ITEM 1. BUSINESS
Telecommunications Income Fund X, L.P., an Iowa limited partnership (the "Partnership"), was organized on April 20, 1993. The general partner is Berthel Fisher & Company Leasing, Inc. (the "General Partner"), an Iowa corporation that has been in operation since 1988. The Partnership's business and the executive offices of the General Partner are located at 425 Second Street S.E., Suite 600 Cedar Rapids, Iowa 52401. All of the voting stock of the General Partner is owned by Berthel Fisher & Company, Inc. ("Berthel Fisher").
The Partnership began offering Units to the public on August 27, 1993. The General Partner suspended sales of Units effective May 16, 1994, pending a decision to prepare an offering supplement to the prospectus. This supplement included updated financial information on the Partnership's lease portfolio and updated the information in the Prior Performance tables contained in the Partnership's prospectus dated August 27, 1993. The General Partner filed, on July 16, 1994, Post-Effective Amendment No. 1 to the registration statement updating the financial information and requesting an extension of sales to December 31, 1994. Approval was received on this request effective July 20, 1994.
The Partnership will operate until December 31, 2002 unless dissolved sooner due to the occurrence of any of the following events: (i) the vote by limited partners owning a majority of 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 sale or disposition of all or substantially all of the assets of the Partnership without the subsequent reinvestment in equipment.
The business of the Partnership is the acquisition and leasing of equipment, primarily telecommunications equipment such as pay telephones and call processing equipment. The Partnership began its primary business activities on September 29, 1993.
A significant portion of the Partnership's business is with customers who are in the telecommunications industry. The telecommunications industry, particularly the pay telephone and long distance facets of the industry, is heavily regulated by the Federal Communications Commission ("FCC") and by various state public utility commissions. Regulation is not directed at the ownership or leasing of telecommunications equipment, but is focused primarily on the business of the Partnership's customers that operate in the telecommunications industry. Generally, regulation affects rates that can be charged and the relationship of the regional Bell operating companies to the rest of the pay telephone industry. Federal legislation signed by the President in February, 1996 included many provisions that affect the activities of the Partnership's customers who are independent pay telephone providers. The FCC is currently proposing regulations affecting long distance rates. The majority of the customers of the Partnership are currently operating within the range of rates proposed by the FCC. Some customers are below the proposed range and will be able to increase their rates. Those customers whose rates exceed the highest rates
ITEM 1. BUSINESS (CONTINUED)
permitted by the FCC will reduce their rates, but management does not expect such reductions to affect those customers' ability to make lease payments. Generally, management does not expect regulation to have any significant negative impact upon the business of the Partnership.
The principle objective of the Partnership is to obtain the maximum available economic return from its investment in equipment leases to unaffiliated third parties with a view toward: (i) generating cash flow from operations, with the intent to make distributions during the Operating Phase (the period which ends when the General Partner elects to begin the liquidation of the Partnership assets); (ii) reinvesting (during the Operating Phase) any undistributed cash flow from operations in additional equipment to be leased to increase the Partnership's assets; (iii) obtaining the residual values of equipment upon sale; (iv) obtaining value from sales of the Partnership's lease portfolio 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.
During 1996 the Partnership acquired equipment with a cost of $4,323,201. All of this equipment has been leased.
The Partnership acquires primarily telecommunications equipment (specifically pay telephones and call processing equipment), that is leased to third parties generally under full payout leases. The Partnership has also acquired other types of equipment that is subject to full payout leases. Full payout leases are leases that are expected to generate gross rental payments sufficient to recover the purchase price of the subject equipment and any overhead and acquisition costs.
Equipment acquired by the Partnership is installed in various locations by the lessees. When the lessee installs the equipment in a location, a site location agreement gives the lessee the right to have the equipment at this site for a specified period of time. These site location agreements generally have a three to five year term. The Partnership, in addition to its ownership of the equipment, takes an assignment of and a first security interest in these site location agreements. Therefore, if a lessee defaulted, the Partnership could have the ability to re-sell or re-lease the equipment in place. This "in place" value is generally much higher than the residual value of the equipment. The telecommunications equipment generates revenue primarily through long distance phone calls. The Partnership's lessee generally receives long distance revenue from a contracted third party billing company. The Partnership also takes an assignment of this revenue.
The General Partner acquires and approves leases on behalf of the Partnership. The General Partner established guidelines to use in approving lessees. Generally, before any lease is approved, there is a review of the potential lessees' financial statements, credit references are checked, and outside business and/or individual credit reports are obtained.
