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 701 Tama Street, Marion, Iowa 52302. Substantially all of the voting stock of the General Partner is owned by Berthel Fisher & Company ("Berthel Fisher").
The Partnership began offering units to the public on August 27, 1993 and continued to offer units to the public through December 31, 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. If it does not appear reasonable to liquidate the Partnership by December 31, 2002, the General Partner may have to ask the limited partners to vote via a proxy statement to extend the Partnership. The Partnership would only be extended if a majority of the limited partnership units vote for the extension.
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. The Partnership entered its liquidation phase on December 31, 1999.
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. Management does not expect regulation to have any significant negative impact upon the business of the Partnership.
The principle objective of the Partnership is obtaining value from sales of the Partnership's lease portfolio and other assets during the liquidating phase (the period during which the General Partner will liquidate the Partnership assets) and providing distributions to the partners during the liquidating phase.
The Partnership acquired primarily telecommunications equipment (specifically pay telephones and call processing equipment), leased to third parties generally under full payout leases. The Partnership also acquired other types of equipment generally 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 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 acquired and approved leases on behalf of the Partnership. The General Partner established guidelines to use in approving lessees. Generally, before any lease was approved, there was a review of the potential lessees' financial statements, credit references were checked, and outside business and/or individual credit reports were obtained.
The Partnership's leases and notes receivable are concentrated in pay telephones, automated teller machines ("ATM"), and the notes receivable of Murdock Communications Corporation ("Murdock"). The portfolio related to these sources for the period ended December 31, 2001, 2000, and 1999 is outlined in the table below.
Two customers accounted for 85% of the Partnership's net investment in direct financing leases and notes receivable portfolio at 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
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 leasing industry is very competitive and the Partnership has fewer assets than some of its major competitors. The principal methods of competition include service and price (interest rate). The Partnership operates in one segment.
The Partnership has no employees and utilizes the administrative services of the General Partner for which it pays an administrative service fee.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership does not own or lease any real estate. The Partnership's materially important assets consist entirely of equipment under lease, primarily telecommunications equipment, as described in Item 1.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 10, 2001, SA Communications, Inc., a debtor in bankruptcy, filed a complaint in the United States Bankruptcy Court for the District of Delaware against the Partnership to avoid transfers and to recover property transferred. The complaint alleged that on September 10, 1997, the debtor paid a check in the amount of $45,069.83 to the Partnership which constituted a preferential transfer in favor of the Partnership. The Partnership filed an answer denying that the payment constituted a preference. Initially, there was a requirement that the parties should exchange discovery documents but that exchange of documents has been continued indefinitely. The Partnership believes that the payment was received in the ordinary course of business and should not constitute a preferential transfer. No loss, if any, has been recorded in the financial statements with respect to this matter.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
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, 2001, $17,707,518 has been paid in distributions to partners during the life of the Partnership. Distributions to partners on a per unit basis were $11.93 in 2001, $32.14 in 2000, and $27.00 during the three prior years.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
* Upon adoption of liquidation basis of accounting
The selected financial data above was derived from the liquidation basis financial statements of the Partnership as of and for the years ending December 31, 2001 and 2000, and the historical cost basis financial statements prior to December 31, 1999. As of December 31, 1999, the Partnership adopted the liquidation basis of accounting. Under liquidation basis accounting, assets are presented at estimated net realizable value and liabilities are presented at estimated settlement amounts. The change to liquidation basis accounting may materially affect the comparability of the selected financial data. The above selected financial data should be read in connection with the financial statements and related notes appearing elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On December 31, 1999, the Partnership ceased reinvestment in equipment and leases and began the orderly liquidation of the Partnership in accordance with the partnership agreement. As a result, the financial statements beginning with that date have been presented under the liquidation basis of accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts.
As discussed above, the Partnership is in liquidation and does not believe a comparison of results would be meaningful. The Partnership realized $100,246 in income from direct financing leases, notes receivable, interest, and other income for the year ended December 31, 2001. This represents an annualized return on average net assets, excluding the decrease in the estimate of the liquidation value of net assets discussed below, of approximately 3.8%.
