UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarter Ended: September 30, 2003
Commission file number: 0-17467
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
(Exact Name of Small Business Issuer as Specified in its Charter)
State of Minnesota 41-1603719
(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 REAL ESTATE FUND XVII LIMITED PARTNERSHIP
INDEX
PART I. Financial Information
Item 1.Balance Sheet as of September 30, 2003 and December 31, 2002
Statements for the Periods ended September 30, 2003 and 2002:
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 REAL ESTATE FUND XVII LIMITED PARTNERSHIP
BALANCE SHEET
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Unaudited)
ASSETS
2003 2002
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,733,735 $ 3,332,053
Receivables 0 9,982
----------- -----------
Total Current Assets 5,733,735 3,342,035
----------- -----------
INVESTMENTS IN REAL ESTATE:
Land 2,934,364 3,529,891
Buildings and Equipment 7,086,877 8,317,246
Accumulated Depreciation (2,521,253) (2,948,624)
----------- -----------
Net Investments in Real Estate 7,499,988 8,898,513
----------- -----------
Total Assets $13,233,723 $12,240,548
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 14,924 $ 46,433
Distributions Payable 281,463 285,894
Unearned Rent 15,053 6,274
----------- -----------
Total Current Liabilities 311,440 338,601
----------- -----------
PARTNERS' CAPITAL:
General Partners 19,520 9,316
Limited Partners, $1,000 Unit value;
30,000 Units authorized; 23,389 Units issued;
19,962 and 20,213 Units outstanding
in 2003 and 2002, respectively 12,902,763 11,892,631
----------- -----------
Total Partners' Capital 12,922,283 11,901,947
----------- -----------
Total Liabilities and Partners' Capital $13,233,723 $12,240,548
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
STATEMENT OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
9/30/03 9/30/02 9/30/03 9/30/02
RENTAL INCOME $ 318,121 $ 312,282 $ 906,751 $ 903,930
EXPENSES:
Partnership Administration -
Affiliates 55,232 51,839 153,814 198,798
Partnership Administration
and Property Management -
Unrelated Parties 5,657 11,376 27,935 36,372
Depreciation 53,561 51,535 156,633 151,925
--------- --------- ---------- ----------
Total Expenses 114,450 114,750 338,382 387,095
--------- --------- ---------- ----------
OPERATING INCOME 203,671 197,532 568,369 516,835
OTHER INCOME:
Interest Income 23,145 4,122 53,674 17,170
--------- --------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS 226,816 201,654 622,043 534,005
Income from Discontinued
Operations 768,519 405,632 1,768,424 596,663
--------- --------- ---------- ----------
NET INCOME $ 995,335 $ 607,286 $2,390,467 $1,130,668
========= ========= ========== ==========
NET INCOME ALLOCATED:
General Partners $ 9,954 $ 9,099 $ 23,905 $ 14,333
Limited Partners 985,381 598,187 2,366,562 1,116,335
--------- --------- ---------- ----------
$ 995,335 $ 607,286 $2,390,467 $1,130,668
========= ========= ========== ==========
INCOME PER LIMITED PARTNERSHIP UNIT:
Continuing Operations $ 11.25 $ 9.85 $ 30.67 $ 25.97
Discontinued Operations 38.11 19.68 87.17 28.87
--------- --------- ---------- ----------
Total $ 49.36 $ 29.53 $ 117.84 $ 54.84
========= ========= ========== ==========
Weighted Average Units
Outstanding 19,962 20,259 20,082 20,357
========= ========= ========== ==========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,390,467 $ 1,130,668
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 178,903 221,968
Gain on Sale of Real Estate (1,621,210) (306,974)
Decrease in Receivables 9,982 45,114
Increase (Decrease) in Payable to
AEI Fund Management, Inc. (31,509) 56,918
Increase in Unearned Rent 8,779 16,557
----------- -----------
Total Adjustments (1,455,055) 33,583
----------- -----------
Net Cash Provided By
Operating Activities 935,412 1,164,251
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Real Estate (1,028,421) (183,486)
Proceeds from Sale of Real Estate 3,869,253 1,223,603
----------- -----------
Net Cash Provided By
Investing Activities 2,840,832 1,040,117
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Distributions Payable (4,431) (609)
Distributions to Partners (1,164,013) (923,779)
Redemption Payments (206,118) (205,658)
----------- -----------
Net Cash Used For
Financing Activities (1,374,562) (1,130,046)
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 2,401,682 1,074,322
CASH AND CASH EQUIVALENTS, beginning of period 3,332,053 1,219,154
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,733,735 $ 2,293,476
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
Limited
Partnership
General Limited Units
Partners Partners Total Outstanding
BALANCE, December 31, 2001 $ 0 $11,332,162 $11,332,162 20,508.35
Distributions (9,237) (914,542) (923,779)
Redemption Payments (2,057) (203,601) (205,658) (248.95)
Net Income 14,333 1,116,335 1,130,668
