirectly acquired, owned,
leased, sold or financed by the Program.
"Program Interest" means the limited partnership unit or other indicia of
ownership in a Program.
"Prospectus" means the final prospectus in the Registration Statement filed
with the SEC on Form S-1, as amended, with respect to the Units offered for
sale, as such Prospectus may be supplemented from time to time.
"Purchase Price of Equipment" means the price paid upon the purchase or sale
of a particular item of Equipment, including the amount of Acquisition Fees and
all liens and mortgages on the Equipment, but excluding points and prepaid
interest.
"Redemption Value of Investor's Units" means the investor's Capital Account
valued by the General Partner as of the last day of the fiscal quarter prior to
the quarter during which a redemption request is received.
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"Roll-Up" means a transaction involving the acquisition, merger, conversion,
or consolidation either directly or indirectly of the Partnership and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(a) a transaction involving securities of a Program that have been for
at least twelve months listed on a national securities exchange or traded
through the National Association of Securities Dealers Automated Quotation
National Market System; or
(b) a transaction involving the conversion to corporate, trust or
association form of only the Partnership if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(1) Limited Partners' voting rights;
(2) the term of existence of the Partnership;
(3) Sponsor compensation; or
(4) The Partnership's investment objectives.
"Roll-Up Entity" means the partnership, corporation, trust, or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"SEC" mean the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Commission" means any commission paid by the Partnership to the
Managing Sales Agent and Selected Sales Agents for their services in marketing
Units as described in "Compensation of the General Partner and Affiliates."
"Special Report" means that report required by the NASAA Equipment Leasing
Guidelines, Section V.G.1.(c), as in effect on the date hereof, which is an
annual report by independent certified public accountants of the breakdown and
allocation of the costs reimbursed to the General Partner or its Affiliates.
Such report shall at a minimum provide a review of the time records of
individual employees, the costs of whose services were reimbursed, and a review
of the specific nature of the work performed by each such employee. The
information required by such report may be contained in the annual report sent
to Limited Partners by the Partnership.
"Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership or any person who will manage or
participate in the management of the Partnership and any Affiliate of any such
person. Sponsor does not include a person whose only relation with the Program
is that of an independent equipment manager and whose only compensation is as
such. Sponsor does not include wholly independent third parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of Program
interests.
"Substitute Limited Partner" means any person who complies with the
requirements of the Partnership Agreement to become a Substitute Limited Partner
of the Partnership and is admitted to the Partnership as a Limited Partner.
"Terminated Partner" means a General Partner who withdraws, is removed,
becomes bankrupt, is dissolved and liquidated or otherwise ceases to exist.
"Unit" means a Limited Partner's interest attributable to each Capital
Contribution of $1,000 to the Partnership.
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ARTICLE II
NAME OF PARTNERSHIP
The name of the Partnership is TELECOMMUNICATIONS INCOME FUND XI, L.P. The
General Partner may, in its sole discretion, change the name of the Partnership
and, in the event of any such change, the General Partner will notify the
Limited Partners in writing within thirty (30) days after any such change. In
addition, the General Partner may adopt such trade or fictitious names as it may
deem appropriate.
ARTICLE III
TERM OF PARTNERSHIP
The Partnership commences at the time of the filing of the Certificate of
Limited Partnership in the office of the Secretary of State of the State of
Iowa, and will continue until December 31, 2012, unless sooner dissolved and
terminated as provided herein.
ARTICLE IV
BUSINESS AND PURPOSES
4.1 BUSINESS ACTIVITY. The primary purpose of the Partnership is to
acquire, own, operate, manage, lease, sell, convey, assign, exchange and dispose
of Equipment or interests therein, either in its own name, or in the name or
names of one or more nominees of the Partnership. The Partnership may enter into
financing arrangements which will involve making secured loans to or other debt
arrangements with unaffiliated third parties. These financings will be completed
only if such financings are advantageous to the Partnership, and will include
cases where lease transactions with those third parties would result in
unfavorable tax treatment. Such loans will generally be securitized with a first
security interest in equipment. In addition, the Partnership may engage in any
other business or do any and all acts and things necessary, incidental or
convenient to carry on the Partnership purposes and business as specified in
this section. Notwithstanding the foregoing, the Partnership shall only acquire
that type of Equipment that the General Partner is experienced in acquiring and
leasing. For purposes of this Partnership Agreement, any Equipment acquired and
held by one or more nominees for the benefit of the Partnership will be deemed
to have been acquired by and to be owned by the Partnership itself. The
Partnership shall not acquire equipment from a limited or general partnership,
joint venture, unincorporated association or similar organization in which the
General Partner has an interest, other than the General Partner. The Partnership
may not acquire Equipment in exchange for Units. The Partnership may not invest
as a limited partner in other leasing programs, as defined by guidelines
promulgated by NASAA.
4.2 OPERATING PHASE OF THE PARTNERSHIP. During the Operating Phase of the
Partnership, the Partnership will make payments pursuant to the terms of Article
XI hereof. During the Operating Phase, any portion of the Partnership's cash or
cash equivalents the General Partner believes are in excess of amounts required
for working capital or other reserves necessary for the operation of the
Partnership will either, in the discretion of the General Partner, be
distributed as Operating Distributions, reinvested in Equipment, or distributed
as Liquidating Distributions (provided there is no cumulative deficiency in
Operating Distributions).
4.3 WINDING-UP OF PARTNERSHIP BUSINESS. Beginning no later than the fifth
anniversary of the Closing Date, the Partnership will cease to reinvest in
Equipment and the General Partner will begin the orderly liquidation of all
Partnership assets. The Liquidation Phase shall begin at an earlier date if the
General Partner determines that it is in the best interest of the Partnership to
cease reinvesting all of the Partnership assets in Equipment. The General
Partner may, if it determines that it is in the best interests of the Limited
Partners, not reinvest a portion of the Partnership assets in Equipment at a
time prior to the fifth anniversary of the Closing Date, without commencing the
Liquidating Phase.
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4.4 LIQUIDATION AND DISTRIBUTION OF PARTNERSHIP PROCEEDS. During the
Liquidating Phase of the Partnership, the General Partner will: (i) liquidate
the assets of the Partnership for cash, (ii) satisfy all Partnership
liabilities, (iii) set aside sufficient reserves to provide for future or
contingent Partnership liabilities, and (iv) make quarterly distributions of the
Partnership's remaining Cash Available for Distribution to all Partners
according to the terms of Article XI hereof.
ARTICLE V
PRINCIPAL PLACE OF BUSINESS
The principal place of business of the Partnership is located at 100 Second
Street, SE, Cedar Rapids, Iowa 52401. The General Partner may from time to time
change the principal place of business of the Partnership, and in the event of
any such change, it will notify the Limited Partners in writing within thirty
(30) days after such change. The General Partner may also establish such
additional places of business for the Partnership as it may deem appropriate.
The name and address of the registered agent for the Partnership is Thomas J.
Berthel, 100 Second Street, SE, Cedar Rapids, Iowa 52401.
ARTICLE VI
NAMES AND ADDRESSES OF PARTNERS
6.1 GENERAL PARTNER. The General Partner of the Partnership is Berthel
Fisher & Company Leasing, Inc., an Iowa corporation, the address of which is 100
Second Street, S.E., Cedar Rapids, Iowa 52401.
6.2 LIMITED PARTNERS. The names, addresses and Capital Contributions of
the Limited Partners are set forth on Exhibit I attached hereto, which exhibit
will be maintained at the principal place of business of the Partnership.
ARTICLE VII
CAPITAL CONTRIBUTIONS
7.1 GENERAL PARTNER. Berthel Fisher & Company Leasing, Inc., as the
General Partner, has contributed Ten Thousand Dollars ($10,000.00) in cash to
the capital of the Partnership and has received an Interest as General Partner,
which is the equivalent of ten (10) Units and which has the same rights and
entitlements as if the General Partner owned 10 Units. The General Partner may
contribute additional amounts to the Partnership to purchase Units. In addition,
the General Partner will be entitled to receive an interest in the Partnership
and its cash distributions and Net Income and Net Loss according to the
provisions of Articles XI and XII. With respect to the ownership of Units, the
General Partner or any Affiliate will have the same rights and entitlements as
all other Limited Partners.
7.2 LIMITED PARTNER AT FORMATION. Thomas J. Berthel, as Initial Limited
Partner, has acquired an initial Unit in return for $1,000. Upon the admission
of Limited Partners pursuant to Section 7.4, the Partnership shall return those
funds to the Initial Limited Partner and shall reacquire his Unit, and the
Initial Limited Partner shall cease to be a Limited Partner in the Partnership.
7.3 LIMITED PARTNERS. Except as otherwise provided in this Partnership
Agreement, the Partnership intends to sell and issue to Limited Partners not
less than 1,200 Units nor more than 25,000 Units and to admit as Limited
Partners the persons who contribute cash to the capital of the Partnership for
such Units.
7.3.1 Each person who acquires Units will be eligible to become a
Limited Partner in the Partnership at such time as he has (i) purchased two
or more Units, (ii) contributed the sum of $1,000 in cash for each Unit
purchased, (iii) executed and filed with the Partnership a Subscription
Agreement in the form attached to the Prospectus as Exhibit B, which sets
forth an intention to become a Limited Partner and requests admission to the
Partnership in that capacity, together with such other instruments as the
General Partner may deem necessary or desirable to effect such
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admission, including the written acceptance and adoption by such person of
the provisions of this Partnership Agreement, and the execution and delivery
to the General Partner of a special power of attorney, the form, style and
content of which are more fully described herein, and (iv) obtained the
consent of the General Partner to such initial admission, the granting or
denial of which will be within the absolute discretion of the General
Partner.
7.3.2 Until Units in an aggregate amount of $1,200,000 have been sold
to Limited Partners other than the General Partner and the Initial Limited
Partner, which shall occur prior to the expiration of one year following the
effective date of the offering, all funds received from subscribers for
Units will be received by the Partnership in trust and will be deposited in
an interest bearing escrow account of the Escrow Agent, or any other banking
institution designated by the General Partner as escrow holder for such
funds. Upon receipt of a minimum of $1,200,000 from subscribers for Units
together with subscription agreements acceptable to the General Partner, the
funds (including the interest, if any, earned on such funds) will be
released from the escrow account to the Partnership on such date as the
General Partner shall determine, and the Partnership will admit such
purchasers into the Partnership as Limited Partners on the Initial Admission
Date.
7.3.3 After the Initial Admission Date, the General Partner will admit
Limited Partners on a daily basis. Subject to Section 7.3, a Limited Partner
will be deemed admitted into the Partnership on a particular date only if as
of that date his subscription funds are received and the General Partner has
accepted the subscription agreement. The General Partner will generally
accept or reject applications to become Limited Partners which are made in
accordance with the provisions of Section 7.3 no later than thirty (30) days
after the receipt of such applications. Subscription amounts of rejected
applicants will be returned to such applicants immediately upon rejection.
The General Partner will amend this Partnership Agreement or certificate as
and to the extent required by Iowa law to reflect the admission of a person
as a Limited Partner. Notwithstanding the foregoing, however, a Limited
Partner will be deemed to have been admitted to the Partnership on a
different date if the General Partner determines that such arrangement is
required or advisable under applicable law, including applicable tax law and
regulations.
7.3.4 Only after the Minimum Offering is achieved can the Partnership
receive subscription amounts directly and apply such funds to the purposes
of the Partnership. Any proceeds of the offering available for investment in
Program Assets that have not been invested or committed to investment in
Program Assets within 24 months after the Effective Date will be distributed
by the Partnership pro rata to the Limited Partners as a return of capital.
7.3.5 No Partner will be entitled to interest on his Capital
Contribution or on his Capital Account. Except as expressly provided herein,
no Partner will have the right to withdraw or to receive any return of his
Capital Contribution, and no Partner will have the right to receive property
other than cash in return of his Capital Contribution.
7.4 CAPITAL ACCOUNTS. A Capital Account will be established and maintained
for each Partner in accordance with federal income tax accounting principles and
specifically the provisions of Section 704 of the Code and the regulations
thereunder. The Capital Account of each Partner (i) will be credited with (a)
the amount of cash contributed by such Partner to the Partnership and (b) such
Partner's distributive share of Partnership Net Income (including income exempt
from tax) and (ii) will be debited with (a) the amount of cash and the fair
market value of property distributed to such Partner (net of liabilities assumed
by such Partner and liabilities to which such distributed property is subject),
(b) such Partner's distributive share of expenditures of the Partnership
described in Code Section 705(a)(2)(B) (which share will be determined in
accordance with such Partner's interest in the Partnership), and (c) such
Partner's distributive share of Partnership Net Loss. The transferee of all or a
portion of a Partner's Units will succeed to that portion of the Partner's
Capital Account which is allocable to the portion of the Units transferred.
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ARTICLE VIII
STATUS OF LIMITED PARTNERS
Pursuant to the Iowa Limited Partnership Act no Limited Partner shall be
bound by, or be personally liable for, the expenses, liabilities or obligations
of the Partnership except as provided by law, unless the Limited Partner, in
addition to the exercise of the Limited Partner's rights and powers as a Limited
Partner, participates in the control of the business. Each Unit will be fully
paid and, except as provided by law, nonassessable. However, Limited Partners
understand and agree that they may be required under the Iowa Limited
Partnership Act (the "Iowa Act") to repay to the Partnership, with interest, any
return of their Capital Contributions previously made by the Partnership to the
extent necessary to discharge the Partnership's liabilities to creditors who
extended credit to the Partnership during the period the contribution was held
by the Partnership. In addition, if a Limited Partner receives a return of his
Capital Contribution in violation of this Partnership Agreement or of the Iowa
Act, such Limited Partner may be liable for up to six (6) years for the amount
of the Capital Contribution wrongfully returned.
ARTICLE IX
COMPENSATION TO THE GENERAL PARTNER AND
SELLING COMMISSIONS TO THE BROKER-DEALERS
9.1 The General Partner and its Affiliates and the selling broker-dealers
will receive compensation from the Partnership only as specified by this
Partnership Agreement. For a description of the General Partner's interest in
allocations of Net Income and Net Loss, and Partnership distributions, see
Articles X, XI and XII hereof. The General Partner and its Affiliates will not
be compensated for any services other than those described in this Partnership
Agreement.
9.2 OFFERING AND ACQUISITION PHASE.
9.2.1 LIMITATION ON FRONT END FEES. The General Partner will commit a
percentage of Capital Contributions to Investment in Program Assets which is
equal to the greater of (a) 80.0% of the Capital Contributions reduced by
.0625% for each 1.0% of indebtedness encumbering Program Assets; or (b)
75.0% of Capital Contributions. The percent of indebtedness encumbering
Program Assets is calculated by dividing the amount of indebtedness by the
Purchase Price of Equipment, excluding the Front End Fees. The resulting
quotient is then multiplied by .0625% to determine the percentage to be
deducted from 80.0%. The General Partner will bear all Front End Fees which
in the aggregate exceed that percentageof Gross Proceeds determined by
subtracting from 100% the percentage amount determined by application of the
foregoing formula.
9.2.2 SELLING COMMISSIONS. The Managing Sales Agent shall be Berthel
Fisher & Company Financial Services, Inc., an affiliate of the General
Partner. The Partnership will pay a Managing Sales Agent Fee to the Managing
Sales Agent equal to 9.0% of the Gross Proceeds. From such amount, the
Managing Sales Agent will pay commissions to Selected Sales Agents of 6.0%
of the selling price of the Units sold through them, provided that for all
Selected Sales Agents who sell more than $1,000,000 of Units, the commission
rate shall be 6.5% of the selling price of the Units sold through them.
9.2.3 ORGANIZATION AND OFFERING EXPENSES. The Partnership will pay a
maximum of three and one-half percent (3.5%) of Gross Proceeds of the
offering for actual expenses incurred by the General Partner in connection
with the formation of the Partnership, and in qualifying Units under
applicable federal and state law and any other expenses actually incurred
and directly related to the qualification, registration, advertising,
offering and sale of Units. Such expenses include (i) fees and expenses paid
by the Partnership to any counsel or accountants, (ii) registration fees,
filing fees and taxes, (iii) the costs of printing, amending, supplementing
and distributing the Prospectus and Registration Statement, (iv) the costs
of producing, qualifying, printing and distributing advertising and sales
materials
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used in connection with the issuance of Units, (v) the costs of "due
diligence" activities (including meetings and seminars), and (vi) accounting
and legal fees incurred in connection with any of the foregoing, but does
not include Acquisition Fees. The total of Organization and Offering
Expenses plus the nine percent (9.0%) Selling Commission will not exceed
twelve and one-half percent (12.5%) of the Gross Proceeds. The twelve and
one-half percent (12.5%) limitation is without recourse to, or reimbursement
by, the Partnership.
9.2.4 ACQUISITION FEE AND ACQUISITION EXPENSES. The General Partner
will receive an Acquisition Fee for rendering of its services in connection
with the research, evaluation and negotiation of available acquisition and
financing opportunities. The Acquisition Fee shall be in an amount equal to
five percent (5%) of the cost of Equipment purchased by the Partnership, all
or a portion of which will be payable when the Equipment is purchased by the
Partnership (or the General Partner as nominee) and five percent (5%) of the
amount of financings placed by the Partnership, payable upon the closing of
a financing transaction. The total Acquisition Fee including all fees and
commissions paid by all parties to all parties in connection with the
initial acquisition or manufacturer of Equipment will not exceed the lesser
of five percent (5%) of the cost of Equipment purchased by the Partnership
and financings placed by the Partnership, or an amount which is competitive
with that charged for Affiliates of the General Partner. Included in such
fee will be any leasing commission, selection fee, construction supervision
fee, financing fee, remarketing fee, nonrecurring management fee, or any fee
of a similar nature, however designated. The Partnership shall not pay,
directly or indirectly, a commission or fee (except to the extent permitted
as set forth in 9.2.1) to a Sponsor in connection with the reinvestment or
distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange, or refinancing of Program Assets. The General Partner
shall pay all Acquisition Expenses out of its Acquisition Fee.
9.3 OPERATING AND LIQUIDATING PHASES.
9.3.1 GENERAL PARTNER DISTRIBUTIONS. During the Operating Phase and
Liquidating Phase of the Partnership, the General Partner is entitled to
receive, to the extent available, (i) the General Partner's Expense
Allowance, (ii) the Management Fee, (iii) twenty percent (20%) of certain
Liquidating Distributions, as provided in Articles XI and XII hereof, (iv)
its distributions as owner of the General Partner interest (equivalent to 10
Units), and (v) the Re-Leasing fee described in Section 9.3.2.
9.3.2 RE-LEASING FEE. As compensation for providing re-leasing
services to the Partnership, the General Partner will receive a fee equal to
the lesser of the competitive rate for comparable services for similar
equipment or 2.0% of the gross rental payments derived from the re-lease of
such equipment after the time that the re-lease has been consummated as a
result of the efforts of the General Partner. The General Partner will not
be paid for re-leasing services where Equipment is re-leased to a previous
lessee of such Equipment or to an affiliate of such previous lessee. The
General Partner has and will maintain adequate staff to render such
re-leasing services and will render substantial re-leasing services in
connection with each re-lease of Equipment. Payment for re-leasing services
shall be paid as each rental payment is made over the term of the re-lease.
This fee will not be paid on a current basis if the Partnership has not paid
the Limited Partners Operating Distributions equal to 9.6% of Adjusted
Capital Contributions for the year. In such case, the fee will be accrued as
a debt of the Partnership payable out of future revenues.
9.4 INTEREST. The General Partner may make loans to the Partnership and
will be entitled to receive repayment of such loans and to receive interest on
loans made to the Partnership, subject to the provisions of Section 16.1.20.
9.5 WITHDRAWAL OF GENERAL PARTNER. Should the General Partner withdraw, be
removed, become bankrupt or dissolve and liquidate or otherwise cease to exist
as provided in Article XVIII, any portion of any fee or commission payable to
the General Partner pursuant to the provisions of this Article IX, which
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is then accrued and due, but not yet paid, will be paid by the Partnership to
the General Partner in accordance with Section 18.2.
ARTICLE X
PARTNERSHIP EXPENSES
10.1 The Partnership will not reimburse the General Partner or its
Affiliates, except for (i) Organization and Offering Expenses reimbursed
pursuant to Section 9.2.3; (ii) loans made pursuant to Section 9.4; (iii) the
actual cost to the General Partner or its Affiliates of goods and materials used
for or by the Partnership and obtained from persons who are not Affiliates of
the General Partner; (iv) expenses incurred by the General Partner or its
Affiliates related to the purchase, operations, financing and acquisition of
Equipment incurred prior to the time that the Partnership has funds available to
pay such expenses directly; and (v) administrative services provided by the
General Partner or any of its Affiliates, such as legal, accounting, computer,
transfer agent, mailings to Limited Partners and other similar services.
However, reimbursement for administrative expenses will be at the lesser of cost
or the competitive rate that is charged by persons who are not Affiliates of the
General Partner for comparable administrative services in the same geographic
area.
The reimbursement for administrative expenses will be for administrative
expenses that are necessary for the prudent operation of the Partnership, and
will not be for time expended by Controlling Persons of the General Partner or
its Affiliates, or for salaries, fringe benefits, travel expenses, and other
administrative items incurred or allocated to any Controlling Person of a
Sponsor. No general or administrative overhead incurred by the General Partner
in connection with the administration of the Partnership will be charged to the
Partnership. Such general or administrative overhead includes, but is not
limited to, salaries, rent, travel expenses, utilities, capital expenditures and
other items generally falling under the category of overhead. No payment will be
made for services to which the General Partner or its Affiliates are entitled by
way of a separate fee.