Management decreased its estimate of the liquidation value of net assets 2001 by $3,425,724. This decrease is primarily due to the write-off of securities the Partnership held in Actel Integrated Communications Inc. ("Actel") and loans to Murdock Communications Corporation ("Murdock"), the impairment of equipment held for sale, and increasing the allowance for possible loan and lease losses. On April 11, 2001, Actel filed for Chapter 11 bankruptcy (subsequently changed to a Chapter 7 filing). The Partnership had a loss of $947,658 to write-off the carrying value of its 421,181 shares of Actel preferred stock. The Partnership also wrote off $910,000 representing its remaining carrying value of notes receivable of Murdock. Murdock's primary asset was the preferred stock of Actel. Another lessee of the Partnership, LIDS Corporation, filed for Chapter 11 bankruptcy during the first quarter, resulting in an increase to the allowance for possible loan and lease losses of $200,000. The Partnership also increased the allowance for possible loan and lease losses during the third and fourth quarters by an approximate total of $125,000 due to the chapter 11 bankruptcy filing of Alpha Tel-Com, a lessee of the Partnership.
The Partnership also decreased its estimate of the liquidation value of net assets as a result of losses incurred on equipment previously held for sale. In November 2000, the Partnership exercised its right to manage the assets leased to Alpha Telecommunications, Inc. ("ATI") due to nonpayment of receivables. The Partnership incurred an impairment loss of $351,041 in 2000 to record the equipment at $1,702,644 at December 31, 2000, the estimated net realizable value of the equipment at that time. During 2001, the Partnership incurred additional losses on this equipment totalling $1,286,184 as a result of a substantial loss in the number of operable payphones and also due to the general decline in payphone equipment, as described in item 1. Many payphone site owners signed contracts with other payphone operators as a result of ATI's bankruptcy filing. The Partnership sold the remaining equipment in the fourth quarter for a note receivable of $176,000.
The Partnership has accrued the estimated expenses of liquidation, which is $175,000 at December 31, 2001. The General Partner reviews this estimate and will adjust quarterly, as needed. The Partnership will continue to make distributions to the partners as leases, notes receivable, and equipment are collected or sold and other assets are sold. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are uncertainties in carrying out the liquidation of the Partnership's net assets. The actual value of the liquidating distributions will depend on a variety of factors, including the actual timing of distributions to the partners. The actual amounts are likely to differ from the amounts presented in the financial statements. Through December 31, 2001, there have been distributions totalling $17,707,518. As of December 31, 2001 the Partnership had $46,197 of cash on hand.
As of December 31, 2001, three customers were over 90 days past due. When payments are past due more than 90 days, the Partnership discontinues recognizing income on those customer contracts. The Partnership's net investment in these contracts totalled $380,153 at December 31, 2001. One lessee, Alpha Tel-Com, filed for chapter 11, as stated above, and resulted in the Partnership increasing the allowance for possible loan and lease losses by approximately $125,000. Management believes its reserve is adequate related to these customers. Management will continue to monitor the past due contracts and take the necessary steps to protect the Partnership's investment.
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 XI, L.P. ("TIF XI"), publicly owned limited partnerships that are engaged in the equipment leasing business. TIF IX is currently in its liquidation phase and must be dissolved by December 31, 2005. Also, an affiliate of the General Partner is the general partner of a privately offered active limited partnership. As of December 31, 2001, the net proceeds of the private program, TIF IX, and TIF XI 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 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 equipment's original cost. The Partnership generally expects to realize the residual value 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 businesses to whom the Partnership leases equipment. There are and will continue to be regulatory issues in the telecommunications industry that the General Partner will monitor.
The Partnership's equipment leases and notes were financed to yield rates of return between 15% and 20%, with terms varying from 36 months to 60 months. Rates charged on a particular lease or note depend on the size of the transaction and the customer's financial strength.
Inflation affects the cost of equipment purchased and the residual values realized when leases terminate and equipment is sold.
