-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ErRYeonrXBYwlK4f3bzAT1MnPjZwBL7MjLDWoHrvec5CHCOeKcnwVw7TrsMo4Hgb HciHOkaGSlwiQdd2YpiwvA== 0000931755-03-000003.txt : 20030326 0000931755-03-000003.hdr.sgml : 20030325 20030326141614 ACCESSION NUMBER: 0000931755-03-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030325 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEI INCOME & GROWTH FUND XXI LTD PARTNERSHIP CENTRAL INDEX KEY: 0000931755 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 411789725 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-85076 FILM NUMBER: 03617890 BUSINESS ADDRESS: STREET 1: 1300 MINNESOTA WORLD TRADE CENTER STREET 2: 30 EAST SEVENTH ST CITY: ST PAUL STATE: MN ZIP: 55101 BUSINESS PHONE: 6122277333 MAIL ADDRESS: STREET 1: 1300 MINNESOTA WORLD TRADE CENTER STREET 2: 30 EAST SEVENTH STREET CITY: ST PAUL STATE: MN ZIP: 55101 10KSB 1 k21-0402.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended: December 31, 2002 Commission file number: 0-29274 AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP (Name of Small Business Issuer 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) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units (Title of class) 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 past 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 Check if disclosure of delinquent filers in response to Rule 405 of Regulation S-B is not contained in this Form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or and amendment to this Form 10-KSB. The Issuer's revenues for year ended December 31, 2002 were $1,660,149. As of February 28, 2003, there were 23,025.326 Units of limited partnership interest in the registrant outstanding and owned by nonaffiliates of the registrant, which Units had an aggregate market value (based solely on the price at which they were sold since there is no ready market for such Units) of $23,025,326. DOCUMENTS INCORPORATED BY REFERENCE The registrant has not incorporated any documents by reference into this report. Transitional Small Business Disclosure Format: Yes No [X] PART I ITEM 1. DESCRIPTION OF BUSINESS. AEI Income & Growth Fund XXI Limited Partnership (the "Partnership" or the "Registrant") is a limited partnership which was organized pursuant to the laws of the State of Minnesota on August 31, 1994. The registrant is comprised of AEI Fund Management XXI, Inc. (AFM) as Managing General Partner, Robert P. Johnson as the Individual General Partner, and purchasers of partnership units as Limited Partners. The Partnership offered for sale up to $24,000,000 of limited partnership interests (the "Units") (24,000 Units at $1,000 per Unit) pursuant to a registration statement effective February 1, 1995. 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 Partnership offering terminated when the maximum subscription limit of 24,000 Limited Partnership Units ($24,000,000) was reached. The Partnership was organized to acquire existing and newly constructed commercial properties located in the United States, to lease such properties to tenants under triple net leases, to hold such properties and to eventually sell such properties. From subscription proceeds, the Partnership purchased ten properties including partial interests in seven properties, at a total cost of $19,686,525. The balance of the subscription proceeds was applied to organization and syndication costs, working capital reserves and distributions, which represented a return of capital. The properties are commercial, single tenant buildings leased under triple net leases. The Partnership's properties were purchased with subscription proceeds without any indebtedness. The Partnership will not finance properties in the future to obtain proceeds for new property acquisitions. If it is required to do so, the Partnership may incur short-term indebtedness, which may be secured by a portion of the Partnership's properties, to finance day-to-day cash flow requirements (including cash flow necessary to repurchase Units). The amount of borrowings that may be secured by the properties is limited in the aggregate to 10% of the purchase price of all properties. The Partnership will not incur borrowings prior to application of the proceeds from sale of the Units, will not incur borrowings to pay distributions, and will not incur borrowings while there is cash available for distributions. The Partnership will hold its properties until the General Partners determine that the sale or other disposition of the properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell properties, the General Partners will consider factors such as potential appreciation, net cash flow and income tax considerations. In addition, certain lessees may be granted options to purchase properties after a specified portion of the lease term has elapsed. The Partnership expects to sell some or all of its properties prior to its final liquidation and to reinvest the proceeds from such sales in additional properties. The Partnership reserves the right, at the discretion of the General Partners, to either distribute proceeds from the sale of properties to the Partners or to reinvest such proceeds in additional properties, provided that sufficient proceeds are distributed to the Limited Partners to pay federal and state income taxes related to any taxable gain recognized as a result of the sale. It is anticipated that the Partnership will commence liquidation through the sale of its remaining properties twelve to fifteen years after its formation, although final liquidation may be delayed by a number of circumstances, including market conditions and seller financing of properties. ITEM 1. DESCRIPTION OF BUSINESS. (Continued) Leases Although there are variations in the specific terms of the leases, the following is a summary of the general terms of the Partnership's leases. The properties are leased to various tenants under triple net leases, which are classified as operating leases. Under a triple net lease, the lessee is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses for the property. The initial lease terms are for 15 to 20 years. The leases provide for base annual rental payments, payable in monthly installments, and contain rent clauses which entitle the Partnership to receive additional rent in future years based on stated rent increases. The leases provide the lessees with two to five five-year renewal options subject to the same terms and conditions as the initial lease. Certain lessees may be granted options to purchase the property, which would exceed the original cost. The actual sale price of a property to a lessee may or may not exceed original cost depending on market and other conditions. On August 2, 2000, the Media Play store was sold to an unrelated third party for $2,500,000. The sale agreement required $500,000 in cash and a $2,000,000 contract for deed, which bore interest at 9%. On January 16, 2001, the Partnership received its share of the outstanding principal and accrued interest on the Note. The Partnership's share of the net sale proceeds was $820,651, which resulted in a net gain of $129,813. At the time of sale, the cost and related accumulated depreciation was $833,860 and $143,022. 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 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 year ended December 31, 2001, the net gain was $289,679. Through December 31, 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 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 years ended December 31, 2002, 2001 and 2000, the net gain was $16,738, $727,695 and $93,835, respectively. Through December 31, 2002, the Partnership sold 99.8466% of the Champps Americana restaurant in Livonia, Michigan, in twenty-one separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $5,490,789, which resulted in a net gain of $1,888,226. The total cost and related accumulated depreciation of the interests sold was $4,143,694 and $541,131, respectively. For the years ended December 31, 2002 and 2001, the net gain was $1,464,843 and $423,383, respectively. ITEM 1. DESCRIPTION OF BUSINESS. (Continued) On March 8, 2000, the Partnership purchased a parcel of land in Fort Wayne, Indiana for $549,000. The land is leased to Tumbleweed, Inc. (TWI) under a Lease Agreement with a primary term of 15 years and annual rental payments of $48,038. Simultaneously with the purchase of the land, the Partnership entered into a Development Financing Agreement under which the Partnership advanced funds to TWI for the construction of a Tumbleweed restaurant on the site. Initially, the Partnership charged interest on the advances at a rate of 8.75%. Effective July 5, 2000, the interest rate was increased to 9.875%. On September 11, 2000, after the development was completed, the Lease Agreement was amended to require annual rental payments of $132,621. Total acquisition costs, including the cost of the land, were $1,334,315. 