The equipment purchased by the Partnership consists of advanced technology pay telephones and call processing systems to be used in hotels, hospitals, colleges, universities, and correctional institutions. The Partnership has also purchased and leased hotel satellite television equipment.
ITEM 1. BUSINESS (CONTINUED)
The Partnership's telecommunication equipment leases are concentrated in the pay telephone and hotel industries representing approximately 70% and 24% of the Partnership's direct finance lease portfolio at December 31, 1996, respectively. One customer accounted for 14% of income from direct financing leases during the year ended December 31, 1996.
The loss of this lessee would have an adverse effect on the Partnership's business. The Partnership's first security interest in the site location agreements could, however, in the case of a default, give the Partnership the ability to re-sell or re-lease the equipment in place, thereby minimizing the Partnership's potential loss.
The leasing industry is very competitive and the Partnership has fewer assets than some of its major competitors.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership does not own or lease any real estate. The Partnership's materially important properties consist entirely of equipment under lease. The carrying value of such equipment is represented by the Partnership's investment in direct financing leases, net of an allowance for possible losses, and operating leases which was $20,103,462 at December 31, 1996. This was comprised primarily of telecommunications equipment, as described in Item 1.
No matters were submitted to a vote of limited partners, through the solicitation of proxies or otherwise during the year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Registrants' Units are not publicly traded. There is no market for the Registrant's Units and it is unlikely that any will develop. The General Partner will resist the development of a public market for the Units.
Through December 31, 1996 there has been $6,545,983 of distributions paid to Partners. As of December 31, 1996 the Partnership had accrued distributions to Partners of $204,800 and had $516,612 of cash available.
The above selected financial data should be read in connection with the financial statements and related notes appearing elsewhere in this report.
The 1996 lease income declined $327,795 from 1995. The Partnership's investment in direct financing leases at December 31, 1996 had declined $5,538,212 compared to December 31, 1995. This decline in lease financing levels is a result of the Partnership's termination of a number of leases within its portfolio due to non-payment of lease receivables. This reduction has resulted in lower lease income recorded. Equipment acquisitions in 1996 amounted to $4,323,201. The equipment invested in direct financing leases in 1996 has served to mitigate some of the decline in lease income from other lease portfolio terminations. Lease income for 1995 increased from 1994 primarily due to increased investments in direct financing leases.
At the end of a lease term, the Partnership will attempt to sell the equipment under lease to the lessee for an amount at least equal to the residual value booked. Additionally, from time to time, the Partnership will receive a request from a lessee for an early pay-off and the amount quoted by the General Partner will always be at least equal to the Partnership's net investment and typically will exceed the net investment as evidenced by the net gains recognized by the Partnership on lease terminations. As the Partnership and the leases mature, these gains on terminations will be expected to continue to increase as the residual assets are sold at the end of lease terms.
Management fees are paid to the General Partner and represent 5% of the rental payments received. Rental payments received in each of the three years ended December 31 are as follows:
The General Partner receives a monthly reimbursement for administrative and clerical services provided to the Partnership.
The increase in interest expense is a result of the Partnership borrowing funds to acquire equipment for investment in direct financing leases. During 1993, the Partnership obtained a $5 million dollar line of credit with a bank and this amount was increased to $7.25 million in March, 1995. The provisions of this credit facility allow the Partnership to borrow up to 32% (40% beginning November 1996) of the Partnership's qualified lease receivables, at a rate of 1.0% above the bank's prime rate. The balance outstanding under this line-of-credit agreement at December 31, 1996 was $2,607,911. In August, 1995, the Partnership obtained a term loan of
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$2,350,000 with a bank secured by certain direct financing leases of the Partnership. This term loan was obtained to capitalize on the favorable interest rate of the term loan of 8.91% and to enable the Partnership to write more lease business and enhance the Partnership's return. This term loan is due in monthly installments through November, 1998.
Professional fees included payments for independent auditing services, tax return preparation, and other accounting assistance. In addition, legal fees were incurred for various regulatory filing requirements of the Partnership during 1994, 1995 and 1996. Legal fees associated with various lessee collection and bankruptcy proceedings during 1996 amounted to $121,685.