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 December 31, 2001, that working capital reserve, as defined, would be $226,025. Actual cash on hand at December 31, 2001 was $46,197. However, upon entering the liquidation phase, the General Partner has prioritized the liquidation of assets and distributing remaining proceeds to the partners. Management believes that the cash on hand at December 31, 2001 is sufficient to satisfy current operating expenses and costs of the Partnership.
The Partnership will continue to liquidate its assets in an orderly manner to achieve the highest price possible for the partners and make distributions as cash becomes available through sales of assets or collections of lease and notes receivable.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EQUITY PRICE SENSITIVITY
The table below provides information about the Partnership's marketable and not readily marketable equity securities that are sensitive to changes in prices at December 31, 2001.
The Partnership's primary market risk exposure with respect to equity securities is equity price. The Partnership's general strategy in owning equity securities is long-term growth in the equity value of emerging companies in order to increase the rate of return to the limited partners over the life of the Partnership. The primary risk of the portfolio is derived from the underlying ability of the companies invested in to satisfy debt obligations and their ability to maintain or improve common equity values. The Partnership holds 165,900 shares of Murdock as marketable and 426,600 shares as not readily marketable, due to restrictions imposed by rule 144 of the Securities and Exchange Commission. Murdock is a shell company with no operations whose stock price can be volatile. At December 31, 2001, the total amount at risk was $38,586.
INTEREST RATE SENSITIVITY
The table below provides information about the Partnership's notes receivable that are sensitive to changes in interest rates. The table presents the principal amounts and related weighted average interest rates by expected maturity dates as of December 31, 2001.
The Partnership manages interest rate risk, its primary market risk exposure with respect to notes receivable, by limiting the terms of notes receivable to no more than five years.
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, 2001, 2000, and 1999 are included in Item 8:
Independent Auditors' Report
Statements of Net Assets as of December 31, 2001 and 2000 (Liquidation Basis)
Statements of Changes in Net Assets (Liquidation Basis) for the Years Ended December 31, 2001 and 2000
Statement of Operations and Comprehensive Income (Going Concern Basis) for the Year Ended December 31, 1999
Statement of Changes in Partners' Equity (Going Concern Basis) for the Year Ended December 31, 1999
Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Partners Telecommunications Income Fund X, L.P.
We have audited the accompanying statements of net assets (liquidation basis) of Telecommunications Income Fund X, L.P. (the "Partnership") as of December 31, 2001 and 2000, and the related statements of changes in net assets (liquidation basis) for the years ended December 31, 2001 and 2000. In addition, we have audited the accompanying statement (going concern basis) of operations and comprehensive income and of changes in partners' equity of the Partnership for the year ended December 31, 1999. In addition, we have audited the accompanying statements of cash flows of the Partnership for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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.
As discussed in Note 1 to the financial statements, the Partnership agreement required that the orderly liquidation of the Partnership's net assets begin on December 31, 1999, and the Partnership commenced liquidation shortly thereafter. As a result, the Partnership has changed its basis of accounting from the going concern basis to the liquidation basis effective December 31, 1999.
In our opinion, such financial statements present fairly, in all material respects, the net assets of Telecommunications Income Fund X, L.P. at December 31, 2001 and 2000, the changes in its net assets for the years ended December 31, 2001 and 2000, the results of its operations for the year ended December 31, 1999, and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America on the basis described in Note 1.
As discussed in Note 1 to the financial statements, because of the inherent uncertainty of valuation when an entity is in liquidation, the amounts realizable from the disposition of the remaining assets may differ materially from the amounts shown in the accompanying financial statements.
/s/ DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa March 1, 2002
TELECOMMUNICATIONS INCOME FUND X, L.P.
STATEMENTS OF NET ASSETS (LIQUIDATION BASIS) AS OF DECEMBER 31, 2001 AND 2000 - --------------------------------------------------------------------------------
See notes to financial statements.
TELECOMMUNICATIONS INCOME FUND X, L.P.
STATEMENTS OF CHANGES IN NET ASSETS (LIQUIDATION BASIS) YEARS ENDED DECEMBER 31, 2001 AND 2000 - --------------------------------------------------------------------------------
See notes to financial statements.
