10-Q 1 tifxi10q-093003.txt ENDED 09-30-03 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2003 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. [X] Yes [ ] No Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ] Yes [X] No As of October 24, 2003, 12,335 units were issued and outstanding. TELECOMMUNICATIONS INCOME FUND XI, L.P. INDEX Page Part I. FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements (unaudited) Balance Sheets - September 30, 2003 and December 31, 2002 3 Statements of Operations - three months ended September 30, 2003 and 2002 4 Statements of Operations - nine months ended September 30, 2003 and 2002 5 Statement of Changes in Partners' Equity - nine months ended September 30, 2003 6 Statements of Cash Flows - nine months ended September 30, 2003 and 2002 7 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 Item 4. Controls and Procedures 11 Part II. OTHER INFORMATION ---------------------------- Item 6. Exhibits 11 Signatures 12 2

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 $178,935 for the nine months ending September 30, 2003 compared to $424,265 for the same period of 2002. The decrease is due to a smaller portfolio of direct financing leases and notes receivable. The Partnership's net investment in direct financing leases and notes receivable was $1,935,366 at September 30, 2003 and $5,470,631 at September 30, 2002. Other income of $18,707 for the first nine months of 2003 is interest income on a money market account and other investments and late charges on lease payments, and is down from $21,064 a year ago. The Partnership had a gain on lease terminations for the first nine months of 2003 of $63,526 compared to a gain of $22,310 for the first nine months of 2002. The gain in 2003 was primarily due to the payoff of one lessee that had previously been on a non-accrual status. Management fees are paid to the General Partner and represent 2% of the gross rental payments, loan payments, and other financing payments received. These gross rental and other payments were $1,730,700 the first nine months of 2003 compared to $2,533,100 for the first nine months of 2002. Administrative services were $115,200 for the first nine months of 2003 compared to $141,250 for the same period a year ago. This expense represents fees paid monthly to the General Partner for the operation of the Partnership as defined in the Partnership Agreement. Interest expense for the first nine months of 2003 was $0 compared to $25,387 for the same period of 2002. This expense was incurred on the Partnership's line of credit agreement, which was paid in full in June, 2002 and was not renewed. Other expenses include legal, accounting, data processing, and other miscellaneous expenses. These costs decreased from $220,668 in 2002 to $100,282 in 2003, primarily due to legal and repossession expenses incurred in 2002 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, 2002. The telecommunications industry has seen a significant downturn in recent years 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: o Lack of sufficient dial around revenues for payphone operators o Decrease inusage of payphones, due to the use of mobile phones, etc. o Lack of economies of scale being achieved with the cost of lines purchased from local exchange carriers o Lack of available capital for payphone operators o Decrease in the number of payphone operators 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. The allowance for possible loan and lease losses is based upon a continuing review of past lease loss experience, current economic conditions, and the underlying lease asset value of the portfolio. At the end of each quarter a review of the allowance account is conducted. The Partnership has a total 9 allowance of $885,667 ($35,396 relating to other receivables) or 43% of the portfolio of leases and notes and other receivables as of September 30, 2003. The Partnership's provision for possible loan and lease losses was $4,000 for the first nine months of 2003 compared to $845,700 for the first nine months of 2002, and was the result of various lease and note contract delinquencies and bankruptcy filings by several customers in 2002. Management will continue to monitor the portfolio of leases and notes and adjust the allowance for possible loan and lease losses accordingly. At September 30, 2003, three 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 $693,017. Management will continue to monitor the past due contracts and take the necessary steps to protect the Partnership's investment. The telecommunications industry has seen a significant downturn in recent years that has adversely affected the Partnership. The net investment on the above delinquencies of $693,017 represents approximately 36% of the Partnership's total portfolio of leases and notes. Management believes its total allowance of $885,667 is adequate for these customers and the remainder of the portfolio and other receivables at September 30, 2003, 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 total allowance will not be necessary. The Partnership's portfolio of leases and notes receivable are concentrated in pay telephones, and office and computer equipment, and industrial equipment, representing approximately 55%, 29%, and 10%, respectively, of the portfolio at September 30, 2003. Two lessees account for approximately 32% of the Partnership's portfolio at September 30, 2003, and these lessees were past due over 90 days. Berthel Fisher & Company, Inc. ("BFC"), the parent of the General Partner, is in default on $2.2 million of its unsecured debt that was due December 31, 2002. BFC is pursuing additional financing, refinancing, and asset sales to meet its obligations and must raise a minimum of $2.4 million. Approximately $900,000 has been raised as of the filing of this report. No assurance can be provided that BFC will be successful in its efforts. Since BFC is in default, its creditors could take legal action to enforce their right to repayment. No legal action has been taken at this time. The failure of BFC to raise the minimum amount of capital or legal action taken by the creditors could impact BFC's ability to continue as a going concern. This could ultimately affect the ability of the General Partner to continue as a going concern. If this were to happen, the Partnership would need to appoint a new general partner. The new general partner could require additional fees and charges that would have a significant negative impact on the Partnership. 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 September 30, 2003, that working capital reserve, as defined, would be $125,930, and the Partnership had this amount available from its cash and cash equivalents. Cash flow from operating activities was a use of cash of $59,224 for the first nine months of 2003, compared to a source of cash of $77,102 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 $1,567,890 for 2003, compared to $2,118,817 for 2002. The Partnership used $1,493,399 of cash for financing activities during the first nine months of 2003, compared to a use of cash of $1,804,880 a year ago. 10 Given the current market in general as well as the specific telecommunications market, the General Partner has determined to limit its investment in new leases and notes receivable at this time. As cash is available, the General Partner will continue to assess market conditions to determine whether to make distributions or reinvest in new leases and notes receivable during the remaining operating phase of the Partnership. In conjunction with this, management anticipates that the current level of monthly distributions can be sustained through December, 2003. Beginning in 2004, the Partnership will only distribute cash as it is available. As the portfolio of leases and notes receivable continues to decline, it is expected that expenses will exceed revenues except to the extent the Partnership is able to generate gains on termination. 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 pertaining to the Partnership's notes receivable as of September 30, 2003. Expected Fixed Rate Average Maturity Date Notes Receivable Interest Rate ------------- ---------------- ------------- 2003 $ 73,933 12.47% 2004 251,873 12.11% 2005 212,027 12.18% 2006 188,015 8.85% 2007 and thereafter 5,211 8.85% ------------- Total $ 731,059 ============= Fair Value $ 467,000 ============= The Partnership manages interest rate risk, its primary market risk exposure, by limiting terms of notes receivable to no more than five years and generally requiring full repayment ratably over the term of the note. Item 4. Controls and Procedures ----------------------- An evaluation was performed under the supervision and with the participation of the Partnership's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as of September 30, 2003. Based on that evaluation, the Partnership's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Partnership's disclosure controls and procedures were effective in timely alerting them to material information relating to the Partnership required to be included in the Partnership's periodic SEC filings. Part II. Other Information Item 6. Exhibits -------- Exhibit 31.1 Certification of Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 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) Date: November 12, 2003 /s/ Ronald O. Brendengen ----------------- ----------------------------------- Ronald O. Brendengen, Chief Financial Officer, Treasurer Date: November 12, 2003 /s/ Daniel P. Wegmann ----------------- ----------------------------------- Daniel P. Wegmann, Controller 12

TELECOMMUNICATIONS INCOME FUND XI LP 10-Q