--------- ----------- ----------- -----------
BALANCE, September 30, 2002 $ 3,039 $11,330,354 $11,333,393 20,259.40
========= =========== =========== ===========
BALANCE, December 31, 2002 $ 9,316 $11,892,631 $11,901,947 20,213.40
Distributions (11,640) (1,152,373) (1,164,013)
Redemption Payments (2,061) (204,057) (206,118) (251.90)
Net Income 23,905 2,366,562 2,390,467
--------- ----------- ----------- -----------
BALANCE, September 30, 2003 $ 19,520 $12,902,763 $12,922,283 19,961.50
========= =========== =========== ===========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(1) The condensed statements included herein have been prepared
by the Partnership, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and
reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results of
operations for the interim period, on a basis consistent with
the annual audited statements. The adjustments made to these
condensed statements consist only of normal recurring
adjustments. Certain information, accounting policies, and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Partnership
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that
these condensed financial statements be read in conjunction
with the financial statements and the summary of significant
accounting policies and notes thereto included in the
Partnership's latest annual report on Form 10-KSB.
(2) Organization -
AEI Real Estate Fund XVII Limited Partnership (Partnership)
was formed to acquire and lease commercial properties to
operating tenants. The Partnership's operations are managed
by AEI Fund Management XVII, Inc. (AFM), the Managing
General Partner. Robert P. Johnson, the President 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 February 10, 1988 when minimum
subscriptions of 2,000 Limited Partnership Units
($2,000,000) were accepted. The offering terminated on
November 1, 1988 when the one-year offering period expired.
The Partnership received subscriptions for 23,388.7 Limited
Partnership Units. Under the terms of the Limited
Partnership Agreement, the Limited Partners and General
Partners contributed funds of $23,388,700 and $1,000,
respectively.
During operations, any Net Cash Flow, as defined, which the
General Partners determine to distribute will be distributed
90% to the Limited Partners and 10% to the General Partners;
provided, however, that such distributions to the General
Partners will be subordinated to the Limited Partners first
receiving an annual, noncumulative distribution of Net Cash
Flow equal to 10% of their Adjusted Capital Contribution, as
defined, and, provided further, that in no event will the
General Partners receive less than 1% of such Net Cash Flow
per annum. Distributions to Limited Partners will be made
pro rata by Units.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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 6%
of their Adjusted Capital Contribution per annum, cumulative
but not compounded, to the extent not previously distributed
from Net Cash Flow; (ii) next, 99% to the Limited Partners
and 1% to the General Partners until the Limited Partners
receive an amount equal to 14% of their Adjusted Capital
Contribution per annum, cumulative but not compounded, to
the extent not previously distributed; (iii) next, to the
General Partners until cumulative distributions to the
General Partners under Items (ii) and (iii) equal 15% of
cumulative distributions to all Partners under Items (ii)
and (iii). Any remaining balance will be distributed 85% to
the Limited Partners and 15% 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 90% to
the Limited Partners and 10% to the General Partners. In
the event no Net Cash Flow is distributed to the Limited
Partners, 90% of each item of income, gain or credit for
each respective year shall be allocated to the Limited
Partners, and 10% of each such item shall be allocated to
the General Partners. Net losses from operations will be
allocated 98% to the Limited Partners and 2% 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 14% of their Adjusted Capital Contributions
per annum, cumulative but not compounded, to the extent not
previously allocated; (iii) third, to the General Partners
until cumulative allocations to the General Partners equal
15% of cumulative allocations. Any remaining balance will
be allocated 85% to the Limited Partners and 15% 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.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Continued)
(3) Summary of Real Estate Accounting Policies -
The Partnership's real estate is leased under triple net
leases classified as operating leases. The leases provide
for base annual rental payments payable in monthly
installments. The Partnership recognizes rental revenue
according to the terms of the individual leases. For leases
which contain stated rental increases, the increases are
recognized in the year in which they are effective.