Generally accepted accounting principles require a provision be established for known and inherent risks in the Partnership's lease portfolio. Since there was no history of a lessee defaulting in the Partnership, and none were foreseen in the future, a reserve had not been established in 1993. Two lessees, Value Added Communications (VAC) and Telecable/Continental, experienced cash flow problems in 1994 resulting in past due lease payments. The past due lease payments from Telecable/Continental were converted to notes receivable during 1994. These notes carried an interest rate of 15% and terms ranging from three months to one year. At December 31, 1994, a reserve of $360,000 was recorded to cover the possibility of future losses for leases in default and other leases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On October 10, 1995, a lessee of the Partnership, Value-Added Communication, Inc. ("VAC"), filed a petition seeking protection under Chapter 11 of the Bankruptcy Act. The Partnership's net investment in its leases with this customer was $1,947,904 at December 31, 1995 representing approximately 8% of the Partnership's net investment in direct financing leases. The bankruptcy court's Order "Approving Emergency Sale" indicated that of the Partnership's total net investment in direct financing leases with VAC, approximately $226,000 of leases would be purchased from the Partnership by an unrelated third party for approximately $121,000 resulting in a loss to the Partnership of $105,000. The remaining net investment balance of approximately $1.7 million was comprised of several leases of equipment in the hospitality telephone industry. This equipment, however, was not in service. Based upon the best information available to management, it appeared the Partnership would incur a loss of approximately $616,000 on these remaining leases. This amount, therefore, together with the loss of $105,000 expected to be realized on the sale of the assets under the other lease, was recorded as a provision for possible losses specifically related to VAC at December 31, 1995. As final settlement on the Partnership's claim to the assets under lease, $580,597 was received from parties to the bankruptcy. An additional loss of $646,307 was recognized in the second quarter of 1996.
In 1995, the Partnership exercised its right to manage the assets leased to a customer due to nonpayment of lease receivables. At the time the Partnership assumed management of these assets, its net investment in the leases approximated $2.4 million and the Partnership subsequently purchased approximately $200,000 of additional equipment. Effective July 1, 1995, a new lease was executed for this equipment with a new lessee, Payphones of America. The terms of this new lease were such that it met the criteria of an operating lease. The equipment under lease was being depreciated under the straight-line method over its estimated remaining life which is the primary reason for the increased depreciation expense in 1995 and 1996.
During the third quarter of 1996, Payphones of America was sold and the sale included those pay telephones under operating lease as discussed above and others that the Partnership had financed under direct financing leases. The Partnership financed this purchase for the purchaser, Phone-Tel Technologies ("Phone-Tel"), via a direct financing lease which included the Partnership receiving $151,997 from Berthel Fisher & Company Leasing, Inc. for its participation in the restructuring to alleviate customer concentration risks resulting in the Partnership having a direct financing lease with Phone-Tel of $3,375,000. Also as part of this transaction, the Partnership received 47,962 shares of publicly traded common stock of Phone-Tel and was owed $53,398 by the General Partner in addition to the $151,997 previously noted for monies received by the General Partner on behalf of the Partnership. These funds were repaid in October 1996.
The remaining net equipment cost of the assets relates primarily to hotel satellite television equipment. This remaining amount is expected to be recovered by the Partnership through the sale of the equipment. The possibility exists that this transaction will not materialize, however, management's best current information indicates that this transaction will be completed. Management has recorded a $621,000 impairment loss to reflect the estimated fair market value of this equipment.
In May 1996, the Partnership exercised its right to manage the assets leased to a customer, United Tele-Systems of Virginia, due to default under the lease agreement. The Partnership's net investment in the leases at the time the assets were repossessed approximated $686,000. This equipment is currently being serviced for the Partnership under a short-term management agreement. The Partnership's intent is to sell the equipment or re-lease the equipment to a new lessee. The Partnership expects to incur a loss upon the sale or re-lease of this equipment. Due to the lower than expected offers received by the Partnership to sell the pay telephones, the Partnership has established a specific reserve of $464,000 for the expected loss. There can be no assurances, however, that the ultimate loss on these pay telephones will not exceed $464,000 due to the uncertainty of the ultimate selling price of the pay telephones at issue.
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"), a publicly owned limited partnership that is engaged in the equipment leasing business. Also, an affiliate of the General Partner is the general partner of a privately offered active limited partnership. As of December 31, 1996, the net proceeds of the private program and TIF IX have been invested in specific equipment. The activities of the General Partner, in regards to its other leasing activities, has had no impact on the Partnership to date in management's opinion.