TELECOMMUNICATIONS INCOME FUND X, L.P.
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (GOING CONCERN BASIS) YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------
See notes to financial statements.
TELECOMMUNICATIONS INCOME FUND X, L.P.
STATEMENT OF CHANGES IN PARTNERS' EQUITY (GOING CONCERN BASIS) YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------
See notes to financial statements.
TELECOMMUNICATIONS INCOME FUND X, L.P.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 - --------------------------------------------------------------------------------
See notes to financial statements.
TELECOMMUNICATIONS INCOME FUND X, L.P.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 - --------------------------------------------------------------------------------
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 its offering period the Partnership sold 90,470 partnership interests at a price per unit of $250.
The Partnership operates in one segment. The Partnership's operations are conducted throughout the United States. The Partnership primarily acquired equipment for lease to third parties under a direct finance arrangement. The lease agreements with individual customers were generally in excess of $500,000 and certain agreements exceed 10% of the Partnership's direct finance lease portfolio (see Note 3). The Partnership ceased reinvestment in equipment and leases and began the orderly liquidation of Partnership assets on January 1, 2000 as required by the Partnership agreement. The Partnership must dissolve on December 31, 2002, or earlier, upon the occurrence of certain events (see Note 7).
Management anticipates extending the dissolution date of the Partnership beyond December 31, 2002 to allow for the orderly liquidation of the remaining assets. Any such extension is subject to the approval of the limited partners.
BASIS OF PRESENTATION - The Partnership began the orderly liquidation of Partnership assets in January 2000 as discussed above. As a result, on December 31, 1999 the Partnership adopted the liquidation basis of accounting. The statements of net assets as of December 31, 2001 and 2000 and the statements of changes in net assets for the years ended December 31, 2001 and 2000 have been prepared on the liquidation basis. Accordingly, assets have been valued at estimated net realizable value and liabilities include estimated costs associated with carrying out the plan of liquidation.
The net adjustment as of December 31, 1999 required to convert from the going concern (historical cost) basis to the liquidation basis of accounting was a decrease in carrying value of $1,464,813, which is included in the statement of changes in net assets as of December 31, 1999. Significant increases (decreases) in the carrying value of net assets are summarized as follows:
Changes in the estimated liquidation value of net assets during the years ended December 31, 2001 and 2000 are summarized as follows:
The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are uncertainties in carrying out the liquidation of the Partnership's net assets. The actual value of the liquidating distributions will depend on a variety of factors, including the actual timing of distributions to partners. The actual amounts are likely to differ from the amounts presented in the financial statements.
The statements (going concern basis) of operations and comprehensive income and changes in partners' equity for the year ended December 31, 1999 have been prepared using the historical cost (going concern) basis of accounting on which the Partnership had previously reported its financial condition and results of operations.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 net realizable values of the Partnership's assets and the reserve for estimated costs during the period of liquidation.
The Partnership's equity security at December 31, 2001 consists of a common stock investment in one company. A prospective buyer may require a substantially lower price than currently estimated and the prospects of this company may deteriorate. These factors, among others, could have a material near-term impact on the net realizable value of its equity security.
Most of the Partnership's leases and notes receivable are with customers that are in the entrepreneurial stage and, therefore, are highly leveraged and require financing in place of or to supplement financing from banks. Although the Partnership attempts to mitigate its credit risk through timely collection efforts, failure of the Partnership's customers to make scheduled payments under their equipment leases and notes receivable could have a material near-term impact on the net realizable value of leases and notes receivable.
Realization of residual values on the Partnership's underlying leased equipment depends on many factors, several of which are not within the Partnership's control, including general market conditions at the time of the 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. Also, the market for pay telephone equipment is volatile. These factors, among others, could have a material near-term impact on the net realizable value of leases.
CERTAIN RISK CONCENTRATIONS - The Partnership's portfolio of leases and notes receivable are concentrated in pay telephone/telecommunications industry representing approximately 95% and 82% at December 31, 2001 and 2000, respectively, of the Partnership's direct finance lease and notes receivable portfolio.
