10-Q 1 c71301e10vq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2002 Commission File Number 000-25593 TELECOMMUNICATIONS INCOME FUND XI, L.P. --------------------------------------- (Exact name of Registrant as specified in its charter) Iowa 39-1904041 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 701 Tama Street, Marion, Iowa 52302 ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 447-5700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interest (the "Units") ------------------------------------------ Title of Class Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes X No -- -- As of July 15, 2002, 12,390 units were issued and outstanding. Based on the book value at June 30, 2002 of $304.68 per unit, the aggregate market value at July 15, 2002 was $3,774,985. TELECOMMUNICATIONS INCOME FUND XI, L.P. INDEX

2 TELECOMMUNICATIONS INCOME FUND XI, L.P. BALANCE SHEETS (UNAUDITED)

See accompanying notes. 3 TELECOMMUNICATIONS INCOME FUND XI, L.P. STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes. 4 TELECOMMUNICATIONS INCOME FUND XI, L.P. STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes. 5 TELECOMMUNICATIONS INCOME FUND XI, L.P. STATEMENT OF CHANGES IN PARTNERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)

See accompanying notes. 6 TELECOMMUNICATIONS INCOME FUND XI, L.P. STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes. 7 TELECOMMUNICATIONS INCOME FUND XI, L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the financial statements and notes thereto included in the Partnership's annual report on Form 10-K for the year ended December 31, 2001. NOTE B - NET INVESTMENT IN DIRECT FINANCING LEASES AND NOTES RECEIVABLE The Partnership's net investment in direct financing leases and notes receivable consists of the following:

NOTE C - BORROWING AGREEMENTS In January 1999, the Partnership obtained financing under a line of credit agreement with a bank. The amount available to borrow under the line of credit was limited to $2,000,000 or 32% of qualified accounts, primarily leases and notes receivable. On October 26, 1999, the agreement was amended, increasing the available amount to $4,400,000 (limited by 32% of qualified accounts) and extending the maturity from June 30, 2000 to June 30, 2002. The interest rate was 1% over the prime rate, with a $4,000 minimum monthly interest charge which began in July, 1999, and the line of credit was collateralized by substantially all assets of the Partnership. The line of credit was guaranteed by the General Partner and certain affiliates of the General Partner. This agreement was not renewed and was paid in full in June, 2002. NOTE D - NET LOSS PER PARTNERSHIP UNIT Net loss per partnership unit is based on the weighted average number of units outstanding (including both general and limited partners) which were 12,393 and 12,402 for the three and six months ended June 30, 2002, respectively, compared to 12,587 for the three and six months ended June 30, 2001. NOTE E - CONTINGENCY The General Partner's parent has approximately $2.2 million of unsecured subordinated debt due on December 31, 2002 and may not have sufficient liquid assets to repay such amounts. The General Partner's parent is pursuing additional financing, refinancing, and asset sales to meet its obligations. No assurance can be provided that the General Partner's parent will be successful in its efforts. The inability of the General Partner to continue as a going concern as a result of the parent's inability to restructure its debts would require the Partnership to elect a successor general partner. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Income derived from direct financing leases and notes receivable was $322,651 for the six months ending June 30, 2002 compared to $570,383 for the same period of 2001. The decrease is due to a smaller portfolio of direct financing leases and notes receivable and a significant number of lease and note contracts that are past due over 90 days, at which time the Partnership places these contracts on a non-accrual basis, as discussed below. The Partnership's net investment in direct financing leases and notes receivable was $5,822,620 at June 30, 2002 and $9,024,127 at June 30, 2001. Other income of $13,576 for the first six months of 2002 is interest income on a money market account and other investments and late charges on lease payments, and is down from $33,623 a year ago. The decrease is due to a decrease in late charges received. The Partnership had a gain on lease terminations for the first six months of 2002 of $25,883 versus a loss of $210,967 a year ago. The loss in 2001 was primarily due to the sale of equipment under operating lease resulting from the repossessed equipment originally leased to Alpha Telecommunications, Inc. ("ATI"). Management fees are paid to the General Partner and represent 2% of the gross rental payments, loan payments, and other financing payments received. These rental payments were $2,080,650 the first six months of 2002 compared to $2,210,250 for the first six months of 2001. The decreased management fees are due to a decrease in the gross rental payments, loan payments, and other financing payments received. Administrative services of $88,000 for the first six months of 2002 represent fees paid to the General Partner for the operation of the Partnership as defined in the Partnership Agreement. The Partnership pays the General Partner monthly for these services. These fees were $78,000 for the first six months of 2001. The increase is due to increased costs incurred by the General Partner on behalf of the Partnership. Interest expense is incurred on the Partnership's line of credit agreement. Interest expense for the first six months of 2002 was $25,387 compared to $82,723 for the same period of 2001. The decrease is the result of a lower line of credit balances and lower interest rates. The line of credit was paid in full in June, 2002 and was not renewed. Depreciation expense was $-0- for the first six months of 2002 compared to $327,281 for the first six months of 2001. Depreciation was on the equipment originally leased to ATI, which was sold in 2001. Other expenses include legal, accounting, data processing, and other miscellaneous expenses. These costs increased from $74,861 in 2001 to $176,330 in 2002, and is primarily the result of legal and repossession expenses incurred as a result of past due customers. The Partnership's delinquencies and other conditions are discussed in more detail in the following paragraphs and in the Partnership's Form 10-K for the year ended December 31, 2001. The telecommunications industry has seen a significant downturn in the last year that has adversely affected the Partnership. The value of payphones and payphone routes has declined substantially in recent years and is due to various factors, including but not limited to the following: - Lack of sufficient dial around revenues for payphone operators - Decrease in usage of payphones, due to the use of mobile phones, etc. - Lack of economies of scale being achieved with the cost of lines purchased from local exchange carriers - Lack of available capital for payphone operators - Decrease in the number of payphone operators 9 Management believes that these conditions may be overcome if current lobbying efforts are successful and economic conditions become more favorable for payphone operators. However, no assurance can be given that any of these conditions may improve or that current values in the telecommunications industry will not continue to decline. At June 30, 2002, nine customers were past due over 90 days. When a payment is past due more than 90 days, the Partnership discontinues recognizing income on the contract. The Partnership's net investment in the past due contracts was $2,187,833, or 38% of the Partnership's portfolio of leases and notes. The allowance for possible loan and lease losses is $2,114,731 at June 30, 2002. The provision for possible loan and lease losses for the first six months of 2002 was $745,300 (compared to $257,656 a year ago), and is primarily the result of a significantly deteriorated value of the phones and other equipment under certain lease contracts. One lessee, Alpha Tel-Com, filed for bankruptcy during 2001, had a net investment of $762,952 at March 31, 2002. The value of the phones under the Alpha Tel-Com deteriorated significantly, with the Partnership realizing approximately $232,000 from the sale of the equipment during the second quarter of 2002. Approximately $210,000 of these proceeds was financed to a new customer under a note agreement. Another lessee, Bax Group has filed for bankruptcy and the Partnership estimates that proceeds will total approximately $177,000 on this contract. The Partnership's net investment in the Bax Group contract was $549,187 at June 30, 2002. These two lessees resulted in the Partnership increasing the provision for possible loan and lease losses by approximately $400,000 for the first six months of 2002. Management believes its allowance for possible loan and lease losses is adequate for the past due customers and the remainder of the portfolio at June 30, 2002, based on the underlying collateral values of the lease and note contracts for past due contracts and historical loss ratios. However, no assurance can be given that future losses or increases in the allowance for possible loan and lease losses will not be necessary. Management will continue to monitor the past due contracts and take the necessary steps to protect the Partnership's investment. The Partnership's portfolio of leases and notes receivable are concentrated in pay telephones, and office and computer equipment, representing approximately 56%, and 32%, respectively, of the portfolio at June 30, 2002. One lessee accounts for approximately 14% of the Partnership's portfolio at June 30, 2002, and this lessee is past due over 90 days. LIQUIDITY AND CAPITAL RESOURCES The Partnership is required to establish working capital reserves of no less than 1% of the total capital raised to satisfy general liquidity requirements, operating costs of equipment, and the maintenance and refurbishment of equipment. At June 30, 2002, that working capital reserve, as defined, would be $125,930, and the Partnership had this amount available from its cash and cash equivalents. In January 1999, the Partnership obtained financing under a line of credit agreement with a bank. The amount available to borrow under the line of credit was limited to $2,000,000 or 32% of qualified accounts, primarily leases and notes receivable. On October 26, 1999, the agreement was amended, increasing the available amount to $4,400,000 (limited by 32% of qualified accounts) and extending the maturity from June 30, 2000 to June 30, 2002. The interest rate was 1% over the prime rate, with a $4,000 minimum monthly interest charge which began in July, 1999, and the line of credit was collateralized by substantially all assets of the Partnership. The line of credit was guaranteed by the General Partner and certain affiliates of the General Partner. This agreement was not renewed and was paid in full in June, 2002. 10 Cash flow from operating activities was $78,258 for the first six months of 2002, compared to $318,283 for the same period a year ago, resulting from the income from direct financing leases and notes received less operating expenses. Cash flow from investing activities was $1,762,224 for 2002, compared to $1,356,220 for 2001. This increase is primarily attributable to proceeds from the sale or early termination of lease or note contracts. These proceeds were used to pay off the line of credit in June, 2002. The Partnership used $1,504,778 of cash for financing activities during the first six months of 2002, compared to a use of cash of $1,674,492 a year ago. Management believes the existing portfolio of direct financing leases and notes receivable will sustain the current level of distributions and operating expenses for the next twelve months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY The table below presents the principal amounts due and related weighted average interest rates by expected maturity dates about the Partnership's notes receivable as of June 30, 2002. Expected Fixed Rate Average Maturity Date Notes Receivable Interest Rate ------------- ---------------- ------------- 2002 $ 307,806 13.16% 2003 411,451 12.95% 2004 388,784 12.79% 2005 328,489 12.96% 2006 595,791 14.31% ------------- Total $ 2,032,321 ============= Fair Value $ 1,655,000 ============= The Partnership manages interest rate risk, its primary market risk exposure, by limiting the terms of notes receivable to no more than five years and generally requiring full repayment ratably over the term of the note. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELECOMMUNICATIONS INCOME FUND XI, L.P. (Registrant)

12 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Telecommunications Income Fund XI (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Berthel, Chief Executive Officer of Berthel Fisher & Company Leasing, Inc., General Partner of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. August 9, 2002 /s/ Thomas J. Berthel ------------------------------------------------ Thomas J. Berthel President and Chief Executive Officer Berthel Fisher & Company Leasing, Inc. General Partner Telecommunications Income Fund XI, L.P. CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Telecommunications Income Fund XI (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald O. Brendengen, Chief Financial Officer of Berthel Fisher & Company Leasing, Inc., General Partner of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbaines-Oxley Act of 2002, that: (1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. August 9, 2002 /s/ Ronald O. Brendengen -------------------------------------------- Ronald O. Brendengen Chief Financial Officer Berthel Fisher & Company Leasing, Inc. General Partner Telecommunications Income Fund XI, L.P.

TELECOMMUNICATIONS INCOME FUND XI LP 10-Q