10.2 Subject to Section 10.1, the Partnership shall pay all expenses of the
Partnership, which expenses shall be billed directly to the Partnership from
unrelated third parties and not from the General Partner and may include, but
are not limited to: (i) all costs (excluding rent, depreciation, utilities,
capital equipment and other overhead items) of personnel employed full or
part-time by the Partnership and involved in the business of the Partnership,
and such personnel may include employees of the General Partner or its
Affiliates (other than Controlling Persons); (ii) all costs of borrowed money,
taxes and assessments on Equipment and other taxes applicable to the
Partnership; (iii) legal, audit, accounting, data processing, programming,
brokerage and other fees; (iv) printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution, transfer, registration
and recording of documents evidencing ownership of an interest in the
Partnership or in connection with the business of the Partnership; (v) fees and
expenses paid to independent contractors, bankers, brokers and servicers,
consultants and other Equipment management personnel, insurance brokers and
other agents; (vi) expenses in connection with the disposition, replacement,
alteration, repair, refurbishment, leasing, re-leasing, financing, refinancing
and operation of Equipment (including the costs and expenses of insurance
premiums and of maintenance of such Equipment); (vii) expenses of organizing,
revising, amending, converting, modifying or terminating the Partnership; (viii)
expenses in connection with distributions made by the Partnership to, and
communications, bookkeeping and clerical work necessary in maintaining relations
with its Limited Partners, including the costs of printing and mailing to such
persons any evidence of ownership of Units and reports of meetings of the
Limited Partners, and of preparation of proxy statements and solicitations of
proxies in connection therewith;
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(ix) expenses in connection with preparing and mailing reports required to be
furnished to Limited Partners for investor, tax reporting or other purposes,
and reports which the General Partner deems to be in the best interests of
the Partnership to furnish to the Limited Partners; (x) any accounting,
computer (including, but not limited to, terminals, controllers, leased
lines, and CPUs), statistical, data processing, programming or bookkeeping
costs necessary for the maintenance of the books and records of the
Partnership (including an allocable portion of the General Partner's costs
of acquiring and owning computer equipment primarily used in connection with
the operations and reporting activities of the Partnership and any other
investment entities sponsored or administered by the General Partner of any
of its Affiliates), and (xi) the cost of preparation and dissemination of
the informational material and documentation relating to the potential
lease, re-lease, sale, financing or other disposition of Equipment.
10.3 ACQUISITION EXPENSES. The General Partner shall pay all Acquisition
Expenses out of its Acquisition Fee. No expenses that are Acquisition Expenses
shall be reimbursed to the General Partner pursuant to Sections 10.1 or 10.2.
ARTICLE XI
DISTRIBUTIONS
11.1 OPERATING DISTRIBUTIONS. Subject to the further provisions of this
Article XI, the Partnership will make certain distributions to Partners to the
extent it has Cash Flow after reinvesting Cash Flow in additional Equipment and
financings to the extent determined by the General Partner to be in the Limited
Partners' best interests, which distributions will be made during the Operating
Phase, in order of priority as follows:
11.1.1 GENERAL PARTNER'S EXPENSE ALLOWANCE. The General Partner shall
be reimbursed in accordance with Section 10.1 hereof for the administrative
services it provides to the Partnership. The costs reimbursed to the General
Partner and its Affiliates under the General Partner's Expense Allowance
will be the subject of a Special Report.
11.1.2 OPERATING DISTRIBUTION TO PARTNERS. To the extent there is
additional Cash Flow, an Operating Distribution of up to nine and six-tenths
percent (9.6%) annually (payable in monthly distributions of up to
approximately eight tenths percent (.8%) to each Partner with respect to the
Units and with respect to the general partner Interest) during the Operating
Phase, said distributions calculated on each Partner's Adjusted Capital
Contribution, as adjusted from time to time, and based on the number of days
that each Partner is a Partner. Operating Distributions will not continue
during the Liquidating Phase.
11.1.3 MANAGEMENT FEE. A Management Fee payable to the General Partner
equal to two percent (2%) per year of the Gross Rental Payments received by
the Partnership and loan payments and other payments received on account of
financing activities of the Partnership, subject to reduction as described
below. This fee will not be paid on a current basis (but will accrue and
accumulate) if the Partnership has not paid the Limited Partners an annual
nine and six-tenths percent (9.6%) Operating Distribution and the General
Partner's Expense Allowance for the year. The Management Fee will not,
however, at any time exceed an amount equal to the sum of (i) two percent
(2%) per year of the Gross Rental Payments received by the Partnership and
loan payments and other payments received on account of financing activities
of the Partnership reduced to the extent that a two percent (2%) rate isnot
competitive with fees customarily charged by others rendering similar
services as an ongoing public activity in the same geographic location and
for similar types of equipment, plus (ii) an amount equal to five percent
(5%) of all distributions from Cash Available for Distribution (other than
Net Disposition Proceeds) and one percent (1%) of distributions made from
net Disposition Proceeds.
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11.1.4 LIMITATION ON BORROWING. The General Partner shall not borrow
for the purpose of making Operating Distributions, except to the extent
necessary to make distributions to pay taxes, as provided in Section 11.4.2.
11.2 LIMITATION ON OPERATING DISTRIBUTIONS. The payment of Operating
Distributions during the Operating Phase will be made monthly, within ten (10)
days after the end of each month of distribution.
11.3 PAYMENT OF OPERATING DISTRIBUTIONS.
11.3.1 Payments of Operating Distributions may be suspended if, at any
time, in the determination of the General Partner, the Partnership is
receiving nominal amounts of yield on Equipment and leases.
11.3.2 There is no assurance that the Cash Flow will be at a level
sufficient to make payments of Operating Distributions. Any portion of the
Partnership's Cash Flow not paid out in the form of Operating Distributions
will be reinvested or distributed as contemplated by Article IV hereof.
11.3.3 Operating Distributions that are made to Limited Partners will
be apportioned among them based on the number of Units held.
11.3.4 The Partnership will not make distributions in kind to any
party.
11.4 LIQUIDATING DISTRIBUTIONS.
11.4.1 During the Liquidating Phase of the Partnership, the General
Partner will proceed with the orderly liquidation of all Partnership assets.
Out of the amounts received by the Partnership pursuant to such liquidation,
the General Partner will satisfy all liabilities of the Partnership and will
set aside reserves to provide for future or contingent Partnership
liabilities. No Operating Distributions will be made during the Liquidating
Phase. The amounts remaining after such payments and reserves will be
distributed in accordance with Sections 11.4.2 and 11.4.3 hereof. During the
Liquidating Phase, Liquidating Distributions will be made quarterly to all
Partners to the extent available, and will be paid within five (5) days
after the end of each such quarter.
11.4.2 During the Operating Phase, the General Partner may sell a
portion of the Equipment, including lease receivables, the residual value of
the Equipment, and other assets, and reinvest the proceeds in additional
Equipment, or in the General Partner's sole discretion, distribute the
proceeds (less amounts to pay expenses or set aside for other Partnership
purposes as determined by the General Partner) to the Limited Partners as
Liquidating Distributions in the manner described in Section 11.4.3. Cash
Available for Distribution shall be reinvested in Equipment for all Limited
Partners on the same terms. Reinvestment of proceeds resulting from the sale
or refinancing of Equipment may take place only if sufficient cash will be
distributed to pay state and federal income tax, if any, (assuming Limited
Partners are in a 40% [combined state and federal] tax bracket) created by
the sale or refinancing of such Equipment. Although 11.1.4 permits borrowing
to make distributions to pay state and federal income tax, no such
borrowings will be made if the proceeds resulting from the sale or
refinancing of Equipment, if distributed, would be sufficient to satisfy the
requirement to make distributions to pay state and federal income tax.
11.4.3 The Liquidating Distributions of the Partnership will be paid in
order of priority as follows:
11.4.3.1 First, payment of the General Partner's Expense Allowance;
11.4.3.2 Second, payment to the Partners to the extent they have not
received, during the term of their investment in the Partnership,
distributions totaling eight percent (8%) (on a cumulative compounded
daily basis) on their Adjusted Capital Contributions;
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11.4.3.3 Third, payment to the Partners of one hundred percent
(100%) of their Adjusted Capital Contributions to the Partnership;
11.4.3.4 Fourth, payment to the Partners to the extent they have not
received, during the term of their investment in the Partnership,
distributions totaling nine and six-tenths percent (9.6%) annually
(calculated only through the end of the Operating Phase), non-compounded,
on their Adjusted Capital Contributions (as calculated from time to
time).
11.4.3.5 Fifth, payment to the General Partner of any unpaid
arrearages in its Management Fee, subject to the limitations set forth in
Section 11.1.3; and
11.4.3.6 Sixth, payment of any remaining amounts will be paid eighty
percent (80%) to the Limited Partners and twenty percent (20%) to the
General Partner; provided, however, the General Partner will not receive
its share of these remaining amounts until such time as the Limited
Partners have received Operating Distributions and Liquidating
Distributions equal to their Capital Contributions plus a cumulative
return of eight percent (8%) annually, compounded daily, on their
Adjusted Capital Contributions (as calculated from time to time).
11.4.4 Any payments of Liquidating Distributions to the Limited
Partners pursuant to Section 11.4.3.6 hereof will be allocated among them on
the basis of the positive Capital Account balance of each Limited Partner
or, if zero, on the basis of the number of Units held.
11.4.5 When all of the assets of the Partners have been liquidated and,
in the determination of the General Partner the Partnership's remaining
assets constitute approximately twenty percent (20%) of the aggregate
Liquidating Distributions, the General Partner will cause an audit of the
Partnership to be made by an independent firm of certified public
accountants, the cost of which audit will be borne by the Partnership. The
General Partner will distribute the remaining Liquidating Distributions
after completion of the audit and in reliance thereon, pursuant to the terms
of Section 11.4.3.
11.5 RETURN OF UNINVESTED NET PROCEEDS. Any Net Proceeds not invested or
committed for Investment in Program Assets or leases within two (2) years after
the Effective Date will be returned (without interest) to the Limited Partners
in proportion to their respective number of Units owned. Any such funds returned
will include, in addition, a return of a proportionate share of Organization and
Offering Expenses and Selling Commissions. Interest earned on such funds will be
retained for the benefit of the Partnership.
The following categories of Net Proceeds will be deemed to be "invested or
committed for investment" in Equipment: (i) funds previously expended in
connection with the acquisition of Equipment or for other Partnership purposes,
(ii) funds to be disbursed in the future under the provisions of agreements
relating to the acquisition of Equipment or other Partnership matters, and (iii)
funds reserved or set aside as a condition to obtaining financing such as
compensating balances, special reserves, and funds subject to escrow or similar
arrangements. Any Net Proceeds which are so "invested or committed for
investment" in Equipment two (2) years after the Effective Date but which are
not thereafter utilized by the Partnership also will be returned (without
interest) to the Limited Partners, in accordance with this Section 11.5. The
amount of each Limited Partner's Adjusted Capital Contribution will be reduced
by its share of any such distributions.
11.6 RESTRICTIONS ON DISTRIBUTIONS. The Partnership may be restricted from
making payments to Partners under the terms of notes, mortgages or other types
of debt obligations it may issue, incur or assume in conjunction with borrowed
funds. Any payments also may be restricted or suspended in circumstances where
the General Partner determines, in its absolute discretion, that such action is
in the best interests of the Partnership. Commissions on distributions are
prohibited. Resale fees on liquidation of Equipment are prohibited.
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11.7 DISTRIBUTIONS SUBJECT TO PARTNERSHIP EXPENSES. All payments to
Partners are subject to the payment of Partnership expenses, as set forth in
Section 10.2, and to the maintenance of reasonable reserves for alteration,
improvement, or repair of Equipment and for other Partnership purposes.
ARTICLE XII
ALLOCATIONS OF INCOME OR LOSS
12.1 ALLOCATIONS OF NET INCOME AND NET LOSS AMONG LIMITED PARTNERS.
12.1.1 That portion of Net Income and Net Loss of the Partnership
allocated to Limited Partners and to the General Partner with respect to its
General Partner Interest (equivalent to 10 Units) for any fiscal year will
be apportioned among them based on the number of Units (equivalent Units in
the case of the General Partner) held and on the number of days within the
fiscal year that they were Partners beginning with the day on which they
were admitted as Partners, subject to the condition that the Partnership net
income shall first be allocated to Partners with negative capital account
balances.
12.1.2 For purposes of the allocations referred to in this Section 12.1
and distributions referred to in Section 11.3.3, a Limited Partner is deemed
to have been admitted as a Limited Partner as follows: if a Limited Partner,
on the day on which he was admitted to the Partnership under Section 7.3, or
if an Assignee, on the date on which the assignment of Units to him is
effective. If a Limited Partner becomes an assignor of Units in accordance
with the provisions of Article XIII, or if his Units are repurchased by the
Partnership in accordance with the provisions of Article XIX, he will be
deemed to have ceased being a Limited Partner with respect to the Units
assigned or repurchased on the day preceding the effective date of the
assignment or repurchase.
12.2 ALLOCATIONS OF NET INCOME AND NET LOSS. Any Partnership Net Loss at
the end of a taxable year will be allocated to the Limited Partners to the
extent of their positive Capital Accounts. Any additional Partnership Net Loss
would be allocated to the General Partner. Partnership Net Income will initially
be allocated to Partners with negative Capital Accounts in proportion to and to
the extent of such negative Capital Accounts so as to reduce such deficit
capital account balances to zero as quickly as possible. Except as provided
below, any Partnership Net Income will then be allocated to the Limited
Partners. During the Liquidating Phase of the Partnership, Net Income earned
from the sale of the Partnership's assets shall be allocated to each Partner in
proportion to such Partner's share of Liquidating Distributions pursuant to
Section 11.4 hereof. For purposes of these allocations, the General Partner will
be characterized as a Limited Partner to the extent of its General Partner
Interest, which is equivalent to 10 Units.
12.3 CONSENT TO ALLOCATION BY LIMITED PARTNERS. The methods set forth
above by which payments to Limited Partners and allocations of Net Income and
Net Loss are made and apportioned are hereby expressly consented to by each
Limited Partner as an express condition to becoming a Limited Partner.
ARTICLE XIII
ASSIGNMENT OF PARTNERSHIP UNITS
13.1 Subject to Sections 13.1.4 and 13.1.5 below, a Limited Partner may
assign the whole or any part of his Units in the Partnership. A Limited Partner
other than the Initial Limited Partner may make an assignment only in whole
Units or, if simultaneously assigning the whole of his interest in the
Partnership, in whole and partial Units. Such assignment shall confer upon the
Assignee the right to become a Limited Partner in the following manner and
subject to the following conditions and the provisions of Article XIV hereof:
13.1.1 An instrument of assignment executed by both the assignor and
the Assignee of the Units satisfactory in form to the General Partner shall
be delivered to the General Partner;
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13.1.2 The assignor or Assignee shall have paid a transfer fee, as
requested by the General Partner, not in excess of the lesser of One Hundred
Fifty Dollars ($150.00) or the Partnership's actual, necessary and
reasonable expenses to cover all reasonable fees and filing costs in
connection with such transfer;
13.1.3 No assignment shall be effective until the last day of the month
in which the General Partner actually receives the instrument of assignment
complying with the requirements of Section 13.1.1 above;
13.1.4 No assignment shall be effective if such assignment might, in
the opinion of counsel to the Partnership or the General Partner, result in
(i) the termination of the Partnership for purposes of the then applicable
provisions of the Code, or (ii) the characterization of the Partnership as
publicly traded for federal income tax purposes, or (iii) the assets of the
Partnership being considered by law to be assets of employee benefit plans
investing in Units and therefore subjecting those assets to the fiduciary
standard of the Employee Retirement Income Security Act of 1974 (provided,
however, that until such time as there is clear authority on these issues,
the General Partner will not permit a transfer of Units except in infrequent
and compelling circumstances, as determined in its sole and absolute
discretion, and only if immediately following such transfer at least
seventy-five percent (75%) of the outstanding Units are held by persons who
are not either employee benefit plans or Individual Retirement Accounts);
13.1.5 No assignment shall be effective if the assignment would, to the
knowledge of the General Partner, violate the provisions of any applicable
federal or state securities laws; and
13.1.6 No assignment to a minor or incompetent shall be effective in
any respect.
13.2 An Assignee of Units will be entitled to receive all payments to
Limited Partners of whatever character attributable to the Units assigned from
and after the effective date of the assignment of such Units to him; however,
anything herein to the contrary notwithstanding, the Partnership and the General
Partner will be entitled to treat the assignor of such Units as the absolute
owner thereof in all respects and will incur no liability for allocations of Net
Income or Net Loss or distributions, or transmittal of reports and notices
required to be given to Limited Partners hereunder, which are made in good faith
to such assignor, until such time as the written instrument of assignment has
been received by the Partnership and recorded on its books and the effective
date of the assignment has passed. Unless otherwise agreed by the General
Partner, Assignee and assignor, any Assignee of Units shall, for the purposes of
Articles XI and XII, be recognized as an Assignee and the assignment will be
effective as of the first day of the month next succeeding the month in which
the General Partner actually receives the instrument of assignment that complied
with the requirements of Section 13.1.1, subject to and conditioned upon
satisfaction of the other provisions of Section 13.1.
13.3 Any attempted or purported assignment of Units in contravention of any
of the provisions of this Article XIII will be void and ineffectual and will not
bind or be recognized by the Partnership.
ARTICLE XIV
SUBSTITUTE LIMITED PARTNERS
14.1 No Assignee will have the right to become a Substitute Limited Partner
in place of his assignor unless the assignment is effective in accordance with
Article XIII hereof and all of the following conditions will first have been
satisfied:
14.1.1 A duly executed and acknowledged written instrument sets forth
the intention of the assignor that the Assignee succeed to the assignor's
interest in the assigned Units as a Substitute Limited Partner in his place,
and gives the Assignee the right to succeed to the assignor's interest in
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the assigned Units as a Substitute Limited Partner, all in accordance with
the provisions of this Article;
14.1.2 The assignor and Assignee will have executed and acknowledged
such other instruments as the General Partner may deem necessary or
desirable to effect such substitution, including a written acceptance and
adoption by the Assignee of the provisions of this Agreement, as amended,
and a special power of attorney, the form and content of which are described
in Article XXII of this Partnership Agreement; and
14.1.3 A reasonable transfer fee to be determined by the General
Partner, which will not exceed the lesser of One Hundred Fifty Dollars
($150.00) or the actual, necessary and reasonable expenses of said
substitution, will be paid to the Partnership plus an additional amount to
cover all reasonable costs and expenses connected with such substitution.
14.2 By executing or adopting this Agreement, each Limited Partner hereby
consents to the admission of Substitute Limited Partners by the Partnership and
to any Assignee of his Units becoming a Substitute Limited Partner.
14.3 The General Partner shall cause the Partnership's records to be
amended at least once each calendar quarter to effect the substitution of
Substituted Limited Partners, but notwithstanding the dates of such amendment
all substitutions will be given effect in accordance with the provisions of
Article XIII and Section 14.1 hereof.
ARTICLE XV
BOOKS, RECORDS, ACCOUNTING AND REPORTS
15.1 The fiscal year of the Partnership will end on December 31 of each
year.
15.2 The General Partner will keep, or cause to be kept, full and accurate
records of all transactions of the Partnership.
15.3 Access by Limited Partners to records and Partnership information
shall be governed by the following:
15.3.1 Any Limited Partner and any designated representative thereof
shall be permitted access to all records of the Partnership at all
reasonable times, and may inspect and copy any of them. A reasonable charge
for copy work may be charged by the Partnership.
15.3.2 An alphabetical list of the names, addresses, and business
telephone numbers of the Limited Partners of the Partnership along with the
number of Units held by each of them (the "Limited Partner List") shall be
maintained as a part of the books and records of the Partnership and shall
be available for inspection by any Limited Partner or its designated agent
at the home office of the Partnership upon the request of the Limited
Partner.
15.3.3 The Limited Partner List shall be updated at least quarterly to
reflect changes in the information contained therein.
15.3.4 A copy of the Limited Partner List shall be mailed to any
Limited Partner requesting the Limited Partner List within ten days of the
request. The copy of the Limited Partner List shall be printed in
alphabetical order, on white paper, and in a readily readable type size (in
no event smaller than 10-point type). A reasonable charge for copy work may
be charged by the Partnership.
15.3.5 The purposes for which a Limited Partner may request a copy of
the Limited Partner List include, without limitation, matters relating to
Limited Partners' voting rights under this Partnership Agreement, and the
exercise of Limited Partners' rights under federal proxy laws.
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15.3.6 If the Sponsor of the Partnership neglects or refuses to
exhibit, produce, or mail a copy of the Limited Partner List as requested,
the Sponsor shall be liable to any Limited Partner requesting the list for
the costs, including attorneys' fees, incurred by that Limited Partner for
compelling the production of the Limited Partner List, and for actual
damages suffered by any Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the Limited Partner List is to
secure such list of Limited Partners or other information for the purpose of
selling such list or copies thereof, or of using the same for a commercial
purpose other than in the interest of the applicant as a Limited Partner
relative to the affairs of the Partnership. The Sponsor may require the
Limited Partner requesting the Limited Partner List to represent that the
list is not requested for a commercial purpose unrelated to the Limited
Partner's interest in the Partnership. The remedies provided hereunder to
Limited Partners requesting copies of the Limited Partner List are in
addition to, and shall not in any way limit, other remedies available to
Limited Partners under federal law or the laws of any state.
15.4 The General Partner will cause to be prepared and will distribute to
the Limited Partners, within sixty (60) days after the end of each fiscal
quarter, a report containing (i) the unaudited financial information included in
the Partnership's report on Form 10-Q for such quarter (if such report is
required to be filed with the Securities and Exchange Commission on behalf of
the Partnership for such quarter, and if such report is not required to be
filed, information similar to that which would be included in the Form 10-Q),
(ii) the Present Value of the Partnership's Lease Portfolio as of the end of
such quarter, (iii) the information contained in any report on Form 8-K filed
with the Securities and Exchange Commission on behalf of the Partnership during
such quarter with respect to the proposed acquisition of any Equipment by the
Partnership, (iv) a description of any Equipment acquired by the Partnership
during such quarter; (v) a statement setting forth the amount of the fees
received by the General Partner from the Partnership during such quarter and
identifying the services to which such fees relate; and (vi) in the appropriate
quarterly report, notification that the General Partner has commenced the
Liquidation Phase of the Partnership.
15.5 The General Partner will cause to be compiled and will distribute to
the Limited Partners, within seventy-five (75) days after the end of each fiscal
year, all financial information regarding the Partnership that is necessary for
the preparation of the Limited Partners' federal income tax returns.