The demand for equipment financing remains strong, and the Partnership continues to fund this demand from Partnership offering proceeds and working capital.
The equipment that the Partnership leases is maintained by the lessee, and the lessee is responsible for keeping the equipment upgraded with any improvements that may be developed. The Partnership generally establishes the equipment's residual value at 10% of the equipments' original cost. This residual value is generally expected to be realized by the sale of the equipment at the expiration of the original lease term. The General Partner monitors the maintenance and upgrades to the equipment and expects the Partnership to realize residual values of at least 10%.
The General Partner is not aware of any regulatory issues that may have a substantial negative impact on the telecommunications business that the Partnership leases equipment to. There are and will continue to be regulatory issues in the telecommunications industry that the General Partner will monitor.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The equipment leases acquired by the Partnership have been financed to yield rates of return between 15% and 20%. The lease terms vary from 36 months to 60 months. The rate charged on a particular lease depends on the size of the transaction and the financial strength of the lessee.
Inflation affects the cost of equipment purchased and the residual values realized when leases terminate and equipment is sold. The impact of inflation is mitigated as any increases in lease related expenses are passed on to the lessees through corresponding increases in rental rates as new leases are entered into.
The Partnership is required to establish working capital reserves of no less than 1% of the proceeds to satisfy general liquidity requirements, operating costs of equipment, and the maintenance and refurbishment of equipment. At December 31, 1996, that working capital reserve, as defined, would be $226,175. Actual cash on hand at December 31, 1996 was $516,612 exceeding the required minimum level by $290,437.
Under terms of the Partnership Agreement, the Partnership may leverage the lease portfolio with debt of up to 40% of the gross equity proceeds raised. At December 31, 1996, the Partnership had the ability to borrow an additional $5,052,728 under this leverage ratio.
At December 31, 1996, the Partnership had a line of credit agreement with a bank that allows the Partnership to borrow the lesser of $7.25 million, or 32% (40%, beginning November 1996) of the Partnership's Qualified Accounts as defined in the agreement. As of December 31, 1996, the balance outstanding under this line of credit was $2,607,911. With the exception of those specific assets pledged as security under the new bank term loan agreement discussed below, this borrowing is secured by all assets of the Partnership. Before any funds are borrowed, the Partnership first utilizes all available excess cash. The Partnership's line of credit is used to acquire additional leases as they become available. The line of credit matures on November 30, 1997.
In August, 1995, the Partnership obtained a term loan of $2,350,000 with a bank secured by certain direct financing leases of the Partnership. This term loan was obtained to capitalize on the favorable interest rate (8.91%) of the term loan and to enable the Partnership to write more lease business and enhance the Partnership's return. This term loan is due in monthly installments through November, 1998. The balance outstanding at December 31, 1996 under this term loan agreement was $1,386,361.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1996 adequate cash was being generated from rentals to make projected distributions and allow for reinvestment of a portion of the cash to fund additional leases.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and related information as of and for the years ended December 31, 1996, 1995 and 1994 are included in Item 8:
Reports of Independent Auditors Balance Sheets Statements of Income Statements of Changes in Partners' Equity Statements of Cash Flows Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Partners
Telecommunications Income Fund X, L.P.
We have audited the accompanying balance sheets of Telecommunications Income Fund X, L.P. as of December 31, 1996 and 1995, and the related statements of income, changes in partners' equity and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1996 and 1995 financial statements present fairly, in all material respects, the financial position of Telecommunications Income Fund X, L.P. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP /s/
Cedar Rapids, Iowa February 28, 1997
Ernst & Young LLP [logo]
REPORT OF INDEPENDENT AUDITORS
The Partners Telecommunications Income Fund X, L.P.
We have audited the accompanying statements of income, changes in partners' equity and cash flows of Telecommunications Income Fund X, L.P. for the year ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Partnership has significant transactions with related parties.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Telecommunications Income Fund X, L.P. for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP ---------------------- Ernst & Young
Des Moines, Iowa February 3, 1995
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TELECOMMUNICATIONS INCOME FUND X, L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS- Telecommunications Income Fund X, L.P. (the "Partnership") was formed on April 20, 1993 under the Iowa Limited Partnership Act. The general partner of the Partnership is Berthel Fisher & Company Leasing, Inc. (the "General Partner"), an Iowa corporation. During the offering period, which ended December 31, 1994, the Partnership sold 90,470 partnership interests at a price per unit of $250.