Two customers account for approximately 85% of the Partnership's net investment in direct financing leases and notes receivable portfolio at December 31, 2001 (four customers represented 81% at December 31, 2000).
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.
EQUITY SECURITIES - The Partnership's common equity securities are restricted as to sale in the public market under rule 144 of the Securities and Exchange Commission. Common equity securities, which can be sold in the public market within one year, are classified as marketable equity securities and valued at the published market prices less an estimated illiquidity discount. Common equity securities, which cannot be sold in the public market within one year, are classified as not readily marketable and valued at an estimated discount from the published market price reflective of their more illiquid nature.
The Partnership's preferred equity security was valued at its estimated net realizable value based on benchmark comparisons to similar public companies.
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 recorded 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 capitalized 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.
NOTES RECEIVABLE - Notes receivable are carried at the principle balance outstanding. Interest income on notes receivable is accrued based on the principle amount outstanding.
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES - The Partnership performed credit evaluations prior to approval of a loan and 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 leased asset. The Partnership maintains an allowance for possible loan and lease losses which could arise should customers become unable to discharge their obligations under the loan and lease 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 loan and lease portfolio. The allowance is based upon a continuing review of past loss experience, current economic conditions, delinquent loans and leases, an estimate of potential loss exposure on significant customers in adverse situations, 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 assets. Loans and leases, 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.
NET REALIZABLE VALUE OF NET INVESTMENT IN DIRECT FINANCING LEASES AND NOTES RECEIVABLE - Management, in arriving at the net realizable value of the Partnership's net investment in direct financing leases and notes receivable, considered the contractual repayment schedule, the estimated duration of the liquidation period, the customer and industry concentration risks, and interest rate levels, among other factors, in arriving at a discount to apply to the portfolio to estimate its net realizable value.
EQUIPMENT HELD FOR SALE - The net realizable value of equipment held for sale at December 31, 2000 was based on recent sales values for similar pay telephone equipment.
SALE OF DIRECT FINANCE LEASES - The Partnership at times sells direct financing leases, 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 Partnership 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.
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. EQUITY SECURITIES
The Partnership's equity securities consist of the following at December 31, 2001 and 2000:
During April 2001, AcTel Integrated Communications, Inc. ("AcTel") filed for Chapter 11 bankruptcy which was later converted to a Chapter 7 liquidation. AcTel preferred shares have been estimated to have no value as of December 31, 2001.
The Partnership's gross changes in unrealized gain (loss) on available-for-sale equity securities for the year ended December 31, 1999 consists of the following:
3. 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 at December 31, 2001 and 2000:
At December 31, 2001, contractual maturities under notes receivable, 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 leases equipment and provides financing to certain companies for which the General Partner or its affiliates have an ownership interest in, provide financing to, or provide investment advisory services for such companies. The Partnership's net investment in direct financing leases and notes receivable with these companies was $0 and $1,535,828 at December 31, 2001 and 2000, respectively.
Five customers accounted for 10% or more of the amount of income from direct financing leases during one or more of the years presented, as follows:
4. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The changes in the allowance for possible loan and lease losses for the years ended December 31, 2001, 2000, and 2000 are as follows:
The allowance for possible loan and lease losses consisted of specific allowances for leases and notes receivable of $185,000, $625,512 and $380,807 and a general unallocated allowance of $31,431, $133,423 and $201,700, respectively, at December 31, 2001, 2000 and 1999. The allowance at December 31, 2001 and 2000 is included in the net realizable value adjustment discussed in Note 3.