15.6 The General Partner will cause to be prepared and will distribute to
the Limited Partners the following:
15.6.1 a report of equipment acquisitions made during each quarter
shall be sent to all Limited Partners within sixty (60) days following the
end of each quarter, until the proceeds of the offering are fully invested
or, if not invested, returned to the Limited Partners. Such reports shall
include, by way of illustration and not limitation, a statement of the
actual purchase price of equipment, including terms of the purchase, a
statement of the total amount of cash expended by the Partnership to acquire
such items of Equipment (including and itemizing all commissions, fees,
expenses and the name of each payee), and a statement of the amount of
proceeds in the Partnership which remain unexpended or uncommitted; and
15.6.2 within one hundred twenty (120) days after the end of each
fiscal year, an annual report containing: (i) a balance sheet as of the end
of the fiscal year and statements of income, partners' equity, and a cash
flow statement, for the year then ended, all of which shall be prepared in
accordance with generally accepted accounting principles and accompanied by
a report of independent auditor, and (ii) a breakdown of distributions to
Limited Partners for the period covered thereby separately identifying
distributions from: (1) cash flow from operations during the period (2) cash
flow from operations during a prior period which had been held as reserves,
(3) proceeds from disposition of Equipment and investments, and (4) reserves
from the gross proceeds of the offering originally obtained from the Limited
Partners.
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For each piece of equipment acquired by the Partnership individually
representing at least ten percent (10%) of the Partnership's total
Investment in Program Assets, the General Partner shall include a status
report as part of the annual report, which status report shall indicate: (i)
condition of Equipment, (ii) how Equipment is being utilized as of the end
of year (leased, operated, held for lease, repair or sale), (iii) remaining
term of leases, (iv) projected use of Equipment for next year (renew lease,
lease, retire, or sell), and (v) such other information relevant to the
value or utilization of the Equipment as the General Partner deems
appropriate. The status report shall describe the method used or basis for
valuation.
15.6.3 Within sixty (60) days after the end of the first six (6) months
of each fiscal year, a report, prepared on the same accounting basis to be
utilized in the annual reports, containing:
a. a condensed balance sheet, which may be unaudited;
b. a condensed statement of income for the period then ended, which
may be unaudited;
c. a cash flow statement for the period then ended, which may be
unaudited; and
d. other pertinent material regarding the Partnership and its
activities during the period covered by the report.
15.6.4 If any Sponsor receives fees for services, it shall, within
sixty (60) days of the end of each quarter wherein such fees were received,
send to each Limited Partner a detailed statement setting forth the services
rendered, or to be rended by such Sponsor and the amount of the fees
received. This requirement may not be circumvented by lump-sum payments to
management companies or other entities who then disburse the funds.
15.7 The General Partner will cause to be prepared federal and state income
tax returns for the Partnership and will further cause such returns to be timely
filed with the appropriate authorities.
15.8 The General Partner will cause to be prepared and timely filed with
appropriate federal and state regulatory and administrative authorities, all
reports required to be filed with such authorities under applicable laws, rules
and regulations. Any Limited Partner will be provided with a copy of such report
upon request and without expense to him.
15.9 The General Partner will bear the expenses of preparation and
distribution of the reports described in this Article XV, other than the costs
of any audit of the Partnership's records or any other expenses which are to be
borne by the Partnership pursuant to Section 10.2. Any expenses borne by the
General Partner hereunder will be included in the reimbursement to the General
Partner out of, and to the extent of, the General Partner's Expense Allowance,
as provided in Section 11.1.1.
15.10 The General Partner will maintain, for a period of six (6) years
following the Initial Admission Date, a record of the information obtained to
indicate that each Limited Partner meets the suitability standards employed in
connection with the offer and sale of its Units and a representation of each
Limited Partner that he is purchasing for his own account, or in lieu of such
representation, information indicating that each Limited Partner for whose
account the purchase is made meets such suitability standards. Such information
will be obtained from each Limited Partner through the use of the Subscription
Agreement signed by each Limited Partner which sets forth the prescribed
suitability standards in full and in which he represents that he meets such
suitability standards and is purchasing for his own account.
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ARTICLE XVI
RIGHTS, AUTHORITY AND POWERS OF THE GENERAL PARTNER
16.1 Subject to Sections 16.2 and 16.3, the General Partner will have all
rights, authority and powers as provided under the Iowa Act and as otherwise
provided by law, and those required or appropriate to the management of the
Partnership business which, by way of illustration but not by way of limitation,
will include the right, authority and power:
16.1.1 To cause the Partnership to (a) acquire, operate, lease,
develop, improve, maintain, hold, exchange, trade, sell or otherwise dispose
of Equipment (including interests therein, appurtenances thereof and
personal or mixed property connected therewith) either in the name of the
Partnership or in the name or names of one or more nominees or trustees for
the benefit of the Partnership, upon such terms and for such consideration
(including cash, securities and other property); and (b) enter into
financing arrangements which will involve making secured loans to or other
debt arrangements with unaffiliated third parties in cases where such
financings are advantageous to the Partnership, are an attractive
alternative to leases, and the General Partner, in its sole discretion,
deems such financing to be in the best interests of the Partnership;
16.1.2 To cause the Partnership to borrow money up to Ten Million
Dollars ($10,000,000.00) in the aggregate at any one time outstanding for
the purpose of rehabilitating or reconfiguring Equipment for sale or
re-lease, and acquiring Equipment, and if security is required therefor, to
mortgage any Partnership assets or subject any such assets to any other
security device, to obtain replacements of any mortgage or other security
device, and to prepay, in whole or in part, refinance, increase, modify,
consolidate or extend any borrowings or any mortgage or other security
device, all at such times as the General Partner, in its sole discretion,
deems to be in the best interests of the Partnership;
16.1.3 To place record title to, or the right to use, Partnership
assets in the name or names of one or more nominees or trustees for any
purpose convenient or beneficial to the Partnership;
16.1.4 To acquire and enter into any contract of insurance the General
Partner deems necessary or appropriate for the protection of the Partnership
and the General Partner, for the conservation of Partnership assets or for
any purpose convenient or beneficial to the Partnership, provided the
Partnership will not incur the portion of the cost of any liability
insurance policies covering the General Partner or any of its Affiliates
attributable to insuring the General Partner or any of its Affiliates
against liabilities as to which the General Partner and its Affiliates are
not entitled to be indemnified by the Partnership;
16.1.5 To cause the Partnership to employ, at the expense of the
Partnership, employees, agents, independent contractors, brokers, attorneys,
accountants and other persons, including the General Partner, Affiliates and
employees thereof, to perform such services specified in this Agreement and
for such compensation as the General Partner will determine in accordance
with this Agreement, and to dismiss such persons from employment;
16.1.6 To prepare or cause to be prepared reports, statements and other
relevant information for distribution to Limited Partners;
16.1.7 To open accounts and deposit and maintain funds in the name of
the Partnership in banks or savings and loan associations not affiliated
with the General Partner or its Affiliates; provided, however, the
Partnership's funds will not be commingled with the funds of any other
persons, except as permitted by this Agreement;
16.1.8 To cause the Partnership to make or revoke any of the elections
provided under the Code;
16.1.9 To select the Partnership's accounting year;
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16.1.10 To determine the appropriate accounting method or methods to be
used by the Partnership;
16.1.11 To cause the Partnership to offer and sell Units to the public
through selected broker-dealers and to employ personnel, agents and dealers
for such purpose;
16.1.12 Notwithstanding anything herein to the contrary, and subject to
the rights granted to the Limited Partners under Section 17.2 herein, to
amend this Agreement: (i) to reflect the addition or substitution of Limited
Partners or the reduction of the Capital Accounts under the refund of
capital to Partners, (ii) to add to the representations, duties or
obligations of the General Partner, or surrender any right or power granted
to the General Partner, herein, for the benefit of the Limited Partners,
(iii) to cure any ambiguity, to correct or supplement any provision herein
that may be inconsistent with any other provision herein, or to add any
other provisions with respect to matters or questions arising under this
Agreement that will not be inconsistent with the provisions of this
Agreement, (iv) to delete or add any provision from or to this Agreement
requested to be so deleted or added by the staff of the Securities and
Exchange Commission or by a state regulatory agency, the deletion or
addition of which provision is deemed by such staff or such regulatory
agency to be for the benefit or protection of the Limited Partners, (v) to
modify any provision of this Agreement, if, in the opinion of counsel to the
Partnership and the General Partner, such modification is necessary to cause
the Partnership not to be characterized as a "publicly traded" partnership
for federal income tax purposes, and (vi) to modify any provision of this
Agreement, if, in the opinion of counsel to the Partnership and the General
Partner, such modification is necessary to cause the allocations contained
in Article XII to have substantial economic effect in accordance with the
final regulations relating to Section 704 of the Code or any other statutory
provision or regulation relating to such allocations; provided, however,
that no amendment will be made pursuant to this section to amend the voting
rights of the Limited Partners;
16.1.13 To require in any or all Partnership contracts that the General
Partner will not have any personal liability thereon and that the person or
entity contracting with the Partnership is to look solely to the Partnership
or its assets for satisfaction, and to require the satisfaction of contracts
on which the General Partner has personal liability prior to contracts on
which it has no such personal liability;
16.1.14 To execute, acknowledge and deliver any and all instruments on
behalf of the Partnership or otherwise, that it deems necessary or
appropriate to effectuate the rights, authority and power of the General
Partner, and take all such action in connection therewith as it in its
discretion deems necessary or appropriate;
16.1.15 To cause the Partnership to reinvest or make a commitment to
reinvest all or any portion of the Partnership assets in Equipment at any
time up to the fifth anniversary from the Closing Date, and to temporarily
invest the Net Proceeds of the Offering (and undistributed Cash Flow) in
United States government securities (including, but not limited to,
short-term Treasury Bills and Treasury Notes), securities issued or
guaranteed by states or municipalities, bank repurchase agreements, money
market accounts, bankers' acceptances, savings and loan association
deposits, deposits with members of The Federal Home Loan Bank System or The
Federal Savings and Loan Insurance Corporation, commercial paper, secured
equipment lease lines of credit, and other investments with appropriate
scheduled maturities or similar investments which will be held by the
Partnership generally not exceeding one (1) year from the date of purchase.
The foregoing notwithstanding, the Partnership does not intend to pursue a
policy which would make it subject to the Investment Company Act of 1940,
and the Partnership's external investment prior to the use of Net Proceeds
as described above will be limited accordingly;
16.1.16 To purchase Equipment in its own name or in the name of a
nominee, a trust or otherwise (and assume loans in connection therewith) or
to enter into agreements to purchase or to
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obtain an option or right of first refusal to purchase Equipment from
persons other than the General Partner and its Affiliates and, in any case,
to temporarily hold title to such Equipment, for the purpose of facilitating
the acquisition of such Equipment by the Partnership, the borrowing of money
or the obtaining of financing by the Partnership, or for any other purpose
related to the business of the Partnership, provided that (i) the price
payable by the Partnership to the General partner for any Equipment may not
exceed the cost to the General Partner ("cost" for this purpose shall mean
the reasonable, necessary and actual expenses incurred by the General
Partner or its Affiliates, as determined in accordance with generally
accepted accounting principles, in holding title to Equipment on a temporary
basis) provided, however, that all revenues from such Equipment will be
received by the Partnership; (ii) the General Partner will not receive any
benefit from such sale other than as set forth in subsection (i) of this
Section 16.1.16; (iii) such transaction is in the best interest of the
Partnership; (iv) there will be no difference in interest terms of any loans
secured by the Equipment at the time acquired by the General partner and at
the time acquired by the Partnership; and (v) any Equipment purchased by the
General Partner on behalf of the Partnership with the intent to transfer
such Equipment to the Partnership will generally not be held for more than
six (6) months;
16.1.17 To prepare, file and publish any and all instruments or
documents necessary to enable the Partnership to transact business or
otherwise to exist, operate and be recognized as a limited partnership in
jurisdictions outside Iowa;
16.1.18 To cause the Partnership to endeavor to maintain Equipment
owned by it and, upon the liquidation of Partnership assets, maintain a cash
reserve from revenues for normal repairs, replacements and any other
contingencies in any amount which the General Partner deems reasonable;
16.1.19 To cause the Partnership to enter into joint ventures with
entities that are not Affiliates of or formed by the Sponsor for the
acquisition, ownership and leasing of Equipment, provided that (i) the
Partnership and such co-venturers have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation
from the Partnership is substantially identical to the sponsor compensation
from such co-venturers; (iv) the investment of the Partnership and such co-
venturers is on substantially the same terms and conditions; (v) the
agreement or other instrument establishing such venture will not authorize
the Partnership to do anything, in its capacity as co-venturer in such
venture, that the Partnership could not do directly because of the policies
set forth in this Agreement; (vi) the agreement or other instrument
establishing such venture gives the Partnership a right of first refusal to
buy out the interest of the other participant in the venture if such other
participant seeks to have the joint venture sell its interest; and (vii) the
joint venture is formed either for the purpose of effecting appropriate
diversification of the Partnership's investments or for the purpose of
effecting a transaction described in Section 16.1.16, except that
investments in limited partnership interests of another program shall be
prohibited; however, nothing herein shall preclude the investment in general
partnerships or ventures that own and operate specific equipment, provided
the Partnership acquires a controlling interest in such other ventures or
general partnerships and the noncontrolling interest is owned by a
nonaffiliate. In such event, duplicate fees shall not be permitted;
16.1.20 To make loans to the Partnership in an aggregate amount not to
exceed (including other Partnership borrowings) Five Hundred Thousand
Dollars ($500,000) at any time. Any interest charged to the Partnership on
such loans will be the lower of (i) the rate which would be charged to the
Partnership by unrelated lending institutions, or (ii) the cost of funds to
the General Partner. No points or prepayment penalty would be charged to the
Partnership with respect to any such loan;
16.1.21 To elect in writing, subject to approval of the Limited
Partners holding a majority of the then outstanding Units, to have the
Partnership governed by laws made effective subsequent to the date the
Partnership was formed, and, upon such election, to supplement or amend this
Agreement or any other instrument or document filed by the Partnership,
including any certificates of limited partnership, and to take such other
actions as it may deem necessary or desirable in connection therewith;
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16.1.22 To commence the orderly liquidation of all or a portion of the
assets of the Partnership, beginning on the fifth anniversary of the Closing
Date or such earlier date as the General Partner may select, and to
distribute among the Partners and other according to the terms of this
Agreement amounts received as a result thereof; and
16.1.23 To continue to manage any of the Partnership's leases that
relate to lease receivables sold to unaffiliated third parties; provided,
however, the General Partner will: (i) manage any such leases for only a
portion of the fee that any third party purchaser would pay to the
Partnership, (ii) receive no more than two percent (2%) in Management Fees
relating to such transactions, (iii) only enter into an agreement with a
third party purchaser to continue to manage the leases in order to
facilitate the Partnership's ability to sell the receivables, and (iv) enter
into such an arrangements only if doing so would benefit the Partnership.
16.1.24 The General Partner may perform services for the Partnership,
if necessary, other than those specifically provided for herein.
a. At a minimum, such self-dealing arrangements must meet the
following criteria:
(i) The compensation, price or fee charged for providing such
services must be comparable and competitive with the
compensation, price or fee of any other Person who is
rendering comparable services or selling or leasing
comparable goods and materials that could reasonably be made
available to the Partnership, and
(ii) The fees and other terms of the contract shall be fully
disclosed, and
(iii) The General Partner must be independently engaged in the
business of providing such services to other than
Affiliates and at least 75% of the Person's gross revenue
from providing such services must be derived from other
than the General Partner.
b. Further, the General Partner may not provide such goods and
services to the Partnership unless all of the following
conditions are also satisfied:
(i) The goods or services are necessary to the prudent operation
of the Partnership,
(ii) The goods or services must be provided at a price which
does not exceed the lesser of the actual cost of such goods
and services to the General Partner or ninety percent (90%)
of the compensation, price or fee charged by unaffiliated
persons in the same geographic location,
(iii) The goods or services for which the General Partner is to
receive compensation shall be embodied in a written
contract, fully disclosed in the Prospectus at the time of
the initial registration of the Units of the Partnership
with the SEC, which precisely describes the goods or
services to be provided and all compensation to be paid.
Such contract may only be modified in any material respect
by the vote of a majority in interest of limited partners
and shall be terminable without penalty on sixty (60) days'
notice, and
(iv) The Sponsor must be previously engaged in the business of
rendering such services, or providing such goods,
independently of the program and as an ordinary and ongoing
business.
For purposes of the foregoing subsections b(i) through b(iv), the
actual cost of services means the pro rata cost of personnel,
including an allocation of overhead directly attributable to such
personnel, based on the amount of time the personnel spent on such
services or other method of allocation acceptable to the
Partnership's certified public accountant. The actual cost of goods
includes the price of goods and materials paid to unaffiliated
persons, and direct costs incurred by the General Partner in the
transaction, including an allocation of
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overhead directly attributable to the transaction. Actual cost shall
exclude (i) salaries, fringe benefits, travel expenses, and other
administrative items incurred or allocated to any controlling person
of the General Partner, and (ii) rent or depreciation, utilities,
capital equipment, and other administrative items generally falling
under the category of overhead, to the extent the items set forth in
(i) and (ii) are not directly attributable to the rendering of such
services.
16.1.25 To call a meeting of the Partners for any lawful purpose.
16.1.26 At the termination of the Partnership, to establish a
liquidating trust on such terms as the General Partner deems necessary and
prudent for the purpose of holding and distributing assets of the
Partnership for which there is no ready market at the termination of the
Partnership or for the purpose of facilitating the liquidation and
distribution of Partnership assets.
16.2 The General Partner will, except as otherwise provided in this
Agreement, have all the rights and powers and will be subject to all the
restrictions and liabilities of a general partner under the limited partnership
law of the State of Iowa. In addition, the General Partner will be the "tax
matters partner" of the Partnership as that term is defined in Section
6231(a)(7) of the Code.
16.3 The General Partner or Affiliates will not have the authority to:
16.3.1 Except as otherwise provided in this Partnership Agreement,
enter into contracts with the Partnership other than equipment leases in the
ordinary course of the Partnership's business which would bind the
Partnership after the expulsion of the General Partner, or continue the
business with Partnership assets after the occurrence of such event;
16.3.2 Alter the primary purpose of the Partnership as set forth in
Article IV;
16.3.3 Receive a rebate or give up or participate in any reciprocal
business arrangements which would enable them to do so (Specifically, no
rebates or give-ups may be received by the General Partner nor may the
General Partner participate in any reciprocal business arrangements which
would circumvent Guidelines promulgated by NASAA. Furthermore, the General
Partner is prohibited from engaging in reciprocal business arrangements
which would circumvent the restrictions against dealing with Affiliates);
16.3.4 Except as provided in Sections 16.1.16 and 16.1.19 and otherwise
herein, permit the Partnership to enter into any joint venture, partnership
or other form of indirect ownership of Equipment;
16.3.5 Purchase or lease Equipment from the Partnership, or lease or
sell Equipment to the Partnership, except as provided in Section 16.1.16 and
16.8;
16.3.6 Cause the Partnership to exchange Units for Equipment;
16.3.7 Make loans to the Partnership, except as provided in Section
16.1.20; provided, however, that the term of any loan by the General Partner
in accordance with Section 16.1.20 shall not exceed twelve (12) months;
16.3.8 Do any act in contravention of this Partnership Agreement or
which would make it impossible to carry on the ordinary business of the
Partnership;
16.3.9 Possess any Equipment owned by the Partnership or assign the
rights of the Partnership in specific Equipment for other than a Partnership
purpose;
16.3.10 Admit a person as a General Partner except with the consent of
the Limited Partners as provided for in this Agreement:
16.3.11 Perform any act (other than an act required by this Agreement
or any act performed in good faith reliance upon counsel's opinion) which
would, at the time such act occurs, subject any Limited Partner to liability
as a general partner in any jurisdiction;
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16.3.12 Unless the General Partner otherwise determines it to be in the
best interest of the Partnership and it is in connection with the orderly
liquidation of the Partnership's assets use Partnership assets after the
fifth anniversary of the Closing Date to acquire additional Equipment, or
reinvest Partnership assets in additional Equipment;
16.3.13 Commingle, or cause the Partnership to commingle, Partnership
funds with those of any other person or entity;
16.3.14 Employ the funds or assets of the Partnership in any manner
except for the exclusive benefit of the Partnership;
16.3.15 Except as otherwise provided herein, cause the Partnership to
enter into any transactions with the General Partner or its Affiliates or
any other partnership in which the General Partner has any interest,
involving the sale or lease of any Equipment to or by the Partnership, the
rendering of services to or by the Partnership, or the lending of any monies
or other property to or by the Partnership;
16.3.16 Directly or indirectly pay or award any finder's fees,
commissions or other compensation to any person engaged by a potential
investor for investment advice as an inducement to such advisor to advise
the purchaser regarding the purchase of Units; provided, however, that the
General Partner will not be prohibited from paying Selling Commissions or
other normal commissions payable to registered broker-dealers (including
Berthel Fisher & Company Financial Services, Inc.) or other properly
licensed persons for selling Units;
16.3.17 Cause the Partnership to incur indebtedness, the principal
amount of which exceeds forty percent (40%) of Gross Proceeds;
16.3.18 Borrow from the Partnership;
16.3.19 Enter into any exclusive agreements with the Partnership;
16.3.20 Without the concurrence of Limited Partners holding a majority
of the outstanding Units:
16.3.20.1 Amend this Partnership Agreement (except for those
amendments which do not alter the rights of the Limited Partners and
except as permitted pursuant to Section 16.1.12);
16.3.20.2 Withdraw as General Partner;
16.3.20.3 Appoint an additional general partner;
16.3.20.4 Sell all or substantially all of the assets of the
Partners, except as provided in Section 16.1.22 hereof;
16.3.20.5 Dissolve the Partnership, except in accordance with
Sections 21.1.4 or 21.1.5 in the ordinary course of the Partnership's
business; or
16.3.20.6 Transfer the General Partner's Interest, except as
provided in Section 21.4.
16.3.21 Except as specifically provided herein in 9.2.4, cause the
Partnership to pay a commission or fee in connection with the reinvestment
or distribution of Cash Available for Distribution or of the proceeds of the
resale, exchange or refinancing of Equipment.
16.3.22 Acquire, for its own account, Equipment suitable for
acquisition by the Partnership or by the General Partner on behalf of the
Partnership until the Net Proceeds have been fully invested in Equipment.
16.3.23 Without the amendment of this Partnership Agreement and the
prior concurrence of Limited Partners holding a majority of the outstanding
Units, merge the Partnership with or engage in any combination with any
other partnership or entity.
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16.3.24 Operate the Partnership in such a manner as to have the
Partnership classified as an "investment company" for purposes of the
Investment Company Act of 1940.