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. 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 are owned 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. During 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, $1,517,778 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 $790,227, including acquisition expenses. 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 will advance funds to SFG for the construction of a Johnny Carino's restaurant on the site. Through December 31, 2002, the Partnership had advanced $44,281 for the construction of the property and was charging interest on the advances at a rate of 10.5%. 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. ITEM 1. DESCRIPTION OF BUSINESS. (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. Major Tenants During 2002, three tenants each contributed more than ten percent of the Partnership's total rental revenue. The major tenants in aggregate contributed 88% of total rental revenue in 2002. It is anticipated that, based on minimum rental payments required under the leases, each major tenant will continue to contribute more than ten percent of rental revenue in 2003 and future years. Any failure of these major tenants could materially affect the Partnership's net income and cash distributions. Competition The Partnership is a minor factor in the commercial real estate business. There are numerous entities engaged in the commercial real estate business which have greater financial resources than the Partnership. At the time the Partnership elects to dispose of its properties, the Partnership will be in competition with other persons and entities to find buyers for its properties. Employees The Partnership has no direct employees. Management services are performed for the Partnership by AEI Fund Management, Inc., an affiliate of AFM. ITEM 2. DESCRIPTION OF PROPERTIES. Investment Objectives The Partnership's investment objectives are to acquire existing or newly-developed commercial properties throughout the United States that offer the potential for (i) regular cash distributions of lease income; (ii) growth in lease income through rent escalation provisions; (iii) preservation of capital through all-cash sale-leaseback transactions; (iv) capital growth through appreciation in the value of properties; and (v) stable property performance through long-term lease contracts. The Partnership does not have a policy, and there is no limitation, as to the amount or percentage of assets that may be invested in any one property. However, to the extent possible, the General Partners attempt to diversify the type and location of the Partnership's properties. ITEM 2. DESCRIPTION OF PROPERTIES. (Continued) Description of Properties The Partnership's properties are commercial, single tenant buildings. The properties were acquired on a debt-free basis and are leased to various tenants under triple net leases, which are classified as operating leases. The Partnership holds an undivided fee simple interest in the properties. The Partnership's properties are subject to the general competitive conditions incident to the ownership of single tenant investment real estate. Since each property is leased under a long-term lease, there is little competition until the Partnership decides to sell the property. At this time, the Partnership will be competing with other real estate owners, on both a national and local level, in attempting to find buyers for the properties. In the event of a tenant default, the Partnership would be competing with other real estate owners, who have property vacancies, to attract a new tenant to lease the property. The Partnership's tenants operate in industries that are very competitive and can be affected by factors such as changes in regional or local economies, seasonality and changes in consumer preference. The following table is a summary of the properties that the Partnership acquired and owned as of December 31, 2002. Total Property Annual Annual Purchase Acquisition Lease Rent Per Property Date Costs Lessee Payment Sq. Ft. Arby's Restaurant Montgomery, AL RTM Gulf (2.6811%) 5/31/95 $ 23,049 Coast, Inc. $ 2,639 $33.20 Garden Ridge Retail Store Pineville, NC Garden (40.75%) 3/28/96 $3,644,391 Ridge, L.P. $423,945 $ 7.37 Champps Champps Americana Restaurant Entertainment San Antonio, TX 12/23/97 $2,833,357 of Texas, Inc. $317,780 $36.61 Champps Americana Restaurant Champps Livonia, MI Operating (.1534%) 5/19/98 $ 6,366 Corporation $ 706 $50.28 Champps Americana Restaurant Champps Centerville, OH Operating (25.0%) 1/27/99 $ 984,426 Corporation $108,816 $46.46 Tumbleweed Restaurant Tumbleweed, Fort Wayne, IN 9/11/00 $1,334,315 Inc. $137,979 $22.96 Children's World ARAMARK Daycare Center Educational Mundelein, IL 3/30/01 $1,618,824 Resources, Inc.$153,710 $16.81 ITEM 2. DESCRIPTION OF PROPERTIES. (Continued) Total Property Annual Annual PurchaseAcquisition Lease Rent Per Property Date Costs Lessee Payment Sq. Ft. Johnny Carino's Restaurant Austin, TX Kona Restaurant (1.1839%) 9/26/01 $ 27,083 Group, Inc. $ 2,850 $37.27 Children's World ARAMARK Daycare Center Educational Andover, MN 6/14/02 $1,264,207 Resources, Inc. $120,204 $13.94 Children's World ARAMARK Daycare Center Educational Ballwin, MO 6/14/02 $1,517,778 Resources, Inc. $144,113 $17.28 Children's World ARAMARK Daycare Center Educational Kimberly, WI 6/14/02 $1,358,239 Resources, Inc. $129,087 $12.49 Johnny Carino's Restaurant SFG Farmington-I Farmington, NM Limited (land only) (1) 10/31/02 $ 790,227 Partnership $ 85,050 $13.51 (1) Restaurant was under construction as of December 31, 2002. The properties listed above with a partial ownership percentage are owned with affiliates of the Partnership and/or unrelated third parties. The remaining interests in the Garden Ridge retail store are owned by AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Net Lease Income & Growth Fund XX Limited Partnership. The remaining interests in the Champps Americana restaurant in Centerville, Ohio are owned by AEI Real Estate Fund XVII Limited Partnership, AEI Real Estate Fund XVIII Limited Partnership and AEI Income & Growth Fund XXII Limited Partnership. The remaining interests in the Arby's restaurant, the Champps Americana restaurant in Livonia, Michigan and the Johnny Carino's restaurant in Austin, Texas are owned by unrelated third parties. 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. The initial Lease terms are 20 years, except for the Children's World daycare centers and the Tumbleweed restaurant, which have Lease terms of 15 years. The Leases contain renewal options which may extend the Lease term an additional 10 years for the Arby's and Tumbleweed restaurants, 14 years for the Johnny Carino's restaurant in Farmington, New Mexico, 15 years for the Children's World daycare centers and the Champps Americana restaurants, and 25 years for the Garden Ridge retail store. Pursuant to the Lease Agreements, the tenants are required to provide proof of adequate insurance coverage on the properties they occupy. The General Partners believe the properties are adequately covered by insurance and consider the properties to be well-maintained and sufficient for the Partnership's operations. ITEM 2. DESCRIPTION OF PROPERTIES. (Continued) For tax purposes, the Partnership's properties are depreciated under the Modified Accelerated Cost Recovery System (MACRS). The largest depreciable component of a property is the building which is depreciated, using the straight-line method, over 39 or 40 years. The remaining depreciable components of a property are personal property and land improvements which are depreciated, using an accelerated method, over 5 and 15 years, respectively. Since the Partnership has tax-exempt Partners, the Partnership is subject to the rules of Section 168(h)(6) of the Internal Revenue Code which requires a percentage of the properties' depreciable components to be depreciated over longer lives using the straight-line method. In general, the federal tax basis of the properties for tax depreciation purposes is the same as the basis for book depreciation purposes. Through December 31, 2002, all properties listed above were 100% occupied. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS. As of December 31, 2002, there were 1,289 holders of record of the registrant's Limited Partnership Units. There is no other class of security outstanding or authorized. The registrant's Units are not a traded security in any market. However, 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. During 2002, eight Limited Partners redeemed a total of 210.02 Partnership Units for $156,938 in accordance with the Partnership Agreement. In prior years, 33 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. ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS. (Continued) Cash distributions of $20,374 and $16,899 were made to the General Partners and $1,859,991 and $1,604,986 were made to the Limited Partners in 2002 and 2001, respectively. The distributions were made on a quarterly basis and represent Net Cash Flow, as defined, except as discussed below. These distributions should not be compared with dividends paid on capital stock by corporations. As part of the Limited Partner distributions discussed above, the Partnership distributed $662,865 and $159,075 of proceeds from property sales in 2002 and 2001, respectively. ITEM 6. 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) 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. 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 years ended December 31, 2002 and 2001, the Partnership recognized rental income of $1,591,244 and $1,763,031, respectively. During the same periods, the Partnership earned investment income of $68,905 and $80,857, 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 six 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) During the years ended December 31, 2002 and 2001, the Partnership paid Partnership administration expenses to affiliated parties of $238,259 and $282,187, 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 $54,147 and $32,447, 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 December 31, 2002, the Partnership's annualized regular 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. Liquidity and Capital Resources During the year ended December 31, 2002, the Partnership's cash balances increased $192,789 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 $1,500,344 in 2001 to $1,353,339 in 2002 mainly as a result of a decrease in income in 2002 which was partially offset by a decrease in Partnership administration expenses in 2002 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 years ended December 31, 2002 and 2001, the Partnership generated cash flow from the sale of real estate of $5,609,087 and $4,746,672, respectively. In addition, during the year ended December 31, 2001, the Partnership received $675,920 in satisfaction of a note, which was received as part of a property sale that closed in 2000. During the years ended December 31, 2002 and 2001, the Partnership expended $4,974,732 and $2,175,331, 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 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 year ended December 31, 2001, the net gain was $289,679. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) Through December 31, 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 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 years ended December 31, 2002 and 2001, the net gain was $16,738 and $727,695, respectively. Through December 31, 2002, the Partnership sold 99.8466% of the Champps Americana restaurant in Livonia, Michigan, in twenty-one separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $5,490,789, which resulted in a net gain of $1,888,226. The total cost and related accumulated depreciation of the interests sold was $4,143,694 and $541,131, respectively. For the years ended December 31, 2002 and 2001, the net gain was $1,464,843 and $423,383, respectively. During 2002 and 2001, the Partnership distributed $669,560 and $160,682 of the net sale proceeds to the Limited and General Partners as part of their quarterly distributions which represented a return of capital of $28.70 and $6.85 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 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. 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 are owned 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. During 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, $1,517,778 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On October 31, 2002, the Partnership purchased a parcel of land in Farmington, New Mexico for $790,227, including acquisition expenses. 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 will advance funds to SFG for the construction of a Johnny Carino's restaurant on the site. Through December 31, 2002, the Partnership had advanced $44,281 for the construction of the property and was charging interest on the advances at a rate of 10.5%. 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 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. 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. During 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, 33 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 7. FINANCIAL STATEMENTS. See accompanying index to financial statements. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS Page Report of Independent Auditors 15 Balance Sheet as of December 31, 2002 and 2001 16 Statements for the Years Ended December 31, 2002 and 2001: Income 17 Cash Flows 18 Changes in Partners' Capital 19 Notes to Financial Statements 20 - 31 REPORT OF INDEPENDENT AUDITORS To the Partners: AEI Income & Growth Fund XXI Limited Partnership St. Paul, Minnesota We have audited the accompanying balance sheet of AEI Income & Growth Fund XXI Limited Partnership (a Minnesota limited partnership) as of December 31, 2002 and 2001 and the related statements of income, cash flows and changes in partners' capital for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AEI Income & Growth Fund XXI Limited Partnership as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Minneapolis, Minnesota January 21, 2003 Boulay, Heutmaker, Zibell & Co. P.L.L.P. Certified Public Accountants AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP BALANCE SHEET DECEMBER 31 ASSETS 2002 2001 CURRENT ASSETS: Cash and Cash Equivalents $4,653,629 $4,460,840 Receivables 15,194 9,567 --------- --------- Total Current Assets 4,668,823 4,470,407 --------- --------- INVESTMENTS IN REAL ESTATE: Land 5,367,113 4,976,315 Buildings and Equipment 10,035,149 9,175,172 Construction in Progress 44,281 0 Accumulated Depreciation (1,399,695) (1,418,203) --------- --------- 14,046,848 12,733,284 Real Estate Held for Sale 0 846,124 --------- --------- Net Investments in Real Estate 14,046,848 13,579,408 --------- --------- Total Assets $18,715,671 $18,049,815 ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 28,714 $ 37,491 Distributions Payable 648,117 405,719 --------- --------- Total Current Liabilities 676,831 443,210 --------- --------- PARTNERS' CAPITAL (DEFICIT): General Partners 17,954 13,932 Limited Partners, $1,000 Unit Value; 24,000 Units authorized and issued; 23,025 and 23,235 Units outstanding in 2002 and 2001, respectively 18,020,886 17,592,673 --------- --------- Total Partners' Capital 18,038,840 17,606,605 --------- --------- Total Liabilities and Partners' Capital $ 18,715,671 $ 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 YEARS ENDED DECEMBER 31 2002 2001 INCOME: Rent $ 1,591,244 $ 1,763,031 Investment Income 68,905 80,857 --------- --------- Total Income 1,660,149 1,843,888 --------- --------- EXPENSES: Partnership Administration - Affiliates 238,259 