The Partnership's operations are conducted throughout the United States. The Partnership acquires primarily telecommunications equipment for lease to third parties. The lease agreements with individual customers are generally in excess of $500,000 and certain agreements exceed 10% of the Partnership's direct finance lease portfolio (see Note 2). At any time after December 31, 1999 (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, 2002, or earlier, upon the occurrence of certain events. See Note 6.
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 and the reported amounts of revenues and expenses during the reporting period. 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 lease losses and the estimated unguaranteed residual values of the Partnership's leased equipment.
Most of the Partnership's leases in the telecommunications industry are with customers that are in the entrepreneurial stage and, therefore, are highly leveraged and require lease financing in place of or to supplement financing from banks. Although the Partnership attempts to mitigate its credit risk through the use of a variety of commercial credit reporting agencies when processing the applications of its customers, failure of the Partnership's customers to make scheduled payments under their equipment leases could have a material near-term impact on the allowance for possible lease losses.
Realization of residual values depends on many factors, several of which are not within the Partnership's control, including general market conditions at the time of the original 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 Partnership's telecommunication equipment leases are concentrated in the pay telephone and hotel industries, representing approximately 70% and 24% of the Partnership's direct finance lease portfolio at December 31, 1996, respectively.
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RELATED PARTY TRANSACTIONS - In fulfilling its role as general partner, Berthel Fisher & Company Leasing, Inc. enters into transactions with the Partnership in the normal course of business. Further, the Partnership also enters into transactions with affiliates of Berthel Fisher & Company Leasing, Inc. These transactions are set forth in the notes that follow. Management is of the opinion that these transactions are in accordance with the terms of the Agreement of Limited Partnership.
CASH AND CASH EQUIVALENTS - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
AVAILABLE-FOR-SALE SECURITY - The Partnership has an investment in a marketable equity security classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of partners' equity. At December 31, 1996, the security had a cost of $173,261 and an estimated fair value of $129,945, resulting in an unrealized loss of $43,316. Fair value is determined using published market prices.
NET INVESTMENT IN DIRECT FINANCING LEASES - The Partnership's primary activity consists of leasing telecommunications equipment under direct financing leases generally over a period of three to five years. At the time of closing a direct financing lease, the Partnership records the gross lease contract receivable, the 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 cost of the equipment leased. In addition, the Partnership 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 residual values are based on estimates of amounts historically realized by the Partnership for similar equipment and are periodically reviewed by management for possible impairment.
The Partnership performs credit evaluations prior to approval of a lease. Subsequently, the creditworthiness of the customer and the value of the underlying assets are monitored on an ongoing basis. Under its lease agreements, the Partnership retains legal ownership of the property or leased asset. The Partnership maintains an allowance for possible lease losses which could arise should customers become unable to discharge their obligations under the lease agreements. The allowance for possible lease losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the lease portfolio. The allowance is based upon a continuing review of past lease loss experience, current economic conditions, and the underlying lease asset value. The consideration of such future potential losses also includes an evaluation for other than temporary declines in value of the underlying assets. Leases which are deemed uncollectible are charged off and deducted from the allowance. The provision for possible lease losses and recoveries are added to the allowance.
Direct financing leases are accounted for as operating leases for income tax purposes.
EQUIPMENT - 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 Partnership for similar equipment and are periodically reviewed by management for possible impairment.
Equipment held for sale is stated at lower of cost or estimated fair market value.
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INTANGIBLES - Intangibles consist of organization costs incurred with the formation of the Partnership and financing costs incurred in connection with borrowing agreements. Deferred organization expenses are being amortized over a five-year period. Deferred financing costs are being amortized over the life of the related debt, which is approximately three years.
TAX STATUS - Under present income tax laws, the Partnership is not liable for income taxes, as each partner recognizes a proportionate share of the Partnership income or loss in their income tax return. Accordingly, no provision for income taxes is made in the financial statements of the Partnership.
NET INCOME PER PARTNERSHIP UNIT - Net income per partnership unit is based on the weighted average number of units outstanding (including both general and limited partners' units).
2. NET INVESTMENT IN DIRECT FINANCING LEASES
The Partnership's net investment in direct financing leases consists of the following at December 31, 1996 and 1995:
At December 31, 1996, future minimum 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:
The Partnership, General Partner and certain affiliates of the General Partner purchase directly and indirectly a substantial portion of telecommunications equipment under lease from Intellicall, Inc., a publicly-held company. The General Partner's parent and certain limited partners are investors in a limited partnership which owns approximately 7% of the outstanding common stock of Intellicall, Inc. In addition, a principal stockholder of the General Partner's parent is also an investor in this limited partnership.