16.4 Although nothing herein will require the General Partner to devote
full time to the Partnership, the General Partner hereby agrees to use its best
efforts in connection with the purposes of the Partnership and to devote to such
purposes such of its time and activity during normal business days and hours as
it, in its discretion, will deem necessary for the management of the affairs of
the Partnership. The General Partner agrees that it will not offer for sale
interests in partnerships to be formed in the future until the interests in this
Partnership have been sold, unless such future partnership has objectives
different than those of this Partnership. In addition, the General Partner will
have the fiduciary responsibility for the safekeeping and use of all funds and
assets of the Partnership, whether or not in its immediate possession or
control, and it will not employ, or permit another to employ such funds or
assets in any manner except for the exclusive benefit to the Partnership.
Furthermore, the General Partner may not contract away its fiduciary duty owed
to the Partnership under the common law. In the event of a conflict between the
interests of the Limited Partners and the General Partner, the General Partner
will be obligated by its fiduciary duty to give priority to the interests of the
Limited Partners.
16.5 Within ninety (90) days after the Limited Partners have voted to expel
the General Partner under Article XVIII, the General Partner will have prepared,
at an expense equally borne by the General Partner and the Partnership,
financial statements (balance sheet and statements of income or loss, partners'
equity and cash flows) prepared in accordance with generally accepted accounting
principles and accompanied by a report thereon containing an opinion of an
independent certified public accounting firm of recognized standing, and will
cause such statement to be mailed to the Limited Partners as soon as possible
after receipt thereof.
16.6 The General Partner will have no personal liability for the repayment
of the Capital Contribution of any Limited Partner.
16.7.
16.7.1 In connection with a proposed Roll-Up, an appraisal of all
Partnership assets shall be obtained from a competent Independent Expert. If
the appraisal will be included in a Prospectus used to offer the securities
of a Roll-Up Entity, the appraisal shall be filed with the SEC and the
states as an Exhibit to the Registration Statement for the offering.
Accordingly, an issuer using the appraisal shall be subject to liability for
violation of Section 11 of the Securities Act of 1933 and comparable
provisions under state laws for any material misrepresentations or material
omissions in the appraisal. Partnership assets shall be appraised on a
consistent basis. The appraisal shall be based on an evaluation of all
relevant information, and shall indicate the value of the Partnership's
assets as of a date immediately prior to the announcement of the proposed
Roll-Up transaction. The appraisal shall assume an orderly liquidation of
Partnership assets over a twelve month period. The terms of the engagement
of the Independent Expert shall clearly state that the engagement is for the
benefit of the Partnership and its Limited Partners. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to the Limited Partners in
connection with a proposed Roll-Up.
16.7.2 In connection with a proposed Roll-Up, the Person sponsoring the
Roll-Up shall offer to Limited Partners who vote "no" on the proposal the
choice of:
a. accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up; or
b. one of the following:
(i) remaining as Limited Partners in the Partnership, and
preserving their interests therein on the same terms and
conditions as existed previously; or
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(ii) receiving cash in an amount equal to the Limited Partners'
pro-rata share of the appraised value of the net assets of
the Partnership.
16.7.3 The Partnership shall not participate in any proposed Roll-Up
which would result in Limited Partners having democracy rights in the
Roll-Up Entity which are less than those provided for under Sections VI.A.
and VI.B. of the Equipment Program Guidelines adopted by NASAA. If the
Roll-Up Entity is a corporation, the voting rights of Limited Partners shall
correspond to the voting rights provided for in said Guidelines to the
greatest extent possible.
16.7.4 The Partnership shall not participate in any proposed Roll-Up
that includes provisions that would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the securities of
the Roll-Up Entity (except to the minimum extent necessary to preserve the
tax status of the Roll-Up Entity). The Partnership shall not participate in
any proposed Roll-Up Entity which would limit the ability of a Limited
Partner to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of Program Interests held by that Limited
Partner.
16.7.5 The Partnership shall not participate in any proposed Roll-Up in
which Limited Partners' rights of access to the records of the Roll-Up
Entity will be less than those provided for under Section VI.D. of said
Guidelines.
16.7.6 The Partnership shall not participate in any proposed Roll-Up in
which any of the costs of the transaction would be borne by the Partnership
if the Roll-Up is not approved by the Limited Partners.
16.8 In the absence of a secondary market for Program Assets at the end of
the term of the Partnership, the Partnership may sell assets to the General
Partner or any Affiliate of the General Partner for cash on a one-time basis
only, to effect a liquidation of the Partnership's assets if all of the
following have been met:
16.8.1 The Partnership has obtained two independent appraisals of the
fair market value of the assets to be sold to the General Partner;
16.8.2 The sale price of the assets is at the greater of the two
appraisals;
16.8.3 Such sale to the General Partner is in the best interests of the
Limited Partners;
16.8.4 The General Partner or its Affiliates do not sell such assets to
another limited partnership sponsored by the General Partner or its
Affiliates; and
16.8.5 The Limited Partners approve the sale by a vote of at least
sixty percent (60%) of the votes entitled to be cast.
ARTICLE XVII
RIGHTS, POWERS AND VOTING RIGHTS OF THE LIMITED PARTNERS
17.1 Limited Partners will not interfere in any manner with the control,
conduct or operation of the Partnership and will have no right or authority to
act for or bind the Partnership. The Limited Partners will not take part, in any
manner, in the conduct or operation of the Partnership. The Limited Partners
shall have the right to at least fifteen (15) days notice prior to the casting
of any vote or prior to any meeting referred to herein.
17.2 Limited Partners owning a majority of the outstanding Units may,
subject to and in accordance with the provisions of this Article XVII, without
concurrence by the General Partner, vote to:
17.2.1 Amend this Partnership Agreement;
17.2.2 Dissolve the Partnership;
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17.2.3 Remove the General Partner (and elect a successor general
partner, provided that the successor general partner is admitted to the
Partnership effective immediately prior to the removal of the General
Partner becoming effective);
17.2.4 Approve or disapprove the sale of all or substantially all of
the assets of the Partnership outside the ordinary course of the
Partnership's business; and
17.2.5 Admit a successor general partner in the event of the
resignation or withdrawal of the General Partner, provided that the
successor is admitted to the Partnership effective immediately prior to the
resignation or withdrawal of the General Partner becoming effective.
17.3 If the General Partner desires to withdraw from the Partnership, it
must furnish notice of its intent to do so and solicit the consent by majority
vote of the Limited Partners at least ninety (90) days prior to the effective
date of such withdrawal. The General Partner will be deemed to have withdrawn
from the Partnership upon the assignment for the benefit of creditors or
adjudication of bankruptcy of the General Partner or appointment of a receiver
for seizure by a judgment creditor of the General Partner's interest in the
Partnership. Prior to the effective date of such withdrawal, or within ninety
(90) days after any such other deemed withdrawal, the Limited Partners will
elect a replacement general partner or may elect to discontinue the business of
the Partnership by a vote of Limited Partners holding at least a majority of the
Units then outstanding. Notwithstanding anything contained herein to the
contrary, a withdrawal pursuant to this Section 17.3 will not constitute a
breach of this Partnership Agreement (except in the event that no successor
General Partner has been elected or approved by the Limited Partners) and the
Partnership may not recover damages from the withdrawing General Partner, and it
may not offset damages against the amount otherwise distributable to the
withdrawing General Partner.
17.4 Except as otherwise provided herein, no Limited Partner will have the
right or power to (i) withdraw or reduce his Capital Contribution, except as
otherwise provided by law, (ii) bring an action for partition against the
Partnership or any other Partner, (iii) cause the dissolution and termination of
the Partnership by court decree or otherwise, or (iv) demand or receive property
other than cash in return for his Capital Contribution. Except as provided in
Article XIX (a) no Limited Partner will have priority over any other Limited
Partner either as to the return of Capital Contributions or as to allocations of
Net Income, Net Loss or any other payments to Limited Partners, and (b) other
than upon the dissolution and termination of the Partnership as provided in this
Partnership Agreement, there has been no time agreed upon when the Capital
Contribution of each Limited Partner may be refunded.
17.5 This Agreement may not be amended without the consent of the Partners
to be adversely affected by an amendment that:
17.5.1 Converts a Limited Partner into a general partner;
17.5.2 Modifies the limited liability of a Limited Partner;
17.5.3 Alters the interest of the General Partner (except an amendment
which alters the interest of the General Partner by way of effectuating
Sections 17.2.2 through 17.2.5) or the Limited Partners in Net Income, Net
Loss or Distributions, or other fees from the Partnership;
17.5.4 Alters the General Partner's rights, powers or increases the
General Partner's duties (except an amendment which alters the rights,
powers or duties of the General Partner by way of effectuating Sections
17.2.2 through 17.2.5) or alters the rights of a Terminated Partner to
receive fees and payments in accordance with Section 18.2; or
17.5.5 Adversely affects the status of the Partnership as a partnership
for federal income tax purposes.
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17.6 Upon the written request of a Limited Partner, the General Partner
will furnish such Limited Partner or his representative by mail or in person, at
such Limited Partner's expense, a list containing the names and addresses of and
Units held of record by all Limited Partners.
17.7 The Limited Partners owning ten percent (10%) of the Units may call a
meeting to propose for vote any matters on which the Limited Partners may vote.
A majority of the votes entitled to be cast will be required to pass any such
proposal, except as otherwise required below. Upon receipt of a written request,
either in person or by registered mail, stating the purpose(s) of the meeting,
the General Partner shall provide all Limited Partners within ten (10) days
after receipt of said request, written notice (either in person or by certified
mail) of a meeting and the purpose(s) of such meeting to be held on a date not
less than fifteen (15) nor more than sixty (60) days after distribution of such
notice, at the time and place specified in the request, or if none, at a time
and place convenient to Limited Partners.
17.8 Any contract between the Partnership and the General Partner or
Affiliates will be subject to termination by majority vote or consent of the
Limited Partners following sixty (60) days prior notice thereof to the Limited
Partners.
ARTICLE XVIII
WITHDRAWAL, REMOVAL, BANKRUPTCY OR DISSOLUTION
AND LIQUIDATION OF GENERAL PARTNER AND
TRANSFER OF GENERAL PARTNER'S INTERESTS
18.1 Upon the withdrawal, removal, bankruptcy or dissolution and
liquidation or other cessation to exist of the General Partner, the Interests of
the Terminated Partner will be purchased by the Partnership for a purchase price
determined according to the provisions of Section 18.2.
18.2 A Terminated Partner will be entitled to receive from the Partnership
the then present fair market value of its Interests to be acquired pursuant to
Section 18.1. Fair market value and payment terms will be determined by
agreement between the Terminated Partner and the Partnership, or, if they cannot
agree, by arbitration in accordance with the then current rules of the American
Arbitration Association: the Terminated Partner will choose one arbitrator, the
Partnership will choose an arbitrator, and the two arbitrators so chosen will
choose a third arbitrator. The decision of a majority of such arbitrators shall
be final and binding and may be enforced by legal proceedings. The Terminated
Partner and the Partnership shall each compensate the arbitrator appointed by
it, and the compensation of the third arbitrator shall be borne equally by such
parties. Where termination is voluntary, payment will be made by a non-interest
bearing, unsecured promissory note, with principal payable, if at all, from
distributions which the Terminated Partner otherwise would have received under
this Partnership Agreement had the General Partner not terminated. Where
termination is involuntary, payment will be made by a note coming due in not
less than five (5) years (with equal installments each year), bearing interest
at an annual rate equal to one hundred ten percent (110%) of the applicable
federal rate from time to time as defined in Code Section 1274 on the unpaid
principal amount of the promissory note.
18.3 Should a successor general partner be elected under Sections 17.2.3 or
17.2.5, such successor general partner ("Acquiring Partner") may purchase from
the Partnership, within sixty (60) days of its election, any portion of the
Interests the Partnership purchased from the Terminated Partner pursuant to
Section 18.2. For such Interests, the Acquiring Partner will pay the amount
determined pursuant to Section 18.2 to be the fair market value of such
Interests. Payments may be made as agreed by the Acquiring Partner and the
Limited Partners.
18.4 Subject to the rights of the Limited Partners provided at Section
16.3.20.6, any entity or person to which the entire interest of the General
Partner in the Partnership is assigned will be substituted, by the filing of
appropriate amendments to this Partnership Agreement and the Partnership's
certificate of limited partnership, as a successor general partner of the
Partnership.
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18.5 Notwithstanding the provisions of Section 17.2, with respect to any
Units owned by the General Partner, the General Partner may not vote or consent
on matters submitted to the Limited Partners regarding the removal of the
General Partner or regarding any transaction between the Partnership and the
General Partner. In determining the requisite percentage in interest of Units
necessary to approve a matter on which the General Partner may not vote or
consent, any Units owned by the General Partner shall not be included.
ARTICLE XIX
REDEMPTION OF PARTNERSHIP UNITS
19.1 At any time after December 31, 1999, a Limited Partner may request
that the Partnership redeem all or any number of whole Units (provided, however,
that a Limited Partner must request the Partnership to redeem all of his Units
if he will retain fewer than two (2) Units) by submitting a written request to
the General Partner. At the sole discretion of the General Partner, to the
extent permitted by applicable laws and regulations, only in extenuating
circumstances and if, in the opinion of the General Partner, it is in the best
interest of the Partnership, the Partnership will redeem Units from a Limited
Partner who so requests. The General Partner will not maintain reserves for
redemption.
The General Partner will not permit a Unit to be redeemed under any
circumstances if, in the opinion of counsel to the Partnership, such redemption
might result in either of the following: (i) the Partnership being characterized
as "publicly traded" for federal income tax purposes; or (ii) the assets of the
Partnership being considered by law to be assets of employee benefit plans
investing in Units and therefore subjecting those assets to the fiduciary
standards of the Employee Retirement Income Security Act of 1974. Until such
time as there is clear authority on this issue, the General Partner will only
allow redemptions of Units if immediately following such redemption at least
seventy-five percent (75%) of the outstanding Units are held by persons who are
not either employee benefit plans or Individual Retirement Accounts.
19.2 The General Partner will honor the acceptable requests for redemption
by postmark on a first-come, first-served per quarter basis. Any requests denied
may be resubmitted in a later quarter.
Within a reasonable time, the General Partner will accept or deny a written
request for the redemption of Units. The General Partner will, in its sole
discretion, decide whether a redemption is in the best interest of the
Partnership and will not be required to provide any reason for the denial of a
redemption request.
19.3 The redemption price for redeemed Units will be determined by the
General Partner as of the last day of the fiscal quarter preceding the quarter
during which such request was received. The redemption price per Unit will equal
the Book Value of Investor's Unit; however, in no event will the redemption
price exceed the then-current fair market value per Unit as determined in good
faith by the General Partner.
19.4 The Limited Partner will tender the redeemed Units upon the acceptance
of the redemption request by the General Partner and the Partnership will pay
the redemption price for the tendered Units within sixty (60) days after the end
of the fiscal quarter during which the request was received, provided that a
Limited Partner may withdraw its request for redemption of its Units within
thirty (30) days of its receipt of written notice of the General Partner's
acceptance of its request for redemption, which notice will state the redemption
price determined by the General Partner.
19.5 Upon the redemption or repurchase of any Units by the Partnership, the
tendered Units will be canceled and will no longer be deemed to represent an
interest in the Partnership.
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19.6 The General Partner will cause this Partnership Agreement to be
amended from time to time to reflect the change in the interests of the Limited
Partners (including the person whose Units were redeemed or repurchased) in the
Net Income, Net Loss and distributions of the Partnership.
19.7 The General Partner may not request the Partnership to redeem or
repurchase any Units owned by it.
19.8 The General Partner may not redeem over the life of the Partnership
more than five percent (5%) of the Units issued by the Partnership, nor more
than one percent (1%) in any given year. No reserves will be maintained for the
redemption of Units.
ARTICLE XX
CERTAIN TRANSACTIONS
The General Partner, each Limited Partner, each shareholder, officer,
director, employee or other Affiliate thereof, and each person owning a legal or
beneficial interest therein, may engage in or possess an interest in any other
business or venture of every nature and description, independently or with
others, including, but not limited to, the ownership, financing, leasing,
operation, management and brokerage of equipment.
ARTICLE XXI
DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
21.1 The Partnership will be dissolved and terminated upon the earliest to
occur of the following:
21.1.1 The resignation, removal, or withdrawal of the last remaining
general partner, if no successor general partner is elected pursuant to
Sections 17.2.3 or 17.2.5;
21.1.2 A vote of the Limited Partners holding a majority of the Units
then outstanding in favor of any proposal by the General Partner for the
dissolution and termination of the Partnership;
21.1.3 The expiration of the term of the Partnership;
21.1.4 The final distribution of all Partnership liquidation proceeds
among the Partners pursuant to Article XI hereof after the orderly
liquidation of the assets of the Partnership during the Liquidation Phase of
the Partnership or otherwise; or
21.1.5 The other sale or disposition of all Equipment and other assets
of the Partnership without the subsequent reinvestment of available
Partnership cash in Equipment.
21.2 Upon the dissolution of the Partnership for any reason, the General
Partner will take full account of the Partnership assets and liabilities, will
wind up the Partnership business and liquidate the assets as promptly as is
consistent with obtaining the fair value thereof, and will apply and distribute
the proceeds therefrom in the following order:
21.2.1 To the payment of creditors of the Partnership, but excluding
secured creditors whose obligations will be assumed or otherwise transferred on
the liquidation of Partnership assets;
21.2.2 To the repayment of any outstanding loans made by the General
Partner to the Partnership;
21.2.3 To the General Partner and Limited Partners pursuant to the
provisions of Article XI.
21.3 Subject to Section 21.4, until the dissolution and cancellation of the
Partnership, the General Partner will not, without the consent of the majority
of outstanding Units, retire or withdraw from the Partnership or take any
voluntary steps to dissolve and liquidate itself.
A-31
21.4 Nothing in this Agreement will be deemed to prevent the merger,
consolidation or reorganization of the General Partner into or with any other
corporation, or the transfer of all the capital stock of the General Partner to
another corporation, or the assumption of the rights and duties of the General
Partner by another corporation in connection with any such transaction in the
case where the resulting successor General Partner consists of substantially the
same senior management as the General Partner and there is no material reduction
in the net worth of the successor General Partner.
21.5 Nothing in this Agreement will be deemed to prevent the establishment
of a liquidating trust to hold and distribute assets of the Partnership for
which there is no ready market at the termination of the Partnership or to
facilitate the liquidation and distribution of Partnership assets.
ARTICLE XXII
SPECIAL POWER OF ATTORNEY
22.1 By executing this Agreement, or the Subscription Agreement for Units
provided with the Prospectus as Exhibit B, each Limited Partner grants to the
General Partner a special power of attorney irrevocably making, constituting and
appointing the General Partner with full power of substitution, as the true and
lawful attorney-in-fact for such Limited Partner, with power and authority to
act in his name and on his behalf to make, execute, deliver, acknowledge, swear
to, file and/or record all documents the General Partner may deem necessary or
desirable to carry out the provisions of this Agreement, which will include, by
way of illustration but not limitation, the following:
22.1.1 Any separate certificates of limited partnership, as well as any
amendments to the Agreement or such certificates which, under the laws of
the State of Iowa or the laws of any other state, are required to be made or
filed or which the General Partner deems to be advisable to make or file;
22.1.2 Any other instrument or document required to be executed or
filed by the Partnership under the laws of any state or by any other
governmental authority; and
22.1.3 Any instrument or document required to effect the continuation
of the Partnership, the admission of a Limited Partner or Substitute Limited
Partner, or the dissolution and termination of the Partnership (provided
such continuation, admission or dissolution and termination are in
accordance with the terms of this Agreement), or to reflect any reductions
in the amounts of contributions of Partners.
22.2 The special power of attorney being granted hereby by each Limited
Partner:
22.2.1 Is a special power of attorney coupled with an interest, is
irrevocable and will survive the death, legal incapacity, insolvency or
dissolution of the granting Limited Partner;
22.2.2 May be exercised by the General Partner (i) acting for each
Limited Partner individually by a signature of one of the officers of the
General Partner acting on the General Partner's behalf, (ii) listing all of
the Limited Partners executing any instrument and having one of the General
Partner's officers sign such instrument on the General Partner's behalf in
the General Partner's capacity as attorney-in-fact for such Limited
Partners, or (iii) utilizing any other method authorized by law; and
22.2.3 Will survive an assignment by a Limited Partner of any or all of
his Units except that, where an Assignee of all of the Units owned by a
Limited Partner has been approved by the General Partner for admission to
the Partnership as a Substitute Limited Partner, the special power of
attorney will survive such assignment for the sole purpose of enabling the
General Partner to execute, acknowledge and file any instrument or document
necessary to effect such substitution.
A-32
ARTICLE XXIII
EXCULPATION AND INDEMNIFICATION
23.1 The General Partner or any of its Affiliates actually performing
services on behalf of the Partnership within the scope of the General Partner's
authority will not be liable to the Partnership or to the Limited Partners for
any loss or damage incurred by reason of any act performed or omitted to be
performed by them in connection with the activities of the Partnership or in
dealing with third parties on behalf of the Partnership, if the General Partner,
in good faith, determined that such course of conduct was in the best interest
of the Partnership, the General Partner was acting on behalf of or performing
services for the Partnership, and such act or omission does not constitute
fraud, negligence, breach of fiduciary duty or misconduct. Subject to Sections
23.2 and 23.3 hereof, the Partnership, and any receiver or trustee appointed to
administer the business or assets of the Partnership, will indemnify and pay all
judgments and claims against the General Partner and any of its Affiliates
actually performing services on behalf of the Partnership within the scope of
the General Partner's authority, and save the same harmless from any liability,
loss or damage incurred by them or by the Partnership by reason of any act
performed or omitted to be performed by them that was determined in good faith
by the General Partner to have been in the best interest of the Partnership in
connection with the activities of the Partnership or in dealing with third
parties on behalf of the Partnership, including costs and attorneys' fees (which
attorneys' fees may be paid as incurred pursuant to Section 23.3 below) and any
amounts expended in the investigation or settlement of any claims of liability,
loss or damage, provided that such act or omission does not constitute fraud,
negligence, breach of fiduciary duty or misconduct. Any indemnification or
agreement to hold harmless provided for herein is recoverable only out of the
assets of the Partnership and not from Limited Partners.