282,187 Partnership Administration and Property Management - Unrelated Parties 54,147 32,447 Depreciation 418,476 472,431 Real Estate Impairment 0 295,354 --------- --------- Total Expenses 710,882 1,082,419 --------- --------- OPERATING INCOME 949,267 761,469 GAIN ON SALE OF REAL ESTATE 1,520,271 1,440,757 --------- --------- NET INCOME $2,469,538 $2,202,226 ======== ======== NET INCOME ALLOCATED: General Partners $ 24,396 $ 69,074 Limited Partners 2,445,142 2,133,152 --------- --------- $2,469,538 $2,202,226 ======== ======== NET INCOME PER LIMITED PARTNERSHIP UNIT (23,183 and 23,300 weighted average Units outstanding in 2002 and 2001, respectively) $ 105.47 $91.55 ======== ======== 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 YEARS ENDED DECEMBER 31 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $2,469,538 $2,202,226 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation 418,476 472,431 Real Estate Impairment 0 295,354 Gain on Sale of Real Estate (1,520,271) (1,440,757) Increase in Receivables (5,627) (4,467) Decrease in Payable to AEI Fund Management, Inc. (8,777) (24,443) --------- ---------- Total Adjustments (1,116,199) (701,882) --------- ---------- Net Cash Provided By Operating Activities 1,353,339 1,500,344 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate (4,974,732) (2,175,331) Proceeds from Sale of Real Estate 5,609,087 4,746,672 Payments Received on Short-Term Note Receivable 0 675,920 --------- ---------- Net Cash Provided By Investing Activities 634,355 3,247,261 --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Distributions Payable 242,398 15,014 Distributions to Partners (1,878,779) (1,621,198) Redemption Payments (158,524) (68,737) ---------- - ---------- Net Cash Used For Financing Activities (1,794,905) (1,674,921) ---------- - ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 192,789 3,072,684 CASH AND CASH EQUIVALENTS, beginning of period 4,460,840 1,388,156 ---------- - ---------- CASH AND CASH EQUIVALENTS, end of period $4,653,629 $4,460,840 ======== ======== 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 YEARS ENDED DECEMBER 31 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 (16,212) (1,604,986) (1,621,198) Redemption Payments (687) (68,050) (68,737) (86.83) Net Income 69,074 2,133,152 2,202,226 -------- ---------- -------- -------- BALANCE, December 31, 2001 13,932 17,592,673 17,606,605 23,235.35 Distributions (18,788) (1,859,991) (1,878,779) Redemption Payments (1,586) (156,938) (158,524) (210.02) Net Income 24,396 2,445,142 2,469,538 -------- --------- -------- -------- BALANCE, December 31, 2002 $17,954 $18,020,886 $18,038,840 23,025.33 ======== ========== ========== ======== The accompanying Notes to Financial Statements are an integral part of this statement. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (1) 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 ($24,000,000) 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. 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (1) ORGANIZATION - (Continued) 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. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Financial Statement Presentation The accounts of the Partnership are maintained on the accrual basis of accounting for both federal income tax purposes and financial reporting purposes. Accounting Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The Partnership regularly assesses whether market events and conditions indicate that it is reasonably possible to recover the carrying amounts of its investments in real estate from future operations and sales. A change in those market events and conditions could have a material effect on the carrying amount of its real estate. Cash Concentrations of Credit Risk The Partnership's cash is deposited primarily in one financial institution and at times during the year it may exceed FDIC insurance limits. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents may include cash in checking, cash invested in money market accounts, certificates of deposit, federal agency notes and commercial paper with a term of three months or less. Receivables Credit terms are extended to tenants in the normal course of business. The Partnership performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Receivables are recorded at their estimated net realizable value. The Partnership follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Partnership is of the belief that such accounts will be collectible in all material respects and thus an allowance is not necessary. Accounts are considered past due if payment is not made on a timely basis in accordance with the Partnership's credit terms. Receivables considered uncollectible are written off. Income Taxes The income or loss of the Partnership for federal income tax reporting purposes is includable in the income tax returns of the partners. In general, no recognition has been given to income taxes in the accompanying financial statements. The tax return, the qualification of the Partnership as such for tax purposes, and the amount of distributable Partnership income or loss are subject to examination by federal and state taxing authorities. If such an examination results in changes with respect to the Partnership qualification or in changes to distributable Partnership income or loss, the taxable income of the partners would be adjusted accordingly. Real Estate The Partnership's real estate is leased under triple net leases classified as operating leases. The Partnership recognizes rental revenue on the accrual basis according to the terms of the individual leases. For leases which contain rental increases based on cost of living increases, the increases are recognized in the year in which they are effective. 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) 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. 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. 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. (3) RELATED PARTY TRANSACTIONS - The Partnership owns a 40.75% interest in a Garden Ridge retail store. The remaining interests in this property are owned by AEI Net Lease Income & Growth Fund XIX Limited Partnership and AEI Net Lease Income & Growth Fund XX Limited Partnership, affiliates of the Partnership. The Partnership owns a 25.0% interest in a Champps Americana restaurant in Centerville, Ohio. The remaining interests in this property are owned by AEI Real Estate Fund XVII Limited Partnership, AEI Real Estate Fund XVIII Limited Partnership and AEI Income & Growth Fund XXII Limited Partnership, affiliates of the Partnership. As of December 31, 2002, the Partnership owns a 1.1839% interest in a Johnny Carino's restaurant in Austin, Texas. The remaining interests in this property were owned 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 until the interests were sold, in a series of transactions, to unrelated third parties in 2002. The Partnership owned a 67.8% interest in a Champps Americana restaurant in Columbus, Ohio. The remaining interests in this property are owned by AEI Real Estate Fund XVIII Limited Partnership and unrelated third parties. The Partnership owned a 49.6% interest in a Champps Americana restaurant in Schaumburg, Illinois. The remaining interests in this property are owned by AEI Net Lease Income & Growth Fund XX Limited Partnership and unrelated third parties. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (3) RELATED PARTY TRANSACTIONS - (Continued) AEI and AFM received the following compensation and reimbursements for costs and expenses from the Partnership: Total Incurred by the Partnership for the Years Ended December 31 2002 2001 a.AEI and AFM are reimbursed for all costs incurred in connection with managing the Partnership's operations, maintaining the Partnership's books and communicating the results of operations to the Limited Partners. $ 238,259 $ 282,187 ======== ======== b.AEI and AFM are reimbursed for all direct expenses they have paid on the Partnership's behalf to third parties relating to Partnership administration and property management. These expenses included printing costs, legal and filing fees, direct administrative costs, outside audit and accounting costs, taxes, insurance and other property costs. $ 54,147 $ 32,447 ======== ======== c.AEI is reimbursed for all costs and direct expenses incurred by it in acquiring properties on behalf of the Partnership. The amounts are net of financing and commitment fees and expense reimbursements received by the Partnership from the lessees in the amount of $120,482 and $36,659 for 2002 and 2001, respectively. $ (42,550) $ (15,919) ======== ======== d.AEI is reimbursed for all costs incurred in connection with the sale of property. $ 206,175 $ 190,895 ======== ======== The payable to AEI Fund Management, Inc. represents the balance due for the services described in 3a, b, c and d. 