Contingent rental payments are recognized when the
contingencies on which the payments are based are satisfied
and the rental payments become due under the terms of the
leases.
Real estate is recorded at the lower of cost or estimated
net realizable value. The Partnership compares the carrying
amount of its properties to the estimated probability-
weighted future cash flows expected to result from the
property and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount
of the property, the Partnership recognizes an impairment
loss by the amount by which the carrying amount of the
property exceeds the fair value of the property.
The Partnership has capitalized as Investments in Real
Estate certain costs incurred in the review and acquisition
of the properties. The costs were allocated to the land,
buildings and equipment.
The buildings and equipment of the Partnership are
depreciated using the straight-line method for financial
reporting purposes based on estimated useful lives of 30
years and 10 years respectively.
In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, upon complete disposal of a property
or classification of a property as Real Estate Held for
Sale, the Partnership includes the operating results and
sale of the property in discontinued operations. In
addition, the Partnership reclassifies the prior periods
operating results and any partial sales of the property to
discontinued operations.
The Partnership accounts for properties owned as tenants-in-
common with affiliated Partnerships and/or unrelated third
parties using the proportionate consolidation method. Each
tenant-in-common owns a separate, undivided interest in the
properties. Any tenant-in-common that holds more than a 50%
interest does not control decisions over the other tenant-in-
common interests. The financial statements reflect only
this Partnership's percentage share of the properties' land,
building and equipment, liabilities, revenues and expenses.
(4) Reclassification -
Certain items in the prior year's financial statements have
been reclassified to conform to 2003 presentation. These
reclassifications had no effect on Partners' capital, net
income or cash flows.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Continued)
(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. Certain lessees
have been granted options to purchase the property at a
formula price. In many of the leases, the option price is
stated to be the greater of the price determined by the
stated formula or the fair market value of the property as
agreed upon by the parties or determined based on
appraisals. In general, the formula price is determined in
one of two ways. Under the first, the option price is the
original purchase price of the property increased by a
specified percentage per year, compounded annually. Under
the second, the option price is determined by dividing the
annual rent at the time the purchase option is exercised by
a percentage. Based on the scheduled annual rent under the
lease, the resulting option price would always be greater
than the original purchase price. The actual sale price of
a property to a lessee may or may not exceed original cost
depending on market and other conditions.
On April 27, 2001, the Partnership purchased a 28% interest
in a parcel of land in Utica, Michigan for $338,380. The
Partnership obtained title to the land in the form of an
undivided fee simple interest in the 28% interest purchased.
The land is leased to Champps Entertainment, Inc. (Champps)
under a Lease Agreement with a primary term of 20 years and
annual rental payments of $30,454. Effective October 23,
2001, the annual rent was increased to $36,376.
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. Initially, the Partnership charged interest on the
advances at a rate of 9.0%. Effective October 23, 2001, the
interest rate was increased to 10.75%. On February 12,
2002, after the development was completed, the Lease
Agreement was amended to require annual rental payments of
$105,350. The Partnership's share of the total acquisition
costs, including the cost of the land, was $961,647. The
remaining interests in the 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.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Continued)
(5) Investments in Real Estate - (Continued)
On April 3, 2003, the Partnership purchased a 50% interest
in a parcel of land in Mansfield, Texas for $383,000. 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 Kona Restaurant Group, Inc. (KRG)
under a Lease Agreement with a primary term of 17 years and
annual rental payments of $38,300. 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. Pursuant to the Lease, any
improvements to the land during the term of the Lease become
the property of the lessor. The Partnership charged
interest on the advances at a rate of 10.0%. On September
3, 2003, after the development was completed, the Lease
Agreement was amended to require annual rental payments of
$103,250. The Partnership's share of the total acquisition
costs, including the cost of the land, was $1,028,421. The
remaining interest in the property was purchased by AEI Real
Estate Fund XVIII Limited Partnership, an affiliate of the
Partnership.
