10QSB 1 q213-02.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, 2002 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.) 1300 Minnesota World Trade Center, 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, 2002 and December 31, 2001 Statements for the Periods ended September 30, 2002 and 2001: 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. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures Certifications AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP BALANCE SHEET SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (Unaudited) ASSETS 2002 2001 CURRENT ASSETS: Cash and Cash Equivalents $ 5,045,472 $ 4,460,840 Receivables 0 9,567 ----------- ----------- Total Current Assets 5,045,472 4,470,407 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 4,728,124 4,976,315 Buildings and Equipment 10,433,312 9,175,172 Accumulated Depreciation (1,366,814) (1,418,203) ----------- ----------- 13,794,622 12,733,284 Real Estate Held for Sale 0 846,124 ----------- ----------- Net Investments in Real Estate 13,794,622 13,579,408 ----------- ----------- Total Assets $18,840,094 $18,049,815 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 102,792 $ 37,491 Distributions Payable 405,719 405,719 Unearned Rent 237 0 ----------- ----------- Total Current Liabilities 508,748 443,210 ----------- ----------- PARTNERS' CAPITAL: General Partners 21,179 13,932 Limited Partners, $1,000 Unit Value; 24,000 Units authorized and issued; 23,235 Units outstanding 18,310,167 17,592,673 ----------- ----------- Total Partners' Capital 18,331,346 17,606,605 ----------- ----------- Total Liabilities and Partners' Capital $18,840,094 $18,049,815 =========== =========== 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 9/30/02 9/30/01 9/30/02 9/30/01 INCOME: Rent $ 425,700 $ 424,785 $ 1,187,531 $ 1,371,592 Investment Income 14,066 20,205 53,473 61,048 --------- --------- ----------- ----------- Total Income 439,766 444,990 1,241,004 1,432,640 --------- --------- ----------- ----------- EXPENSES: Partnership Administration - Affiliates 54,290 82,427 198,789 220,151 Partnership Administration and Property Management - Unrelated Parties 11,769 10,918 49,101 24,379 Depreciation 113,249 121,520 305,024 366,704 Real Estate Impairment 0 295,354 0 295,354 --------- --------- ----------- ----------- Total Expenses 179,308 510,219 552,914 906,588 --------- --------- ----------- ----------- OPERATING INCOME (LOSS) 260,458 (65,229) 688,090 526,052 GAIN ON SALE OF REAL ESTATE 603,426 494,429 1,263,914 945,049 --------- --------- ----------- ----------- NET INCOME $ 863,884 $ 429,200 $ 1,952,004 $ 1,471,101 ========= ========= =========== =========== NET INCOME ALLOCATED: General Partners $ 8,639 $ 16,292 $ 19,520 $ 38,711 Limited Partners 855,245 412,908 1,932,484 1,432,390 --------- --------- ----------- ----------- $ 863,884 $ 429,200 $ 1,952,004 $ 1,471,101 ========= ========= =========== =========== NET INCOME PER LIMITED PARTNERSHIP UNIT (23,235 and 23,322 weighted average Units outstanding in 2002 and 2001, respectively) $ 36.81 $ 17.70 $ 83.17 $ 61.42 ========= ========= =========== =========== 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 PERIODS ENDED SEPTEMBER 30 (Unaudited) 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,952,004 $ 1,471,101 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 305,024 366,704 Real Estate Impairment 0 295,354 Gain on Sale of Real Estate (1,263,914) (945,049) (Increase) Decrease in Receivables 9,567 (1,071) Increase (Decrease) in Payable to AEI Fund Management, Inc. 65,301 (61,934) Increase in Unearned Rent 237 80,450 ----------- ----------- Total Adjustments (883,785) (265,546) ----------- ----------- Net Cash Provided By Operating Activities 1,068,219 1,205,555 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (4,140,223) (2,174,765) Proceeds from Sale of Real Estate 4,883,899 3,152,532 Payments Received on Short-Term Note Receivable 0 675,920 ----------- ----------- Net Cash Provided By Investing Activities 743,676 1,653,687 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Distributions Payable 0 15,025 Distributions to Partners (1,227,263) (1,212,110) ----------- ----------- Net Cash Used For Financing Activities (1,227,263) (1,197,085) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 584,632 1,662,157 CASH AND CASH EQUIVALENTS, beginning of period 4,460,840 1,388,156 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 5,045,472 $ 3,050,313 =========== =========== 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, 2000 $(38,243) $17,132,557 $17,094,314 23,322.18 Distributions (12,121) (1,199,989) (1,212,110) Net Income 38,711 1,432,390 1,471,101 -------- ----------- ----------- ----------- BALANCE, September 30, 2001 $(11,653) $17,364,958 $17,353,305 23,322.18 ======== =========== =========== =========== BALANCE, December 31, 2001 $ 13,932 $17,592,673 $17,606,605 23,235.35 Distributions (12,273) (1,214,990) (1,227,263) Net Income 19,520 1,932,484 1,952,004 -------- ----------- ----------- ----------- BALANCE, September 30, 2002 $ 21,179 $18,310,167 $18,331,346 23,235.35 ======== =========== =========== =========== 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, 2002 (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 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 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 SEPTEMBER 30, 2002 (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) Short-Term Note Receivable - On August 2, 2000, the Partnership received a Contract for Deed from an affiliate of the buyer of the Media Play store in Apple Valley, Minnesota. The Note bore interest at 9% and was secured by the land, building and equipment. As of December 31, 2000, the Partnership's share of outstanding principal due on the Note was $675,920. On January 16, 2001, the Partnership received the outstanding principal and accrued interest on the Note. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Continued) (4) Investments in Real Estate - Through December 31, 2001, the Partnership sold its interest in the Champps Americana restaurant in Columbus, Ohio, in eleven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,295,174, which resulted in a total net gain of $631,607. The total cost and related accumulated depreciation of the interests sold was $1,808,880 and $145,313, respectively. For the nine months ended September 30, 2001, the net gain was $289,679. Through September 30, 2002, the Partnership sold its interest in the Champps Americana restaurant in Schaumburg, Illinois, in thirteen separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,892,414, which resulted in a total net gain of $838,268. The total cost and related accumulated depreciation of the interests sold was $2,256,461 and $202,315, respectively. For the nine months ended September 30, 2002 and 2001, the net gain was $16,738 and $605,992, respectively. Through September 30, 2002, the Partnership sold 86.6082% of the Champps Americana restaurant in Livonia, Michigan, in eighteen separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $4,765,601, which resulted in a net gain of $1,631,869. The total cost and related accumulated depreciation of the interests sold was $3,594,292 and $460,560, respectively. For the nine months ended September 30, 2002, the net gain was $1,208,486. Subsequent to September 30, 2002, the Partnership sold an additional 8.5171% of the Champps Americana restaurant in Livonia, Michigan, in two separate transactions, to unrelated third parties. The Partnership received net sale proceeds of approximately $468,000, which resulted in a net gain of approximately $166,000. During the first nine months of 2002, the Partnership distributed $234,149 of the net sale proceeds to the Limited and General Partners as part of their regular quarterly distributions which represented a return of capital of $9.98 per Limited Partnership Unit. The remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. On March 30, 2001, the Partnership purchased a Children's World daycare center in Mundelein, Illinois for $1,618,824. The property is leased to ARAMARK Educational Resources, Inc. under a Lease Agreement with a primary term of 15 years and annual rental payments of $153,710. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Continued) (4) Investments in Real Estate - (Continued) On March 8, 2001, the Partnership purchased a 25% interest in a parcel of land in Austin, Texas for $283,000. The land is leased to Kona Restaurant Group, Inc. (KRG) under a Lease Agreement with a primary term of 17 years and annual rental payments of $29,715. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to KRG for the construction of a Johnny Carino's restaurant on the site. The Partnership charged interest on the advances at a rate of 10.5%. On September 26, 2001, after the development was completed, the Lease Agreement was amended to require annual rental payments of $60,191. The Partnership's share of the total acquisition costs, including the cost of the land, was $571,902. The remaining interests in the property were purchased by AEI Real Estate Fund 85-A Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, and AEI Income & Growth Fund 23 LLC, affiliates of the Partnership. In the third quarter of 2002, the Partnership sold 23.8161% of the Johnny Carino's restaurant in Austin, Texas, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $603,681, which resulted in a net gain of $68,672. The total cost and related accumulated depreciation of the interests sold was $544,819 and $9,810, respectively. On June 14, 2002, the Partnership purchased three Children's World daycare centers located in Andover, Minnesota, Ballwin, Missouri and Kimberly, Wisconsin. The properties were purchased for $1,264,207, $1,517,777 and $1,358,239, respectively. The properties are leased to ARAMARK Educational Resources, Inc. under Lease Agreements with primary terms of 15 years and annual rental payments of $120,204, $144,113 and $129,087, respectively. On October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $810,000. The land is leased to SFG Farmington I Limited Partnership (SFG) under a Lease Agreement with a primary term of 17 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 will advance funds to SFG for the construction of a Johnny Carino's restaurant on the site. The total purchase price, including the cost of the land, will be approximately $2,290,000. After the construction is complete, the Lease Agreement will be amended to require annual rental payments of approximately $240,450. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Continued) (4) Investments in Real Estate - (Continued) In May, 2001, Huntington Restaurants Group, Inc. (HRG), the lessee of the Denny's Restaurant in Covington, Louisiana notified the Partnership that it was experiencing financial problems and would not make the lease payments while they worked out a plan which would enable them to continue operations without seeking bankruptcy protection. In October, 2001, the Partnership received an offer to buy the restaurant for $900,000 from an unrelated third party. Effective December 10, 2001, the Partnership terminated the Lease to accommodate the sale. Through this date, HRG owed $80,316 of rent, which will not be collected and was not accrued for financial reporting purposes. In the third quarter of 2001, a charge to operations for real estate impairment of $295,354 was recognized, which was the difference between the book value at September 30, 2001 of $1,145,354 and the estimated net sales proceeds of $850,000. The charge was recorded against the cost of the building and equipment. At December 31, 2001, the land and building were classified as Real Estate Held for Sale. On February 19, 2002, the sale closed with the Partnership receiving net sale proceeds of $816,143 which resulted in a net loss of $29,982. (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. 