10QSB 1 q1022-603.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Quarter Ended: June 30, 2003 Commission file number: 24003 AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP (Exact Name of Small Business Issuer as Specified in its Charter) ___State of Minnesota____ __41-1848181__ (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 30 East 7th Street, Suite 1300, St. Paul, Minnesota 55101 (Address of Principal Executive Offices) _____________(651) 227-7333_____________ (Issuer's telephone number) ______________________Not Applicable__________________________ (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Transitional Small Business Disclosure Format: Yes _____ No __X__ AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP INDEX Page PART I. Financial Information Item 1. Balance Sheet as of June 30, 2003 and December 31, 2002 3 Statements for the Periods ended June 30, 2003 and 2002: Income 4 Cash Flows 5 Changes in Partners' Capital 6 Notes to Financial Statements 7 - 12 Item 2. Management's Discussion and Analysis 12 - 16 Item 3. Controls and Procedures 17 PART II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18 AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP BALANCE SHEET JUNE 30, 2003 AND DECEMBER 31, 2002 (Unaudited) ASSETS 2003 2002 CURRENT ASSETS: Cash and Cash Equivalents $4,818,310 $2,108,482 Receivables 46,882 3,563 --------- --------- 4,865,192 2,112,045 --------- --------- INVESTMENTS IN REAL ESTATE: Land 3,433,901 4,684,762 Buildings and Equipment 5,006,109 6,883,098 Construction in Progress 860,663 3,687 Accumulated Depreciation (750,097) (938,819) --------- --------- Net Investments in Real Estate 8,550,576 10,632,728 --------- --------- Total Assets $13,415,768 $12,744,773 ========= ========= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 10,154 $ 11,613 Distributions Payable 282,098 287,113 --------- --------- Total Current Liabilities 292,252 298,726 --------- --------- PARTNERS' CAPITAL: General Partners 10,517 3,792 Limited Partners, $1,000 Unit Value; 24,000 Units authorized; 16,917 Units issued; 16,414 and 16,516 Units outstanding in 2003 and 2002, respectively 13,112,999 12,442,255 --------- --------- Total Partners' Capital 13,123,516 12,446,047 --------- --------- Total Liabilities and Partners' Capital $13,415,768 $12,744,773 ========= ========= The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF INCOME FOR THE PERIODS ENDED JUNE 30 (Unaudited) Three Months Ended Six Months Ended 6/30/03 6/30/02 6/30/03 6/30/02 RENTAL INCOME $207,681 $261,839 $ 427,597 $ 524,108 EXPENSES: Partnership Administration - Affiliates 27,064 42,163 79,212 93,962 Partnership Administration and Property Management - Unrelated Parties 22,255 18,723 34,734 28,340 Depreciation 52,712 71,623 109,411 143,248 ------- ------- ------- ------- Total Expenses 102,031 132,509 223,357 265,550 ------- ------- ------- ------- OPERATING INCOME 105,650 129,330 204,240 258,558 OTHER INCOME: Interest Income 26,496 2,636 35,450 5,415 Gain on Sale of Real Estate 0 114,370 298,050 114,370 ------- ------- ------- ------- Total Other Income 26,496 117,006 333,500 119,785 ------- ------- ------- ------- INCOME FROM CONTINUING OPERATIONS 132,146 246,336 537,740 378,343 Income from Discontinued Operations 765,633 31,890 797,376 63,216 ------- ------- ------- ------- NET INCOME $897,779 $ 278,226 $1,335,116 $ 441,559 ======== ======= ======== ======= NET INCOME ALLOCATED: General Partners $ 14,042 $ 11,267 $ 21,202 $ 16,167 Limited Partners 883,737 266,959 1,313,914 425,392 ------- ------- ------- ------- $897,779 $ 278,226 $1,335,116 $ 441,559 ======= ======= ======== ======= INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 7.81 $ 14.26 $ 32.14 $ 22.00 Discontinued Operations 46.03 1.87 47.66 3.70 ------- ------- ------- ------- Total $ 53.84 $ 16.13 $ 79.80 $ 25.70 ====== ====== ====== ====== Weighted Average Units Outstanding 16,414 16,547 16,465 16,552 ====== ====== ====== ====== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30 (Unaudited) 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $1,335,116 $ 441,559 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 125,694 168,670 Gain on Sale of Real Estate (1,053,910) (114,370) Increase in Receivables (43,319) 0 Increase (Decrease) in Payable to AEI Fund Management, Inc. (1,459) 17,444 Increase in Unearned Rent 0 8,343 --------- ---------- Total Adjustments (972,994) 80,087 --------- ---------- Net Cash Provided By Operating Activities 362,122 521,646 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (859,857) 0 Proceeds from Sale of Real Estate 3,870,225 440,406 --------- ---------- Net Cash Provided By Investing Activities 3,010,368 440,406 --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in Distributions Payable (5,015) (1,008) Distributions to Partners (578,677) (590,061) Redemption Payments (78,970) (7,738) ---------- ---------- Net Cash Used For Financing Activities (662,662) (598,807) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,709,828 363,245 CASH AND CASH EQUIVALENTS, beginning of period 2,108,482 880,350 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period $4,818,310 $1,243,595 ========= ========= The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIODS ENDED JUNE 30 (Unaudited) Limited Partnership General Limited Units Partners Partners Total Outstanding BALANCE, December 31, 2001 $ 1,645 $12,585,494 $12,587,139 16,556.63 Distributions (16,489) (573,572) (590,061) Redemption Payments (232) (7,506) (7,738) (10.00) Net Income 16,167 425,392 441,559 -------- -------- -------- -------- BALANCE, June 30, 2002 $ 1,091 $12,429,808 $12,430,899 16,546.63 ======= ======== ======== ======== BALANCE, December 31, 2002 $ 3,792 $12,442,255 $12,446,047 16,516.29 Distributions (12,108) (566,569) (578,677) Redemption Payments (2,369) (76,601) (78,970) (102.29) Net Income 21,202 1,313,914 1,335,116 -------- -------- -------- -------- BALANCE, June 30, 2003 $10,517 $13,112,999 $13,123,516 16,414.00 ======= ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Unaudited) (1)The condensed statements included herein have been prepared by the Partnership, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Partnership believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the Partnership's latest annual report on Form 10-KSB. (2) ORGANIZATION - AEI Income & Growth Fund XXII Limited Partnership (Partnership) was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management XXI, Inc. (AFM), the Managing General Partner. Robert P. Johnson, the President and sole shareholder of AFM, serves as the Individual General Partner and an affiliate of AFM, AEI Fund Management, Inc. (AEI), performs the administrative and operating functions for the Partnership. The terms of the Partnership offering call for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer. The Partnership commenced operations on May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. The offering terminated January 9, 1999 when the extended offering period expired. The Partnership received subscriptions for 16,917.222 Limited Partnership Units. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $16,917,222 and $1,000, respectively. During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 97% to the Limited Partners and 3% to the General Partners. Distributions to Limited Partners will be made pro rata by Units. Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 9% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow; (ii) any remaining balance will be distributed 90% to the Limited Partners and 10% to the General Partners. Distributions to the Limited Partners will be made pro rata by Units. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Continued) (2) ORGANIZATION - (Continued) For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year. Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed. Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners. For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 9% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Partners and 10% to the General Partners. Losses will be allocated 98% to the Limited Partners and 2% to the General Partners. The General Partners are not required to currently fund a deficit capital balance. Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions. (3) SUMMARY OF REAL ESTATE ACCOUNTING POLICIES - The Partnership's real estate is leased under triple net leases classified as operating leases. The leases provide for base annual rental payments payable in monthly installments. The Partnership recognizes rental revenue according to the terms of the individual leases. For leases which contain stated rental increases, the increases are recognized in the year in which they are effective. Contingent rental payments are recognized when the contingencies on which the payments are based are satisfied and the rental payments become due under the terms of the leases. Real estate is recorded at the lower of cost or estimated net realizable value. The Partnership compares the carrying amount of its properties to the estimated probability- weighted future cash flows expected to result from the property and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the property, the Partnership recognizes an impairment loss by the amount by which the carrying amount of the property exceeds the fair value of the property. The Partnership has capitalized as Investments in Real Estate certain costs incurred in the review and acquisition of the properties. The costs were allocated to the land, buildings and equipment. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Continued) (3) SUMMARY OF REAL ESTATE ACCOUNTING POLICIES - (Continued) The buildings and equipment of the Partnership are depreciated using the straight-line method for financial reporting purposes based on estimated useful lives of 25 years and 5 years, respectively. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations. In addition, the Partnership reclassifies the prior periods operating results and any partial sales of the property to discontinued operations. The Partnership accounts for properties owned as tenants-in- common with affiliated Partnerships and/or unrelated third parties using the proportionate consolidation method. Each tenant-in-common owns a separate, undivided interest in the properties. Any tenant-in-common that holds more than a 50% interest does not control decisions over the other tenant-in- common interests. The financial statements reflect only this Partnership's percentage share of the properties' land, building and equipment, liabilities, revenues and expenses. (4) RECLASSIFICATION - Certain items in the prior year's financial statements have been reclassified to conform to 2003 presentation. These reclassifications had no effect on Partners' capital, net income or cash flows. (5) INVESTMENTS IN REAL ESTATE - On January 1, 2002, the Partnership owned 64.4916% of the Hollywood Video store in Saraland, Alabama. In 2002, the Partnership sold 61.4116% of the property, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $896,350, which resulted in a net gain of $120,988. The total cost and related accumulated depreciation of the interests sold was $846,185 and $70,823, respectively. For the six months ended June 30, 2002, the net gain was $-0-. Through December 31, 2002, the Partnership sold 38.0038% of the Children's World in Golden, Colorado, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $790,102, which resulted in a net gain of $164,893. The total cost and related accumulated depreciation of the interests sold was $638,318 and $13,109, respectively. For the six months ended June 30, 2002, the net gain was $-0-. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Continued) (5) INVESTMENTS IN REAL ESTATE - (Continued) During 2002, the Partnership sold 39.1271% of the TGI Friday's restaurant, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $789,247, which resulted in a net gain of $208,061. The total cost and related accumulated depreciation of the interests sold was $653,564 and $72,378, respectively. For the six months ended June 30, 2002, the net gain was $114,370. Through June 30, 2003, the Partnership sold 24.6846% of the Children's World daycare center in Plainfield, Illinois, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $450,673, which resulted in a net gain of $103,162. The total cost and related accumulated depreciation of the interests sold was $363,531 and $16,020, respectively. For the six months ended June 30, 2003 and 2002, the net gain was $53,648 and $-0-, respectively. During the first six months of 2003, the Partnership sold 81.7389% of the Arby's restaurant, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,279,056, which resulted in a net gain of $244,402. The total cost and related accumulated depreciation of the interests sold was $1,138,290 and $103,636, respectively. Subsequent to June 30, 2003, the Partnership sold 17.6734% of the Arby's restaurant, to an unrelated third party. The Partnership received net sale proceeds of approximately $283,000, which resulted in a net gain of approximately $61,000. During the first six months of 2003 and 2002, the Partnership distributed $262,626 and $60,606 of net sale proceeds to the Limited and General Partners as part of their regular quarterly distributions which represented a return of capital of $15.82 and $3.63 per Limited Partnership Unit, respectively. The remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. On December 6, 2002, the Partnership purchased a 50% interest in a parcel of land in West Chester, Ohio for $476,105, including acquisition expenses. The Partnership obtained title to the land in the form of an undivided fee simple interest in the 50% interest purchased. The land is leased to Champps Operating Corporation (Champps) under a Lease Agreement with a primary term of 20 years and annual rental payments of $50,600. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership will advance funds to Champps for the construction of a Champps Americana restaurant on the site. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property of the lessor. Through June 30, 2003, the Partnership had advanced $860,663 for the construction of the property and was charging interest on the advances at a rate of 10.0%. The Partnership's share of the total purchase price, including the cost of the land, will be approximately $1,750,000. After the construction is complete, the Lease Agreement will be amended to require annual rental payments of approximately $175,000. The remaining interest in the property is owned by AEI Net Lease Income and Growth Fund XX Limited Partnership, an affiliate of the Partnership. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Continued) (5) INVESTMENTS IN REAL ESTATE - (Continued) Subsequent to June 30, 2003, the lessee of the Razzoo's restaurant in Austin, Texas notified the Partnership that they are experiencing financial difficulty and may not be able to pay future rents. However, rents are current through August 31, 2003 and the Partnership holds a personal guarantee from the majority shareholder of the lessee for payment of all rents. The personal guarantee expires on June 27, 2004. Due to this notification, the Partnership is evaluating the lease and property value and has decided that it is premature to recognize an impairment loss at this time. It is reasonably possible that this decision may change in the future. At June 30, 2003, the book value of the Razzoo's property owned by the Partnership is $1,466,497. (6) PAYABLE TO AEI FUND MANAGEMENT, INC. - AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership. The payable to AEI Fund Management represents the balance due for those services. This balance is non-interest bearing and unsecured and is to be paid in the normal course of business. (7) DISCONTINUED OPERATIONS - During the first six months of 2003, the Partnership sold the Children's World daycare center in Houston, Texas, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,056,594, which resulted in a net gain of $279,298. The total cost and related accumulated depreciation of the interests sold was $892,219 and $114,923, respectively. During the first six months of 2003, the Partnership sold its 23% interest in the Champps Americana restaurant in Centerville, Ohio, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,314,145, which resulted in a net gain of $476,562. The total cost and related accumulated depreciation of the interests sold was $924,843 and $87,260, respectively. AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (Continued) (7) DISCONTINUED OPERATIONS - (Continued) The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The results of discontinued operations are as follows: Three Months Ended Six Months Ended 6/30/03 6/30/02 6/30/03 6/30/02 Rental Income $ 13,902 $ 44,801 $ 58,703 $ 89,031 Property Management Expenses (557) (199) (904) (393) Depreciation (3,572) (12,712) (16,283) (25,422) Gain on Disposal of Real Estate 755,860 0 755,860 0 ------- ------- ------- ------- Income from Discontinued Operations $ 765,633 $ 31,890 $797,376 $ 63,216 ======= ======= ======= ======= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. The Management's Discussion and Analysis contains various "forward looking statements" within the meaning of federal securities laws which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, taxation levels, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters. These, and other forward looking statements made by the Partnership, must be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following: - Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate; - the federal income tax consequences of rental income, deductions, gain on sales and other items and the affects of these consequences for the Partners; - resolution by the General Partners of conflicts with which they may be confronted; - the success of the General Partners of locating properties with favorable risk return characteristics; - the effect of tenant defaults; and - the condition of the industries in which the tenants of properties owned by the Partnership operate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) The Application of Critical Accounting Policies The preparation of the Partnership's financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates these estimates on an ongoing basis, including those related to the carrying value of real estate and the allocation by AEI Fund Management, Inc. of expenses to the Partnership as opposed to other funds they manage. The Partnership purchases properties and records them in the financial statements at the lower of cost or estimated realizable value. The Partnership initially records the properties at cost (including capitalized acquisition expenses). The Partnership is required to periodically evaluate the carrying value of properties to determine whether their realizable value has declined. For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property's probability-weighted cash flows to its current carrying value. For properties held for sale, management determines whether impairment has occurred by comparing the property's estimated fair value less cost to sell to its current carrying value. If the carrying value is greater than the realizable value, an impairment loss is recorded to reduce the carrying value of the property to its realizable value. A change in these assumptions or analysis could cause material changes in the carrying value of the properties. AEI Fund Management Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund's affairs. They also allocate expenses at the end of each month that are not directly related to a fund's operations based upon the number of investors in the fund and the fund's capitalization relative to other funds they manage. The Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement. Management of the Partnership has discussed the development and selection of the above accounting estimates and the management discussion and analysis disclosures regarding them with the managing partner of the Partnership. Results of Operations Management's discussion of the results of operations, liquidity and capital resources for the six months ended June 30, 2003 and 2002 includes comparisons of total rental income, expenses and gains (losses) on sales of real estate resulting from both Continuing and Discontinued Operations. Reference should be made to Note 7 of the Financial Statements for a summary of the components of Discontinued Operations. For the six months ended June 30, 2003 and 2002, the Partnership recognized rental income of $486,300 and $613,139, respectively. During the same periods, the Partnership earned interest income of $35,450 and $5,415, respectively. In 2003, rental income decreased due to property sales. This decrease in rental income was partially offset by additional rent received from one property acquisition in 2002 and a rent increase on one property. In 2003, interest income increased due to the Partnership receiving interest from construction advances and having more money invested in a money market account due to property sales. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) During the six months ended June 30, 2003 and 2002, the Partnership paid Partnership administration expenses to affiliated parties of $79,212 and $93,962, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and correspondence to the Limited Partners. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $35,638 and $28,733, respectively. These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit and accounting costs, taxes, insurance and other property costs. As of June 30, 2003, the Partnership's annualized cash distribution rate was 7.0%, based on the Adjusted Capital Contribution. Pursuant to the Partnership Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Partners and 3% to the General Partners. Subsequent to June 30, 2003, the lessee of the Razzoo's restaurant in Austin, Texas notified the Partnership that they are experiencing financial difficulty and may not be able to pay future rents. However, rents are current through August 31, 2003 and the Partnership holds a personal guarantee from the majority shareholder of the lessee for payment of all rents. The personal guarantee expires on June 27, 2004. Due to this notification, the Partnership is evaluating the lease and property value and has decided that it is premature to recognize an impairment loss at this time. It is reasonably possible that this decision may change in the future. At June 30, 2003, the book value of the Razzoo's property owned by the Partnership is $1,466,497. Inflation has had a minimal effect on income from operations. Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases. In addition, leases may contain rent clauses which entitle the Partnership to receive additional rent in future years if gross receipts for the property exceed certain specified amounts. Increases in sales volumes of the tenants, due to inflation and real sales growth, may result in an increase in rental income over the term of the leases. Inflation also may cause the real estate to appreciate in value. However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions. Liquidity and Capital Resources During the six months ended June 30, 2003, the Partnership's cash balances increased $2,709,828 as a result of cash generated from the sale of property, which was partially offset by cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities. Net cash provided by operating activities decreased from $521,646 in 2002 to $362,122 in 2003 as a result of a decrease in total rental and interest income in 2003 and net timing differences in the collection of payments from the lessees and the payment of expenses. The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate. During the six months ended June 30, 2003 and 2002, the Partnership generated cash flow from the sale of real estate of $3,870,225 and $440,406, respectively. During the six months ended June 30, 2003, the Partnership expended $859,857, to invest in real properties (inclusive of acquisition expenses) as the Partnership reinvested cash generated from property sales. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On January 1, 2002, the Partnership owned 64.4916% of the Hollywood Video store in Saraland, Alabama. In 2002, the Partnership sold 61.4116% of the property, in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $896,350, which resulted in a net gain of $120,988. The total cost and related accumulated depreciation of the interests sold was $846,185 and $70,823, respectively. For the six months ended June 30, 2002, the net gain was $-0-. Through December 31, 2002, the Partnership sold 38.0038% of the Children's World in Golden, Colorado, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $790,102, which resulted in a net gain of $164,893. The total cost and related accumulated depreciation of the interests sold was $638,318 and $13,109, respectively. For the six months ended June 30, 2002, the net gain was $-0-. During 2002, the Partnership sold 39.1271% of the TGI Friday's restaurant, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $789,247, which resulted in a net gain of $208,061. The total cost and related accumulated depreciation of the interests sold was $653,564 and $72,378, respectively. For the six months ended June 30, 2002, the net gain was $114,370. Through June 30, 2003, the Partnership sold 24.6846% of the Children's World daycare center in