UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarter Ended: March 31, 2004
Commission file number: 24003
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
(Exact Name of Small Business Issuer as Specified in its Charter)
State of Minnesota 41-1848181
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 East 7th Street, Suite 1300, St. Paul, Minnesota 55101
(Address of Principal Executive Offices)
(651) 227-7333
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.
Yes [X] No
Transitional Small Business Disclosure Format:
Yes No [X]
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
INDEX
PART I. Financial Information
Item 1. Balance Sheet as of March 31, 2004 and December 31, 2003
Statements for the Periods ended March 31, 2004 and 2003:
Income
Cash Flows
Changes in Partners' Capital
Notes to Financial Statements
Item 2. Management's Discussion and Analysis
Item 3. Controls and Procedures
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
BALANCE SHEET
MARCH 31, 2004 AND DECEMBER 31, 2003
(Unaudited)
ASSETS
2004 2003
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,636,492 $ 875,777
Receivables 0 44,191
----------- -----------
Total Current Assets 2,636,492 919,968
----------- -----------
INVESTMENTS IN REAL ESTATE:
Land 4,080,987 4,042,900
Buildings and Equipment 7,820,594 6,766,348
Construction in Progress 0 889,670
Accumulated Depreciation (806,649) (727,204)
----------- -----------
11,094,932 10,971,714
Real Estate Held for Sale 0 1,564,145
----------- -----------
Net Investments in Real Estate 11,094,932 12,535,859
----------- -----------
Total Assets $13,731,424 $13,455,827
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 40,174 $ 77,508
Distributions Payable 279,731 281,412
Unearned Rent 8,999 0
----------- -----------
Total Current Liabilities 328,904 358,920
----------- -----------
PARTNERS' CAPITAL:
General Partners 13,994 12,908
Limited Partners, $1,000 per Unit;
24,000 Units authorized; 16,917 Units issued;
16,326 Units outstanding 13,388,526 13,083,999
----------- -----------
Total Partners' Capital 13,402,520 13,096,907
----------- -----------
Total Liabilities and Partners' Capital $13,731,424 $13,455,827
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF INCOME
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
2004 2003
RENTAL INCOME $ 268,432 $ 187,501
EXPENSES:
Partnership Administration - Affiliates 39,594 52,148
Partnership Administration and Property
Management - Unrelated Parties 12,467 12,286
Depreciation 79,445 49,295
----------- -----------
Total Expenses 131,506 113,729
----------- -----------
OPERATING INCOME 136,926 73,772
OTHER INCOME:
Interest Income 8,480 8,954
Gain on Sale of Real Estate 0 298,050
----------- -----------
Total Other Income 8,480 307,004
----------- -----------
INCOME FROM CONTINUING OPERATIONS 145,406 380,776
Income from Discontinued Operations 444,596 56,561
----------- -----------
NET INCOME $ 590,002 $ 437,337
=========== ===========
NET INCOME ALLOCATED:
General Partners $ 9,012 $ 7,160
Limited Partners 580,990 430,177
----------- -----------
$ 590,002 $ 437,337
=========== ===========
INCOME PER LIMITED PARTNERSHIP UNIT:
Continuing Operations $ 8.64 $ 22.73
Discontinued Operations 26.95 3.32
----------- -----------
Total $ 35.59 $ 26.05
=========== ===========
Weighted Average Units Outstanding 16,326 16,516
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 590,002 $ 437,337
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating Activities:
Depreciation 79,445 69,410
Gain on Sale of Real Estate (434,401) (298,050)
(Increase) Decrease in Receivables 44,191 (14,989)
Increase (Decrease) in Payable to
AEI Fund Management, Inc. (37,334) 45,151
Increase in Unearned Rent 8,999 8,343
----------- -----------
Total Adjustments (339,100) (190,135)
----------- -----------
Net Cash Provided By
Operating Activities 250,902 247,202
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Real Estate (202,663) (224,354)
Proceeds from Sale of Real Estate 1,998,546 1,499,486
----------- -----------
Net Cash Provided By
Investing Activities 1,795,883 1,275,132
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Distributions Payable (1,681) 0
Distributions to Partners (284,389) (291,852)
----------- -----------
Net Cash Used For
Financing Activities (286,070) (291,852)
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 1,760,715 1,230,482
CASH AND CASH EQUIVALENTS, beginning of period 875,777 2,108,482
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,636,492 $ 3,338,964
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
Limited
Partnership
General Limited Units
Partners Partners Total Outstanding
BALANCE, December 31, 2002 $ 3,792 $12,442,255 $12,446,047 16,516.29
Distributions (7,342) (284,510) (291,852)
Net Income 7,160 430,177 437,337
-------- ----------- ----------- -----------