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Additionally, the Partnership leases equipment to certain companies for which Berthel Fisher & Company Financial Services, Inc., an affiliate of the General Partner, provides financing and investment advisory services or for which the General Partner or its affiliates have an ownership interest. The Company's net investment in direct financing leases with these companies approximated $2,815,000 and $7,077,000 at December 31, 1996 and 1995, respectively.
Four customers each account for 10% or more of the amount of income from direct financing leases during one or more of the periods presented, as follows:
3. ALLOWANCE FOR POSSIBLE LEASE LOSSES
The changes in the allowance for possible lease losses for the years ended December 31, 1996, 1995 and 1994 are as follows:
The allowance for possible lease losses consisted of specific allowances for leases of $21,000, $721,000 and $0 and a general unallocated allowance of $302,398, $467,911, and $360,000, respectively, at December 31, 1996, 1995 and 1994.
On October 10, 1995, a lessee of the Partnership, Value-Added Communication, Inc. ("VAC"), filed a petition seeking protection under Chapter 11 of the Bankruptcy Act. The Partnership's net investment in its leases with this customer was $1,947,904 at December 31, 1995 representing approximately 8% of the Partnership's net investment in direct financing leases. The bankruptcy court's Order "Approving Emergency Sale" indicated that of the Partnership's total net investment in direct financing leases with VAC, approximately $226,000 of leases would be purchased from the Partnership by an unrelated third party for approximately $121,000 resulting in a loss to the Partnership of $105,000. The remaining net investment balance of approximately $1.7 million comprised several leases of equipment in the hospitality telephone industry. This equipment, however, was not in service. Based upon the best information available to management, it appeared the Partnership would sustain some loss with respect to these remaining leases. Management's best estimate of the amount of the loss to the Partnership was that the Partnership may incur a loss of approximately $616,000 on these remaining leases. This amount, therefore, together with the loss of $105,000 expected to be realized on the sale of the assets under the other leases, was recorded as a provision for possible lease losses specifically related to VAC at December 31, 1995. During 1996, as settlement on the Partnership's claim to the assets under lease,
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$580,597 was received from sale of the assets and from parties to the bankruptcy. Therefore, an additional loss of $646,307 was recognized in the second quarter of 1996.
On May 6, 1996, a lessee of the Partnership, United Tele-Systems of Virginia, Inc. ("UTS"), filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. The bankruptcy petition was dismissed on May 22, 1996 and, in connection therewith, the Partnership 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 $686,000. This equipment is currently being operated for the Partnership under a short-term management agreement. The Partnership, the General Partner, an affiliated partnership 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 Partnership expects to incur a loss upon the sale or re-lease of this equipment. Management charged $464,000 to the provision for possible 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 $464,000. The Partnership'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.
4. EQUIPMENT HELD FOR SALE
In May 1995, the Partnership exercised its right to manage the assets leased to Telecable/Continental due to nonpayment of lease receivables. At the time the Partnership assumed management of these assets, its net investment in the leases and notes receivable approximated $2,400,000 and the Partnership subsequently purchased approximately $200,000 of additional equipment. During 1996, $1,431,000 of this net investment was leased to an unrelated third party under a direct financing lease, which was paid off in December 1996. The remaining net equipment cost, which relates to hotel satellite television equipment, is expected by management to be recovered through the sale of the equipment. Such equipment cost has been adjusted for an impairment loss of $621,000, to reflect management's estimated fair market value of the equipment.
5. BORROWING AGREEMENTS
The Partnership has a line-of-credit agreement with a bank which bears interest at a variable rate (10.13% and 9.5% at December 31, 1996 and 1995, respectively). On March 6, 1995, the line-of-credit agreement was amended to increase the amount available to borrow to the lesser of $7.25 million, or 32% (40% as of November 1996) of Partnership's Qualified Accounts, as defined in the agreement. On September 11, 1995, the agreement was further amended to extend the maturity date to November 30, 1997 and to reduce the interest rate from 2.0% over prime to 1.0% over prime (minimum interest charge of $7,500 per month). In addition, certain loan covenants were changed. The agreement is cancellable by the lender after giving a 90-day notice and is collateralized by substantially all assets of the Partnership. This line-of-credit is guaranteed by the General Partner and certain affiliates of the General Partner.