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. 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 some 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) 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, 2002 and 2001, the Partnership recognized rental income of $1,187,531 and $1,371,592, respectively. During the same periods, the Partnership earned investment income of $53,473 and $61,048, respectively. In 2002, rental income decreased as a result of the loss of rent from the Denny's restaurant and the property sales discussed below. These decreases in rental income were partially offset by additional rent received from five property acquisitions in 2001 and 2002, and rent increases on four properties. In May, 2001, Huntington Restaurants Group, Inc. (HRG), the lessee of the Denny's Restaurant in Covington, Louisiana notified the Partnership that it was experiencing financial problems and would not make the lease payments while they worked out a plan which would enable them to continue operations without seeking bankruptcy protection. In October, 2001, the Partnership received an offer to buy the restaurant for $900,000 from an unrelated third party. Effective December 10, 2001, the Partnership terminated the Lease to accommodate the sale. Through this date, HRG owed $80,316 of rent, which will not be collected and was not accrued for financial reporting purposes. In the third quarter of 2001, a charge to operations for real estate impairment of $295,354 was recognized, which was the difference between the book value at September 30, 2001 of $1,145,354 and the estimated net sales proceeds of $850,000. The charge was recorded against the cost of the building and equipment. At December 31, 2001, the land and building were classified as Real Estate Held for Sale. On February 19, 2002, the sale closed with the Partnership receiving net sale proceeds of $816,143 which resulted in a net loss of $29,982. During the nine months ended September 30, 2002 and 2001, the Partnership paid Partnership administration expenses to affiliated parties of $198,789 and $220,151, 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 $49,101 and $24,379, 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 September 30, 2002, the Partnership's annualized cash distribution rate was 6.75%, based on the Adjusted Capital Contribution. Distributions of Net Cash Flow to the General Partners were subordinated to the Limited Partners as required in the Partnership Agreement. As a result, 99% of distributions were allocated to Limited Partners and 1% to the General Partners. 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Liquidity and Capital Resources During the nine months ended September 30, 2002, the Partnership's cash balances increased $584,632 mainly as the result of cash generated from the sale of property, which was partially offset by cash used to purchase property. Net cash provided by operating activities decreased from $1,205,555 in 2001 to $1,068,219 in 2002 as a result of a decrease in income and an increase in Partnership administration expenses in 2002, which were partially offset by 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, 2002 and 2001, the Partnership generated cash flow from the sale of real estate of $4,883,899 and $3,152,532, respectively. During the same periods, the Partnership expended $4,140,223 and $2,174,765, respectively, to invest in real properties (inclusive of acquisition expenses) as the Partnership reinvested cash generated from property sales. Through December 31, 2001, the Partnership sold its interest in the Champps Americana restaurant in Columbus, Ohio, in eleven separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,295,174, which resulted in a total net gain of $631,607. The total cost and related accumulated depreciation of the interests sold was $1,808,880 and $145,313, respectively. For the nine months ended September 30, 2001, the net gain was $289,679. Through September 30, 2002, the Partnership sold its interest in the Champps Americana restaurant in Schaumburg, Illinois, in thirteen separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,892,414, which resulted in a total net gain of $838,268. The total cost and related accumulated depreciation of the interests sold was $2,256,461 and $202,315, respectively. For the nine months ended September 30, 2002 and 2001, the net gain was $16,738 and $605,992, respectively. Through September 30, 2002, the Partnership sold 86.6082% of the Champps Americana restaurant in Livonia, Michigan, in eighteen separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $4,765,601, which resulted in a net gain of $1,631,869. The total cost and related accumulated depreciation of the interests sold was $3,594,292 and $460,560, respectively. For the nine months ended September 30, 2002, the net gain was $1,208,486. Subsequent to September 30, 2002, the Partnership sold an additional 8.5171% of the Champps Americana restaurant in Livonia, Michigan, in two separate transactions, to unrelated third parties. The Partnership received net sale proceeds of approximately $468,000, which resulted in a net gain of approximately $166,000. During the first nine months of 2002, the Partnership distributed $234,149 of the net sale proceeds to the Limited and General Partners as part of their regular quarterly distributions which represented a return of capital of $9.98 per Limited Partnership Unit. The remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future. On March 30, 2001, the Partnership purchased a Children's World daycare center in Mundelein, Illinois for $1,618,824. The property is leased to ARAMARK Educational Resources, Inc. under a Lease Agreement with a primary term of 15 years and annual rental payments of $153,710. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) On March 8, 2001, the Partnership purchased a 25% interest in a parcel of land in Austin, Texas for $283,000. The land is leased to Kona Restaurant Group, Inc. (KRG) under a Lease Agreement with a primary term of 17 years and annual rental payments of $29,715. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to KRG for the construction of a Johnny Carino's restaurant on the site. The Partnership charged interest on the advances at a rate of 10.5%. On September 26, 2001, after the development was completed, the Lease Agreement was amended to require annual rental payments of $60,191. The Partnership's share of the total acquisition costs, including the cost of the land, was $571,902. The remaining interests in the property were purchased by AEI Real Estate Fund 85-A Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, and AEI Income & Growth Fund 23 LLC, affiliates of the Partnership. In the third quarter of 2002, the Partnership sold 23.8161% of the Johnny Carino's restaurant in Austin, Texas, in three separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $603,681, which resulted in a net gain of $68,672. The total cost and related accumulated depreciation of the interests sold was $544,819 and $9,810, respectively. On June 14, 2002, the Partnership purchased three Children's World daycare centers located in Andover, Minnesota, Ballwin, Missouri and Kimberly, Wisconsin. The properties were purchased for $1,264,207, $1,517,777 and $1,358,239, respectively. The properties are leased to ARAMARK Educational Resources, Inc. under Lease Agreements with primary terms of 15 years and annual rental payments of $120,204, $144,113 and $129,087, respectively. On October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $810,000. The land is leased to SFG Farmington I Limited Partnership (SFG) under a Lease Agreement with a primary term of 17 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 will advance funds to SFG for the construction of a Johnny Carino's restaurant on the site. The total purchase price, including the cost of the land, will be approximately $2,290,000. After the construction is complete, the Lease Agreement will be amended to require annual rental payments of approximately $240,450. 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 week 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. Effective April 1, 2001, the Partnership's distribution rate was increased from 6.5% to 6.75%. As a result, distributions were higher in 2002 when compared to 2001. 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) On October 1, 2002, eight Limited Partners redeemed a total of 210.02 Partnership Units for $156,938 in accordance with the Partnership Agreement. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, thirty- three Limited Partners redeemed a total of 764.65 Partnership Units for $647,929. The redemptions increase the remaining Limited Partners' 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)/15d-14(c)] under the Exchange Act) related to the Partnership as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the Evaluation Date, the disclosure controls and procedures are effective in timely alerting them to the material information relating to the Partnership required to be included in periodic SEC filings. (b) Changes in internal controls There were no significant changes made in the Partnership's internal controls during the period covered by this report or, to the Managing General Partner's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. 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 10.1 Development Financing Agreement dated October 31, 2002 between the Partnership and SFG Farmington I Limited Partnership relating to the property at 3500 East Main Street, Farmington, New Mexico. 10.2 Net Lease Agreement dated October 31, 2002 between the Partnership and SFG Farmington I Limited Partnership. relating to the property at 3500 East Main Street, Farmington, New Mexico. 99.1 Certification of Chief Executive Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of 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: November 1, 2002 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/ Mark E Larson Mark E. Larson Chief Financial Officer (Principal Accounting Officer) CERTIFICATIONS I, Robert P. Johnson, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge; the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have; a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 1, 2002 /s/ Robert P Johnson Robert P. Johnson, President AEI Fund Management XXI, Inc. Managing General Partner CERTIFICATIONS I, Mark E. Larson, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge; the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have; a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 1, 2002 /s/ Mark E Larson Mark E. Larson, Chief Financial Officer AEI Fund Management XXI, Inc. Managing General Partner