BALANCE, March 31, 2003 $ 3,610 $12,587,922 $12,591,532 16,516.29
======== =========== =========== ===========
BALANCE, December 31, 2003 $ 12,908 $13,083,999 $13,096,907 16,325.90
Distributions (7,926) (276,463) (284,389)
Net Income 9,012 580,990 590,002
-------- ----------- ----------- -----------
BALANCE, March 31, 2004 $ 13,994 $13,388,526 $13,402,520 16,325.90
======== =========== =========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
(1) The condensed statements included herein have been prepared
by the Partnership, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and
reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results of
operations for the interim period, on a basis consistent with
the annual audited statements. The adjustments made to these
condensed statements consist only of normal recurring
adjustments. Certain information, accounting policies, and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Partnership
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that
these condensed financial statements be read in conjunction
with the financial statements and the summary of significant
accounting policies and notes thereto included in the
Partnership's latest annual report on Form 10-KSB.
(2) Organization -
AEI Income & Growth Fund XXII Limited Partnership
(Partnership) was formed to acquire and lease commercial
properties to operating tenants. The Partnership's
operations are managed by AEI Fund Management XXI, Inc.
(AFM), the Managing General Partner. Robert P. Johnson, the
President and sole director of AFM, serves as the Individual
General Partner. AFM is a wholly owned subsidiary of AEI
Capital Corporation of which Mr. Johnson is the majority
shareholder. AEI Fund Management, Inc. (AEI), an affiliate
of AFM, performs the administrative and operating functions
for the Partnership.
The terms of the Partnership offering call for a
subscription price of $1,000 per Limited Partnership Unit,
payable on acceptance of the offer. The Partnership
commenced operations on May 1, 1997 when minimum
subscriptions of 1,500 Limited Partnership Units
($1,500,000) were accepted. The offering terminated January
9, 1999 when the extended offering period expired. The
Partnership received subscriptions for 16,917.222 Limited
Partnership Units. Under the terms of the Limited
Partnership Agreement, the Limited Partners and General
Partners contributed funds of $16,917,222 and $1,000,
respectively.
During operations, any Net Cash Flow, as defined, which the
General Partners determine to distribute will be distributed
97% to the Limited Partners and 3% to the General Partners.
Distributions to Limited Partners will be made pro rata by
Units.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Organization - (Continued)
Any Net Proceeds of Sale, as defined, from the sale or
financing of properties which the General Partners determine
to distribute will, after provisions for debts and reserves,
be paid in the following manner: (i) first, 99% to the
Limited Partners and 1% to the General Partners until the
Limited Partners receive an amount equal to: (a) their
Adjusted Capital Contribution plus (b) an amount equal to 9%
of their Adjusted Capital Contribution per annum, cumulative
but not compounded, to the extent not previously distributed
from Net Cash Flow; (ii) any remaining balance will be
distributed 90% to the Limited Partners and 10% to the
General Partners. Distributions to the Limited Partners
will be made pro rata by Units.
For tax purposes, profits from operations, other than
profits attributable to the sale, exchange, financing,
refinancing or other disposition of property, will be
allocated first in the same ratio in which, and to the
extent, Net Cash Flow is distributed to the Partners for
such year. Any additional profits will be allocated in the
same ratio as the last dollar of Net Cash Flow is
distributed. Net losses from operations will be allocated
99% to the Limited Partners and 1% to the General Partners.
For tax purposes, profits arising from the sale, financing,
or other disposition of property will be allocated in
accordance with the Partnership Agreement as follows: (i)
first, to those partners with deficit balances in their
capital accounts in an amount equal to the sum of such
deficit balances; (ii) second, 99% to the Limited Partners
and 1% to the General Partners until the aggregate balance
in the Limited Partners' capital accounts equals the sum of
the Limited Partners' Adjusted Capital Contributions plus an
amount equal to 9% of their Adjusted Capital Contributions
per annum, cumulative but not compounded, to the extent not
previously allocated; (iii) third, the balance of any
remaining gain will then be allocated 90% to the Limited
Partners and 10% to the General Partners. Losses will be
allocated 98% to the Limited Partners and 2% to the General
Partners.