The Partnership also has an installment loan agreement which bears interest at 8.91% and is due in monthly installments through November 1998 with a subjective acceleration clause. The agreement is collateralized by certain direct financing leases and a second interest in all other Partnership assets. The agreement is also guaranteed by the General Partner. Covenants under the agreement require the Partnership, among other things, to be profitable, not exceed a 40% debt to original equity raised ratio, and not sell a material portion of its assets. The agreement matures as follows: 1997, $804,684; and 1998, $581,677.
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6. LIMITED PARTNERSHIP AGREEMENT
The Partnership was formed pursuant to an Agreement of Limited Partnership dated as of April 20, 1993 and amended August 12, 1993 (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 consist of the $10,000 contributed by the General Partner and the amounts contributed by limited partners for the purchase of their units.
Any Partnership net loss will first be allocated to the limited partners to the extent of their positive capital account balances. Any additional 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 additional net income will then be allocated to the General Partner and limited partners based on number of units held. During liquidation of the partnership, when cash distributions are to be made 80% to the limited partners and 20% to the General Partner (see below), net income will be allocated 80% to the limited partners and 20% to the General Partner. Net income or net loss allocated to the limited partners will be apportioned among them based on the number of limited partnership units held and on the number of months within the respective year that such units were held.
During the Partnership's operating phase, to the extent there is cash available for distribution, cash distributions will be made on a monthly basis in the following order of priority: first, to reimburse the General Partner for administrative services it provides to the Partnership, as further described in the Agreement (see Note 7); second, to the limited partners up to amounts representing a 10.8% cumulative annual return on their adjusted capital contribution (as defined); and, third, to the General Partner, representing a monthly equipment management fee of 5% of the gross rental payments received by the Partnership (see Note 7). To the extent that cash is not available to pay all or a portion of the equipment management fee pursuant to the above priority distributions, such fee will accrue and accumulate. Any remaining cash distributions after payment of the above (including arrearages) will be paid, at the discretion of the General Partner, to the limited partners.
During the Partnership's liquidation phase, cash available for distribution will be distributed in the following order of priority: first, for payment of the General Partner's administrative services expense described above; second, to the limited partners for any arrearage in their 10.8% cumulative priority return; third, to the limited partners for 100% of their adjusted capital contributions; fourth, to the limited partners, distributions totaling 10.8% annually, noncompounded, on their adjusted capital contributions; fifth, to the General Partner for any arrearage in its equipment management fee; and, sixth, 80% to the limited partners and 20% to the General Partner (provided, however, that the General Partner will not receive such amounts unless the limited partners have received total distributions equal to their capital contribution plus a 10.8% annualized return).
7. MANAGEMENT AND SERVICE AGREEMENTS
The Partnership paid the General Partner 4% of all leases acquired by the Partnership during the initial funding period, which the Partnership capitalized as initial direct costs. Amounts incurred by the Partnership as acquisition fees were $123,687 for 1995, $807,074 for 1994. Unless the Partnership decides to issue additional partnership units, no further acquisition fees will be paid.
The Partnership also pays an equipment management fee equal to 5% of the amount of gross rental payments received, to the General Partner. The General Partner, in turn, pays 50% of those fees to its parent. During the periods ended December 31, 1996, 1995 and 1994, those management fees aggregated $379,665, $422,866 and $244,673, respectively.
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In addition, the General Partner is reimbursed for certain other costs under an administrative services agreement. Amounts incurred by the Partnership pursuant to this agreement amounted to $73,500, $85,800 and $92,919 for the periods ended December 31, 1996, 1995 and 1994, respectively.
As a part of the issuance of partnership units, the Partnership paid commissions of 10% to Berthel Fisher & Company Financial Services, Inc., a broker-dealer affiliated with the General Partner, and reimbursed other offering expenses of up to 4% of the gross proceeds to the General Partner. These fees have been treated as syndication costs and charged directly to partners' equity.
8. RECONCILIATION OF FINANCIAL AND INCOME TAX REPORTING BASIS
A reconciliation of net income for financial reporting purposes with the related amount reported for income tax purposes is as follows:
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by management of the Partnership 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, 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 instrument. Also, the Partnership's available-for-sale security is reported at market value. The estimated fair value of other significant financial instruments are based principally on discounted future cash flows at rates commensurate with the credit and interest rate risk involved.
