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, 2006
Commission file number: 000-51823
AEI INCOME & GROWTH FUND 26 LLC
(Exact Name of Small Business Issuer as Specified in its Charter)
State of Delaware 41-2173048
(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 Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No [X]
Transitional Small Business Disclosure Format: Yes No [X]
AEI INCOME & GROWTH FUND 26 LLC
INDEX
PART I.Financial Information
Item 1. Balance Sheet as of March 31, 2006 and December 31, 2005
Statements for the Period ended March 31, 2006 and 2005:
Operations
Cash Flows
Changes in Members' Equity (Deficit)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis
Item 3. Controls and Procedures
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
AEI INCOME & GROWTH FUND 26 LLC
BALANCE SHEET
MARCH 31, 2006 AND DECEMBER 31, 2005
(Unaudited)
ASSETS
2006 2005
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,000 $ 1,004
======== ========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Payable to AEI Fund Management, Inc. $ 2,709 $ 0
MEMBERS' EQUITY (DEFICIT):
Managing Members' Equity 1,004 1,004
Accumulated Losses (2,713) 0
-------- --------
Total Members' Equity (Deficit) (1,709) 1,004
-------- --------
Total Liabilities and Members' Equity $ 1,000 $ 1,004
======== ========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
2006 2005
INCOME $ 1 $ 0
EXPENSES:
LLC Administration - Affiliates 1,214 0
LLC Administration - Unrelated Parties 1,500 0
-------- --------
Total Expenses 2,714 0
-------- --------
NET LOSS $ (2,713) $ 0
======== ========
NET LOSS ALLOCATED:
Managing Members $ (2,713) $ 0
======== ========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,713) $ 0
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Increase in Payable to
AEI Fund Management, Inc. 2,709 0
-------- --------
Net Cash Used For
Operating Activities (4) 0
-------- --------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (4) 0
CASH AND CASH EQUIVALENTS, beginning of period 1,004 0
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,000 $ 0
======== ========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
Limited
Member
Managing Limited Units
Members Members Total Outstanding
BALANCE, March 14, 2005 $ 0 $ 0 $ 0 0
Capital Contributions 0 0 0 0
------- --------- --------- ---------
BALANCE, March 31, 2005 $ 0 $ 0 $ 0 0
======= ========= ========= =========
BALANCE, December 31, 2005 $ 1,004 $ 0 $ 1,004 0
Net Loss (2,713) 0 (2,713) 0
------- --------- --------- ---------
BALANCE, March 31, 2006 $(1,709) $ 0 $ (1,709) 0
======= ========= ========= =========
The accompanying Notes to Financial Statements are an integral
part of this statement.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(Unaudited)
(1) The condensed statements included herein have been prepared
by the Company, 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 Company 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
Company's latest annual report on Form 10-KSB.
(2) Organization -
AEI Income & Growth Fund 26 LLC (the Company), a Limited
Liability Company, was formed on March 14, 2005 to acquire
and lease commercial properties to operating tenants. The
Company's operations are managed by AEI Fund Management XXI,
Inc. (AFM), the Managing Member. Robert P. Johnson, the
President and sole director of AFM, serves as the Special
Managing Member. 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 Company.
The terms of the offering call for a subscription price of
$10 per LLC Unit, payable on acceptance of the offer. All
subscriptions will be held in escrow until a minimum of
150,000 Units are sold. As of March 31, 2006, no Limited
Members were admitted to the Company. Under the terms of
the Operating Agreement, 10,000,000 LLC Units are available
for subscription which, if fully subscribed, will result in
contributed Limited Members' capital of $100,000,000. The
Managing Members have contributed capital of $1,000. The
Company shall continue until December 31, 2055, unless
dissolved, terminated and liquidated prior to that date.
During operations, any Net Cash Flow, as defined, which the
Managing Members determine to distribute will be distributed
97% to the Limited Members and 3% to the Managing Members.