The General Partners are not required to currently fund a
deficit capital balance. Upon liquidation of the
Partnership or withdrawal by a General Partner, the General
Partners will contribute to the Partnership an amount equal
to the lesser of the deficit balances in their capital
accounts or 1% of total Limited Partners' and General
Partners' capital contributions.
(3) Reclassification -
Certain items in the prior year's financial statements have
been reclassified to conform to 2004 presentation. These
reclassifications had no effect on Partners' capital, net
income or cash flows.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Investments in Real Estate -
Through March 31, 2003, the Partnership sold 24.6846% of the
Children's World daycare center in Plainfield, Illinois, in
three separate transactions, to unrelated third parties.
The Partnership received total net sale proceeds of
$450,673, which resulted in a net gain of $103,162. The
total cost and related accumulated depreciation of the
interests sold was $363,531 and $16,020, respectively. For
the three months ended March 31, 2003, the net gain was
$53,648.
During the first nine months of 2003, the Partnership sold
99.4123% of the Arby's restaurant, in five separate
transactions, to unrelated third parties. The Partnership
received total net sale proceeds of $1,562,751, which
resulted in a net gain of $306,567. The total cost and
related accumulated depreciation of the interests sold was
$1,384,408 and $128,224, respectively. For the three months
ended March 31, 2003, the net gain was $244,402.
During the first three months of 2004 and 2003, the
Partnership distributed $30,303 and $70,707 of net sale
proceeds to the Limited and General Partners as part of
their regular quarterly distributions, which represented a
return of capital of $1.84 and $4.24 per Limited Partnership
Unit, respectively. The Partnership anticipates the
remaining net sale proceeds will either be reinvested in
additional property or distributed to the Partners in the
future.
On December 6, 2002, the Partnership purchased a 50%
interest in a parcel of land in West Chester, Ohio for
$506,000. The Partnership obtained title to the land in the
form of an undivided fee simple interest in the 50% interest
purchased. The land is leased to Champps Operating
Corporation (Champps) under a Lease Agreement with a primary
term of 20 years and annual rental payments of $50,600.
Simultaneously with the purchase of the land, the
Partnership entered into a Development Financing Agreement
under which the Partnership advanced funds to Champps for
the construction of a Champps Americana restaurant on the
site. Pursuant to the Lease, any improvements to the land
during the term of the Lease become the property of the
lessor. Through December 31, 2003, the Partnership had
advanced $889,670 for construction of the property. The
Partnership charged interest on the advances at a rate of
10.0%. On January 13, 2004, after the development was
completed, the Lease Agreement was amended to require annual
rental payments of $160,000. The Partnership's share of the
total acquisition costs, including the cost of the land, was
$1,569,884. The remaining interest in the property was
purchased by AEI Net Lease Income & Growth Fund XX Limited
Partnership, an affiliate of the Partnership.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Investments in Real Estate - (Continued)
On August 27, 2003, the Company purchased a 32% interest in
a Garden Ridge retail store in Woodlands, Texas for
$2,661,132. The property is leased to Garden Ridge, L.P.
under a Lease Agreement with a primary term of 20 years and
annual rental payments of $301,611. The remaining interests
in the property were purchased by AEI Real Estate Fund XVIII
Limited Partnership, AEI Income & Growth Fund 24 LLC and AEI
Real Estate Fund XV Limited Partnership, affiliates of the
Partnership.