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The estimated fair values of the Partnership's other significant financial instruments are as follows at December 31, 1996 and 1995:
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
B. Executive officers of the General Partner of the Registrant:
Thomas J. Berthel (age 45) - Mr. Berthel is the Chief Executive Officer and Director of the General Partner, a position he has held since the General Partner's inception in 1988. Mr. Berthel is also President and a Director of the General Partner's parent, Berthel Fisher & Company, Inc. ("Berthel Fisher"), which he founded in 1985, and Berthel Fisher's other subsidiaries, Berthel Fisher & Company Financial Services, Inc.; Berthel Fisher & Company Management Corp.; Berthel Fisher & Company Planning, Inc.; and one other corporation which acts as general partner of a separate private program. He also serves as the Chairman of the Board and Director of Amana Colonies Golf Course, Inc. Mr. Berthel holds a bachelor's degree from St. Ambrose College in Davenport, Iowa (1974). 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. Mr. Berthel is also a Certified Life Underwriter. Mr. Berthel also serves as an individual general partner of the limited partnership referred to above. Mr. Berthel received a MBA degree from the University of Iowa in 1993.
Ronald O. Brendengen (age 41) - 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 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., the trust advisor of Berthel Growth & Income Trust I, a company required to file reports pursuant to the Securities Exchange Act of 1934. 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. From 1979 to 1984, Mr. Brendengen worked in various capacities for Morris Plan and MorAmerica Financial Corp., Cedar Rapids, Iowa. 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.
ITEM 10.
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Nancy L. Lowenberg (age 37), has been elected Vice President and Chief Operating Officer of the General Partner beginning January 2, 1997. From September 1986 to December 1996, Ms. Lowenberg has been employed by First Star Bank Iowa, N.A., in Cedar Rapids, since 1986 as Vice President Commercial Loans for Iowa. As Vice President Commercial Loans, she has been 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. From 1981-1986, Ms. Lowenberg was employed by First Star Bank Systems. Ms. Lowenberg received her Bachelor of Science Agricultural Business with a minor in Finance in 1981 from Iowa State University, Ames, Iowa.
Lynn Whiteman (age 40) - Ms. Whiteman is Vice President- Operations of the General Partner, a position she has held since January, 1993. Prior to January, 1993, Ms. Whiteman was employed with Firstar Bank Cedar Rapids, N.A., formerly Merchants National Bank. She spent five years in the Correspondent Banking Dept. and then seven in the Commercial Loan Dept., most recently as Vice President Commercial Loans. Ms. Whiteman holds a Bachelors Degree in Business Administration/Finance from the University of Iowa, Iowa City, Iowa. Effective February 21, 1997, Ms. Whiteman has resigned from the Company.
Gregory G. Pugh (age 38) - Mr. Pugh was appointed Executive Vice President in 1995. He has served as Vice President of the General Partner since October 1990. Mr. Pugh has a Bachelor of Science in Industrial Administration/Business Management from Iowa State University, Ames, Iowa in 1981. He also has a Masters of Business Administration from Drake University in Des Moines, Iowa in 1990. Prior to Berthel Fisher & Company, Greg worked at Norwest Mortgage from 1989 to 1990 as Branch Facilities Specialist in Des Moines, Iowa. Mr. Pugh was employed by the Principal Financial Group from 1983-1988 in various capacities lastly as a Mortgage Loan Officer. From 1981-1983 Mr. Pugh was employed by Hawkeye Capital Bank, in Des Moines, Iowa.
Leasing, Inc.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person owns of record, or is known by the Registrant to own beneficially, more than five percent of the Partnership Units.
(b) The General Partner of the Registrant owns Units of the Registrant set forth in the following table.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Page No.
2. Financial Statements Schedules
Information pursuant to Rule 12-09 (Schedule II) is included in the
financial statements and notes thereto.
3. Exhibits
(1) Incorporated herein by reference to Exhibit A in the Partnership's registration statement on Form S-1, effective August 27, 1993
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 X, L.P. (REGISTRANT)
By Berthel Fisher & Company Leasing, Inc.
By: Thomas J. Berthel/s/ Date: March 27, 1997 Thomas J. Berthel President
By Berthel Fisher & Company Leasing, Inc.
By: Ronald O. Brendengen/s/ Date: March 27, 1997 Chief Financial Officer, Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
(1) Incorporated herein by reference to Partnership Exhibit A to the prospectus included in the Partnership's post effective amendment No. 4 to Form S-1 registration statement filed on December 22, 1992.