23.2 Notwithstanding the foregoing Section 23.1, the General Partner and
any of its Affiliates, and any person acting as a broker-dealer, engaged in the
performance of services on behalf of the Partnership or in connection with its
business, will not be indemnified against any liability, loss or damage imposed
by judgment, and costs associated therewith, including attorneys' fees, arising
from or out of a violation of state or federal securities laws or rules. The
General Partner and such Affiliates will be indemnified for settlements and
related expenses of lawsuits alleging securities law violations, and for
expenses incurred in successfully defending such lawsuits, or if such lawsuits
are dismissed with prejudice on the merits, provided that a court either:
23.2.1 approves the settlement and finds that indemnification of the
settlement and related costs should be made, or
23.2.2 approves indemnification of litigation costs if a successful
defense is made.
Any amounts payable to the General Partner or its Affiliates pursuant to the
foregoing are recoverable only out of the assets of the Partnership and not from
the Limited Partners.
23.3 Advances of Partnership Funds for Indemnification Expenses. Every
application for registration of Units shall contain an undertaking that the
parties seeking indemnification will apprise the court of the positions of the
Securities and Exchange Commission and State Administrators with respect to
indemnification of securities laws violations, before seeking approval for
indemnification.
23.3.1 Advances of Partnership funds to the General Partner or its
Affiliates for legal expenses and other costs incurred as a result of legal
action initiated against the General Partner or its Affiliates by a Limited
Partner are prohibited.
23.3.2 Advances of Partnership funds to the General Partner or its
Affiliates for legal expenses and other costs incurred as a result of legal
action initiated against the General Partner or its Affiliates by anyone
other than a Limited Partner will be made if:
23.3.2.1 the legal action relates to the performance of duties or
services by the General Partner or its Affiliates on behalf of, or in
connection with, the Partnership's business;
A-33
23.3.2.2 the legal action is initiated by a third party who is not a
Limited Partner;
23.3.2.3 the General Partner or its Affiliates undertake to repay
within ninety (90) days the advanced funds with interest to the
Partnership in cases in which they would not be entitled to
indemnification; and
23.3.2.4 the General Partner has, prior to receiving such advances,
obtained an opinion of independent legal counsel that indemnification
will be appropriate, and if it is later determined that indemnification
was not appropriate, the General Partner must repay any advances received
by it, with interest.
23.4 The Partnership will not pay for any insurance covering liability of
the General Partner and its Affiliates for actions or omissions for which
indemnification is not permitted hereunder; provided, however, that nothing
contained herein will preclude the Partnership from purchasing and paying for
such types of insurance, including extended coverage liability and casualty and
workers' compensation, as would be customary for any person owning comparable
assets and engaged in a similar business, or from naming the General Partner and
its Affiliates as additional insured parties thereunder, provided that such
addition does not add to the premiums payable by the Partnership. Nothing
contained herein will constitute a waiver by any Limited Partner of any right
which he may have against any party under federal or state securities laws.
ARTICLE XXIV
MISCELLANEOUS
24.1 This Agreement may be executed in several counterparts and all so
executed will constitute one (1) Partnership Agreement, binding on all of the
parties hereto, notwithstanding that all of the parties are not signatory to the
same counterpart.
24.2 Except as otherwise provided herein, the terms and provisions of this
Agreement will be binding upon and will inure to the benefit of the successors
and permitted assigns of the respective parties.
24.3 If any sentence or section of this Partnership Agreement is declared
by a court of competent jurisdiction to be void, such sentence or section will
be deemed severed from the remainder of this Partnership Agreement and the
balance of this Partnership Agreement will remain in effect.
24.4 All notices under this Partnership Agreement will be in writing and,
unless otherwise provided herein, will be given to the persons entitled thereto,
by personal service or by mail, posted to the address maintained by the
Partnership for such persons or at such other addresses as such persons may
specify in writing in accordance with the terms of this Agreement.
24.5 Section titles or captions contained in this Agreement are inserted
only as a matter of convenience and for reference. Such titles and captions in
no way define, limit, extend or describe the scope of this Partnership Agreement
or the intent of any provision hereof.
24.6 Whenever required by the contest hereof, the singular will include the
plural, and vice-versa; the masculine gender will include the feminine and
neuter genders; the neuter gender will include the masculine and feminine
genders; and the word "person" will include a corporation, partnership, firm or
other form of association.
24.7 Notwithstanding the place where this Agreement may be executed by any
of the parties hereto, the parties expressly agree that all the terms and
provisions hereof will be construed under the laws of the
A-34
State of Iowa and that the limited partnership law of the State of Iowa will
govern the partnership aspects of this Partnership Agreement.
GENERAL PARTNER:
BERTHEL FISHER & COMPANY LEASING, INC.
By /s/ THOMAS J. BERTHEL
-------------------------------------
THOMAS J. BERTHEL,
CHIEF EXECUTIVE OFFICER
INITIAL LIMITED PARTNER:
/s/ THOMAS J. BERTHEL
---------------------------------------
THOMAS J. BERTHEL
LIMITED PARTNERS:
"The Parties Listed on Exhibit I"
By: BERTHEL FISHER & COMPANY LEASING,
INC., as Attorney-in-Fact
for said parties
By /s/ THOMAS J. BERTHEL
-------------------------------------
THOMAS J. BERTHEL,
CHIEF EXECUTIVE OFFICER
A-35
EXHIBIT I
TELECOMMUNICATIONS INCOME FUND XI, L.P.
PARTNERS
TOTAL
CAPITAL NUMBER OF
NAME AND ADDRESS CONTRIBUTION UNITS
- ----------------------------------------------------------------------------- ------------ ---------------------
Berthel Fisher & Company Leasing, Inc., General Partner...................... $ 10,000 General Partner
interest equivalent
to 10 Units
Limited Partners:
Thomas J. Berthel (Initial Limited Partner)................................ $ 1,000 1
EXHIBIT B
TELECOMMUNICATIONS INCOME FUND XI, L.P. SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
SUBSCRIBER HEREBY SUBSCRIBES for the number of Units of limited partnership
interest specified below, and hereby tenders the amount set forth below ($1,000
per Unit) as full payment for the Units, and hereby agrees, subject to the
General Partner's acceptance of this subscription, to become a Limited Partner
in the Partnership and to make a Capital Contribution thereto in an amount equal
to the amount tendered. Subscriber agrees that Subscriber may not revoke,
cancel, terminate or withdraw this subscription or this Subscription Agreement
without the prior written consent of the General Partner, and acknowledges that
the General Partner may reject this subscription for any reason whatsoever.
CHECK HERE TO INDICATE IF SUBSCRIBER
AMOUNT ENCLOSED HAS
NUMBER OF ($1,000 PER PREVIOUSLY SUBSCRIBED IN THIS
UNITS UNIT) PARTNERSHIP
- ---------- ---------------- ------------------------------------
$ / / NO / / YES
- ---------- ----------------
- --------------------------------------------------------------------------------
1. INVESTOR DATA--(Please print or type):
(1) Name (Mr./Mrs./Ms.) ________________________________________________________
Social Security or Tax ID # ________________________________________________
(2) Name (Mr./Mrs./Ms.) ________________________________________________________
Social Security or Tax ID # ________________________________________________
Residence Address: _____________________________________________________________
Street (Please do not use a P.O. Box)
- --------------------------------------------------------------------------------
City & State Zip
Code
- --------------------------------------------------------------------------------
Home Phone Business Phone
- --------------------------------------------------------------------------------
Mailing Address
- --------------------------------------------------------------------------------
City & State Zip Code Phone
- --------------------------------------------------------------------------------
2. OWNERSHIP - CHECK ONE:
/ / Individual / / Trust
/ / Joint Tenant with right of / / Custodian, Uniform Gifts to Minors
Survivorship Act
/ / Community Property / / IRA
/ / Tenants in Common / / Keogh Plan
/ / Corporation / / Pension or Profit
/ / General Partnership / / Other (explain) -------------------
/ / Limited Partnership ------------------------------------
- --------------------------------------------------------------------------------
3. TAX MATTERS. Under penalties of perjury, I certify that (i) the number shown
on this form is my correct taxpayer identification number, and (ii) that I am
not subject to backup withholding because (A) I have not been notified that I am
subject to backup withholding as a result of a failure to report all interest or
dividends or (B) the Internal Revenue Service has notified me that I am no
longer subject to backup withholding. Under penalties of perjury, I certify that
I am not a non-resident alien individual, a foreign partnership, a foreign
corporation, or a foreign estate or trust, that would be a foreign person within
the meaning of Sections 1441, 1446 and 7701 of the Internal Revenue Code of
1986, as amended, and that I will notify the Partnership before a change in my
foreign status.
- --------------------------------------------------------------------------------
4. DISTRIBUTIONS--Complete this to direct distribution checks (IF TO A
RETIREMENT ACCOUNT, DISTRIBUTIONS MUST GO TO CUSTODIAN OR TRUSTEE UNLESS OTHER
AUTHORIZATION IS ATTACHED HERETO):
- --------------------------------------------------------------------------------
(a) Name Address
- --------------------------------------------------------------------------------
(b) City & State Zip Code
- --------------------------------------------------------------------------------
(c) Account No. (for distributions to a designated account)
5. REPRESENTATIONS AND WARRANTIES: (a) Subscriber hereby represents and warrants
the following (please initial if applicable):
____ Subscriber is a CALIFORNIA investor and understands that IT IS UNLAWFUL TO
CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO
RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA EXCEPT AS PERMITTED IN
THE COMMISSIONER'S RULES. If the Subscriber is a California investor and the
Units subscribed for are to be purchased on behalf of a fiduciary account,
Subscriber represents that the Partnership suitability standards are satisfied
by the beneficiary of the account; except where the donor of the funds for
investment is the fiduciary of the account, the fiduciary may satisfy the
standards. Subscriber has received a copy of Exhibit D to the Prospectus, which
is California Rule 260.141.11.
____ Subscriber is a TEXAS investor and meets the Texas suitability standards on
the reverse side.
____ Subscriber is an investor in a state other than Texas and meets the general
suitability standards on the reverse side.
____ (b) Subscriber hereby represents and warrants that Investor has received a
copy of the current Prospectus for Telecommunications Income Fund XI, L.P. and
the Partnership Agreement and understands that the Units being acquired will be
governed by the terms of such Prospectus and Partnership Agreement, and hereby
adopts and agrees to be bound by each and every provision of the Partnership
Agreement. The information set forth on the signature page hereof is true and
accurate and Subscriber has proper authority to execute this Subscription
Agreement and make this investment.
____ (c) Subscriber (other than Minnesota subscribers) hereby represents and
warrants that this purchase is made for the Subscriber's own account and not
with a view toward distribution.
____ (d) Subscriber (other than Minnesota subscribers) warrants that Subscriber
understands there are restrictions on the transferability of Units, that it is
not anticipated that an active market will ever develop for Units, and that it
may be impossible for Subscriber to liquidate Subscriber's investment in the
Partnership, even in the event of an emergency. Any transfer of Units must
comply with the requirements of the Partnership Agreement and with any
additional requirements imposed by law or by any governmental authorities.
- --------------------------------------------------------------------------------
6. SIGNATURES: Signature must be identical to subscriber name. SUBSCRIBERS MUST
SIGN THE SUBSCRIPTION AGREEMENT. SECURITIES REPRESENTATIVES AND INVESTMENT
ADVISORS MAY NOT SIGN ON BEHALF OF SUBSCRIBERS.
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS UNDER FEDERAL SECURITIES LAWS OR THE SECURITIES LAWS OF ANY STATE. BY
COMPLETING AND EXECUTING THIS PAGE, THE INVESTOR(S) HEREBY AGREES TO ALL
PROVISIONS SET FORTH ON THIS PAGE AND ON THE REVERSE SIDE.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Print Name
(FIDUCIARY SIGNATURE LINE BELOW APPLIES ONLY TO CUSTODIANS, TRUSTS, IRAS,
KEOGH (HR 10) PENSION OR PROFIT SHARING PLANS. FIDUCIARY REPRESENTS THAT THE
BENEFICIARY MEETS THE SUITABILITY STANDARDS.)
- --------------------------------------------------------------------------------
Fiduciary Signature on Behalf of Beneficiary Date
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BROKER-DEALER DATA--TO BE COMPLETED AND SIGNED BY REGISTERED REPRESENTATIVE
I hereby represent that I, the Registered Representative:
(1) have reasonable grounds to believe, on the basis of information obtained
from the Investor concerning the Investor's educational level, knowledge of
investment, investment objectives, other investments, financial situation, needs
and any other information known by me that
(a) the Investor is or will be in a financial position appropriate to
enable him to realize to a significant extent the benefits described in the
Prospectus,
(b) the Investor has a fair market net worth sufficient to sustain the
risks inherent in this program, including loss of investment and lack of
liquidity, and
(c) this program is suitable for the Investor;
(2) will maintain on file documents disclosing the basis upon which the
determination of suitability was reached; and
(3) have, prior to execution of the written Subscription Agreement, informed
the Investor of all pertinent facts relating to the liquidity and marketability
of the Units during the term of the investment.
- --------------------------------------------------------------------------------
Registered Representative's Signature Date
- --------------------------------------------------------------------------------
Print Name of Registered Representative (Not Principal of Firm)
- --------------------------------------------------------------------------------
Broker-Dealer Firm Name Firm Phone No.
- --------------------------------------------------------------------------------
Branch Office Name
- --------------------------------------------------------------------------------
Street Address (Branch Office)
- --------------------------------------------------------------------------------
City & State Zip
Code
- --------------------------------------------------------------------------------
FOR USE OF GENERAL PARTNER OF TELECOMMUNICATIONS INCOME FUND XI, L.P.
Number of Units: __________________________ Amount: $ __________________________
Investor #: __________________________ Investor State: _________________________
Acceptance Date: ______________________ Date of Transfer: ______________________
- --------------------------------------------------------------------------------
WHITE - FUND XI COPY - CANARY - BROKER COPY - PINK -
CUSTOMER COPY - GOLD - ESCROW AGENT
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
TO THE GENERAL PARTNER OF TELECOMMUNICATIONS INCOME FUND XI, L.P.:
THE INVESTOR SIGNATORY HERETO ("SUBSCRIBER") REPRESENTS, WARRANTS,
ACKNOWLEDGES AND AGREES AS FOLLOWS:
1. Subscriber hereby represents and warrants that Subscriber: (a) is of
majority age and (b) is a U.S. resident. Subscriber also warrants that
Subscriber (a) meets the general suitability standards, which means that
Subscriber either (i) has a net worth (exclusive of home, home furnishings and
automobiles) of at least $45,000, and expects to have, for the current tax year,
gross income from all sources in excess of $45,000, or (ii) has a net worth
(exclusive of home, home furnishings and automobiles) of at least $150,000, or
(b) if Subscriber is a TEXAS investor, Subscriber meets the Texas suitability
standards, which means the Subscriber has a net worth (or joint net worth with
the investor's spouse) (exclusive of home, home furnishings and automobiles) of
at least ten times the amount of the investment, and either (a) a net worth (or
joint net worth with the investor's spouse) (exclusive of home, home furnishings
and automobiles) of at least $45,000 and current taxable annual income of
$45,000, or (b) has a net worth (exclusive of home, home furnishings and
automobiles) of at least $150,000.
2. Subscriber hereby irrevocably makes, constitutes and appoints Berthel
Fisher & Company Leasing, Inc. (the General Partner of the Partnership), with
full power of substitution, as Subscriber's true and lawful attorney-in-fact,
for Subscriber and in Subscriber's name, place and stead, to make, execute,
sign, acknowledge, swear to, deliver, record and/or file: the Partnership
Agreement, in substantially the form attached to the Prospectus as Exhibit A,
and any and all amendments thereto; any and all amendments to the Certificate of
Limited Partnership for the Partnership; and any other documents or instruments
that the General Partner may consider necessary or desirable to carry out fully
the purposes of the Partnership as set forth in the provisions of the
Partnership Agreement. The power of attorney hereby granted shall be deemed to
be coupled with an interest; shall be irrevocable and shall survive the death,
incapacity, insolvency or dissolution of Subscriber or any assignment by
Subscriber of any or all of Subscriber's Units; and may be exercised by the
General Partner (i) acting for Subscriber individually by the signature of one
of the officers of the General Partner acting on the General Partner's behalf,
or (ii) by listing all of the subscribers for Units executing any instrument and
having one of the General Partner's officers sign such instrument on the General
Partner's behalf in the General Partner's capacity as attorney-in-fact for such
subscribers, or (iii) by any other method authorized by law.
3. Subscriber hereby acknowledges that the Escrow Agent's sole role in the
offering described in the Prospectus is that of escrow agent, and that the
Escrow Agent has not reviewed the Prospectus and makes no representations
whatsoever as to the nature of such offering or the compliance of such offering
with any applicable state or federal laws, rules or regulations. Subscriber
understands that the Escrow Agent will make all computations regarding the
amount of interest (if any) that will be paid to such Subscriber with respect to
his subscription payment.
The capitalized terms used have the meanings assigned to them in the
Prospectus unless the context otherwise requires.
EXHIBIT C
TELECOMMUNICATIONS INCOME FUND XI, L.P.
TABULAR INFORMATION
CONCERNING PRIOR TRANSACTIONS
The following Tables present unaudited information in connection with eight
private programs ("Private Programs") organized by affiliates of the General
Partner and two Public Programs for which the General Partner serves as the
general partner. Mr. Thomas J. Berthel served as a general partner of each of
the Private Programs, together with corporate general partners which were
subsidiaries of Berthel Fisher & Company, Inc. The General Partner is a
subsidiary of Berthel Fisher & Company.
The General Partner purchased equipment placed in four of the Private
Programs (Telecommunications Limited Partnership No. 2, Telecommunications
Limited Partnership No. 5, Telecommunications Limited Partnership No. 7 and
Telecommunications Limited Partnership No. 8) and the Public Programs. The
General Partner is managing the lease portfolios of both of Public Programs. All
of the Private Programs have been closed and liquidated.
One of the Private Programs (Telecommunications Limited Partnership No. 1)
was designed to fund a start-up company through both an operating loan and
equipment leasing. Equipment leases in that program represented approximately
16% of its business. All of the other Private Programs had equipment leasing as
their primary business. The Public Programs have equipment leasing as their
primary business. The Public Programs' lease portfolios and all of the Private
Programs' lease portfolios consist predominately of telecommunications
equipment.
THE INFORMATION SET FORTH IN THE FOLLOWING TABLES IS INCLUDED HEREIN SOLELY
TO INFORM INVESTORS OF THE PRIOR AND NOT FUTURE PERFORMANCE OF PROGRAMS
PREVIOUSLY SPONSORED BY THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL
PARTNER AND SHOULD NOT BE CONSIDERED AS INDICATIVE OF POSSIBLE CAPITALIZATION OR
OPERATIONS OF THE PARTNERSHIP. LIMITED PARTNERS WILL HAVE NO INTEREST IN THE
PROGRAMS DESCRIBED ON THE FOLLOWING TABLES UNLESS THEY ARE ALSO INVESTORS IN
THOSE PROGRAMS.
The Tables are provided solely to enable prospective investors to evaluate
the experience of the General Partner and its affiliates.
C-1
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
PRIVATE REG. D OFFERINGS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #1 TLP #2 TLP #3 TLP #4 TLP #5
------------ ------------ ----------- ----------- ------------
Dollar amount offered................. $ 2,000,000 $ 2,000,000 $ 280,000 $ 390,000 $ 1,000,000
Dollar amount raised.................. $ 1,363,500(1) $ 1,383,700(1) $ 282,828(1) $ 393,939(1) $ 1,010,000(1)
Less offering expenses:
Selling commissions and discounts
retained by affiliates............ 9.0% 9.0% 9.0% 9.0% 9.0%
Organizational expenses............. 9.4% 11.5% 10.2% 9.6% 8.3%
Other............................... 14.8 (2) 0.0% 0.0% 0.0% 0.8%
Reserves.............................. 0.0% 0.0% 0.0% 0.0% 0.0%
------------ ------------ ----------- ----------- ------------
Percent available for investment...... 66.8% 79.5% 80.8% 81.4% 82.7%
Acquisition Costs:
Acquisition fees.................... 0.0% 0.0% 4.3% 4.5% 3.5%
Other............................... 0.0% 0.0% 0.0% 0.0% 0.0%
------------ ------------ ----------- ----------- ------------
Total acquisition costs............... 0.0% 0.0% 4.3% 4.5% 3.5%
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
Percent leveraged (financing divided
by total equipment cost)(3)......... 32.2% 46.6% 59.9% 45.3% 37.6%
Date offering began................... 07-01-86 02-01-87 02-24-88 04-18-88 11-28-88
Length of offering.................... 6 months 11 months 0 months 0 months 3 months
Months to invest 90% of amount
available for investment............ 16 months 21 months 7 months 1 month 9 months
- ------------------------
(1) Includes 1% general partner purchase of units.
(2) Operating loan to lessee.
(3) Percentage calculated based on total financing (highest outstanding balance)
to total equipment purchased.
C-2
TABLE I (CONTINUED)
EXPERIENCE IN RAISING AND INVESTING FUNDS
PRIVATE REG. D OFFERINGS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #6 TLP #7 TLP #8 TIF IX(4) TIF X(4)
---------- ------------ ------------ ------------- -------------
Dollar amount offered.............. $ 475,000 $ 1,000,000 $ 2,000,000 $ 25,000,000 $ 25,000,000
Dollar amount raised............... $ 479,750(1) $ 1,010,000(5) $ 1,217,050(1) $ 17,001,750(5) $ 22,617,500(5)
Less offering expenses:
Selling commissions and discounts
retained by affiliates......... 8.0% 9.0% 9.0% 10.0% 10.0%
Organizational expenses.......... 8.3% 9.4% 9.4% 4.0% 4.0%
Other............................ 0.0% 0.0% 0.0% 0.0% 0.0%
Reserves........................... 0.0% 0.0% 0.0% 1.0% 1.0%
---------- ------------ ------------ ------------- -------------
Percent available for investment... 83.7% 81.6% 81.6% 85.0% 85.0%
---------- ------------ ------------ ------------- -------------
Acquisition Costs:
Acquisition fees................. 0.0% 1.6% 2.0% 4.0% 4.0%
Other............................ 0.0% 0.0% 0.0% 0.0% 0.0%
---------- ------------ ------------ ------------- -------------
Total acquisition costs............ 0.0% 1.6% 2.0% 4.0% 4.0%
---------- ------------ ------------ ------------- -------------
---------- ------------ ------------ ------------- -------------
Percent leveraged (financing
divided by total equipment
cost)(3)......................... 49.7% 31.3% 34.2% 18.2% 15.6%
Date offering began................ 05-31-89 08-16-89 02-28-90 10-30-91 08-27-93
Length of offering................. 1 month 6 months 11 months 19 months 16 months
Months to invest 90% of amount
available for investment......... 1 month 7 months 11 months 17 months 16 months
- ------------------------
(1) Includes 1% general partner purchase of partnership interest.