In February 2004, Garden Ridge, L.P. (GR) filed for Chapter
11 bankruptcy reorganization. In press releases, GR has
stated their intent to close eight of 44 stores and attempt
to renegotiate lease terms for certain other stores. The
Woodlands store was not identified as one of the eight to be
closed and GR has verbally communicated that they are
interested in confirming the Lease for this site. In April
2004, GR submitted a written proposal requesting a 28%
reduction in monthly rent. The Partnership is gathering
market information about the site to prepare a counter-
proposal. With the exception of February, GR was current on
all rents due through May 2004. The rent for February is
considered a pre-petition obligation, which may be paid from
the bankruptcy court, on a prorata basis with other claims,
to the extent available. The Partnership expects to
continue to receive all scheduled rents in future months
unless the Lease is rejected by GR. If the Lease is
confirmed, GR must comply with all Lease terms. If the
Lease is rejected, GR would be required to return possession
of the property to the Partnership and the Partnership would
be responsible for real estate taxes and other costs
required to maintain the property.
On December 30, 2003, the Partnership purchased a 50%
interest in a Johnny Carino's restaurant in Longmont,
Colorado for $1,293,405. The property is leased to Kona
Restaurant Group, Inc. under a Lease Agreement with a
primary term of 13 years and annual rental payments of
$107,992. The remaining interest in the property was
purchased by AEI Accredited Investor Fund 2002 Limited
Partnership, an affiliate of the Partnership.
In July 2003, the lessee of the Razzoo's restaurant in
Austin, Texas notified the Partnership that they are
experiencing financial difficulty and may not be able to pay
future rents. However, rents are current and the
Partnership holds a personal guarantee from the majority
shareholder of the lessee for payment of all rents. The
personal guarantee expires on June 27, 2004. Due to this
notification, the Partnership is evaluating the lease and
property value and has decided that it is premature to
recognize an impairment loss at this time. It is reasonably
possible that this decision may change in the future. At
March 31, 2004, the book value of this property was
$1,437,353.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Payable to AEI Fund Management, Inc. -
AEI Fund Management, Inc. performs the administrative and
operating functions for the Partnership. The payable to AEI
Fund Management represents the balance due for those
services. This balance is non-interest bearing and
unsecured and is to be paid in the normal course of
business.
(6) Discontinued Operations -
During the second quarter of 2003, the Partnership sold the
Children's World daycare center in Houston, Texas, in four
separate transactions, to unrelated third parties. The
Partnership received total net sale proceeds of $1,056,594,
which resulted in a net gain of $279,298. The total cost
and related accumulated depreciation of the interests sold
was $892,219 and $114,923, respectively.
During the second quarter of 2003, the Partnership sold its
23% interest in the Champps Americana restaurant in
Centerville, Ohio, in two separate transactions, to
unrelated third parties. The Partnership received total net
sale proceeds of $1,314,145, which resulted in a net gain of
$476,562. The total cost and related accumulated
depreciation of the interests sold was $924,843 and $87,260,
respectively.
During the fourth quarter of 2003, the Partnership sold
56.7837% of the Hollywood Video store in Muscle Shoals,
Alabama, in three separate transactions, to unrelated third
parties. The Partnership received total net sale proceeds
of $871,473, which resulted in a net gain of $182,491. The
total cost and related accumulated depreciation of the
interests sold was $761,257 and $72,275, respectively.
During the first quarter of 2004, the Partnership sold its
remaining 43.2163% interest in the Hollywood Video store in
Muscle Shoals, Alabama, in two separate transactions, to
unrelated third parties. The Partnership received total net
sale proceeds of $668,266, which resulted in a net gain of
$144,885. At December 31, 2003, the property was classified
as Real Estate Held for Sale with a book value of $523,381.
On December 10, 2003, the Partnership purchased a 50%
interest in a Tia's Tex-Mex restaurant in Killeen, Texas for
$1,041,935. The property was leased to Tia's Texas - Alamo
LLC under a Lease Agreement with a primary term of 15 years
and annual rental payments of $105,570. The remaining
interest in the property was purchased by AEI Private Net
Lease Millennium Fund Limited Partnership, an affiliate of
the Partnership.
During the first quarter of 2004, the Partnership sold its
interest in the Tia's Tex-Mex restaurant, in four separate
transactions, to unrelated third parties. The Partnership
received total net sale proceeds of $1,330,280, which
resulted in a net gain of $289,516. At December 31, 2003,
the property was classified as Real Estate Held for Sale
with a book value of $1,040,764.