Distributions to Limited Members will be made pro rata by
Units.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Organization - (Continued)
Any Net Proceeds of Sale, as defined, from the sale or
financing of properties which the Managing Members determine
to distribute will, after provisions for debts and reserves,
be paid in the following manner: (i) first, 99% to the
Limited Members and 1% to the Managing Members until the
Limited Members receive an amount equal to: (a) their
Adjusted Capital Contribution plus (b) an amount equal to
6.5% 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 Members and 10% to
the Managing Members. Distributions to the Limited Members
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 97% to the Limited Members and 3% to the Managing
Members. Net losses from operations will be allocated 99%
to the Limited Members and 1% to the Managing Members.
For tax purposes, profits arising from the sale, financing,
or other disposition of property will be allocated in
accordance with the Operating Agreement as follows: (i)
first, to those Members with deficit balances in their
capital accounts in an amount equal to the sum of such
deficit balances; (ii) second, 99% to the Limited Members
and 1% to the Managing Members until the aggregate balance
in the Limited Members' capital accounts equals the sum of
the Limited Members' Adjusted Capital Contributions plus an
amount equal to 6.5% 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
Members and 10% to the Managing Members. Losses will be
allocated 99% to the Limited Members and 1% to the Managing
Members.
The Managing Members are not required to currently fund a
deficit capital balance. Upon liquidation of the Company or
withdrawal by a Managing Member, the Managing Members will
contribute to the Company an amount equal to the lesser of
the deficit balances in their capital accounts or 1.01% of
the total capital contributions of the Limited Members over
the amount previously contributed by the Managing Members.
AEI INCOME & GROWTH FUND 26 LLC
NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Investments in Real Estate -
At March 31, 2006, the Company had not entered into any
formal contractual commitments to expend capital. In order
to facilitate the purchase of the Company's first property,
AEI Fund Management XVII, Inc. (AFMX), an affiliate of the
Managing Members, purchased a 40% interest in a Gart Sports
(Sports Authority) store in Wichita, Kansas for
approximately $2,231,000 from an unrelated third party.
Subsequent to March 31, 2006, the Company purchased a 29.5%
interest in the property from AFMX. When sufficient
additional subscription proceeds are raised, the Company
anticipates it will purchase the remaining 10.5% interest
from AFMX. The price the Company pays will be equal to the
price paid by AFMX plus the expenses incurred to transfer
ownership of the property to the Company, which are expected
to be minimal. Any profit or loss on the property during
the period the property is owned by AFMX will be paid or
charged to the Company. There will be no other benefit
arising out of the transaction to the Managing Members or
their affiliates apart from compensation otherwise permitted
by the Operating Agreement.
(4) Payable to AEI Fund Management, Inc. -
AEI Fund Management, Inc. performs the administrative and
operating functions for the Company. The payable to AEI
Fund Management represents the balance due for those
services. This balance is non-interest bearing and
unsecured and is to be paid in the normal course of
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of federal
securities laws which represent management's expectations or
beliefs concerning future events, including statements regarding
anticipated application of cash, expected returns from rental
income, growth in revenue, taxation levels, the sufficiency of
cash to meet operating expenses, rates of distribution, and other
matters. These, and other forward looking statements made by our
managers, must be evaluated in the context of a number of factors
that may affect our financial condition and results of
operations, including the following:
Market and economic conditions which affect the value
of the properties we purchase 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 members;
resolution by our managers of conflicts with which they
may be confronted;
the success of our managers of locating properties with
favorable risk return characteristics;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
the effect of tenant defaults; and
the condition of the industries in which the tenants of
properties purchased by the Company operate.
The Application of Critical Accounting Policies
The preparation of the Company'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 Company as opposed to other funds they manage.
The Company will purchase properties and record them in
the financial statements at the lower of cost or estimated
realizable value. The Company initially records the properties
at cost (including capitalized acquisition expenses). The
Company is required to periodically evaluate the carrying value
of properties to determine whether their realizable value has
declined. For properties the Company 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 Company reimburses these expenses
subject to detailed limitations contained in the Operating
Agreement.