(2) Operating loan to lessee.
(3) Percentage calculated based on total financing (highest outstanding balance)
to total equipment purchased.
(4) Public Program
(5) Includes $10,000 general partner purchase of partnership interest.
C-3
TABLE II
COMPENSATION TO SPONSOR
THROUGH SEPTEMBER 30, 1997
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #1 TLP #2 TLP #3 TLP #4 TLP #5
------------ ------------ ---------- ---------- ------------
Date offering commenced........................ 07-01-86 02-01-87 02-24-88 04-18-88 11-28-88
Dollar amount raised........................... $ 1,363,000 $ 1,383,700 $ 282,828 $ 393,939 $ 1,010,000
Amount paid to sponsor from proceeds of
offering:
Underwriting fees and commissions............ $ 216,000 $ 219,200 $ 44,800 $ 62,400 $ 160,000
Lease acquisition fee........................ $ 0 $ 0 $ 23,720 $ 23,695 $ 47,904
Dollar amount of cash generated from operations
before deducting payments to sponsor......... $ 1,997,279 $ 1,994,576 $ 561,256 $ 663,620 $ 1,505,111
Amount paid to sponsor from operations:
Partnership management fees.................. $ 25,779 $ 121,042 $ 24,858 $ 50,249 $ 60,000
Other........................................ $ 0 $ 0 $ 0 $ 0 $ 0
Dollar amount of property sales and financing
before deducting payments to sponsor:
Cash......................................... $ 125,000 $ 474,976 $ 182,675 $ 106,066 $ 512,501
Notes........................................ $ 0 $ 530,617 $ 0 $ 0 $ 21,037
Amount paid to sponsor from property sales and
refinancing:
Incentive fees............................... $ 0 $ 0 $ 0 $ 0 $ 0
Other........................................ $ 0 $ 0 $ 0 $ 0 $ 0
C-4
TABLE II (CONTINUED)
COMPENSATION TO SPONSOR
THROUGH SEPTEMBER 30, 1997
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #6 TLP #7 TLP #8 TIF IX TIF X
------------ ------------ ------------ ------------- -------------
Date offering commenced.................. 05-31-89 08-16-89 02-28-90 10-30-91 08-27-93
Dollar amount raised..................... $ 479,750 $ 1,010,000 $ 1,217,050 $ 17,001,750 $ 22,617,500
Amount paid to sponsor from proceeds of
offering:
Underwriting fees and commissions...... $ 68,875 $ 160,000 $ 192,800 $ 1,700,175 $ 2,261,750
Lease acquisition fee.................. $ 0 $ 21,587 $ 35,664 $ 799,345 $ 1,157,901
Dollar amount of cash generated from
operations before deducting payments to
sponsor................................ $ 1,042,077 $ 1,591,989 $ 1,937,192 $ 11,825,813 $ 9,238,558
Amount paid to sponsor from operations:
Partnership management fees............ $ 20,250 $ 13,500 $ 47,760 $ 1,829,154 $ 1,331,233
Other.................................. $ 0 $ 0 $ 0 $ 439,204 $ 346,665
Dollar amount of property sales and
financing before deducting payments to
sponsor:
Cash................................... $ 13,162 $ 215,883 $ 184,392 $ 12,172,770 $ 7,216,706
Notes.................................. $ 0 $ 83,451 $ 318,178 $ 5,901,016 $ 5,742,236
Amount paid to sponsor from property
sales and refinancing:
Incentive fees......................... $ 0 $ 0 $ 0 $ 0 $ 0
Other.................................. $ 0 $ 0 $ 0 $ 0 $ 0
C-5
TABLE III
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #1(1)(2)
-----------------------------------------------------------
08-26-86
TO 12-31-86 1987 1988 1989 1990
----------- ---------- ---------- ---------- ----------
Gross Revenues...................................... $ 14,775 $ 253,699 $ 344,833 $ 314,644 $ 189,792
Profit (loss) on sale of equipment(3)............... $ 0 $ 0 $ 0 $ 0 $ 41,754
Less: Operating Expenses............................ $ 662 $ 5,669 $ 33,079 $ 18,855 $ 18,881
Interest Expense............................... $ 0 $ 26,287 $ 33,982 $ 26,400 $ 13,796
Depreciation................................... $ 49,708 $ 173,474 $ 198,441 $ 199,339 $ 194,648
Write-offs of Syndication
Costs and A/R................................ $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Net Income--Tax Basis(4)............................ $ (35,595) $ 48,269 $ 79,331 $ 70,500 $ 4,221
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Cash generated from operations(4)................... $ 14,113 $ 221,743 $ 277,772 $ 269,389 $ 157,115
Cash generated from sales........................... $ 0 $ 0 $ 0 $ 0 $ 125,000
Cash generated from refinancing..................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated from operations, sales and
refinancing....................................... $ 14,113 $ 221,743 $ 277,772 $ 269,389 $ 282,115
Less: Cash distributions to investors
from operating cash flow....................... $ 1,372 $ 141,875 $ 192,828 $ 241,372 $ 59,970
from sales and refinancing..................... $ 0 $ 0 $ 0 $ 0 $ 0
from other..................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash
distributions..................................... $ 12,741 $ 79,868 $ 84,944 $ 28,017 $ 222,145
Less: Special items--principal reduction............ $ 0 $ 43,984 $ 80,761 $ 88,066 $ 92,290
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash distributions
and special items(5).............................. $ 12,741 $ 35,884 $ 4,183 $ (60,049) $ 129,885
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Tax and distribution data per 1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations.......... $ (26) $ 36 $ 59 $ 52 $ 3
Capital gain (loss)............................. $ 0 $ 0 $ 0 $ 0 $ 31
Cash distributions to Investors Source
(on cash basis)
Sales........................................... $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing..................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations...................................... $ 1 $ 105 $ 143 $ 179 $ 44
Other........................................... $ 0 $ 0 $ 0 $ 0 $ 0
C-6
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #1(1)(2)
-----------------------------------------------
01-01-94
1991 1992 1993 TO 10-31-94
---------- ---------- ---------- -----------
Gross Revenues................................................... $ 148,210 $ 82,047 $ 102,000 $ 760,138
Profit (loss) on sale of equipment(3)............................ $ 0 $ 0 $ 0 $ 0
Less: Operating Expenses......................................... $ 24,252 $ 2,489 $ 2,170 $ 3,003
Interest Expense............................................ $ 3,334 $ 0 $ 0 $ 0
Depreciation................................................ $ 67,537 $ 62,433 $ 41,553 $ 204,396
Write-offs of Syndication
Costs and A/R............................................. $ 0 $ 0 $ 0 $ 559,152
---------- ---------- ---------- -----------
Net Income--Tax Basis............................................ $ 53,087 $ 17,125 $ 58,277 $ (6,413)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Cash generated from operations(4)................................ $ 120,624 $ 79,558 $ 99,830 $ 757,135
Cash generated from sales........................................ $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing.................................. $ 0 $ 0 $ 0 $ 0
---------- ---------- ---------- -----------
Cash generated from operations, sales and refinancing............ $ 120,624 $ 79,558 $ 99,830 $ 757,135
Less: Cash distributions to investors
from operating cash flow.................................... $ 59,999 $ 102,000 $ 102,000 $ 751,378
from sales and refinancing.................................. $ 0 $ 0 $ 0 $ 0
from other.................................................. $ 0 $ 0 $ 0 $ 0
---------- ---------- ---------- -----------
Cash generated (deficiency) after cash distributions............. $ 60,625 $ (22,442) $ (2,170) $ 5,757
Less: Special items--principal reduction........................ $ 97,621 $ 0 $ 0 $ 0
---------- ---------- ---------- -----------
Cash generated (deficiency) after cash distributions and
special items(5)............................................... $ (36,996) $ 22,442 $ (2,170) $ 5,757
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Tax and distribution data per 1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations....................... $ 39 $ 13 $ 43 $ (5)
Capital gain (loss).......................................... $ 0 $ 0 $ 0 $ 0
Cash distributions to Investors Source (on cash basis)
Sales.......................................................... $ 0 $ 0 $ 0 $ 0
Refinancing.................................................... $ 44 $ 76 $ 76 $ 557
Operations..................................................... $ 0 $ 0 $ 0 $ 0
Other.......................................................... $ 0 $ 0 $ 0 $ 0
- ------------------------
(1) In addition to equipment leases, TLP1 invested in operating loans to a
lessee.
(2) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(3) Telecommunications Limited Partnership No. 1 invested its assets in
equipment which was leased to one lessee and in an operating loan to that
lessee. Due to financial difficulties experienced by the lessee, full lease
payments and interest payments were not made during the term of the lease
and operating loan. In 1990, following a recapitalization of the lessee, the
lease was restructured to provide for smaller lease payments and an extended
term. As a result of the foregoing, and as shown on Table III, Exhibit C,
there was a reduction of Gross Income and Net Income from 1990 through 1993.
The equipment was sold in 1994, resulting in an early payoff of the
restructured lease.
(4) "Net Income(loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(5) Deficiencies were funded with a combination of cash generated in prior years
and cash reserves maintained by TLP1.
C-7
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #2(1)
-------------------------------------------------------------
05-19-87
TO 12-31-87 1988 1989 1990 1991
----------- ---------- ----------- ----------- ----------
Gross Revenues..................................... $ 85,224 $ 476,365 $ 575,247 $ 567,619 $ 396,975
Profit (loss) on sale of equipment(2).............. $ 0 $ 0 $ 0 $ (88,490) $ 0
Less: Operating Expenses........................... $ 17,826 $ 75,354 $ 31,644 $ 28,138 $ 21,911
Interest Expense.............................. $ 493 $ 47,407 $ 76,990 $ 57,855 $ 37,031
Depreciation.................................. $ 18,666 $ 137,070 $ 183,158 $ 175,057 $ 122,542
Write-offs of Syndication Costs and A/R....... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ----------- ----------- ----------
Net Income--Tax Basis.............................. $ 48,239 $ 216,534 $ 283,455 $ 218,079 $ 215,491
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Cash generated from operations(3).................. $ 66,905 $ 353,604 $ 466,613 $ 481,626 $ 338,033
Cash generated from sales.......................... $ 0 $ 0 $ 0 $ 436,476 $ 0
Cash generated from refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ----------- ----------- ----------
Cash generated from operations, sales and
refinancing...................................... $ 66,905 $ 353,604 $ 466,613 $ 918,102 $ 338,033
Less: Cash distributions to investors
from operating cash flow..................... $ 22,063 $ 255,547 $ 306,000 $ 300,000 $ 300,000
from sales and refinancing................... $ 0 $ 0 $ 0 $ 0 $ 0
from other................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ----------- ----------- ----------
Cash generated (deficiency) after cash
distributions.................................... $ 44,842 $ 98,057 $ 160,613 $ 618,102 $ 38,033
Less: Special items--principal reduction........... $ 0 $ 84,946 $ 187,310 $ 201,331 $ 219,808
----------- ---------- ----------- ----------- ----------
Cash generated (deficiency) after cash
distributions and special items(4)............... $ 44,842 $ 13,111 $ (26,697) $ 416,771 $ 181,785
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations....... $ 35 $ 158 $ 207 $ 159 $ 157
Capital gain (loss).......................... $ 0 $ 0 $ 0 $ (65) $ 0
Cash distributions to Investors
Source (on cash basis)
Sales........................................ $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing.................................. $ 0 $ 0 $ 0 $ 0 $ 0
Operations................................... $ 16 $ 187 $ 223 $ 219 $ 219
Other........................................ $ 0 $ 0 $ 0 $ 0 $ 0
C-8
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #2(1)
------------------------------------
01-01-94
1992 1993 TO 09-30-94
----------- ---------- -----------
Gross Revenues.............................................................. $ 302,760 $ 23,703 $ 16,706
Profit (loss) on sale of equipment(2)....................................... $ (207,695) $ (29,631) $ (57,011)
Less: Operating Expenses.................................................... $ 19,125 $ 18,472 $ 4,774
Interest Expense...................................................... $ 12,581 $ 422 $ 0
Depreciation.......................................................... $ 95,802 $ 22,447 $ 3,142
Write-offs of Syndication Costs and A/R............................... $ 0 $ 0 $ 288,669
----------- ---------- -----------
Net Income--Tax Basis....................................................... $ (32,443) $ (47,269) $ 336,890
----------- ---------- -----------
----------- ---------- -----------
Cash generated from operations(3)........................................... $ 271,054 $ 4,809 $ 11,932
Cash generated from sales................................................... $ 341,657 $ 258,789 $ 188,960
Cash generated from refinancing............................................. $ 0 $ 0 $ 0
----------- ---------- -----------
Cash generated from operations, sales and refinancing....................... $ 612,711 $ 263,598 $ 200,892
Less: Cash distributions to investors from operating cash flow.............. $ 275,000 $ 6,211 $ 35,040
from sales and refinancing............................................ $ 0 $ 37,098 $ 0
from other............................................................ $ 0 $ 221,691 $ 188,960
----------- ---------- -----------
Cash generated (deficiency) after cash distributions........................ $ 337,711 $ (1,402) $ (23,108)
Less: Special items--principal reduction.................................... $ 185,168 $ 29,787 $ 0
----------- ---------- -----------
Cash generated (deficiency) after cash distributions and special items(4)... $ 152,543 $ (31,189) $ (23,108)
----------- ---------- -----------
----------- ---------- -----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations................................ $ (24) $ (35) $ (246)
Capital gain (loss)................................................... $ (152) $ (22) $ (42)
Cash distributions to Investors
Source (on cash basis)
Sales................................................................. $ 0 $ 27 $ 0
Refinancing........................................................... $ 0 $ 0 $ 0
Operations............................................................ $ 201 $ 5 $ 26
Other................................................................. $ 0 $ 162 $ 138
- ------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP2 generally depreciated equipment on a straight line basis over ten
years. As a result, when a lease ended and the equipment was sold for
residual value, in many cases, due to the depreciation taken by TLP2, the
sale resulted in a tax loss, even though TLP2 realized a positive receipt of
cash. The losses of $88,490 in 1990 and $207,695 in 1992 reflects such tax
losses.
(3) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(4) Deficiencies were funded with a combination of cash generated in prior years
and cash reserves maintained by TLP2.
C-9
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #3(1)
----------------------------------------------------------
03-08-88 01-01-92
TO 12-31-88 1989 1990 1991 TO 10-20-92
----------- --------- --------- ---------- -----------
Gross Revenues........................................ $ 122,598 $ 177,125 $ 170,258 $ 159,847 $ 72,700
Profit (loss) on sale of equipment(2)................. $ 0 $ 0 $ 0 $ 0 $ (151,475)
Less: Operating Expenses.............................. $ 7,288 $ 14,415 $ 9,177 $ 4,916 $ 7,049
Interest Expense................................. $ 19,789 $ 31,176 $ 24,397 $ 16,772 $ 6,293
Depreciation..................................... $ 22,302 $ 55,151 $ 55,151 $ 55,151 $ 29,607
Write-offs of Syndication
Costs and A/R................................ $ 0 $ 0 $ 0 $ 0 $ 53,740
----------- --------- --------- ---------- -----------
Net Income--Tax Basis................................. $ 73,219 $ 76,383 $ 81,533 $ 83,008 $ (175,464)
----------- --------- --------- ---------- -----------
----------- --------- --------- ---------- -----------
Cash generated from operations(3)..................... $ 95,521 $ 131,534 $ 136,684 $ 138,159 $ 59,358
Cash generated from sales............................. $ 0 $ 0 $ 0 $ 0 $ 182,675
Cash generated from refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- --------- ---------- -----------
Cash generated from operations, sales and
refinancing......................................... $ 95,521 $ 131,534 $ 136,684 $ 138,159 $ 242,033
Less: Cash distributions to investors
from operating cash flow......................... $ 40,007 $ 76,501 $ 78,000 $ 78,000 $ 102,306
from sales and refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 46,294
from other....................................... $ 0 $ 0 $ 0 $ 0 0
----------- --------- --------- ---------- -----------
Cash generated (deficiency) after cash
distributions....................................... $ 55,514 $ 55,033 $ 58,684 $ 60,159 $ 93,433
Less: Special items--principal reduction.............. $ 29,351 $ 56,764 $ 63,538 $ 71,124 $ 109,842
----------- --------- --------- ---------- -----------
Cash generated (deficiency) after cash distributions
and special items(4)................................ $ 26,163 $ (1,731) $ (4,854) $ (10,965) $ (16,409)
----------- --------- --------- ---------- -----------
----------- --------- --------- ---------- -----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations............ $ 261 $ 273 $ 291 $ 296 $ (627)
Capital gain (loss)............................... $ 0 $ 0 $ 0 $ 0 $ (541)
Cash distributions to Investors
Source (on cash basis)
Sales............................................. $ 0 $ 0 $ 0 $ 0 $ 165
Refinancing....................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations........................................ $ 143 $ 273 $ 279 $ 279 $ 365
Other............................................. $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP3 generally depreciated equipment on a straight line basis over ten
years. As a result, when leases ended and the equipment was sold for
residual value, in many cases, due to the depreciation taken by TLP3, the
sale resulted in a tax loss, even though TLP3 realized a positive receipt of
cash. The loss of $151,475 in 1992 reflects such a tax loss.
(3) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(4) Deficiencies were funded with a combination of cash generated in prior years
and cash reserves maintained by TLP3.
C-10
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #4(1)
---------------------------------------------------------
05-03-88 01-01-92
TO 12-31-88 1989 1990 1991 TO 10-20-92
----------- --------- --------- --------- -----------
Gross Revenues........................................ $ 136,484 $ 185,494 $ 175,939 $ 170,488 $ 133,888
Profit (loss) on sale of equipment(2)................. $ 0 $ 0 $ 0 $ 0 $ (205,695)
Less: Operating Expenses.............................. $ 7,461 $ 16,465 $ 18,236 $ 12,414 $ 13,636
Interest Expense................................. $ 19,377 $ 20,534 $ 15,787 $ 10,562 $ 4,201
Depreciation..................................... $ 17,336 $ 52,655 $ 52,655 $ 52,655 $ 39,491
Write-offs of Syndication
Costs and A/R.................................. $ 0 $ 0 $ 0 $ 0 $ 72,734
----------- --------- --------- --------- -----------
Net Income--Tax Basis................................. $ 92,310 $ 95,840 $ 89,261 $ 94,857 $ (201,869)
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
Cash generated from operations(3)..................... $ 109,646 $ 148,495 $ 141,916 $ 147,512 $ 166,051
Cash generated from sales............................. $ 0 $ 0 $ 0 $ 0 $ 106,066
Cash generated from refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- --------- --------- -----------
Cash generated from operations, sales and
refinancing......................................... $ 109,646 $ 148,495 $ 141,916 $ 147,512 $ 222,117
Less: Cash distributions to investors
from operating cash flow......................... $ 44,700 $ 108,001 $ 108,001 $ 108,001 $ 116,042
from sales and refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 79,196
from other....................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- --------- --------- -----------
Cash generated (deficiency) after cash
distributions....................................... $ 64,946 $ 40,494 $ 33,916 $ 39,511 $ 26,879
Less: Special items--principal reduction.............. $ 25,347 $ 41,610 $ 46,270 $ 51,463 $ 73,857
----------- --------- --------- --------- -----------
Cash generated (deficiency) after cash distributions
and special items(4)................................ $ 39,599 $ (1,116) $ (12,354) $ (11,952) $ (46,978)
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations............ $ 237 $ 246 $ 229 $ 243 $ (518)
Capital gain (loss)............................... $ 0 $ 0 $ 0 $ 0 $ (527)
Cash distributions to Investors
Source (on cash basis)
Sales............................................. $ 0 $ 0 $ 0 $ 0 $ 203
Refinancing....................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations........................................ $ 115 $ 277 $ 277 $ 277 $ 298
Other............................................. $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP4 generally depreciated equipment on a straight line basis over ten
years. As a result, when leases ended and the equipment was sold for
residual value, in many cases, due to the depreciation taken by TLP4, the
sale resulted in a tax loss, even though TLP4 realized a positive receipt of
cash. The loss of $205,695 in 1992 reflects such a tax loss.
(3) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(4) Deficiencies were funded with a combination of cash generated in prior years
and cash reserves maintained by TLP4.