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Operations - (Continued)
The financial results for these properties are reflected as
Discontinued Operations in the accompanying financial
statements. The following are the results of discontinued
operations for the three months ended March 31:
2004 2003
Rental Income $ 10,381 $ 77,216
Property Management Expenses (186) (540)
Depreciation 0 (20,115)
Gain on Disposal of Real Estate 434,401 0
---------- ---------
Income from Discontinued Operations $ 444,596 $ 56,561
========== =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of federal
securities laws which represent management's expectations or
beliefs concerning future events, including statements regarding
anticipated application of cash, expected returns from rental
income, growth in revenue, taxation levels, the sufficiency of
cash to meet operating expenses, rates of distribution, and other
matters. These, and other forward looking statements made by the
Partnership, must be evaluated in the context of a number of
factors that may affect the Partnership's financial condition and
results of operations, including the following:
Market and economic conditions which affect the value
of the properties the Partnership owns and the cash
from rental income such properties generate;
the federal income tax consequences of rental income,
deductions, gain on sales and other items and the
affects of these consequences for the Partners;
resolution by the General Partners of conflicts with
which they may be confronted;
the success of the General Partners of locating
properties with favorable risk return characteristics;
the effect of tenant defaults; and
the condition of the industries in which the tenants of
properties owned by the Partnership operate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
The Application of Critical Accounting Policies
The preparation of the Partnership's financial statements
requires management to make estimates and assumptions that may
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. Management evaluates these estimates on an ongoing
basis, including those related to the carrying value of real
estate and the allocation by AEI Fund Management, Inc. of
expenses to the Partnership as opposed to other funds they
manage.
The Partnership purchases properties and records them in
the financial statements at the lower of cost or estimated
realizable value. The Partnership initially records the
properties at cost (including capitalized acquisition expenses).
The Partnership is required to periodically evaluate the carrying
value of properties to determine whether their realizable value
has declined. For properties the Partnership will hold and
operate, management determines whether impairment has occurred by
comparing the property's probability-weighted cash flows to its
current carrying value. For properties held for sale, management
determines whether impairment has occurred by comparing the
property's estimated fair value less cost to sell to its current
carrying value. If the carrying value is greater than the
realizable value, an impairment loss is recorded to reduce the
carrying value of the property to its realizable value. A change
in these assumptions or analysis could cause material changes in
the carrying value of the properties.
AEI Fund Management Inc. allocates expenses to each of the
funds they manage primarily on the basis of the number of hours
devoted by their employees to each fund's affairs. They also
allocate expenses at the end of each month that are not directly
related to a fund's operations based upon the number of investors
in the fund and the fund's capitalization relative to other funds
they manage. The Partnership reimburses these expenses subject
to detailed limitations contained in the Partnership Agreement.
Management of the Partnership has discussed the
development and selection of the above accounting estimates and
the management discussion and analysis disclosures regarding them
with the managing partner of the Partnership.
Results of Operations
For the three months ended March 31, 2004 and 2003, the
Partnership recognized rental income from continuing operations
of $268,432 and $187,501, respectively. In 2004, rental income
increased due to additional rent received from four property
acquisitions in 2003 and 2004 and rent increases on two
properties. These increases were partially offset by a decrease
in rental income due to sales of two properties discussed below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
For the three months ended March 31, 2004 and 2003, the
Partnership incurred Partnership administration expenses from
affiliated parties of $39,594 and $52,148, 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 $12,467 and $12,286, 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.
In July 2003, the lessee of the Razzoo's restaurant in
Austin, Texas notified the Partnership that they are experiencing
financial difficulty and may not be able to pay future rents.
However, rents are current through May 31, 2004 and the
Partnership holds a personal guarantee from the majority
shareholder of the lessee for payment of all rents. The personal
guarantee expires on June 27, 2004. Due to this notification,
the Partnership is evaluating the lease and property value and
has decided that it is premature to recognize an impairment loss
at this time. It is reasonably possible that this decision may
change in the future. At March 31, 2004, the book value of this
property was $1,437,353.