Due to cash flow problems experienced during 1997 by a lessee of the Partnership, North American Communications Group, Inc. ("NACG"), the Partnership, in an attempt to protect the assets leased to NACG, advanced funds to various entities to whom NACG owed money related to the operation of such leased assets. In addition, the Partnership assisted in arranging a management agreement between NACG and another entity to attempt to improve NACG's cash flow generated by the leased assets. In spite of the funds advanced by the Partnership and the management agreement, the cash flow of NACG continued to deteriorate. The General Partner actively solicited bids from parties to purchase the assets associated with the Partnership leases to NACG. Based on the value of similar assets and contract sites, management believed the equipment leased to NACG had substantial value. However, the offers received were not adequate to cover additional funds, which were required to be advanced to keep the equipment sites operating. The General Partner, therefore, determined it was no longer economically feasible to continue to advance funds on behalf of NACG, discontinued doing so, and informed all site operators of that decision. As a result, the Partnership decided to provide for a specific allowance of $3,319,159 at December 31, 1997, which was equal to the carrying value of the leases and advances associated with NACG. Such leases and advances were charged-off to the allowance for possible loan and lease losses during 1998. The Partnership received $105,000 in the first quarter of 1999 from the sale of assets recovered to date, and credited this to the allowance for possible loan and lease losses.
In December 1998, the Partnership, Telecommunications Income Fund IX, the General Partner, NACG, and others filed a suit against Shelby County, Tennessee ("County"). The suit alleged, among other things, damages for wrongful termination of the pay phone contract between NACG and Shelby County and racial discrimination by the County against NACG. The County filed an answer and the initial discovery was completed. In 1999, management determined it was not economical to continue to spend Partnership funds in an effort to obtain additional information or to continue the lawsuit.
In June 2000, the Partnership's two leases with Murdock Communications Corporation ("Murdock") were converted to notes and stock as part of a restructuring. At the time of the restructuring, the Partnership's net investment in the contracts after accruing for related property taxes, totaled $2,437,062. The Partnership received two notes and recorded these at their estimated net realizable value of $1,535,828 and 421,181 (adjusted for a stock split) shares of preferred stock in AcTel, a not readily marketable security. The estimated net realizable value of the AcTel preferred stock was $947,658 at December 31, 2000. The Partnership did not accrue interest on the notes receivable due to the uncertainty of Murdock's ability to pay. The Partnership established a specific allowance of $625,512 at December 31, 2000 for the notes receivable related to this uncertainty. The Partnership increased the allowance for loan and lease losses by $910,000 in 2001 and wrote-off the carrying value of the notes receivable as Murdock's primary asset was AcTel preferred stock (see Note 2).
Another lessee of the Partnership, LIDS Corporation, filed for Chapter 11 bankruptcy during 2001, resulting in an increase to the allowance for possible loan and lease losses and a loan write-off of $200,000.
At December 31, 2001, the Partnership had three customers with payments over 90 days past due. The Partnership's net investment in lease contracts with these customers totaled $380,153. Management has provided a specific allowance of $185,000 at December 31, 2001 related to two of these customers. Management believes that the underlying collateral is adequate to recover the Partnership's net investment for the remaining past due customer. If a lease or note receivable is past due more than 90 days, the Partnership discontinues recognizing income on the contract.
5. EQUIPMENT HELD FOR SALE
In November 2000, the Partnership exercised its right to manage the assets, primarily pay phones, leased to Alpha Telecommunications, Inc. due to nonpayment of lease receivables. Such equipment had been adjusted for an impairment loss of $351,041 to reflect management's estimated net realizable value of the equipment at December 31, 2000. The equipment was sold during 2001 to two parties for a note receivable of $176,000 and cash of $240,460 resulting in a loss of $1,286,184.
The significant loss on equipment in 2001 occurred because payphone site lease contracts were not accepted by the trustee during bankruptcy of Alpha Telecommunications, Inc. Without the contracts in place, the value of the payphones decreased significantly. Additionally, the market value of payphones decreased due to the general decline experienced in the industry during 2001.
6. BORROWING AGREEMENT
The Partnership had a line-of-credit agreement with a bank, which bore interest at a variable rate of 9.5% at December 31, 1999. The line-of-credit was paid in full and discontinued during 2000.
7. 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.
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. Any share of Partnership net loss will first be allocated to the limited partners to the extent of their positive capital account balances. Any share of 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.
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 8); 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 8). 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).
8. MANAGEMENT AND SERVICE AGREEMENTS
The Partnership paid an equipment management fee, equal to 5% of the amount of gross rental payments received, to the General Partner. The Partnership entered its liquidation phase in January 2000 and at that time discontinued the fee. During the year ended December 31, 1999, such management fees aggregated $217,147.
