10QSB 1 q213-04.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: September 30, 2004 Commission file number: 0-29274 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP (Exact Name of Small Business Issuer as Specified in its Charter) State of Minnesota 41-1789725 (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 XXI LIMITED PARTNERSHIP INDEX PART I. Financial Information Item 1. Balance Sheet as of September 30, 2004 and December 31, 2003 Statements for the Periods ended September 30, 2004 and 2003: Income Cash Flows Changes in Partners' Capital Notes to Financial Statements Item 2. Management's Discussion and Analysis Item 3. Controls and Procedures PART II. Other Information Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits Signatures AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP BALANCE SHEET SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (Unaudited) ASSETS 2004 2003 CURRENT ASSETS: Cash and Cash Equivalents $ 2,536,063 $ 6,018,352 Receivables 26,045 579 ----------- ----------- Total Current Assets 2,562,108 6,018,931 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 5,556,728 4,770,063 Buildings and Equipment 10,187,122 10,063,261 Accumulated Depreciation (1,089,819) (862,718) ----------- ----------- 14,654,031 13,970,606 Real Estate Held for Sale 2,107,185 264,200 ----------- ----------- Net Investments in Real Estate 16,761,216 14,234,806 ----------- ----------- Total Assets $19,323,324 $20,253,737 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 33,849 $ 160,512 Distributions Payable 405,911 951,129 Unearned Rent 12,769 0 ----------- ----------- Total Current Liabilities 452,529 1,111,641 ----------- ----------- PARTNERS' CAPITAL: General Partners 26,275 28,987 Limited Partners, $1,000 per Unit; 24,000 Units authorized and issued; 22,907 Units outstanding 18,844,520 19,113,109 ----------- ----------- Total Partners' Capital 18,870,795 19,142,096 ----------- ----------- Total Liabilities and Partners'Capital $19,323,324 $20,253,737 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30 (Unaudited) Three Months Ended Nine Months Ended 9/30/04 9/30/03 9/30/04 9/30/03 RENTAL INCOME $ 335,232 $ 218,463 $ 981,450 $ 646,145 EXPENSES: Partnership Administration - Affiliates 53,563 60,314 162,083 167,388 Partnership Administration and Property Management - Unrelated Parties 9,112 3,448 27,110 19,102 Depreciation 94,720 61,985 276,080 181,427 ---------- ----------- ----------- ---------- Total Expenses 157,395 125,747 465,273 367,917 ---------- ----------- ----------- ---------- OPERATING INCOME 177,837 92,716 516,177 278,228 OTHER INCOME: Interest Income 11,836 13,512 36,011 68,062 Gain on Sale of Real Estate 0 0 137,068 0 ---------- ----------- ----------- ---------- Total Other Income 11,836 13,512 173,079 68,062 ---------- ----------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS 189,673 106,228 689,256 346,290 Income from Discontinued Operations 57,328 684,162 266,721 1,422,125 ---------- ----------- ----------- ---------- NET INCOME $ 247,001 $ 790,390 $ 955,977 $1,768,415 ========== =========== =========== ========== NET INCOME ALLOCATED: General Partners $ 2,470 $ 7,904 $ 9,560 $ 17,684 Limited Partners 244,531 782,486 946,417 1,750,731 ---------- ----------- ----------- ---------- $ 247,001 $ 790,390 $ 955,977 $1,768,415 ========== =========== =========== ========== INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 8.19 $ 4.57 $ 29.79 $ 14.89 Discontinued Operations 2.48 29.41 11.53 61.15 ---------- ----------- ----------- ---------- Total $ 10.67 $ 33.98 $ 41.32 $ 76.04 ========== =========== =========== ========== Weighted Average Units Outstanding 22,907 23,025 22,907 23,025 ========== =========== =========== ========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30 (Unaudited) 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 955,977 $ 1,768,415 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 311,230 312,160 Gain on Sale of Real Estate (265,704) (993,576) (Increase) Decrease in Receivables (25,466) 15,194 Increase (Decrease) in Payable to AEI Fund Management, Inc. (126,663) 40,946 Increase in Unearned Rent 12,769 26,541 ----------- ----------- Total Adjustments (93,834) (598,735) ----------- ----------- Net Cash Provided By Operating Activities 862,143 1,169,680 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (3,839,008) (3,044,950) Proceeds from Sale of Real Estate 1,267,072 3,395,778 ----------- ----------- Net Cash Provided By (Used For) Investing Activities (2,571,936) 350,828 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in Distributions Payable (545,218) (242,423) Distributions to Partners (1,227,278) (1,227,282) ----------- ----------- Net Cash Used For Financing Activities (1,772,496) (1,469,705) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,482,289) 50,803 CASH AND CASH EQUIVALENTS, beginning of period 6,018,352 4,653,629 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 2,536,063 $ 4,704,432 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIODS ENDED SEPTEMBER 30 (Unaudited) Limited Partnership General Limited Units Partners Partners Total Outstanding BALANCE, December 31, 2002 $ 17,954 $18,020,886 $18,038,840 23,025.33 Distributions (12,273) (1,215,009) (1,227,282) Net Income 17,684 1,750,731 1,768,415 -------- ----------- ----------- ---------- BALANCE, September 30, 2003 $ 23,365 $18,556,608 $18,579,973 23,025.33 ======== =========== =========== ========== BALANCE, December 31, 2003 $ 28,987 $19,113,109 $19,142,096 22,907.49 Distributions (12,272) (1,215,006) (1,227,278) Net Income 9,560 946,417 955,977 -------- ----------- ----------- ---------- BALANCE, September 30, 2004 $ 26,275 $18,844,520 $18,870,795 22,907.49 ======== =========== =========== ========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (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 XXI 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 director of AFM, serves as the Individual General Partner. AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder. AEI Fund Management, Inc. (AEI), an affiliate of AFM, 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 April 14, 1995 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted. On January 31, 1997, the offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $24,000,000 and $1,000, respectively. During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. Distributions to Limited Partners will be made pro rata by Units. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (2) Organization - (Continued) 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 10% 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. 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 10% 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) Reclassification - Certain items in the prior year's financial statements have been reclassified to conform to 2004 presentation. These reclassifications had no effect on Partners' capital, net income or cash flows. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (4) Investments in Real Estate - On September 19, 2003, the Partnership purchased a 37% interest in a Winn-Dixie store in Panama City, Florida for $1,714,965. The property is leased to Winn-Dixie Montgomery, Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $138,380. The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Income & Growth Fund 24 LLC, affiliates of the Partnership. Through March 31, 2004, the Partnership sold 16.5975% of the Winn-Dixie store in Panama City, Florida, in four separate transactions, to unrelated third parties. The Partnership received net sale proceeds of $900,843, which resulted in a net gain of $139,707. The cost and related accumulated depreciation of the interests sold was $769,300 and $8,164, respectively. For the nine months ended September 30, 2004 and 2003, the net gain was $137,068 and $-0-, respectively. On December 30, 2003, the Partnership purchased a Johnny Carino's restaurant in Laredo, Texas for $2,605,079. The property is leased to Kona Restaurant Group, Inc. under a Lease Agreement with a primary term of 13 years and annual rental payments of $215,646. On February 9, 2004, the Partnership purchased a 50% interest in a Jared Jewelry store in Hanover, Maryland for $1,984,828. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $153,228. The remaining interest in the property was purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Partnership. In March 2004, the Partnership entered into an agreement to purchase a 50% interest in an Eckerd drug store in Buffalo, New York for approximately $1,606,500. In May 2004, by mutual agreement of the parties, the agreement was terminated. On September 20, 2004, the Partnership purchased a 40% interest in an Eckerd drug store in Utica, New York for $1,843,884. The property is leased to Eckerd Corporation under a Lease Agreement with a primary term of 20 years and annual rental payments of $149,671. The remaining interest in the property was purchased by AEI Accredited Investor Fund 2002 Limited Partnership, an affiliate of the Partnership. (5) 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Operations - During the first nine months of 2003, the Partnership sold the Children's World in Mundelein, Illinois, in seven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,010,839, which resulted in a net gain of $495,127. The total cost and related accumulated depreciation of the interests sold was $1,618,824 and $103,112, respectively. During the third quarter of 2003, the Partnership sold its 25% interest in the Champps Americana restaurant in Centerville, Ohio, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,384,939, which resulted in a net gain of $498,449. The total cost and related accumulated depreciation of the interests sold was $984,426 and $97,936, respectively. During the fourth quarter of 2003, the Partnership sold 37.0128% of the Garden Ridge retail store in Pineville, North Carolina, in eleven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $3,968,116, which resulted in a net gain of $1,347,739. The total cost and related accumulated depreciation of the interests sold was $3,310,163 and $689,786, respectively. On January 13, 2004, the Partnership sold its remaining 3.7372% interest in the Garden Ridge retail store to an unrelated third party. The Partnership received net sale proceeds of $392,836, which resulted in a net gain of $128,636. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $264,200. On October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $810,000. The Partnership obtained title to the land in the form of an undivided fee simple interest. The land is leased to SFG Farmington I Limited Partnership (SFG) under a Lease Agreement with a primary term of 20 years and annual rental payments of $85,050. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to SFG for the construction of a Johnny Carino's restaurant on the site. Pursuant to the Lease, any improvements to the land during the term of the Lease, become property of the lessor. The Partnership charged interest on the advances at a rate of 10.5%. On May 28, 2003, after the development was completed, the Lease Agreement was amended to require annual rental payments of $231,000. Total acquisition costs, including the cost of the land, were $2,183,344. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Operations - (Continued) In June 2004, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Farmington, New Mexico to an unrelated third party. Subsequent to September 30, 2004, the sale closed with the Partnership receiving net sale proceeds of approximately $2,900,000, which resulted in a net gain of approximately $793,000. At September 30, 2004, the property was classified as Real Estate Held for Sale with a book value of $2,107,185. During the first nine months of 2004 and 2003, the Partnership distributed $225,776 and $140,284 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $9.76 and $6.04 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The following are the results of discontinued operations for the periods ended September 30: Three Months Ended Nine Months Ended 9/30/04 9/30/03 9/30/04 9/30/03 Rental Income $ 57,750 $ 177,097 $ 174,504 $ 566,330 Property Management Expenses (422) (4,016) (1,269) (7,048) Depreciation 0 (44,582) (35,150) (130,733) Gain on Disposal of Real Estate 0 555,663 128,636 993,576 ---------- ---------- ---------- ---------- Income from Discontinued Operations $ 57,328 $ 684,162 $ 266,721 $1,422,125 ========== ========== ========== ========== 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. 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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 For the nine months ended September 30, 2004 and 2003, the Partnership recognized rental income from continuing operations of $981,450 and $646,145, respectively. In 2004, rental income increased as a result of additional rent received from four property acquisitions in 2003 and 2004 and rent increases on two properties. For the nine months ended September 30, 2004 and 2003, the Partnership incurred Partnership administration expenses from affiliated parties of $162,083 and $167,388, 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 $27,110 and $19,102, 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. For the nine months ended September 30, 2004 and 2003, the Partnership recognized interest income of $36,011 and $68,062, respectively. In 2004, interest income decreased due to the Partnership receiving interest from construction advances in 2003. For the nine months ended September 30, 2004, the Partnership recognized gain on sale of real estate from continuing operations of $137,068 from the sale of the Winn-Dixie store. Since the Partnership retains an ownership interest in the property, the operating results and gain on sale of the property were not classified as discontinued operations. Through March 31, 2004, the Partnership sold 16.5975% of the Winn-Dixie store in Panama City, Florida, in four separate transactions, to unrelated third parties. The Partnership received net sale proceeds of $900,843, which resulted in a net gain of $139,707. The cost and related accumulated depreciation of the interests sold was $769,300 and $8,164, respectively. For the nine months ended September 30, 2004 and 2003, the net gain was $137,068 and $-0-, respectively. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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. For the nine months ended September 30, 2004, the Partnership recognized income from discontinued operations of $266,721, representing rental income less property management expenses and depreciation of $138,085 and gain on disposal of real estate of $128,636. For the nine months ended September 30, 2003, the Partnership recognized income from discontinued operations of $1,422,125, representing rental income less property management expenses and depreciation of $428,549 and gain on disposal of real estate of $993,576. During the first nine months of 2003, the Partnership sold the Children's World in Mundelein, Illinois, in seven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,010,839, which resulted in a net gain of $495,127. The total cost and related accumulated depreciation of the interests sold was $1,618,824 and $103,112, respectively. During the third quarter of 2003, the Partnership sold its 25.0% interest in the Champps Americana restaurant in Centerville, Ohio, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,384,939, which resulted in a net gain of $498,449. The total cost and related accumulated depreciation of the interests sold was $984,426 and $97,936, respectively. During the fourth quarter of 2003, the Partnership sold 37.0128% of the Garden Ridge retail store in Pineville, North Carolina, in eleven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $3,968,116, which resulted in a net gain of $1,347,739. The total cost and related accumulated depreciation of the interests sold was $3,310,163 and $689,786, respectively. On January 13, 2004, the Partnership sold its remaining 3.7372% interest in the Garden Ridge retail store to an unrelated third party. The Partnership received net sale proceeds of $392,836, which resulted in a net gain of $128,636. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $264,200. In June 2004, the Partnership entered into an agreement to sell the Johnny Carino's restaurant in Farmington, New Mexico to an unrelated third party. Subsequent to September 30, 2004, the sale closed with the Partnership receiving net sale proceeds of approximately $2,900,000, which resulted in a net gain of approximately $793,000. At September 30, 2004, the property was classified as Real Estate Held for Sale with a book value of $2,107,185. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) In 2003 and the first quarter of 2004, the Partnership realized significant gains from the sale of property. While the real estate market is expected to remain attractive for sellers of property, there can be no assurance the Partnership will be able to achieve a similar level of sales activity or sales profitability during the remainder of 2004 due to unforeseen changes in the real estate market. In addition, it is likely the Partnership will curtail its selling activity as it is becoming more difficult to find attractive property in which to reinvest the proceeds from property sales. 