In October 2003, the Partnership entered into an Agreement
to purchase a 50% interest in an Eckerd drug store in
Cicero, New York for approximately $1,550,000. The property
will be leased to Eckerd Corporation, under a Lease
Agreement with a primary term of 20 years and annual rental
payments of approximately $126,325. The remaining interest
in the property will be purchased by AEI Net Lease Income &
Growth Fund XX Limited Partnership, an affiliate of the
Partnership.
On November 5, 2003, the Partnership purchased a 50%
interest in a Johnny Carino's restaurant in Longview, Texas
for approximately $1,175,000. The property is leased to
Kona Restaurant Group, Inc. under a Lease Agreement with a
primary term of 17 years and annual rental payments of
approximately $105,750. The remaining interest in the
property was purchased by AEI Net Lease Income & Growth Fund
XIX Limited Partnership, an affiliate of the Partnership.
During the first nine months of 2003 and 2002, the
Partnership distributed $411,424 and $95,980 of net sale
proceeds to the Limited and General Partners as part of
their quarterly distributions, which represented a return of
capital of $20.27 and $4.66 per Limited Partnership Unit.
The remaining net sale proceeds will either be reinvested in
additional property or distributed to the Partners in the
future.
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 November
30, 2003 and the Partnership holds a personal guarantee from
the majority shareholder of the lessee for payment of all
rents. The personal guarantee expires on June 27, 2004.
Due to this notification, the Partnership is evaluating the
lease and property value and has decided that it is
premature to recognize an impairment loss at this time. It
is reasonably possible that this decision may change in the
future. At September 30, 2003, the book value of the
Razzoo's property owned by the Partnership is $520,524.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Continued)
(6) Payable to AEI Fund Management -
AEI Fund Management, Inc. performs the administrative and
operating functions for the Partnership. The payable to AEI
Fund Management represents the balance due for those
services. This balance is non-interest bearing and
unsecured and is to be paid in the normal course of
business.
(7) Discontinued Operations -
In May 2001, Huntington Restaurants Group, Inc. (HRG), the
lessee of the Denny's restaurant in Casa Grande, Arizona,
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. For the
years ended December 31, 2002 and 2001, HRG owed $124,926
and $55,981 for past due rent, which was not accrued for
financial reporting purposes. In October 2002, the
Partnership entered into an agreement to sell the property
to an unrelated third party. As part of the transaction,
the past due rent was forgiven. On December 27, 2002, the
sale closed with the Partnership receiving net sale proceeds
of $1,090,781, which resulted in a net gain of $628,322. At
the time of sale, the cost and related accumulated
depreciation was $721,420 and $258,961, respectively.
In the third quarter of 2002, the Partnership sold its 60%
interest in the TGI Friday's restaurant in Greensburg,
Pennsylvania, in four separate transactions, to unrelated
third parties. The Partnership received total net sale
proceeds of $1,223,603, which resulted in a net gain of
$306,974. The total cost and related accumulated
depreciation of the interests sold was $1,009,045 and
$92,416, respectively.
During the first six months of 2003, the Partnership sold
its 26.05% interest in the Champps Americana restaurant in
Troy, Michigan, in eight separate transactions, to unrelated
third parties. The Partnership received total net sale
proceeds of $1,753,563, which resulted in a net gain of
$602,200. The total cost and related accumulated
depreciation of the interests sold was $1,289,135 and
$137,772, respectively.
During the second quarter of 2003, the Partnership sold its
14% interest in the Champps Americana restaurant in
Centerville, Ohio, in four separate transactions, to
unrelated third parties. The Partnership received total net
sale proceeds of $782,545, which resulted in a net gain of
$272,714. The total cost and related accumulated
depreciation of the interests sold was $551,677 and $41,846,
respectively.
In May 2003, the Partnership entered into an agreement to
sell the Taco Cabana restaurant in San Marcos, Texas, to the
lessee. On July 30, 2003, the sale closed with the
Partnership receiving net sale proceeds of $1,333,145, which
resulted in a net gain of $746,296. At the time of sale,
the cost and related accumulated depreciation was $1,013,505
and $426,656, respectively.