C-11
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #5(1)
-----------------------------------------------------------
12-01-88
TO 12-31-88 1989 1990 1991 1992
----------- ---------- ---------- ---------- ----------
Gross Revenues...................................... $ 16,091 $ 325,420 $ 417,548 $ 414,909 $ 341,810
Profit (loss) on sale of equipment(2)............... $ 0 $ 0 $ 0 $ 0 $ (69,483)
Less: Operating Expenses............................ $ 2,058 $ 16,746 $ 17,409 $ 17,992 $ 17,289
Interest Expense.............................. $ 0 $ 39,583 $ 54,947 $ 42,628 $ 26,381
Depreciation.................................. $ 1,846 $ 79,258 $ 136,791 $ 137,466 $ 80,994
Write-offs of Syndication
Costs and A/R............................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Net Income--Tax Basis............................... $ 12,187 $ 189,563 $ 208,401 $ 216,823 $ 147,663
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Cash generated from operations(3)................... $ 14,033 $ 268,821 $ 345,192 $ 354,289 $ 298,140
Cash generated from sales........................... $ 0 $ 0 $ 0 $ 0 $ 378,397
Cash generated from refinancing..................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated from operations, sales and
refinancing....................................... $ 14,033 $ 268,821 $ 345,192 $ 354,289 $ 676,537
Less: Cash distributions to investors
from operating cash flow...................... $ 0 $ 129,389 $ 239,998 $ 260,649 $ 260,000
from sales and refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 0
from other.................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash
distributions..................................... $ 14,033 $ 139,432 $ 105,194 $ 93,640 $ 416,537
Less: Special items--principal reduction............ $ 0 $ 35,557 $ 95,928 $ 110,527 $ 150,675
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash distributions
and special items(4).............................. $ 14,033 $ 103,875 $ 9,266 $ (16,887) $ 265,862
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations........ $ 12 $ 190 $ 208 $ 217 $ 148
Capital gain (loss)........................... $ 0 $ 0 $ 0 $ 0 $ (69)
Cash distributions to Investors
Source (on cash basis)
Sales......................................... $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations.................................... $ 0 $ 129 $ 240 $ 261 $ 260
Other......................................... $ 0 $ 0 $ 0 $ 0 $ 0
C-12
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #5(1)
------------------------
1993 1994
----------- -----------
Gross Revenues.......................................................................... $ 224,659 $ 35,597
Profit (loss) on sale of equipment(2)................................................... $ (114,028) $ 224,899
Less: Operating Expenses................................................................ $ 18,317 $ 7,757
Interest Expense.................................................................. $ 8,525 $ 1,021
Depreciation...................................................................... $ 71,170 $ 35,575
Write-offs of Syndication
Costs and A/R................................................................... $ 37,399 $ 173,420
----------- -----------
Net Income--Tax Basis................................................................... $ (24,780) $ (407,075)
----------- -----------
----------- -----------
Cash generated from operations(3)....................................................... $ 197,817 $ 26,819
Cash generated from sales............................................................... $ 300,597 $ 60,024
Cash generated from refinancing......................................................... $ 0 $ 0
----------- -----------
Cash generated from operations, sales and refinancing................................... $ 498,414 $ 86,843
Less: Cash distributions to investors
from operating cash flow.......................................................... $ 325,000 $ 26,819
from sales and refinancing........................................................ $ 0 $ 60,024
from other........................................................................ $ 164,552 $ 51,383
----------- -----------
Cash generated (deficiency) after cash distributions.................................... $ 8,862 $ (51,383)
Less: Special items--principal reduction................................................ $ 123,785 $ 0
----------- -----------
Cash generated (deficiency) after cash distributions and special items(4)............... $ (114,923) $ (51,383)
----------- -----------
----------- -----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations............................................ $ (25) $ (407)
Capital gain (loss)............................................................... $ (114) $ (225)
Cash distributions to Investors
Source (on cash basis)
Sales............................................................................. $ 0 $ 60
Refinancing....................................................................... $ 0 $ 0
Operations........................................................................ $ 325 $ 27
Other............................................................................. $ 165 $ 51
- ------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP5 generally depreciated equipment on a straight line basis over ten
years. As a result, when a lease ended and the equipment was sold for
residual value, in many cases, due to the depreciation taken by TLP5, the
sale resulted in a tax loss, even though TLP5 realized a positive receipt of
cash. The loss of $69,483 in 1992 reflects such a tax loss.
(3) "Net Income(loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(4) Deficiencies were funded with cash generated in prior years.
C-13
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #6(1)
-----------------------------------------------------------
07-14-89
TO 12-31-89 1990 1991 1992 1993
----------- ---------- ---------- ---------- ----------
Gross Revenues...................................... $ 115,881 $ 192,346 $ 194,487 $ 197,229 $ 188,894
Profit (loss) on sale of equipment.................. $ 0 $ 0 $ 0 $ 0 $ 0
Less: Operating Expenses............................ $ 5,718 $ 8,525 $ 6,879 $ 7,689 $ 9,269
Interest Expense............................... $ 26,854 $ 45,881 $ 40,457 $ 36,568 $ 27,117
Depreciation................................... $ 36,003 $ 79,208 $ 79,856 $ 80,504 $ 80,504
Write-offs of Syndication......................
Costs and A/R................................ $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Net Income--Tax Basis............................... $ 47,306 $ 58,732 $ 67,295 $ 72,468 $ 72,004
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Cash generated from operations(2)................... $ 83,309 $ 137,940 $ 147,151 $ 152,972 $ 152,508
Cash generated from sales........................... $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing..................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated from operations, sales and
refinancing....................................... $ 83,309 $ 137,940 $ 147,151 $ 152,972 $ 152,508
Less: Cash distributions to investors
from operating cash flow....................... $ 13,769 $ 99,999 $ 99,999 $ 100,000 $ 100,000
from sales and refinancing..................... $ 0 $ 0 $ 0 $ 0 $ 0
from other..................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash
distributions..................................... $ 69,540 $ 37,941 $ 47,152 $ 52,972 $ 52,508
Less: Special items--principal reduction............ $ 19,722 $ 40,059 $ 45,471 $ 49,353 $ 58,784
----------- ---------- ---------- ---------- ----------
Cash generated (deficiency) after cash distributions
and special items(3).............................. $ 49,818 $ (2,118) $ 1,681 $ 3,619 $ (6,276)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations............ $ 100 $ 124 $ 142 $ 153 $ 152
Capital gain (loss)............................... $ 0 $ 0 $ 0 $ 0 $ 0
Cash distributions to Investors Source (on cash
basis)
Sales............................................. $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing....................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations........................................ $ 29 $ 211 $ 211 $ 211 $ 211
Other............................................. $ 0 $ 0 $ 0 $ 0 $ 0
C-14
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #6(1)
-----------------------------------
1994 1995 1996
---------- ---------- -----------
Gross Revenues.............................................................. $ 193,470 $ 162,239 $ 63,215
Profit (loss) on sale of equipment.......................................... $ 0 $ (6,052) $ (174,675)
Less: Operating Expenses.................................................... $ 8,820 $ 7,537 $ 5,234
Interest Expense....................................................... $ 16,988 $ 10,916 $ 1,232
Depreciation........................................................... $ 81,600 $ 76,128 $ 48,950
Write-offs of Syndication
Costs and A/R........................................................ $ 0 $ 0 $ 77,320
---------- ---------- -----------
Net Income--Tax Basis....................................................... $ 86,062 $ 61,606 $ (244,196)
---------- ---------- -----------
---------- ---------- -----------
Cash generated from operations(2)........................................... $ 167,662 $ 143,786 $ 56,749
Cash generated from sales................................................... $ 0 $ 1,301 $ 11,861
Cash generated from refinancing............................................. $ 0 $ 0 $ 0
---------- ---------- -----------
Cash generated from operations, sales and refinancing....................... $ 167,662 $ 145,087 $ 68,610
Less: Cash distributions to investors
from operating cash flow............................................... $ 100,000 $ 125,000 $ 61,860
from sales and refinancing............................................. $ 0 $ 0 $ 0
from other............................................................. $ 0 $ 0 $ 0
---------- ---------- -----------
Cash generated (deficiency) after cash distributions........................ $ 67,662 $ 20,087 $ 6,750
Less: Special items--principal reduction.................................... $ 69,354 $ 75,049 $ 42,208
---------- ---------- -----------
Cash generated (deficiency) after cash distributions and special items(3)... $ (1,692) $ (54,962) $ (35,458)
---------- ---------- -----------
---------- ---------- -----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations.................................. $ 181 $ 130 $ (514)
Capital gain (loss)..................................................... $ 0 $ (13) $ (368)
Cash distributions to Investors Source (on cash basis)......................
Sales................................................................... $ 0 $ 0 $ 0
Refinancing............................................................. $ 0 $ 0 $ 0
Operations.............................................................. $ 211 $ 263 $ 130
Other................................................................... $ 0 $ 0 $ 0
- ------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(3) Deficiencies were funded with cash generated in prior years.
C-15
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #7(1)
--------------------------------------------------------------------
01-01-94
08-30-89 TO
TO 12-31-89 1990 1991 1992 1993 09-30-94
----------- --------- --------- --------- ---------- ----------
Gross Revenues................................. $ 58,574 $ 403,825 $ 446,673 $ 398,353 $ 314,143 $ 140,640
Profit (loss) on sale of equipment(2).......... $ 0 $ 0 $ 0 $ (92,261) $ (177,823) $ (342,437)
Less: Operating Expenses....................... $ 2,599 $ 9,569 $ 9,433 $ 12,504 $ 8,906 $ 8,926
Interest Expense.......................... $ 4,290 $ 42,520 $ 33,830 $ 21,054 $ 13,400 $ 3,188
Depreciation.............................. $ 26,137 $ 104,289 $ 133,646 $ 130,053 $ 103,876 $ 50,736
Write-offs of Syndication Costs
and A/R.................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 184,655
----------- --------- --------- --------- ---------- ----------
Net Income--Tax Basis.......................... $ 25,548 $ 247,447 $ 269,764 $ 142,481 $ 10,138 $ (449,302)
----------- --------- --------- --------- ---------- ----------
----------- --------- --------- --------- ---------- ----------
Cash generated from operations(3).............. $ 51,685 $ 351,736 $ 403,410 $ 364,795 $ 291,837 $ 128,526
Cash generated from sales...................... $ 0 $ 0 $ 0 $ 6,000 $ 48,103 $ 190,715
Cash generated from refinancing................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- --------- --------- ---------- ----------
Cash generated from operations, sales and
refinancing.................................. $ 51,685 $ 351,736 $ 403,410 $ 370,795 $ 339,940 $ 319,241
Less: Cash distributions to investors
from operating cash flow.................. $ 1,660 $ 177,484 $ 227,998 $ 228,000 $ 228,000 $ 128,002
from sales and refinancing................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 266,901
from other................................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- --------- --------- ---------- ----------
Cash generated (deficiency) after cash
distributions................................ $ 50,025 $ 174,252 $ 175,412 $ 142,795 $ 111,940 $ (75,662)
Less: Special items--principal reduction....... $ 5,013 $ 81,572 $ 106,206 $ 84,743 $ 68,319 $ 69,147
----------- --------- --------- --------- ---------- ----------
Cash generated (deficiency) after cash
distributions and special items.............. $ 45,012 $ 92,680 $ 69,206 $ 58,052 $ 43,621 $ (144,809)
----------- --------- --------- --------- ---------- ----------
----------- --------- --------- --------- ---------- ----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations..... $ 26 $ 247 $ 270 $ 142 $ 10 $ (449)
Capital gain (loss)........................ $ 0 $ 0 $ 0 $ (92) $ (178) $ (342)
Cash distributions to Investors
Source (on cash basis)
Sales...................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 267
Refinancing................................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Operations................................. $ 2 $ 177 $ 228 $ 228 $ 228 $ 128
Other...................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP7 generally depreciated equipment on a straight line basis over ten
years, even though the equipment was leased pursuant to a lease having a
three to five year term. As a result, when a lease ended and the equipment
was sold for residual value, in many cases the sale resulted in a tax loss
because the sale price was less than the adjusted basis of the equipment.
The loss of $92,261 in 1992 reflects such a tax loss that resulted from the
sale of equipment that TLP7 took possession of in 1991 following the early
termination of a lease.
(3) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
C-16
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
INCOME TAX BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TLP #8(1)
----------------------------------------------------------
01-01-94
$04-09-90 TO
TO 12-31-90 1991 1992 1993 09-30-94
----------- --------- ---------- ---------- ----------
Gross Revenues..................................... $ 282,731 $ 821,754 $ 475,321 $ 418,859 $ 177,850
Profit (loss) on sale of equipment(2).............. $ 0 $ 0 $ (351,774) $ (154,322) $ (372,256)
Less: Operating Expenses........................... $ 21,826 $ 26,531 $ 27,054 $ 16,772 $ 10,196
Interest Expense.............................. $ 28,958 $ 56,699 $ 39,109 $ 12,178 $ 0
Depreciation.................................. $ 78,386 $ 175,511 $ 108,398 $ 196,959 $ 52,029
Write-offs of Syndication Costs and A/R....... $ 0 $ 0 $ 0 $ 0 $ 231,437
----------- --------- ---------- ---------- ----------
Net Income--Tax Basis.............................. $ 153,561 $ 563,013 $ (51,014) $ 38,628 $ (488,068)
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
Cash generated from operations(3).................. $ 231,947 $ 738,524 $ 409,158 $ 389,909 $ 167,654
Cash generated from sales.......................... $ 0 $ 0 $ 24,000 $ 7,400 $ 137,194
Cash generated from refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- ---------- ---------- ----------
Cash generated from operations, sales and
refinancing...................................... $ 231,947 $ 738,524 $ 433,158 $ 397,309 $ 304,848
Less: Cash distributions to investors
from operating cash flow...................... $ 53,053 $ 256,000 $ 256,000 $ 256,000 $ 474,722
from sales and refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 137,194
from other.................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- --------- ---------- ---------- ----------
Cash generated (deficiency) after cash
distributions.................................... $ 178,894 $ 482,524 $ 177,158 $ 141,309 $ (307,068)
Less: Special items--principal reduction........... $ 61,507 $ 103,803 $ 203,565 $ 138,901 $ 138,901
----------- --------- ---------- ---------- ----------
Cash generated (deficiency) after cash
distributions and special items(4)............... $ 117,387 $ 378,721 $ (26,407) $ 2,408 $ (445,969)
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations......... $ 127 $ 467 $ (42) $ 32 $ (405)
Capital gain (loss)............................ $ 0 $ 0 $ (292) $ (128) $ (309)
Cash distributions to Investors
Source (on cash basis)
Sales.......................................... $ 0 $ 0 $ 0 $ 0 $ 114
Refinancing.................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations..................................... $ 44 $ 212 $ 212 $ 212 $ 394
Other.......................................... $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------
(1) This was a nonpublic program whose books were kept on an income tax basis.
This table includes the presentation of income tax basis information.
(2) TLP8 generally depreciated equipment on a straight line basis over ten
years, even though the equipment was leased pursuant to a lease having a
three to five year term. As a result, when a lease ended and the equipment
was sold for residual value, in many cases the sale resulted in a tax loss
because the sale price was less than the adjusted basis of the equipment.
The loss of $351,774 in 1992 reflects such a tax loss that resulted from the
sale of equipment that TLP8 took possession of in 1991 following the early
termination of a lease.
(3) "Net Income (loss)--Tax Basis" plus current year Depreciation plus loss (if
any) on sale of equipment or less gain (if any) on sale of equipment.
(4) Deficiencies were funded with cash generated in prior years.
C-17
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
GAAP BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TIF IX(1)(2)
--------------------------------------------------------------------
11-30-91
TO 12-31-91 1992 1993 1994 1995
----------- ------------ ------------ ------------- ------------
Gross Revenues..................................... $ 27,892 $ 1,068,671 $ 2,759,468 $ 2,958,118 $ 2,933,329
Profit (loss) on sale of equipment................. $ 0 $ 0 $ 94,003 $ 38,445 $ 23,355
Less: Operating Expenses........................... $ 13,375 $ 254,794 $ 495,491 $ 578,979 $ 630,062
Interest Expense.............................. $ 482 $ 110,245 $ 239,437 $ 363,881 $ 432,197
Provision for possible lease losses........... $ 0 $ 0 $ 0 $ 270,000 $ 94,156
Depreciation.................................. $ 0 $ 0 $ 0 $ 0 $ 150,540
Impairment loss on Equipment.................. $ 0 $ 0 $ 0 $ 0 $ 0
----------- ------------ ------------ ------------- ------------
Net Income--GAAP Basis............................. $ 14,035 $ 703,632 $ 2,118,543 $ 1,783,703 $ 1,649,729
----------- ------------ ------------ ------------- ------------
----------- ------------ ------------ ------------- ------------
Cash generated from operations..................... $ 86,725 $ 1,969,307 $ 2,291,515 $ 1,435,986 $ 1,830,610
Proceeds from termination of direct financing
leases........................................... $ 0 $ 0 $ 2,291,412 $ 379,489 $ 416,768
Cash generated from refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ------------ ------------ ------------- ------------
Cash generated from operations, sales and
refinancing...................................... $ 86,725 $ 1,969,307 $ 4,582,927 $ 1,815,475 $ 2,247,378
Less: Cash distributions to investors from
operating cash flow........................... $ 14,550 $ 710,834 $ 1,839,447 $ 2,040,210 $ 2,040,208
from sales and refinancing.................... $ 0 $ 0 $ 0 $ 0 $ 0
from other.................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ------------ ------------ ------------- ------------
Cash generated (deficiency) after cash
distributions.................................... $ 72,175 $ 1,258,473 $ 2,743,480 $ (224,735) $ 207,170
Less: Special items--principal reduction....... $ 0 $ 133,588 $ 0 $ 1,121,243 $ 0
----------- ------------ ------------ ------------- ------------
Cash generated (deficiency) after cash
distributions and special items.................. $ 72,175 $ 1,124,885 $ 2,743,480 $ (1,345,978) $ 207,170
----------- ------------ ------------ ------------- ------------
----------- ------------ ------------ ------------- ------------
Income Tax Reporting Basis
Net income for income tax reporting purposes..... $ 40,414 $ (238,776) $ 679,003 $ 1,515,757 $ 1,267,314
Gain (loss) on sales of equipment................ $ 0 $ 567 $ 85,044 $ (34,565) $ (635,945)
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations......... $ 33 $ (22) $ 40 $ 89 $ 75
Gain (loss) on sale of Equipment............... $ 0 $ 0 $ 5 $ (2) $ (37)
Cash distributions to Investors
Source (on GAAP basis)
Sales.......................................... $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing.................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations..................................... $ 12 $ 65 $ 108 $ 120 $ 120
Other.......................................... $ 0 $ 0 $ 0 $ 0 $ 0
C-18
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
GAAP BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TIF IX(1)(2)
---------------------------
1996 09-30-97
------------- ------------
Gross Revenues....................................................................... $ 2,875,262 $ 1,701,976
Profit (loss) on sale of equipment................................................... $ 413,880 $ 486,921
Less: Operating Expenses............................................................. $ 574,268 $ 443,174
Interest Expense................................................................ $ 492,210 $ 136,560
Provision for possible lease losses............................................. $ 577,931 $ 57,283
Depreciation.................................................................... $ 286,526 $ 230,808
Impairment loss on Equipment......................................................... $ 350,000 $ 0
------------- ------------
Net Income--GAAP Basis............................................................... $ 1,008,207 $ 1,321,072
------------- ------------
------------- ------------
Cash generated from operations....................................................... $ 1,803,251 $ 1,184,865
Proceeds from termination of direct financing leases................................. $ 6,874,524 $ 2,450,406
Cash generated from refinancing...................................................... $ 0 $ 0
------------- ------------
Cash generated from operations, sales and refinancing................................ $ 8,677,775 $ 3,635,271
Less: Cash distributions to investors from operating cash flow....................... $ 2,065,823 $ 1,527,565
from sales and refinancing $ 0 $ 0
from other...................................................................... $ 0 $ 0
------------- ------------
cash distributions.............................................................. $ 6,611,952 $ 2,107,706
Less: Special items--principal reduction $ 3,437,296 $ 1,222,261
------------- ------------
Cash generated (deficiency) after cash distributions and special items............... $ 3,174,656 $ 885,445
------------- ------------
------------- ------------
Income Tax Reporting Basis
Net income for income tax reporting purposes....................................... $ 2,687,332 (3)
Gain (loss) on sales of equipment.................................................... $ (3,475,641) (3)
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations........................................... $ 158 (3)
Gain (loss) on sale of Equipment................................................. $ (205) (3)
Cash distributions to Investors
Source (on GAAP basis)
Sales............................................................................ $ 0 $ 0
Refinancing...................................................................... $ 0 $ 0
Operations....................................................................... $ 122 $ 90
Other............................................................................ $ 0 $ 0
- ------------------------
(1) This is a public program whose books are kept on a GAAP basis.
(2) The amount (in percentage terms) remaining invested in program equipment at
the end of September, 1997 is 100.00%.
(3) Tax information not available at this time.
C-19
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR TRANSACTIONS
GAAP BASIS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
TIF X(1)(2)
----------------------------------------------------------------
08-27-93
TO 12-31-93 1992 1993 1994 9-30-97
----------- ----------- ----------- ------------ -----------
Gross Revenues........................................ $ 136,896 $ 2,240,714 $ 3,751,290 $ 3,444,271 $ 2,319,276
Profit (loss) on sale of equipment.................... $ 0 $ 20,306 $ 77,143 $ 260,706 $ 61,073
Less: Operating Expenses.............................. $ 51,378 $ 388,920 $ 605,211 $ 709,592 $ 509,482
Interest Expense................................. $ 0 $ 216,665 $ 672,512 $ 692,863 $ 267,646
Provision for possible lease losses.............. $ 0 $ 360,000 $ 828,911 $ 1,092,551 $ 67,005
Depreciation..................................... $ 0 $ 0 $ 170,646 $ 392,774 $ 310,348
Impairment loss on Equipment..................... $ 0 $ 0 $ 0 $ 621,000 $ 0
----------- ----------- ----------- ------------ -----------
Net Income--GAAP Basis................................ $ 85,518 $ 1,295,435 $ 1,551,153 $ 196,197 $ 1,225,868
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
Cash generated from operations........................ $ 158,914 $ 1,643,652 $ 2,566,020 $ 1,938,010 $ 1,254,064
Proceeds from termination of direct financing
leases.............................................. $ 0 $ 201,125 $ 837,182 $ 5,297,671 $ 880,728
Cash generated from refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ----------- ----------- ------------ -----------
Cash generated from operations, sales and
refinancing......................................... $ 158,914 $ 1,844,777 $ 3,403,202 $ 7,235,681 $ 2,134,792
Less: Cash distributions to investors
from operating cash flow......................... $ 104,880 $ 1,416,600 $ 2,427,345 $ 2,456,178 $ 1,824,139
from sales and refinancing....................... $ 0 $ 0 $ 0 $ 0 $ 0
from other....................................... $ 0 $ 0 $ 0 $ 0 $ 0
----------- ----------- ----------- ------------ -----------
Cash generated (deficiency) after cash
distributions....................................... $ 54,034 $ 288,786 $ 960,510 $ 4,793,261 $ 310,563
Less: Special items--principal reduction........ $ 0 $ 0 $ 0 $ 3,811,544 $ 595,496
----------- ----------- ----------- ------------ -----------
Cash generated (deficiency) after cash distributions
and special items................................... $ 54,034 $ 288,786 $ 960,510 $ 981,717 $ (284,843)
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
Income Tax Reporting Basis
Net income for income tax reporting purposes........ $ 6,473 $ (624,998) $ (949,880) $ (1,135,380) (3)
Gain (loss) on sales of equipment................... $ 0 $ 42,853 $ 142,416 $ (1,284,298) (3)
Tax and distribution data per $1,000 invested:
Federal income tax results:
Ordinary income (loss) from operations............ $ 1 $ (28) $ (42) $ (50) (3)
Gain (loss) on sale of Equipment.................. $ 0 $ 2 $ 6 $ (57) (3)
Cash distributions to Investors
Source (on GAAP basis)
Sales............................................. $ 0 $ 0 $ 0 $ 0 $ 0
Refinancing....................................... $ 0 $ 0 $ 0 $ 0 $ 0
Operations........................................ $ 17 $ 69 $ 108 $ 108 $ 81
Other............................................. $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------
(1) This is a public program whose books are kept on a GAAP basis.