In February 2004, Garden Ridge, L.P. (GR), the lessee of
the Garden Ridge retail store in Woodlands, Texas, filed for
Chapter 11 bankruptcy reorganization. In press releases, GR has
stated their intent to close eight of 44 stores and attempt to
renegotiate lease terms for certain other stores. The Woodlands
store was not identified as one of the eight to be closed and GR
verbally communicated that they are interested in confirming the
Lease for this site. In April 2004, GR submitted a written
proposal requesting a 28% reduction in monthly rent. The
Partnership is gathering market information about the site to
prepare a counter-proposal. With the exception of February, GR
was current on all rents due through May 2004. The rent for
February is considered a pre-petition obligation, which may be
paid from the bankruptcy court, on a prorata basis with other
claims, to the extent available. The Partnership expects to
continue to receive all scheduled rents in future months unless
the Lease is rejected by GR. If the Lease is confirmed, GR must
comply with all Lease terms. If the Lease is rejected, GR would
be required to return possession of the property to the
Partnership and the Partnership would be responsible for real
estate taxes and other costs required to maintain the property.
For the three months ended March 31, 2004 and 2003, the
Partnership recognized interest income of $8,480 and $8,954,
respectively.
For the three months ended March 31, 2003, the Partnership
recognized gain on sale of real estate from continuing operations
of $298,050 from the sale of two properties. Since the
Partnership retains an ownership interest in the properties, the
operating results and gain on sale of the properties were not
classified as discontinued operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Through March 31, 2003, the Partnership sold 24.6846% of
the Children's World daycare center in Plainfield, Illinois, in
three separate transactions, to unrelated third parties. The
Partnership received total net sale proceeds of $450,673, which
resulted in a net gain of $103,162. The total cost and related
accumulated depreciation of the interests sold was $363,531 and
$16,020, respectively. For the three months ended March 31,
2003, the net gain was $53,648.
During the first nine months of 2003, the Partnership sold
99.4123% of the Arby's restaurant, in five separate transactions,
to unrelated third parties. The Partnership received total net
sale proceeds of $1,562,751, which resulted in a net gain of
$306,567. The total cost and related accumulated depreciation of
the interests sold was $1,384,408 and $128,224, respectively.
For the three months ended March 31, 2003, the net gain was
$244,402.
In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, upon complete disposal of a property or
classification of a property as Real Estate Held for Sale, the
Partnership includes the operating results and sale of the
property in discontinued operations. In addition, the
Partnership reclassifies the prior periods operating results and
any partial sales of the property to discontinued operations.
For the three months ended March 31, 2004, the Partnership
recognized income from discontinued operations of $444,596,
representing rental income less property management expenses of
$10,195 and gain on disposal of real estate of $434,401. For the
three months ended March 31, 2003, the Partnership recognized
income from discontinued operations of $56,561, representing
rental income less property management expenses and depreciation.
During the second quarter of 2003, the Partnership sold
the Children's World daycare center in Houston, Texas, in four
separate transactions, to unrelated third parties. The
Partnership received total net sale proceeds of $1,056,594, which
resulted in a net gain of $279,298. The total cost and related
accumulated depreciation of the interests sold was $892,219 and
$114,923, respectively.
During the second quarter of 2003, the Partnership sold
its 23% interest in the Champps Americana restaurant in
Centerville, Ohio in two separate transactions, to unrelated
third parties. The Partnership received total net sale proceeds
of $1,314,145, which resulted in a net gain of $476,562. The
total cost and related accumulated depreciation of the interests
sold was $924,843 and $87,260, respectively.
During the fourth quarter of 2003, the Partnership sold
56.7837% of the Hollywood Video store in Muscle Shoals, Alabama,
in three separate transactions, to unrelated third parties. The
Partnership received total net sale proceeds of $871,473, which
resulted in a net gain of $182,491. The total cost and related
accumulated depreciation of the interests sold was $761,257 and
$72,275, respectively.
During the first quarter of 2004, the Partnership sold its
remaining 43.2163% interest in the Hollywood Video store in
Muscle Shoals, Alabama, in two separate transactions, to
unrelated third parties. The Partnership received total net sale
proceeds of $668,266, which resulted in a net gain of $144,885.
At December 31, 2003, the property was classified as Real Estate
Held for Sale with a book value of $523,381.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
During the first quarter of 2004, the Partnership sold its
interest in the Tia's Tex-Mex restaurant in Killeen, Texas, in
four separate transactions, to unrelated third parties. The
Partnership received total net sale proceeds of $1,330,280, which
resulted in a net gain of $289,516. At December 31, 2003, the
property was classified as Real Estate Held for Sale with a book
value of $1,040,764.