AEI REAL ESTATE FUND XVII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Continued)
(7) Discontinued Operations - (Continued)
The financial results for these properties are reflected as
Discontinued Operations in the accompanying financial
statements. The results of discontinued operations are as
follows:
Three Months Ended Nine Months Ended
9/30/03 9/30/02 9/30/03 9/30/02
Rental Income $ 14,623 $ 119,325 $ 163,245 $ 381,327
Property Management Expenses 9,274 2,078 6,239 (21,595)
Depreciation (1,674) (22,745) (22,270) (70,043)
Gain on Disposal of Real Estate 746,296 306,974 1,621,210 306,974
--------- --------- ---------- ----------
Income from Discontinued
Operations $ 768,519 $ 405,632 $1,768,424 $ 596,663
========= ========= ========== ==========
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 nine months ended September 30, 2003 and 2002, the
Partnership recognized rental income from continuing operations
of $906,751 and $903,930, respectively. In 2003, rental income
increased due to additional rent received from two property
acquisitions in 2003 and 2002, and rent increases on eight
properties. These increases in rental income were partially
offset by a temporary rent concession given to one lessee in
exchange for signing an extension of the lease term.
For the nine months ended September 30, 2003 and 2002, the
Partnership incurred Partnership administration expenses from
affiliated parties of $153,814 and $198,798, respectively. These
administration expenses include costs associated with the
management of the properties, processing distributions, reporting
requirements and correspondence to the Limited Partners. During
the same periods, the Partnership incurred Partnership
administration and property management expenses from unrelated
parties of $27,935 and $36,372, 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.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
During the same periods, the Partnership earned interest
income of $53,674 and $17,170, respectively. In 2003, interest
income increased due to the Partnership receiving greater
interest from construction advances and having more money
invested in a money market account due to property sales.
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 November 30, 2003 and the
Partnership holds a personal guarantee from the majority
shareholder of the lessee for payment of all rents. The personal
guarantee expires on June 27, 2004. Due to this notification,
the Partnership is evaluating the lease and property value and
has decided that it is premature to recognize an impairment loss
at this time. It is reasonably possible that this decision may
change in the future. At September 30, 2003, the book value of
the Razzoo's property owned by the Partnership is $520,524.
In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, upon complete disposal of a property or
classification of a property as Real Estate Held for Sale, the
Partnership includes the operating results and sale of the
property in discontinued operations. In addition, the
Partnership reclassifies the prior periods operating results and
any partial sales of the property to discontinued operations.
For the nine months ended September 30, 2003, the Partnership
recognized income from discontinued operations of $1,768,424,
representing rental income less property management expenses and
depreciation of $147,214 and gain on disposal of real estate of
$1,621,210. For the nine months ended September 30, 2002, the
Partnership recognized income from discontinued operations of
$596,663, representing rental income less property management
expenses and depreciation of $289,689 and gain on disposal of
real estate of $306,974.
In May 2001, Huntington Restaurants Group, Inc. (HRG), the
lessee of the Denny's restaurant in Casa Grande, Arizona,
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. For the years ended December 31,
2002 and 2001, HRG owed $124,926 and $55,981 for past due rent,
which was not accrued for financial reporting purposes. In
October 2002, the Partnership entered into an agreement to sell
the property to an unrelated third party. As part of the
transaction, the past due rent was forgiven. On December 27,
2002, the sale closed with the Partnership receiving net sale
proceeds of $1,090,781, which resulted in a net gain of $628,322.
At the time of sale, the cost and related accumulated
depreciation was $721,420 and $258,961, respectively.
In the third quarter of 2002, the Partnership sold its 60%
interest in the TGI Friday's restaurant in Greensburg,
Pennsylvania, in four separate transactions, to unrelated third
parties. The Partnership received total net sale proceeds of
$1,223,603, which resulted in a net gain of $306,974. The total
cost and related accumulated depreciation of the interests sold
was $1,009,045 and $92,416, respectively.