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 DECEMBER 31, 2002 AND 2001 (4) 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. (5) INVESTMENTS IN REAL ESTATE - The Partnership leases its properties to various tenants through triple net leases, which are classified as operating leases. Under a triple net lease, the lessee is responsible for all real estate taxes, insurance, maintenance, repairs and operating expenses of the property. The initial Lease terms are 20 years, except for the Children's World daycare centers and the Tumbleweed restaurant, which have Lease terms of 15 years. The Leases contain renewal options which may extend the Lease term an additional 10 years for the Arby's and Tumbleweed restaurants, 14 years for the Johnny Carino's restaurant in Farmington, New Mexico, 15 years for the Children's World daycare centers and the Champps Americana restaurants, and 25 years for the Garden Ridge retail store. The Leases contain rent clauses which entitle the Partnership to receive additional rent in future years based on stated rent increases. The Partnership's properties are commercial, single-tenant buildings. The Arby's restaurant was constructed and acquired in 1995. The Garden Ridge retail store was constructed and acquired in 1996. The Champps Americana restaurants in San Antonio, Texas and Livonia, Michigan were constructed and acquired in 1997 and 1998, respectively. The land for the Champps Americana restaurant in Centerville, Ohio was acquired in 1998 and construction of the restaurant was completed in 1999. The Tumbleweed restaurant was constructed and acquired in 2000. The Children's World daycare center in Mundelein, Illinois was constructed in 2000 and acquired in 2001. The Johnny Carino's restaurant in Austin, Texas was constructed and acquired in 2001. The Children's World daycare centers in Andover, Minnesota and Kimberly, Wisconsin were constructed in 1998 and acquired in 2002. The Children's World daycare center in Ballwin, Missouri was constructed in 1999 and acquired in 2002. The land for the Johnny Carino's restaurant in Farmington, New Mexico was acquired in 2002 and construction of the restaurant will be completed in 2003. There have been no costs capitalized as improvements subsequent to the acquisitions. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (5) INVESTMENTS IN REAL ESTATE - (Continued) The cost of the properties and related accumulated depreciation at December 31, 2002 are as follows: Buildings and Accumulated Property Land Equipment Total Depreciation Arby's, Montgomery, AL $ 10,033 $ 13,016 $ 23,049 $ 3,948 Garden Ridge, Pineville, NC 1,181,253 2,463,138 3,644,391 665,047 Champps Americana, San Antonio, TX 1,127,016 1,706,341 2,833,357 403,925 Champps Americana, Livonia, MI 1,753 4,613 6,366 973 Champps Americana, Centerville, OH 498,204 486,222 984,426 84,844 Tumbleweed, Fort Wayne, IN 562,078 772,237 1,334,315 83,948 Children's World, Mundelein, IL 435,936 1,182,888 1,618,824 82,802 Johnny Carino's, Austin, TX 13,771 13,312 27,083 685 Children's World, Andover, MN 179,755 1,084,452 1,264,207 23,496 Children's World, Ballwin, MO 255,080 1,262,698 1,517,778 27,359 Children's World, Kimberly, WI 312,007 1,046,232 1,358,239 22,668 Johnny Carino's, Farmington, NM 790,227 0 790,227 0 -------- --------- -------- -------- $ 5,367,113 $ 10,035,149 $15,402,262 $1,399,695 ======== ========== ========== ========= 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 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 year ended December 31, 2001, the net gain was $289,679. Through December 31, 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 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 years ended December 31, 2002 and 2001, the net gain was $16,738 and $727,695, respectively. Through December 31, 2002, the Partnership sold 99.8466% of the Champps Americana restaurant in Livonia, Michigan, in twenty-one separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $5,490,789, which resulted in a net gain of $1,888,226. The total cost and related accumulated depreciation of the interests sold was $4,143,694 and $541,131, respectively. For the years ended December 31, 2002 and 2001, the net gain was $1,464,843 and $423,383, respectively. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (5) INVESTMENTS IN REAL ESTATE - (Continued) During 2002 and 2001, the Partnership distributed $669,560 and $160,682 of the net sale proceeds to the Limited and General Partners as part of their quarterly distributions which represented a return of capital of $28.70 and $6.85 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 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. 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. During 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, $1,517,778 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 $790,227, including acquisition expenses. 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 will advance funds to SFG for the construction of a Johnny Carino's restaurant on the site. Through December 31, 2002, the Partnership had advanced $44,281 for the construction of the property and was charging interest on the advances at a rate of 10.5%. 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 DECEMBER 31, 2002 AND 2001 (5) 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. The Partnership owns a 2.6811% interest in an Arby's restaurant. The remaining interests in this property are owned by unrelated third parties, who own the property with the Partnership as tenants-in-common. The minimum future rentals on the Leases for years subsequent to December 31, 2002 are as follows: 2003 $ 1,626,938 2004 1,627,369 2005 1,629,117 2006 1,630,899 2007 1,632,755 Thereafter 15,562,610 --------- $23,709,688 ========= There were no contingent rents recognized in 2002 or 2001. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (6) MAJOR TENANTS - The following schedule presents rent revenue from individual tenants, or affiliated groups of tenants, who each contributed more than ten percent of the Partnership's total rent revenue for the years ended December 31: 2002 2001 Tenants Industry Champps Americana Group Restaurant $ 602,580 $ 998,729 Garden Ridge, L.P. Retail 423,945 417,283 ARAMARK Educational Resources, Inc. Child Care 368,989 N/A --------- --------- Aggregate rent revenue of major tenants $1,395,514 $ 1,416,012 ========= ========= Aggregate rent revenue of major tenants as a percentage of total rent revenue 88% 80% ======== ======== (7) PARTNERS' CAPITAL - Cash distributions of $20,374 and $16,899 were made to the General Partners and $1,859,991 and $1,604,986 were made to the Limited Partners for the years ended December 31, 2002 and 2001, respectively. The Limited Partners' distributions represent $80.23 and $68.88 per Limited Partnership Unit outstanding using 23,183 and 23,300 weighted average Units in 2002 and 2001, respectively. The distributions represent $80.23 and $68.88 per Unit of Net Income. As part of the Limited Partner distributions discussed above, the Partnership distributed $662,865 and $159,075 of proceeds from property sales in 2002 and 2001, respectively. Distributions of Net Cash Flow to the General Partners during 2002 and 2001 were subordinated to the Limited Partners as required in the Partnership Agreement. As a result, 99% of distributions were allocated to the Limited Partners and 1% to the General Partners. 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. AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (7) PARTNERS' CAPITAL - (Continued) During 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 2001, eight Limited Partners redeemed a total of 86.83 Partnership Units for $68,050. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. After the effect of redemptions, the Adjusted Capital Contribution, as defined in the Partnership Agreement, is $1,042.33 per original $1,000 invested. (8) INCOME TAXES - The following is a reconciliation of net income for financial reporting purposes to income reported for federal income tax purposes for the years ended December 31: 2002 2001 Net Income for Financial Reporting Purposes $2,469,538 $2,202,226 Depreciation for Tax Purposes Under Depreciation for Financial Reporting Purposes 135,151 161,296 Real Estate Impairment Loss Not Recognized for Tax Purposes 0 295,354 Amortization of Start-Up and Organization Costs (13,974) (49,289) Gain on Sale of Real Estate for Tax Purposes Under Gain for Financial Reporting Purposes (477,558) (121,527) --------- --------- Taxable Income to Partners $2,113,157 $2,488,060 ========= ========= AEI INCOME & GROWTH FUND XXI LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (8) INCOME TAXES - (Continued) The following is a reconciliation of Partners' capital for financial reporting purposes to Partners' capital reported for federal income tax purposes for the years ended December 31: 2002 2001 Partners' Capital for Financial Reporting Purposes $18,038,840 $17,606,605 Adjusted Tax Basis of Investments in Real Estate Over Net Investments in Real Estate for Financial Reporting Purposes 466,369 808,776 Capitalized Start-Up Costs Under Section 195 291,517 291,517 Amortization of Start-Up and Organization Costs (297,517) (283,543) Organization and Syndication Costs Treated as Reduction of Capital for Financial Reporting Purposes 3,214,043 3,214,043 --------- --------- Partners' Capital for Tax Reporting Purposes $21,713,252 $21,637,398 ========== ========== (9) FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values of the financial instruments, none of which are held for trading purposes, are as follows at December 31: _______2002_______ _______2001_______ Carrying Fair Carrying Fair Amount Value Amount Value Cash $ 0 $ 0 $ 115 $ 115 Money Market Funds 4,653,629 4,635,629 4,460,725 4,460,725 -------- --------- --------- --------- Total Cash and Cash Equivalents $4,653,629 $4,653,629 $4,460,840 $4,460,840 ========= ========= ========= ========= ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The registrant is a limited partnership and has no officers, directors, or direct employees. The General Partners of the registrant are Robert P. Johnson and AFM. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The director and officers of AFM are as follows: Robert P. Johnson, age 58, is Chief Executive Officer, President and Director and has held these positions since the formation of AFM in August 1994, and has been elected to continue in these positions until December 2003. From 1970 to the present, he has been employed exclusively in the investment industry, specializing in tax-advantaged limited partnership investments. In that capacity, he has been involved in the development, analysis, marketing and management of public and private investment programs investing in net lease properties as well as public and private investment programs investing in energy development. Since 1971, Mr. Johnson has been the president, a director and a registered principal of AEI Securities, Inc., which is registered with the Securities and Exchange Commission as a securities broker-dealer, is a member of the National Association of Securities Dealers, Inc. (NASD) and is a member of the Security Investors Protection Corporation (SIPC). Mr. Johnson has been president, a director and the principal shareholder of AEI Fund Management, Inc., a real estate management company founded by him, since 1978. Mr. Johnson is currently a general partner or principal of the general partner in fourteen limited partnerships and a managing member in three LLCs. Patrick W. Keene, age 43, is Chief Financial Officer, Treasurer and Secretary and has held these positions since January 22, 2003 and has been elected to continue in these positions until December 2003. Mr. Keene has been employed by AEI Fund Management, Inc. and affiliated entities since 1986. Prior to being elected to the positions above, he was Controller of the various entities. From 1982 to 1986, Mr. Keene was with KPMG Peat Marwick Certified Public Accountants, first as an auditor and later as a tax manager. Mr. Keene is responsible for all accounting functions of AFM and the registrant. Section 16(a) Beneficial Ownership Reporting Compliance Under federal securities laws, the directors and officers of the General Partner of the Partnership, and any beneficial owner of more than 10% of a class of equity securities of the Partnership, are required to report their ownership of the Partnership's equity securities and any changes in such ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established by the Commission, and the Partnership is required to disclose in this Annual Report on 10-KSB any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 2002. Based upon information provided by officers and directors of the General Partner, all officers, directors and 10% owners filed all reports on a timely basis in the 2002 fiscal year. ITEM 10. EXECUTIVE COMPENSATION. The General Partner and affiliates are reimbursed at cost for all services performed on behalf of the registrant and for all third party expenses paid on behalf of the registrant. The cost for services performed on behalf of the registrant is actual time spent performing such services plus an overhead burden. These services include organizing the registrant and arranging for the offer and sale of Units, reviewing properties for acquisition and rendering administrative, property management and property sales services. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information pertaining to the ownership of the Units by each person known by the Partnership to beneficially own 5% or more of the Units, by each General Partner, and by each officer or director of the Managing General Partner as of February 28, 2003: Name and Address Number of Percent of Beneficial Owner Units Held of Class AEI Fund Management XXI, Inc. 0 0% 1300 Minnesota World Trade Center 30 East 7th Street, St. Paul, Minnesota 55101 Robert P. Johnson 0 0% 1300 Minnesota World Trade Center 30 East 7th Street, St. Paul, Minnesota 55101 Patrick W. Keene 0 0% 1300 Minnesota World Trade Center 30 East 7th Street, St. Paul, Minnesota 55101 Mark E. Larson * 0 0% 1300 Minnesota World Trade Center 30 East 7th Street, St. Paul, Minnesota 55101 * Mr. Larson resigned as an officer of the Managing General Partner effective February 28, 2003. The General Partners know of no holders of more than 5% of the outstanding Units. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The registrant, AFM and its affiliates have common management and utilize the same facilities. As a result, certain administrative expenses are allocated among these related entities. All of such activities and any other transactions involving the affiliates of the General Partner of the registrant are governed by, and are conducted in conformity with, the limitations set forth in the Limited Partnership Agreement of the registrant. Reference is made to Note 3 of the Financial Statements, as presented, and is incorporated herein by reference, for details of related party transactions for the years ended December 31, 2002 and 2001. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (Continued) The limitations included in the Partnership Agreement require that the cumulative reimbursements to the General Partners and their affiliates for certain expenses will not exceed an amount equal to the sum of (i) 20% of gross offering proceeds, (ii) 5% of Net Cash Flow for property management, (iii) 3% of Net Proceeds of Sale, and (iv) 10% of Net Cash Flow less the Net Cash Flow actually distributed to the General Partners. The cumulative reimbursements subject to this limitation are reimbursements for (i) organization and offering expenses, including commissions, (ii) acquisition expenses, (iii) services provided in the sales effort of properties, and (iv) expenses of controlling persons and overhead expenses directly attributable to the forgoing services or attributable to administrative services. As of December 31, 2002, these cumulative reimbursements to the General Partners and their affiliates did not exceed the limitation amount. The following table sets forth the forms of compensation, distributions and cost reimbursements paid by the registrant to the General Partners or their Affiliates in connection with the operation of the Fund and its properties for the period from inception through December 31, 2002. Person or Entity Amount Incurred From Receiving Form and Method Inception (August 31, 1994) Compensation of Compensation To December 31, 2002 AEI Securities, Inc. Selling Commissions equal to 8% of proceeds $2,400,000 plus a 2% nonaccountable expense allowance, most of which was reallowed to Participating Dealers. General Partners Reimbursement at Cost for other Organization $ 877,000 and Affiliates and Offering Costs. General Partners Reimbursement at Cost for all Acquisition $ 370,871 and Affiliates Expenses General Partners Reimbursement at Cost for all Administrative $1,883,323 and Affiliates Expenses attributable to the Fund, including all expenses related to management of the Fund's properties and all other transfer agency, reporting, partner relations and other administrative functions. General Partners Reimbursement at Cost for all expenses $ 523,368 and Affiliates related to the disposition of the Fund's properties. General Partners 1% of Net Cash Flow in any fiscal year until $ 108,920 the Limited Partners have received annual, non-cumulative distributions of Net Cash Flow equal to 10% of their Adjusted Capital Contributions and 10% of any remaining Net Cash Flow in such fiscal year. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (Continued) Person or Entity Amount Incurred From Receiving Form and Method Inception (August 31, 1994) Compensation of Compensation To December 31, 2002 General Partners 1% of distributions of Net Proceeds of Sale $ 20,889 until Limited Partners have received an amount equal to (a) their Adjusted Capital Contributions, plus (b) an amount equal to 12% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously distributed. 10% of distributions of Net Proceeds of Sale thereafter. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. A. Exhibits - Description 3.1 Certificate of Limited Partnership (incorporated by reference to Exhibit 3.1 of the registrant's Registration Statement on Form SB-2 filed October 10, 1994 [File No. 33- 85076C]). 3.2 Restated Limited Partnership Agreement to the Prospectus (incorporated by reference to Exhibit A of Amendment No. 2 of the registrant's Registration Statement on Form SB-2 filed January 20, 1995 [File No. 33-85076C]). 10.1 Net Lease Agreement dated May 31, 1995, between the Partnership and RTM Gulf Coast, Inc., relating to the property at 2719 Zelda Road, Montgomery, Alabama (incorporated by reference to Exhibit A of Form 8-K filed June 14, 1995). 10.2 Net Lease Agreement dated August 2, 1995, between TKC X, LLC and Garden Ridge, Inc. relating to the property at 11415 Carolina Place Parkway, Pineville, North Carolina (incorporated by reference to Exhibit 10.1 of Form 8-K filed April 10, 1996). 10.3 First Amendment to Lease Agreement dated March 1, 1996 between TKC X, LLC and Garden Ridge, L.P. relating to the property at 11415 Carolina Place Parkway, Pineville, North Carolina (incorporated by reference to Exhibit 10.2 of Form 8-K filed April 10, 1996). 10.4 Assignment and Assumption of Lease dated March 28, 1996 between the Partnership, AEI Net Lease Income & Growth Fund XIX Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, and TKC X, LLC relating to the property at 11415 Carolina Place Parkway, Pineville, North Carolina (incorporated by reference to Exhibit 10.3 of Form 8-K filed April 10, 1996). 10.5 Net Lease Agreement dated March 14, 1997 between the Partnership and Champps Entertainment of Texas, Inc. relating to the property at 11440 Interstate Highway 10, San Antonio, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed March 25, 1997). 10.6 Net Lease Agreement dated July 8, 1997 between the Partnership and Champps Americana, Inc. relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed August 5, 1997). 10.7 First Amendment to Net Lease Agreement dated December 23, 1997 between the Partnership and Champps Entertainment of Texas, Inc. relating to the property at 11440 Interstate Highway 10, San Antonio, Texas (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 5, 1998). 10.8 First Amendment to Net Lease Agreement dated May 19, 1998 between the Partnership and Champps Americana, Inc. relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.2 of Form 8-K filed June 16, 1998). 10.9 Net Lease Agreement dated June 29, 1998 between AEI Income & Growth Fund XXII Limited Partnership and Americana Dining Corporation relating to the property at 7880 Washington Village Drive, Centerville, Ohio (incorporated by reference to Exhibit 10.4 of Form 10-QSB filed November 9, 1998). 10.10 First Amendment to Net Lease Agreement dated January 27, 1999 between the Partnership, AEI Real Estate Fund XVII Limited Partnership, AEI Real Estate Fund XVIII Limited Partnership, AEI Income & Growth Fund XXII Limited Partnership and Americana Dining Corp. relating to the property at 7880 Washington Village Drive, Centerville, Ohio (incorporated by reference to Exhibit 10.26 of Form 10- KSB filed March 12, 1999). 10.11 Net Lease Agreement dated March 8, 2000, between the Partnership and Tumbleweed, Inc. relating to the property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.29 of Form 10-KSB filed March 10, 2000). 10.12 First Amendment to Net Lease Agreement dated September 11, 2000 between the Partnership and Tumbleweed, Inc. relating to the property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed November 7, 2000). 10.13 Second Amendment to Net Lease Agreement dated September 11, 2000 between the Partnership and Tumbleweed, Inc. relating to the property at 8607 US Highway 24 West, Fort Wayne, Indiana (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 7, 2000). 10.14 Development Financing Agreement dated March 8, 2001 between the Partnership, AEI Real Estate Fund 85-A Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, AEI Income & Growth Fund 23 LLC and Kona Restaurant Group, Inc. relating to the property at 5601 Brodie Lane, Austin, Texas (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed May 10, 2001). 10.15 Net Lease Agreement dated March 8, 2001 between the Partnership, AEI Real Estate Fund 85-A Limited Partnership, AEI Net Lease Income & Growth Fund XX Limited Partnership, AEI Income & Growth Fund 23 LLC and Kona Restaurant Group, Inc. relating to the property at 5601 Brodie Lane, Austin, Texas (incorporated by reference to Exhibit 10.4 of Form 10-QSB filed May 10, 2001). 10.16 Purchase Agreement dated March 26, 2001 between the Partnership and Patrick and Dolores Devlin relating to the property at 161 E. Campus View Boulevard, Columbus, Ohio (incorporated by reference to Exhibit 10.5 of Form 10- QSB filed May 10, 2001). 10.17 Net Lease Agreement dated March 30, 2001 between the Partnership and ARAMARK Educational Resources, Inc. relating to the property at 800 South Route 83, Mundelein, Illinois (incorporated by reference to Exhibit 10.6 of Form 10-QSB filed May 10, 2001). 10.18 Purchase Agreement dated April 3, 2001 between the Partnership and Lynn and Camille Bushman relating to the property at 161 E. Campus View Boulevard, Columbus, Ohio (incorporated by reference to Exhibit 10.1 of Form 10- QSB filed August 7, 2001). 10.19 Purchase Agreement dated May 8, 2001 between the Partnership and The Wood Family Trust relating to the property at 161 E. Campus View Boulevard, Columbus, Ohio (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed August 7, 2001). 10.20 Purchase Agreement dated May 17, 2001 between the Partnership, AEI Real Estate Fund XVIII Limited Partnership and Walter L. Schrock relating to the property at 161 E. Campus View Boulevard, Columbus, Ohio (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed August 7, 2001). 