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 $90,000, $84,000, and $84,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
9. RECONCILIATION OF FINANCIAL AND INCOME TAX REPORTING BASIS
A reconciliation of net income/change in net assets excluding distributions and withdrawals for financial reporting purposes with the related amount reported for income tax purposes for the years ended December 31, 2001, 2000 and 1999 is as follows:
10. CONTINGENCIES
On January 10, 2001, SA Communications filed a suit against the Partnership, the General Partner, and others alleging the Partnership received a preference of approximately $45,000 prior to the filing of its petition in bankruptcy. The Partnership maintains that it was receiving regular monthly payments and there was no preference. SA Communications has been converted from Chapter 11 to Chapter 7 and the plaintiff has taken no action beyond the discovery phase. No loss, if any, has been recorded in the financial statements with respect to this matter.
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.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The change in estimate of liquidation value of net assets by quarter is as follows:
Interest and other income for the fourth quarter of 2000 includes the reversal of $185,537 of income recognized for the Murdock Communications Corporation note receivable, which note was considered to be only partially collectible in the fourth quarter.
Change in estimate of liquidation value of net assets for the fourth quarter of 2000 includes the $625,512 specific reserve for Murdock discussed in Note 4 and the $351,401 impairment loss on repossessed equipment discussed in Note 5.
* * * *
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
A: The General Partner of the registrant:
Berthel Fisher & Company Leasing, Inc., an Iowa corporation.
B: Executive officers of the General Partner of the Registrant:
Thomas J. Berthel (age 50) - Mr. Berthel is the Chief Executive Officer, President, 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 47) - Mr. Brendengen is the Treasurer, Chief Operating Officer, Chief Financial Officer, and a Director (1988 to present) of the General Partner. He was elected to his current offices in October 1996. He served as Treasurer and Chief Financial Officer since October 1996. He has also 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), and was also elected Chief Operating Officer in January 1998, 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.
Timothy J. White (age 48) - Mr. White was elected President of the General Partner on January 26, 2001. From 1999 to 2000, Mr. White was Vice President of New Markets for Great America Leasing in Cedar Rapids, Iowa. From 1996 to 1999, Mr. White was Vice President of Business Development for GE Capital in Cedar Rapids, Iowa. From 1993 to 1996, Mr. White was President of Aloha Capital Corporation in Syracuse, New York. From 1989 to 1993, Mr. White was Vice President of Sales for Dana Commercial Credit in Troy, Michigan. During his career, Mr. White has been responsible for the management of a leasing business in excess of $200 million and sales budgets in excess of $400 million. Mr. White holds a Bachelor's degree in Business Management from Walsh College in Troy, Michigan. Mr. White resigned effective July 13, 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Set forth is the information relating to all direct remuneration paid or accrued by the Registrant during the last three years to the General Partner:
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.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related party transactions are described in Notes 3 and 8 of the notes to the financial statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 2001.
- -------------------------------------------------------------------------------- (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 25, 2002 -------------------------------------- Thomas J. Berthel President
By Berthel Fisher & Company Leasing, Inc.
By: Ronald O. Brendengen/s/ Date: March 25, 2002 -------------------------------------- Ronald O. Brendengen 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.
Thomas J. Berthel/s/ Date: March 25, 2002 - ------------------------------------------ Thomas J. Berthel Chief Executive Officer President, Director Berthel Fisher & Company Leasing, Inc. Corporate General Partner
Ronald O. Brendengen/s/ Date: March 25, 2002 - ------------------------------------------ Ronald O. Brendengen Treasurer, Director Berthel Fisher & Company Leasing, Inc. Corporate General Partner
Daniel P. Wegmann/s/ Date: March 25, 2002 - ------------------------------------------ Daniel P. Wegmann Controller Berthel Fisher & Company Leasing, Inc. Corporate General Partner
Leslie D. Smith/s/ Date: March 25, 2002 - ------------------------------------------ Leslie D. Smith Director Berthel Fisher & Company Leasing, Inc. Corporate General Partner
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.