In 2003 and the first quarter of 2004, the Partnership
realized significant gains from the sale of property. While the
real estate market is expected to remain attractive for sellers
of property, there can be no assurance the Partnership will be
able to achieve a similar level of sales activity or sales
profitability during the remainder of 2004 due to unforeseen
changes in the real estate market. In addition, it is likely
the Partnership will curtail its selling activity as it is
becoming more difficult to find attractive property in which to
reinvest the proceeds from property sales.
Inflation has had a minimal effect on income from
operations. Leases may contain rent increases, based on the
increase in the Consumer Price Index over a specified period,
which will result in an increase in rental income over the term
of the leases. In addition, leases may contain rent clauses
which entitle the Partnership to receive additional rent in
future years if gross receipts for the property exceed certain
specified amounts. Increases in sales volumes of the tenants,
due to inflation and real sales growth, may result in an increase
in rental income over the term of the leases. Inflation also may
cause the real estate to appreciate in value. However, inflation
and changing prices may have an adverse impact on the operating
margins of the properties' tenants, which could impair their
ability to pay rent and subsequently reduce the Net Cash Flow
available for distributions.
Liquidity and Capital Resources
During the three months ended March 31, 2004, the
Partnership's cash balances increased $1,760,715 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. During the three months ended March 31, 2003, the
Partnership's cash balances increased $1,230,482 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 increased from
$247,202 in 2003 to $250,902 in 2004 as a result of an increase
in total rental and interest income and a decrease in Partnership
administration and property management expenses in 2004, which
were partially offset by net timing differences in the collection
of payments from the lessees and the payment of expenses.
The major components of the Partnership's cash flow from
investing activities are investments in real estate and proceeds
from the sale of real estate. During the three months ended
March 31, 2004 and 2003, the Partnership generated cash flow from
the sale of real estate of $1,998,546 and $1,499,486,
respectively. During the same periods, the Partnership expended
$202,663 and $224,354, respectively, to invest in real properties
(inclusive of acquisition expenses) as the Partnership reinvested
cash generated from property sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
On December 6, 2002, the Partnership purchased a 50%
interest in a parcel of land in West Chester, Ohio for $506,000.
The Partnership obtained title to the land in the form of an
undivided fee simple interest in the 50% interest purchased. The
land is leased to Champps Operating Corporation (Champps) under a
Lease Agreement with a primary term of 20 years and annual rental
payments of $50,600. Simultaneously with the purchase of the
land, the Partnership entered into a Development Financing
Agreement under which the Partnership advanced funds to Champps
for the construction of a Champps Americana restaurant on the
site. Pursuant to the Lease, any improvements to the land during
the term of the Lease become the property of the lessor. Through
December 31, 2003, the Partnership had advanced $889,670 for
construction of the property. The Partnership charged interest
on the advances at a rate of 10.0%. On January 13, 2004, after
the development was completed, the Lease Agreement was amended to
require annual rental payments of $160,000. The Partnership's
share of the total acquisition costs, including the cost of the
land, was $1,569,884. The remaining interest in the property was
purchased by AEI Net Lease Income & Growth Fund XX Limited
Partnership, an affiliate of the Partnership.
On August 27, 2003, the Company purchased a 32% interest
in a Garden Ridge retail store in Woodlands, Texas for
$2,661,132. The property is leased to Garden Ridge, L.P. under a
Lease Agreement with a primary term of 20 years and annual rental
payments of $301,611. The remaining interests in the property
were purchased by AEI Real Estate Fund XVIII Limited Partnership,
AEI Income & Growth Fund 24 LLC and AEI Real Estate Fund XV
Limited Partnership, affiliates of the Partnership.
On December 10, 2003, the Partnership purchased a 50%
interest in a Tia's Tex-Mex restaurant in Killeen, Texas for
$1,041,935. The property is leased to Tia's Texas - Alamo LLC
under a Lease Agreement with a primary term of 15 years and
annual rental payments of $105,570. The remaining interest in
the property was purchased by AEI Private Net Lease Millennium
Fund Limited Partnership, an affiliate of the Partnership.