Plainfield, Illinois, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $450,673, which resulted in a net gain of $103,162. The total cost and related accumulated depreciation of the interests sold was $363,531 and $16,020, respectively. For the six months ended June 30, 2003 and 2002, the net gain was $53,648 and $-0-, respectively. During the first six months of 2003, the Partnership sold the Children's World daycare center in Houston, Texas, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,056,594, which resulted in a net gain of $279,298. The total cost and related accumulated depreciation of the interests sold was $892,219 and $114,923, respectively. During the first six months of 2003, the Partnership sold its 23% interest in the Champps Americana restaurant in Centerville, Ohio in two separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,314,145, which resulted in a net gain of $476,562. The total cost and related accumulated depreciation of the interests sold was $924,843 and $87,260, respectively. During the first six months of 2003, the Partnership sold 81.7389% of the Arby's restaurant, in four separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,279,056, which resulted in a net gain of $244,402. The total cost and related accumulated depreciation of the interests sold was $1,138,290 and $103,636, respectively. Subsequent to June 30, 2003, the Partnership sold 17.6734% of the Arby's restaurant, to an unrelated third party. The Partnership received net sale proceeds of approximately $283,000, which resulted in a net gain of approximately $61,000. During the first six months of 2003 and 2002, the Partnership distributed $262,626 and $60,606 of net sale proceeds to the Limited and General Partners as part of their regular quarterly distributions which represented a return of capital of $15.82 and $3.63 per Limited Partnership Unit, respectively. The remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On December 6, 2002, the Partnership purchased a 50% interest in a parcel of land in West Chester, Ohio for $476,105, including acquisition expenses. The Partnership obtained title to the land in the form of an undivided fee simple interest in the 50% interest purchased. The land is leased to Champps Operating Corporation (Champps) under a Lease Agreement with a primary term of 20 years and annual rental payments of $50,600. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership will advance funds to Champps for the construction of a Champps Americana restaurant on the site. Pursuant to the Lease, any improvements to the land during the term of the Lease become the property of the lessor. Through June 30, 2003, the Partnership had advanced $860,663 for the construction of the property and was charging interest on the advances at a rate of 10.0%. The Partnership's share of the total purchase price, including the cost of the land, will be approximately $1,750,000. After the construction is complete, the Lease Agreement will be amended to require annual rental payments of approximately $175,000. The remaining interest in the property is owned by AEI Net Lease Income and Growth Fund XX Limited Partnership, an affiliate of the Partnership. The Partnership's primary use of cash flow is distribution and redemption payments to Partners. The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first ten days after the end of each quarter. The Partnership attempts to maintain a stable distribution rate from quarter to quarter. Redemption payments are paid to redeeming Partners on a semi-annual basis. The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership. Such Units may be acquired at a discount. The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year. In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership. On April 1, 2003, five Limited Partners redeemed a total of 102.29 Partnership Units for $76,601 in accordance with the Partnership Agreement. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, 23 Limited Partners redeemed a total of 400.93 Partnership Units for $306,536. The redemptions increase the remaining Limited Partner's ownership interest in the Partnership. The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis. ITEM 3. CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of the Partnership are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms. (b) Changes in internal controls There were no significant changes made in the Partnership's internal controls during the most recent period covered by this report that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. PART II - OTHER INFORMATION (Continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits - Description 31.1 Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports filed on Form 8-K - None. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 8, 2003 AEI Income & Growth Fund XXII Limited Partnership By: AEI Fund Management XXI, Inc. Its: Managing General Partner By: /s/ Robert P. Johnson Robert P. Johnson President (Principal Executive Officer) By: /s/ Patrick W. Keene Patrick W. Keene Chief Financial Officer (Principal Accounting Officer)