During the first six months of 2003, the Partnership sold
its 26.05% interest in the Champps Americana restaurant in Troy,
Michigan, in eight separate transactions, to unrelated third
parties. The Partnership received total net sale proceeds of
$1,753,563, which resulted in a net gain of $602,200. The total
cost and related accumulated depreciation of the interests sold
was $1,289,135 and $137,772, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
During the second quarter of 2003, the Partnership sold
its 14% interest in the Champps Americana restaurant in
Centerville, Ohio, in four separate transactions, to unrelated
third parties. The Partnership received total net sale proceeds
of $782,545, which resulted in a net gain of $272,714. The total
cost and related accumulated depreciation of the interests sold
was $551,677 and $41,846, respectively.
In May 2003, the Partnership entered into an agreement to
sell the Taco Cabana restaurant in San Marcos, Texas, to the
lessee. On July 30, 2003, the sale closed with the Partnership
receiving net sale proceeds of $1,333,145, which resulted in a
net gain of $746,296. At the time of sale, the cost and related
accumulated depreciation was $1,013,505 and $426,656,
respectively.
Inflation has had a minimal effect on income from
operations. Leases may contain rent increases, based on the
increase in the Consumer Price Index over a specified period,
which will result in an increase in rental income over the term
of the leases. In addition, leases may contain rent clauses
which entitle the Partnership to receive additional rent in
future years if gross receipts for the property exceed certain
specified amounts. Increases in sales volumes of the tenants,
due to inflation and real sales growth, may result in an increase
in rental income over the term of the leases. Inflation also may
cause the real estate to appreciate in value. However, inflation
and changing prices may have an adverse impact on the operating
margins of the properties' tenants, which could impair their
ability to pay rent and subsequently reduce the Net Cash Flow
available for distributions.
Liquidity and Capital Resources
During the nine months ended September 30, 2003, the
Partnership's cash balances increased $2,401,682 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 nine months ended September 30, 2002, the
Partnership's cash balances increased $1,074,322 mainly as a
result of cash generated from the sale of property, which was
partially offset by cash used to purchase property.
Net cash provided by operating activities decreased from
$1,164,251 in 2002 to $935,412 in 2003 due to a decrease in total
rental and interest income in 2003 and net timing differences in
the collection of payments from lessees and the payment of
expenses, which were partially offset by a decrease in
Partnership administration expenses in 2003.
The major components of the Partnership's cash flow from
investing activities are investments in real estate and proceeds
from the sale of real estate. During the nine months ended
September 30, 2003 and 2002, the Partnership generated cash flow
from the sale of real estate of $3,869,253 and $1,223,603,
respectively. During the same periods, the Partnership expended
$1,028,421 and $183,486, 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 April 27, 2001, the Partnership purchased a 28%
interest in a parcel of land in Utica, Michigan for $338,380. The
Partnership obtained title to the land in the form of an
undivided fee simple interest in the 28% interest purchased. The
land is leased to Champps Entertainment, Inc. (Champps) under a
Lease Agreement with a primary term of 20 years and annual rental
payments of $30,454. Effective October 23, 2001, the annual rent
was increased to $36,376. 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.
Initially, the Partnership charged interest on the advances at a
rate of 9.0%. Effective October 23, 2001, the interest rate was
increased to 10.75%. On February 12, 2002, after the development
was completed, the Lease Agreement was amended to require annual
rental payments of $105,350. The Partnership's share of the
total acquisition costs, including the cost of the land, was
$961,647. The remaining interests in the 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.
On April 3, 2003, the Partnership purchased a 50% interest
in a parcel of land in Mansfield, Texas for $383,000. 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 Kona Restaurant Group, Inc. (KRG) under a Lease
Agreement with a primary term of 17 years and annual rental
payments of $38,300. 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.
Pursuant to the Lease, any improvements to the land during the
term of the Lease become the property of the lessor. The
Partnership charged interest on the advances at a rate of 10.0%.
On September 3, 2003, after the development was completed, the
Lease Agreement was amended to require annual rental payments of
$103,250. The Partnership's share of the total acquisition
costs, including the cost of the land, was $1,028,421. The
remaining interest in the property was purchased by AEI Real
Estate Fund XVIII Limited Partnership, an affiliate of the
Partnership.