On December 30, 2003, the Partnership purchased a 50%
interest in a Johnny Carino's restaurant in Longmont, Colorado
for $1,293,405. The property is leased to Kona Restaurant Group,
Inc. under a Lease Agreement with a primary term of 13 years and
annual rental payments of $107,992. The remaining interest in
the property was purchased by AEI Accredited Investor Fund 2002
Limited Partnership, an affiliate of the Partnership.
The Partnership's primary use of cash flow, other than
investment in real estate, is distribution and redemption
payments to Partners. The Partnership declares its regular
quarterly distributions before the end of each quarter and pays
the distribution in the first ten days after the end of each
quarter. The Partnership attempts to maintain a stable
distribution rate from quarter to quarter. Redemption payments
are paid to redeeming Partners on a semi-annual basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
For the three months ended March 31, 2004 and 2003, the
Partnership declared distributions of $284,389 and $291,852,
respectively. Pursuant to the Partnership Agreement,
distributions of Net Cash Flow were allocated 97% to the Limited
Partners and 3% to the General Partners. Distributions of Net
Proceeds of Sale were allocated 99% to the Limited Partners and
1% to the General Partners. The Limited Partners received
distributions of $276,463 and $284,510 and the General Partners
received distributions of $7,926 and $7,342 for the periods,
respectively.
During the first three months of 2004 and 2003, the
Partnership distributed $30,303 and $70,707 of net sale proceeds
to the Limited and General Partners as part of their regular
quarterly distributions, which represented a return of capital of
$1.84 and $4.24 per Limited Partnership Unit, respectively. The
Partnership anticipates the remaining net sale proceeds will
either be reinvested in additional property or distributed to the
Partners in the future.
The Partnership may acquire Units from Limited Partners
who have tendered their Units to the Partnership. Such Units may
be acquired at a discount. The Partnership will not be obligated
to purchase in any year any number of Units that, when aggregated
with all other transfers of Units that have occurred since the
beginning of the same calendar year (excluding Permitted
Transfers as defined in the Partnership Agreement), would exceed
5% of the total number of Units outstanding on January 1 of such
year. In no event shall the Partnership be obligated to purchase
Units if, in the sole discretion of the Managing General Partner,
such purchase would impair the capital or operation of the
Partnership.
During 2003, ten Limited Partners redeemed a total of
190.39 Partnership Units for $143,963 in accordance with the
Partnership Agreement. The Partnership acquired these Units
using Net Cash Flow from operations. In prior years, a total of
23 Limited Partners redeemed 400.93 Partnership Units for
$306,536. The redemptions increase the remaining Limited
Partner's ownership interest in the Partnership. As a result of
these redemption payments and pursuant to the Partnership
Agreement, the General Partners received distributions of $4,452
in 2003.
The continuing rent payments from the properties, together
with cash generated from property sales, should be adequate to
fund continuing distributions and meet other Partnership
obligations on both a short-term and long-term basis.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of
management, including its President and Chief Financial Officer,
the Managing General Partner of the Partnership evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act). Based upon that evaluation, the President and
Chief Financial Officer of the Managing General Partner concluded
that, as of the end of the period covered by this report, the
disclosure controls and procedures of the Partnership are
adequately designed to ensure that information required to be
disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in applicable rules and forms.
(b) Changes in internal controls
There were no significant changes made in the
Partnership's internal controls during the most recent period
covered by this report that have materially affected, or are
reasonably likely to materially affect, the Partnership's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Partnership is a party or of which the Partnership's property
is subject.
ITEM 2.CHANGES IN SECURITIES
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5.OTHER INFORMATION
None.
PART II - OTHER INFORMATION
(Continued)
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits -
Description
31.1 Certification of Chief Executive Officer of General
Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of General
Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer of General Partner pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
b. Reports filed on Form 8-K - During the quarter ended
March 31, 2004, the
Partnership filed a Form
8-K dated January 21,2004,
reporting the acquisition
of a Champps Americana
restaurant in West
Chester, Ohio.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: May 11, 2004 AEI Income & Growth Fund XXII
Limited Partnership
By: AEI Fund Management XXI, Inc.
Its: Managing General Partner
By: /s/ Robert P Johnson
Robert P. Johnson
President
(Principal Executive Officer)
By: /s/ Patrick W Keene
Patrick W. Keene
Chief Financial Officer
(Principal Accounting Officer)