(2) The amount (in percentage terms) remaining invested in program equipment at
the end of September, 1997 is 100.00%.
(3) Tax information not available at this time.
C-20
TABLE IV
RESULTS OF COMPLETED PROGRAMS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
PROGRAM NAME TLP #1 TLP #2 TLP #3 TLP #4 TLP #5
- ----------------------------------------------- ------------ ------------ ---------- ---------- ------------
Dollar Amount Raised(1)........................ $ 1,363,500 $ 1,383,700 $ 282,828 $ 393,939 $ 1,010,000
Date of Closing of Offering.................... 12/31/86 12/31/87 03/04/88 05/03/88 02/28/89
Date of First Sale of Equipment................ 10/01/90 10/01/90 03/01/92 10/01/92 10/01/92
Date of Final Sale of Equipment................ 10/01/90 09/01/93 08/01/92 10/01/92 03/01/94
Tax and Distribution Data per $1,000
Federal Income Tax Results:
Ordinary income (loss)
--from operations........................ $ 214 $ 692 $ 1,036 $ 964 $ 751
--from recapture......................... $ 0 $ 0 $ 0 $ 0 $ 0
Capital Gain (loss)........................ $ 31 $ (279) $ (541) $ (527) $ (408)
Deferred Gain
Capital.................................. $ 0 $ 0 $ 0 $ 0 $ 0
Ordinary................................. $ 0 $ 0 $ 0 $ 0 $ 0
Cash Distributions to Investors
Source (on GAAP basis)
--Investment Income........................ $ 224 $ 422 $ 504 $ 446 $ 518
--Return of Capital........................ $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Source (on cash basis)
--Sales.................................... $ 0 $ 27 $ 165 $ 203 $ 60
--Refinancing.............................. $ 0 $ 0 $ 0 $ 0 $ 0
--Operations............................... $ 1,224 $ 1,095 $ 1,339 $ 1,243 $ 1,242
--Other.................................... $ 0 $ 300 $ 0 $ 0 $ 216
Receivable on Net Purchase Money
Financing
- ------------------------
(1) Includes general partner purchase of 1% of amount raised from investors.
C-21
TABLE IV
RESULTS OF COMPLETED PROGRAMS
TABLE IV (CONTINUED)
RESULTS OF COMPLETED PROGRAMS
NOTE: PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
PROGRAM NAME TLP #6 TLP #7 TLP #8
- -------------------------------------------------------------------------- ---------- ------------ ------------
Dollar Amount Raised(1)................................................... $ 479,750 $ 1,010,000 $ 1,217,050
Date of Closing of Offering............................................... 07/14/89 02/21/90 02/07/91
Date of First Sale of Equipment........................................... 12/01/96 09/01/92 01/01/93
Date of Final Sale of Equipment........................................... 12/01/96 09/01/93 11/01/93
Tax and Distribution Data per $1,000
Federal Income Tax Results:
Ordinary income (loss)
--from operations................................................... $ 846 $ 859 $ 908
--from recapture.................................................... $ 0 $ 0 $ 0
Capital Gain (loss)................................................... $ (380) $ (613) $ (729)
Deferred Gain
Capital............................................................. $ 0 $ 0 $ 0
Ordinary............................................................ $ 0 $ 0 $ 0
Cash Distributions to Investors
Source (on GAAP basis)
--Investment Income................................................... $ 475 $ 258 $ 189
--Return of Capital................................................... $ 1,000 $ 1,000 $ 1,000
Source (on cash basis)
--Sales............................................................... $ 0 $ 267 $ 114
--Refinancing......................................................... $ 0 $ 0 $ 0
--Operations.......................................................... $ 1,475 $ 991 $ 1,075
--Other............................................................... $ 0 $ 0 $ 0
Receivable on Net Purchase Money
Financing
- ------------------------
(1) Includes general partner purchase of 1% of amount raised from investors.
C-22
TABLE V
SALES OR DISPOSITION OF EQUIPMENT BY PUBLIC PROGRAM SINCE 01/01/94
NET
NET CASH NOTES/NONCASH NET
PROCEEDS FROM PROCEEDS FROM PROCEEDS
NET TERMINATION TERMINATION FROM
INVESTMENT OF OF TERMINATION
IN DIRECT DIRECT DIRECT OF DIRECT
DATE YEAR OF FINANCING FINANCING FINANCING FINANCING
PARTNERSHIP DESCRIPTION ACQUIRED DISPOSITION LEASES LEASES LEASES LEASES
- --------------- --------------------- --------- ------------- ------------- ------------- ------------- -------------
TIF IX Telecommunication Various 1994 $ 341,044 $ 379,489 $ 0 $ 379,486
Equipment
TIF IX Telecommunication Various 1995 $ 393,413 $ 416,768 $ 0 $ 416,768
Equipment
TIF IX Telecommunication Various 1996 $ 12,361,660 $ 6,874,524 $ 5,901,016 $ 12,775,540
Equipment
TIF X Telecommunication Various 1994 $ 180,819 $ 201,125 $ 0 $ 201,125
Equipment
TIF X Telecommunication Various 1995 $ 760,039 $ 837,182 $ 0 $ 837,182
Equipment
TIF X Telecommunication Various 1996 $ 10,779,201 $ 5,297,671 $ 5,742,236 $ 11,039,907
Equipment
FEDERAL
GAAP TAXABLE
PARTNERSHIP GAIN/(LOSS) GAIN/(LOSS)
- --------------- ----------- -------------
TIF IX $ 38,445 $ (34,565)
TIF IX $ 23,355 $ (635,945)
TIF IX $ 413,880 $ (3,475,641)
TIF X $ 20,306 $ 42,853
TIF X $ 77,143 $ 142,416
TIF X $ 260,706 $ (1,284,298)
C-23
EXHIBIT D
NOTICE TO CALIFORNIA INVESTORS
SECTION260.141.11. RESTRICTION ON TRANSFER
(a) The issuer of any security upon which a restriction on transfer has been
imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy
of this section to be delivered to each issuee or transferee of such security at
the time the certificate evidencing the security is delivered to the issuee or
transferee.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien given
by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113, or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation,
or by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or 25113
of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
D-1
(15) by the State Controller pursuant to the Unclaimed Property Law or by
the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by
subdivision (1) of Section 25102; provided that any such transfer is on the
condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
D-2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer contained in this Prospectus and, if
given or made such information or representations must not be relied upon.
Neither the delivery of this Prospectus nor any sale made hereunder will, under
any circumstances, create any implication that the information herein is correct
as of any time subsequent to its date. However, if any material change in the
information stated herein does occur during the period when the Prospect is
required to be delivered, it will be supplemented or amended accordingly.
------------------------
------------------------
Until ninety days after the Effective Date of this Prospectus, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
This Prospectus does not constitute an offer or solicitation by anyone in
any state in which said offer or solicitation is not authorized or in which the
person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation.
$25,000,000
TELECOMMUNICATIONS
INCOME FUND XI, L.P.
AN IOWA LIMITED PARTNERSHIP
---------------------
$1,000 PER UNIT
------------------------
A MINIMUM OF 1,200 UNITS ($1,200,000)
OF LIMITED PARTNERSHIP INTEREST
---------------------
MINIMUM INVESTMENT:
2 UNITS ($2,000)
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
100 SECOND STREET, S.E.
CEDAR RAPIDS, IOWA 52401
(319) 365-2506
(800) 356-5234
FAX (319) 365-4538
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
BERTHEL FISHER & COMPANY LEASING, INC. INVITES YOU TO JOIN US
AS AN INVESTOR IN THE EXPANDING MARKET FOR EQUIPMENT LEASING.
TELECOMMUNICATIONS INCOME FUND XI (TIF XI) IS THE ELEVENTH
LIMITED PARTNERSHIP WE'VE OFFERED SINCE 1986.
INVESTING IN THE PARTNERSHIP
- TIF XI will invest primarily in telecommunications equipment for lease.
- TIF XI will also invest in general equipment for emerging growth markets.
- Leases will be full payout.
LEASING IS BIG BUSINESS
Leasing is one of the largest equipment financing options in the United
States.
Lease benefits are as follows:
- 100% financing
- Cash conservation
- Tax advantages
- Inflation hedge
- Cash flow improvements
TELECOMMUNICATIONS LEASING MARKET
- The expanding telecommunications industry is an established market for
equipment leasing.
- Lease rates for telecommunications equipment are competitive and
affordable for the expanding industry.
- Deregulation of the telephone industry has allowed private companies to
enter the pay telephone and call processing business.
- Private companies acquire equipment via full payout leases.
- Each lease request is evaluated upon the private company's
creditworthiness.
- Pay telephone and call processing equipment generate income that repays
the lease.
- Revenues are generally collected by independent billing companies and
in many cases are paid direct to the Lessor.
GENERAL LEASING MARKET
- The General Partner has identified special markets for general equipment
leasing.
- Growth markets are emerging businesses with limited access to capital.
- Examples of general equipment required by companies identified as growth
markets:
- Automated Teller Machines (ATM)
- Cash Dispensing Machines
- Durable home medical equipment
- Manufacturing equipment
- Retail point of sales systems
- The General Partner anticipates that equipment other than
telecommunications equipment will make up a small portion of the
portfolios.
FULL PAYOUT LEASES
- Full payout leases are a conservative approach to equipment leasing.
- Full payout leases return the original cost of the equipment plus a return
on invested funds.
- At lease end the partnership owns the equipment and can sell or release
the equipment.
- Leases are noncancellable for the entire term of the lease.
[GRAPHIC DESCRIBING PROCESS BY WHICH INVESTORS MAKE CAPITAL CONTRIBUTIONS AND
RECEIVE DISTRIBUTIONS, THE PARTNERSHIP MAKES INVESTMENTS IN LEASED EQUIPMENT AND
COLLECTS LEASE REVENUE, AND THE GENERAL PARTNER MANAGES THE FUND AND ORIGINATES
LEASES. PHOTOGRAPHS OF CROWD OF PEDESTRIANS, THE OFFICE OF THE GENERAL PARTNER,
THE LOGO OF THE PARTNERSHIP, AND THREE ITEMS OF TYPICAL LEASE EQUIPMENT]
[LOGO]
THE TIF XI ADVANTAGES
[GRAPHIC OF STAR WITH THE FOLLOWING FIVE ITEMS OF TEXT AT THE POINTS]
SUBORDINATED MANAGEMENT FEE
Investors will receive a return before the General Partner receives its
management fee. The General Partner and its Affiliates will receive substantial
Front End Fees before investors receive a return.
MONTHLY DISTRIBUTIONS
Cash payments are expected to be paid monthly to investors, but
distributions are at the discretion of the General Partner, and there is no
assurance that they will be made. Distributions may include a return of capital.
FULL PAYOUT LEASES
Leases pay back the full cost of equipment plus a return on invested funds.
80/20 PROFIT SPLIT
After the Investors receive their original investment plus a 9.6% annual
return, calculated during the Operating Phase, 80% of the profits will be
returned to investors, and 20% to the General Partner.
TAX-DEFERRED INCOME
A portion of the income on certain leases will be tax-deferred through
equipment depreciation. Investors will not be able to defer taxes on their own
income as a result of investing in the Partnership.
OFFERING SUMMARY
TYPE OF OFFERING:
Publicly registered Leasing Income Fund.
OFFERING SIZE:
Minimum--$1,200,000
Maximum--$25,000,000
UNIT SIZE:
$1,000
MINIMUM PURCHASE
$2,000
GENERAL PARTNER:
Berthel Fisher & Company Leasing, Inc.
PRIOR PROGRAMS:
Eight private placements and two publicly registered programs.
ALLOCATION OF CASH FLOW:
The Partnership Agreement provides that after distributions to the Limited
Partners equal their original investment plus a 9.6% return, calculated during
the Operating Phase, subsequent profits, if any, at liquidation will be split
80/20, with Limited Partners receiving 80% and the General Partner 20%.
CASH DISTRIBUTIONS:
Distributions during the Operating Phase will be paid monthly to the extent
funds are available. Distributions are at the discretion of the General Partner
and there is no assurance that they will be made. Distributions may include a
return of capital.
LENGTH OF INVESTMENT:
The Liquidation Phase will begin 3.5 to 5 years after closing of offering.
PARTNERSHIP OBJECTIVES:
- Preserve capital
- Maximize current income
- Reinvest all available cash in new leases.
- Maximize residual values.
PARTNERSHIP BORROWING:
Maximum leverage of 40%.
TYPES OF LEASED EQUIPMENT:
- Telecommunications systems
- Call Processing systems
- Pay telephones
- PBX systems
- ATM systems
- Miscellaneous income-producing general equipment
TAX DEFERRAL:
Tax on distributions may be deferred through the use of accelerated
depreciation. Investors will not be able to defer taxes on their own income as a
result of investing in the partnership.
PASSIVE INCOME:
TIF XI is a passive income generator.
INVESTOR REPORTING:
- Welcome letter and certificate confirming participation in TIF XI
- Quarterly reports
- Annual reports audited by an independent public accounting firm
- Tax information (schedule K-1)
TELECOMMUNICATIONS INCOME FUND XI
PAST PERFORMANCE
PRIOR PERFORMANCE DOES NOT DICTATE FUTURE PERFORMANCE
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF PRIOR PROGRAMS
SPONSORED BY BERTHEL FISHER & COMPANY LEASING, INC. AND AFFILIATES
AS OF JUNE 30, 1997
DISTRIBUTION
AS
A % OF
PROGRAM OFFERING LENGTH OF TOTAL PAID ORIGINAL PROGRAM
PROGRAM SIZE CLOSING PROGRAM TO DATE INVESTMENT CLOSED
- ------------- ------------- --------- ----------- ------------ -------------- ---------
1 $ 1,363,500 12/31/86 8 years $ 1,652,794 121.22% 10/31/94
2 1,383,700 12/31/87 7 years 1,947,611 140.75 9/30/94
3 282,828 3/4/88 4 1/2 years 421,109 148.89 9/42/92
4 393,939 5/3/88 4 1/2 years 563,940 143.15 10/19/92
5 1,010,000 2/28/89 6 years 1,353,262 133.99 12/31/94
6 479,750 7/14/89 7 1/2 years 700,627 146.04 12/31/96
7 1,010,000 2/21/90 4 1/2 years 1,258,045 124.56 9/30/94
8 1,217,050 2/7/91 3 1/2 years 1,432,969 117.74 9/30/94
9 17,001,750 4/30/93 Open(1) 9,690,392 57.00 Open
10 22,617,500 12/31/94 Open(1) 7,878,145 34.83 Open
- ------------------------
(1) Designed for a 5 year term from Closing of Offering.
There can be no assurance that any specific level of cash distributions or
any of the investment objectives of the partnership can or will be attained.
Anyone interested in Telecommunications Income Fund XI should carefully
review the Prospectus.
[PHOTO OF OFFICES OF BERTHEL FISHER & COMPANY]
BERTHEL FISHER & COMPANY
FOUNDED IN 1985 AS A DIVERSIFED FINANCIAL SERVICES HOLDING COMPANY, BERTHEL
FISHER & COMPANY, INC. OPERATES A NUMBER OF SUBSIDIARIES, INCLUDING:
- BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.
- BERTHEL FISHER & COMPANY LEASING, INC.
- BERTHEL FISHER & COMPANY PLANNING, INC.
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
100 SECOND STREET SE
CEDAR RAPIDS, IOWA 52401
(319) 365-2506
(800) 356-5234 (TOLL FREE)
(319) 365-4538 (FAX)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses payable by the Registrant (other than broker-dealer
commissions) in connection with the offering herein described are as follows:
MINIMUM MAXIMUM
---------- ----------
Securities and Exchange Commission Registration Fee................... $ 7575 $ 7575
National Association of Securities Dealers Registration Fee........... 3,000 3,000
Legal Fees and Expenses............................................... 100,000 100,000
Accountants' Fees and Expenses........................................ 25,000 25,000
Fees and Expenses Relating to Blue Sky Qualifications (including legal
fees)............................................................... 50,000 50,000
Printing.............................................................. 45,000 45,000
Miscellaneous......................................................... 0
Seminars.............................................................. 75,000 75,000
Advertising and Sales................................................. 85,000 85,000
Literature............................................................ 25,000 25,000
---------- ----------
Total Estimated Expenses.......................................... $ 415,575 $ 415,575
---------- ----------
---------- ----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership Agreement provides that the General Partner or its
Affiliates performing services on behalf of the Partnership will not be liable
to the Partnership or the Limited Partners for any act performed or omitted to
be performed by them in connection with the activities of the Partnership or in
dealing with third parties on behalf of the Partnership, if the General Partner,
in good faith, determined that such course of conduct was in the best interest
in the Partnership, and such act or omission does not constitute fraud,
negligence, breach of fiduciary duty or misconduct. The Partnership Agreement
provides that the General Partner or its Affiliates performing services on
behalf of the Partnership will be indemnified by the Partnership for any
liabilities incurred by them arising from acts performed or omitted to be
performed by them that were determined in good faith by the General Partner to
have been in the best interest of the Partnership in connection with the
activities of the Partnership or in dealing with third parties on behalf of the
Partnership, including attorney's fees (which may be paid as incurred subject to
certain restrictions) and any amounts expended in the investigation or
settlement of any claims, except for claims with respect to acts or omissions
which constitute fraud, negligence, breach of fiduciary duty or misconduct.
The General Partner or any of its Affiliates performing services on behalf
of the Partnership, or in connection with its business, will not be indemnified
against any liability, loss or damage incurred by reason of any act performed or
omitted to be performed by them in good faith in connection with the activities
of the Partnership or in dealing with third parties on behalf of the
Partnership, involving allegations that federal or state securities laws were
violated, unless such lawsuits alleging such claims are successfully defended or
a court approves indemnification of litigation costs (provided that the Court is
apprised of the position of the SEC), unless such lawsuits are dismissed with
prejudice on the merits or unless such lawsuits are settled and a court approves
the settlement and the indemnification.
The Partnership Agreement provides that the Partnership will not incur the
cost of that portion of any insurance which insures any party against any
liability the indemnification of which is prohibited by the Partnership
Agreement.
II-1
Advances of attorney's fees and costs will not be permitted for
indemnification suits unless the action relates to the performance of duties or
services by the General Partner or its Affiliates on behalf of the Partnership,
or in connection with the Partnership's business, the claim against which
indemnification is sought is not made by a Limited Partner and the indemnified
party undertakes to repay within 90 days the advanced funds to the Partnership
in cases in which they would not be entitled to indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Thomas J. Berthel has purchased one Unit for $1,000 in order to become an
Initial Limited Partner and permit the filing of a Certificate of Limited
Partnership. The General Partner has purchased 10 Units for $10,000. These sales
were made pursuant to the exemption contained in Section 4(2) of the Securities
Act of 1933, as a transaction not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
*1.1 Managing Sales Agent Agreement
*1.2 Form of Selected Sales Agent Agreement
3.1 Amended and Restated Agreement of Limited Partnership (included as
Exhibit A to the Prospectus)
*3.2 Certificate of Limited Partnership
*4.1 Form of Certificate Representing Limited Partnership Interests in the
Registrant
*5.1 Opinion of Bradley & Riley, P.C., Counsel to Registrant, as to the
legality of the securities being registered
*8.1 Opinion of Bradley & Riley, P.C., Counsel to Registrant, as to tax
matters
*10.1 Escrow Agreement
*10.2 Amended Contract between the General Partner and the Partnership
23.1 Consent of Deloitte & Touche, LLP
*23.2 Consent of Bradley & Riley, P.C. included in its opinions filed as
Exhibits 5.1 and 8.1
*24.1 Power of Attorney
*27.1 Financial Data Schedule
- ------------------------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
None
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) To include
any Prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement;
II-2
(b) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) To provide to the Managing Sales Agent at the closing specified in
the Managing Sales Agent Agreement certificates in such denominations and
registered in such names as required by the Managing Sales Agent and
Soliciting Sales Agents to permit prompt delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cedar Rapids, and State
of Iowa on this 18th day of December, 1997.
TELECOMMUNICATIONS INCOME FUND XI, L.P.,
an Iowa Limited Partnership
By: BERTHEL FISHER & COMPANY LEASING, INC.
By: /s/ THOMAS J. BERTHEL
-----------------------------------------
THOMAS J. BERTHEL
CHIEF EXECUTIVE OFFICER
By: /s/ RONALD O. BRENDENGEN
-----------------------------------------
RONALD O. BRENDENGEN
CHIEF FINANCIAL OFFICER
By: /s/ DANIEL P. WEGMANN
-----------------------------------------
DANIEL P. WEGMANN
CHIEF ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Act of 1993, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 18th day of December, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ THOMAS J. BERTHEL Director, Chief Executive
- ------------------------------ Officer and President of
THOMAS J. BERTHEL the General Partner
/s/ NANCY LOWENBERG Director, Vice President
- ------------------------------ and Chief Operating
NANCY LOWENBERG Officer
/s/ RONALD O. BRENDENGEN Director, Treasurer and
- ------------------------------ Chief Financial Officer
RONALD O. BRENDENGEN of the General Partner
II-4
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ DANIEL P. WEGMANN
- ------------------------------ Chief Accounting Officer
DANIEL P. WEGMANN
/s/ LESLIE D. SMITH
- ------------------------------ Secretary of the General
LESLIE D. SMITH Partner
/s/ VON ELBERT
- ------------------------------ Director of the General
VON ELBERT Partner
/s/ EMMETT J. SCHERRMAN
- ------------------------------ Director of the General
EMMETT J. SCHERRMAN Partner
/s/ JAMES W. NOYCE
- ------------------------------ Director of the General
JAMES W. NOYCE Partner
II-5
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. NAME PAGE NUMBER
- ------------- --------------------------------------------------------------------------------------- ---------------
3.1 Amended and Restated Agreement of Limited Partnership (included as Exhibit A to the
Prospectus)..........................................................................
23.1 Consent of Deloitte & Touche, LLP