10.21 Purchase Agreement dated June 26, 2001 between the Partnership and David L. Cruickshank relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.4 of Form 10-QSB filed August 7, 2001). 10.22 Purchase Agreement dated July 2, 2001 between the Partnership and The Charles M. and Judith K. Westfahl Community Trust relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.5 of Form 10-QSB filed August 7, 2001). 10.23 Purchase Agreement dated July 20, 2001 between the Partnership and The White Family Living Trust relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.6 of Form 10-QSB filed August 7, 2001). ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (Continued) A. Exhibits - Description 10.24 Purchase Agreement dated July 30, 2001 between the Partnership and the Hoang/Do Living Trust relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed October 26, 2001). 10.25 Purchase Agreement dated August 14, 2001 between the Partnership and Munkberg Farms Inc. relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed October 26, 2001). 10.26 Purchase Agreement, as amended, dated September 11, 2001 between the Partnership and The Elizabeth C. Hsu Living Trust relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed October 26, 2001). 10.27 Purchase Agreement dated September 14, 2001 between the Partnership and Barbara Bou-Sliman relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.4 of Form 10-QSB filed October 26, 2001). 10.28 Purchase Agreement dated September 14, 2001 between the Partnership and Barbara Bou-Sliman Trust relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.5 of Form 10-QSB filed October 26, 2001). 10.29 Purchase Agreement, as amended, dated September 21, 2001 between the Partnership and The Sherrill L. Hossom Family Trust relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.7 of Form 10-QSB filed October 26, 2001). 10.30 Purchase Agreement, as amended, dated September 24, 2001 between the Partnership and The Linda L. Landes Family Trust relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.8 of Form 10-QSB filed October 26, 2001). 10.31 Purchase Agreement dated September 25, 2001 between the Partnership and Kenneth Robert Mayne Properties, L.C. relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.9 of Form 10-QSB filed October 26, 2001). 10.32 First Amendment to Net Lease Agreement dated September 26, 2001 between the Partnership, AEI Real Estate Fund 85-A Limited Partnership, AEI Income & Growth Fund XX Limited Partnership, AEI Income & Growth Fund 23 LLC and Kona Restaurant Group, Inc. relating to the property at 5601 Brodie Lane, Austin, Texas (incorporated by reference to Exhibit 10.10 of Form 10-QSB filed October 26, 2001). 10.33 Purchase Agreement dated October 5, 2001 between the Partnership and The Patricia A. Struif Trust relating to the property at 955 Golf Road, Schaumburg, Illinois (incorporated by reference to Exhibit 10.14 of Form 10-QSB filed October 26, 2001). 10.34 Purchase Agreement dated October 19, 2001 between the Partnership and Tony Thai Nguyen relating to the property at 720 North Highway 190, Covington, Louisiana (incorporated by reference to Exhibit 10.52 of Form 10-KSB filed March 8, 2002). 10.35 Purchase Agreement dated October 23, 2001 between the Partnership and Gregory A. Roemhild relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.53 of Form 10-KSB filed March 8, 2002). 10.36 Purchase Agreement dated November 1, 2001 between the Partnership and David L. Cruickshank relating to the property at 19470 Haggerty Road, Livonia, Michigan (incorporated by reference to Exhibit 10.54 of Form 10-KSB filed March 8, 2002). 10.37 Lease Termination Agreement dated December 3, 2001 between the Partnership and Huntington Restaurants Group, Inc. relating to the property at 720 North Highway 190, Covington, Louisiana (incorporated by reference to Exhibit 10.57 of Form 10-KSB filed March 8, 2002). 10.38 Assignment of Purchase and Sale Agreement dated May 24, 2002 between the Partnership and AEI Fund Management, Inc. relating to the property at 1485 Bunker Lake Boulevard NW, Andover, Minnesota (incorporated by reference to Exhibit 10.1 of Form 8-K filed June 18, 2002). ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (Continued) A. Exhibits - Description 10.39 Assignment of Purchase and Sale Agreement dated May 24, 2002 between the Partnership and AEI Fund Management, Inc. relating to the property at 497 Big Bend Road, Ballwin, Missouri (incorporated by reference to Exhibit 10.2 of Form 8-K filed June 18, 2002). 10.40 Assignment of Purchase and Sale Agreement dated May 24, 2002 between the Partnership and AEI Fund Management, Inc. relating to the property at 749 Truman Street, Kimberly, Wisconsin (incorporated by reference to Exhibit 10.3 of Form 8-K filed June 18, 2002). 10.41 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the property at 1485 Bunker Lake Boulevard NW, Andover, Minnesota (incorporated by reference to Exhibit 10.4 of Form 8-K filed June 18, 2002). 10.42 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the property at 497 Big Bend Road, Ballwin, Missouri (incorporated by reference to Exhibit 10.5 of Form 8-K filed June 18, 2002). 10.43 Net Lease Agreement dated June 14, 2002 between the Partnership and ARAMARK Educational Resources, Inc. relating to the property at 749 Truman Street, Kimberly, Wisconsin (incorporated by reference to Exhibit 10.6 of Form 8-K filed June 18, 2002). 10.44 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 (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed November 1, 2002). 10.45 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 (incorporated by reference to Exhibit 10.2 of Form 10-QSB filed November 1, 2002). 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 on Form 8-K - None. ITEM 14. 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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEI INCOME & GROWTH FUND XXI Limited Partnership By: AEI Fund Management XXI, Inc. Its Managing General Partner March 25, 2003 By: /s/ Robert P. Johnson Robert P. Johnson, President and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Robert P. Johnson President (Principal Executive Officer) March 25, 2003 Robert P. Johnson and Sole Director of Managing General Partner /s/ Patrick W. Keene Chief Financial Officer and Treasurer March 25, 2003 Patrick W. Keene (Principal Accounting Officer) CERTIFICATIONS I, Robert P. Johnson, certify that: 1. I have reviewed this annual report on Form 10-KSB of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge; the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual report whether 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: March 25, 2003 /s/ Robert P. Johnson Robert P. Johnson, President AEI Fund Management XXI, Inc. Managing General Partner CERTIFICATIONS I, Patrick W. Keene, certify that: 1. I have reviewed this annual report on Form 10-KSB of AEI Income & Growth Fund XXI Limited Partnership; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge; the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual report whether 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: March 25, 2003 /s/ Patrick W. Keene Patrick W. Keene, Chief Financial Officer AEI Fund Management XXI, Inc. Managing General Partner EX-1 4 r99-1.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AEI Income & Growth Fund XXI Limited Partnership (the "Partnership") on Form 10-KSB for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert P. Johnson, President of AEI Fund Management XXI, Inc., the Managing General Partner of the Partnership, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Robert P Johnson Robert P. Johnson, President AEI Fund Management XXI, Inc. Managing General Partner March 25, 2003 EX-2 5 r99-2.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AEI Income & Growth Fund XXI Limited Partnership (the "Partnership") on Form 10-KSB for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick W. Keene, Chief Financial Officer of AEI Fund Management XXI, Inc., the Managing General Partner of the Partnership, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Patrick W. Keene Patrick W. Keene, Chief Financial Officer AEI Fund Management XXI, Inc. Managing General Partner March 25, 2003 -----END PRIVACY-ENHANCED MESSAGE-----