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 nine months ended September 30, 2004, the Partnership's cash balances decreased $3,482,289 as a result of cash used to purchase property and distributions paid to the Partners in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property. During the nine months ended September 30, 2003, the Partnership's cash balances increased $50,803 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 $1,169,680 in 2003 to $862,143 in 2004 as a result of a decrease in total rental and interest income in 2004 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 nine months ended September 30, 2004 and 2003, the Partnership generated cash flow from the sale of real estate of $1,267,072 and $3,395,778, respectively. During the same periods, the Partnership expended $3,839,008 and $3,044,950, respectively, 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 October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $810,000. The Partnership obtained title to the land in the form of an undivided fee simple interest. The land is leased to SFG Farmington I Limited Partnership (SFG) under a Lease Agreement with a primary term of 20 years and annual rental payments of $85,050. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to SFG for the construction of a Johnny Carino's restaurant on the site. Pursuant to the Lease, any improvements to the land during the term of the Lease, become property of the lessor. The Partnership charged interest on the advances at a rate of 10.5%. On May 28, 2003, after the development was completed, the Lease Agreement was amended to require annual rental payments of $231,000. Total acquisition costs, including the cost of the land, were $2,183,344. On September 19, 2003, the Partnership purchased a 37% interest in a Winn-Dixie store in Panama City, Florida for $1,714,965. The property is leased to Winn-Dixie Montgomery, Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $138,380. The remaining interests in the property were purchased by AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Income & Growth Fund 24 LLC, affiliates of the Partnership. On December 30, 2003, the Partnership purchased a Johnny Carino's restaurant in Laredo, Texas for $2,605,079. The property is leased to Kona Restaurant Group, Inc. under a Lease Agreement with a primary term of 13 years and annual rental payments of $215,646. On February 9, 2004, the Partnership purchased a 50% interest in a Jared Jewelry store in Hanover, Maryland for $1,984,828. The property is leased to Sterling Jewelers Inc. under a Lease Agreement with a primary term of 20 years and annual rental payments of $153,228. The remaining interest in the property was purchased by AEI Net Lease Income & Growth Fund XX Limited Partnership, an affiliate of the Partnership. On September 20, 2004, the Partnership purchased a 40% interest in an Eckerd drug store in Utica, New York for $1,843,884. The property is leased to Eckerd Corporation under a Lease Agreement with a primary term of 20 years and annual rental payments of $149,671. The remaining interest in the property was purchased by AEI Accredited Investor Fund 2002 Limited Partnership, an affiliate of the Partnership. The Partnership's primary use of cash flow, other than investment in real estate, 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 in the fourth quarter of each year. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) For the nine months ended September 30, 2004 and 2003, the Partnership declared distributions of $1,227,278 and $1,227,282, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $1,215,006 and $1,215,009 and the General Partners received distributions of $12,272 and $12,273 for the periods, respectively. In December 2003, the Partnership declared a bonus distribution of $545,455 of net sale proceeds, which resulted in a higher distribution payable at December 31, 2003. During the first nine months of 2004 and 2003, the Partnership distributed $225,776 and $140,284 of net sale proceeds to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $9.76 and $6.04 per Limited Partnership Unit, respectively. The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. 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 October 1, 2004, seven Limited Partners redeemed a total of 96.24 Partnership Units for $59,064 in accordance with the Partnership Agreement. On October 1, 2003, eight Limited Partners redeemed a total of 117.84 Partnership Units for $81,076. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 41 Limited Partners redeemed 974.67 Partnership Units for $804,867. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of these redemption payments and pursuant to the Partnership Agreement, the General Partners received distributions of $597 and $819 in 2004 and 2003, respectively. 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.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) During the period covered by this report, the Partnership did not sell any equity securities that are not registered under the Securities Act of 1933. (b) Not applicable. (c) Pursuant to Section 7.7 of the Partnership Agreement, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during September of each year. The purchase price of the Units is based on a formula specified in the Partnership Agreement. Units tendered to the Partnership are redeemed on October 1st of each year subject to the following limitations. 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. During the period covered by this report, the Partnership did not purchase any Units. ITEM 3.DEFAULTS UPON SENIOR SECURITIES None. PART II - OTHER INFORMATION (Continued) ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5.OTHER INFORMATION None. ITEM 6.EXHIBITS 10.1 Assignment of Purchase Agreement dated August 16, 2004 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and AEI Fund Management, Inc. relating to the Property at 121 Herkimer Road, Utica, New York. 10.2 Assignment and Assumption of Lease dated September 20, 2004 between the Partnership, AEI Accredited Investor Fund 2002 Limited Partnership and Herkimer Rd. & Euclid Rd. Development, LLC relating to the Property at 121 Herkimer Road, Utica, New York. 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. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 10, 2004 AEI Income & Growth Fund XXI 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)