In October 2003, the Partnership entered into an Agreement
to purchase a 50% interest in an Eckerd drug store in Cicero, New
York for approximately $1,550,000. The property will be leased
to Eckerd Corporation, under a Lease Agreement with a primary
term of 20 years and annual rental payments of approximately
$126,325. The remaining interest in the property will be
purchased by AEI Net Lease Income & Growth Fund XX Limited
Partnership, an affiliate of the Partnership.
On November 5, 2003, the Partnership purchased a 50%
interest in a Johnny Carino's restaurant in Longview, Texas for
approximately $1,175,000. The property is leased to Kona
Restaurant Group, Inc. under a Lease Agreement with a primary
term of 17 years and annual rental payments of approximately
$105,750. The remaining interest in the property was purchased
by AEI Net Lease Income & Growth Fund XIX 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 week after the end of each quarter.
The Partnership attempts to maintain a stable distribution rate
from quarter to quarter. Redemption payments are paid to
redeeming Partners on a quarterly basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
For the nine months ended September 30, 2003 and 2002, the
Partnership declared distributions of $1,164,013 and $923,779,
respectively, which were distributed 99% to the Limited Partners
and 1% to the General Partners. The Limited Partners received
distributions of $1,152,373 and $914,542 and the General Partners
received distributions of $11,640 and $9,237 for the periods,
respectively. In March 2003, the Partnership declared a bonus
distribution of $252,525 of net sale proceeds, which resulted in
higher distributions in 2003, when compared to 2002.
During the first nine months of 2003 and 2002, the
Partnership distributed $411,424 and $95,980 of net sale proceeds
to the Limited and General Partners as part of their quarterly
distributions, which represented a return of capital of $20.27
and $4.66 per Limited Partnership Unit. 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 is not obligated to
purchase in any year more than 5% of the number of Units
outstanding at the beginning of the year. In no event shall the
Partnership be obligated to purchase Units if, in the sole
discretion of the Managing General Partner, such purchase would
impair the capital or operation of the Partnership.
On January 1, 2003, seven Limited Partners redeemed a
total of 46.40 Partnership Units for $37,961 in accordance with
the Partnership Agreement. On April 1, 2003, five limited
Partners redeemed a total of 48.50 Partnership Units for $39,641.
On July 1, 2003, eleven Limited Partners redeemed a total of 157
Partnership Units for $126,455. The Partnership acquired these
Units using Net Cash Flow from operations. In prior years, a
total of 246 Limited Partners redeemed 3,175.3 Partnership Units
for $2,313,522. The redemptions increase the remaining Limited
Partners' ownership interest in the Partnership.
The continuing rent payments from the properties, together
with cash generated from property sales, should be adequate to
fund continuing distributions and meet other Partnership
obligations on both a short-term and long-term basis.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of
management, including its President and Chief Financial Officer,
the Managing General Partner of the Partnership evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) 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.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits -
Description
10.1 First Amendment to Net Lease Agreement dated September
3, 2003 between the Partnership, AEI Real Estate Fund
XVIII Limited Partnership and Kona Restaurant Group, Inc.
relating to the Property at 960 N.Highway 287, Mansfield,
Texas.
10.2 Assignment of Purchase and Sale Agreement and First
Amendment to Purchase and Sale Agreement dated October 23,
2003 between the Partnership and AEI Fund Management, Inc.
relating to the Property at 8379 Thompson Road, Cicero,
New York.
10.3 Purchase Agreement dated November 5, 2003 between the
Partnership, AEI Net Lease Income & Growth Fund XIX
Limited Partnership and Kona Restaurant Group, Inc.
relating to the Property at 411 B East Loop 281, Longview,
Texas.
10.4 Net Lease Agreement dated November 5, 2003 between the
Partnership, AEI Net Lease Income & Growth Fund XIX
Limited Partnership and Kona Restaurant Group, Inc.
relating to the Property at 411 B East Loop 281,
Longview, Texas.
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
September 30, 2003, the
Partnership filed a Form 8-K
dated August 11, 2003,
reporting the disposition of
a Taco Cabana restaurant in
San Marcos, Texas.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: November 11, 2003 AEI Real Estate Fund XVII
Limited Partnership
By: AEI Fund Management XVII, 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)