Management of the Company has discussed the development
and selection of the above accounting estimates and the
management discussion and analysis disclosures regarding them
with the managing member of the Company.
Results of Operations
For the period ended March 31, 2006, the Company has had
minimum operations. Expenses incurred represent administrative
costs associated with reporting and correspondence requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
Liquidity and Capital Resources
The Company's primary sources of cash will be proceeds
from the sale of Units, interest income, rental income and
proceeds from the sale of property. Its primary uses of cash
will be investment in real properties, payment of expenses
involved in the sale of Units, the management of properties, the
organization and administration of the Company, and the payment
of distributions.
Before the acquisition of properties, cash flow from
operating activities is not significant. Net income, after
adjustment for depreciation, is lower during the first few years
of operations as administrative expenses remain high and a large
amount of the Company's assets remain invested on a short-term
basis in lower-yielding cash equivalents. Net income will become
the largest component of cash flow from operating activities and
the largest component of cash flow after the completion of the
acquisition phase.
The Operating Agreement requires that all proceeds from
the sale of Units, subject to a reasonable reserve for ongoing
operations, be invested or committed to investment in properties
by the later of two years after the date of the Prospectus or
twelve months after the offering terminates. While the Company
is purchasing properties, cash flow from investing activities
(investment in real property) will remain negative and will
constitute the principal use of the Company's available cash
flow.
At March 31, 2006, the Company had not entered into any
formal contractual commitments to expend capital. In order to
facilitate the purchase of the Company's first property, AEI Fund
Management XVII, Inc. (AFMX), an affiliate of the Managing
Members, purchased a 40% interest in a Gart Sports (Sports
Authority) store in Wichita, Kansas for approximately $2,231,000
from an unrelated third party. Subsequent to March 31, 2006, the
Company purchased a 29.5% interest in the property from AFMX.
When sufficient additional subscription proceeds are raised, the
Company anticipates it will purchase the remaining 10.5% interest
from AFMX. The price the Company pays will be equal to the price
paid by AFMX plus the expenses incurred to transfer ownership of
the property to the Company, which are expected to be minimal.
Any profit or loss on the property during the period the property
is owned by AFMX will be paid or charged to the Company. There
will be no other benefit arising out of the transaction to the
Managing Members or their affiliates apart from compensation
otherwise permitted by the Operating Agreement.
During the offering of Units, the Company's primary source
of cash flow will be from the sale of LLC Units. The Company
commenced its offering of LLC Units to the public through a
registration statement that became effective October 20, 2005 and
will continue until October 19, 2006, subject to extension to
October 19, 2007 if all 10,000,000 LLC Units are not sold before
then. The registration statement indicated that the Company
would not be capitalized, and all subscription funds would be
held in escrow, until the Company had received subscriptions for
150,000 Units ($1,500,000). The Company obtained subscriptions
for the 150,000 Units required for release of escrow proceeds and
on April 3, 2006, the Company accepted subscriptions for
193,231.6 Units for aggregate proceeds of $1,932,316.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued)
The Operating Agreement requires that no more than 15% of
the proceeds from the sale of Units be applied to expenses
involved in the sale of Units (including Commissions) and that
such expenses, together with acquisition expenses, not exceed 20%
of the proceeds from the sale of Units. As set forth under the
caption "Estimated Use of Proceeds" of the Prospectus, the
Managing Members anticipate that 15% of such proceeds will be
applied to cover organization and offering expenses if only the
minimum proceeds are obtained and that 12.8% of such proceeds
will be applied to such expenses if the maximum proceeds are
obtained. To the extent organization and offering expenses
actually incurred exceed 15% of proceeds, they are borne by the
Managing Members.
After completion of the acquisition phase, the Company's
primary use of cash flow will be distribution payments to
Members. The Company will declare its regular quarterly
distributions before the end of each quarter and pay the
distribution in the first ten days after the end of each quarter.
Beginning in March 2009, the Company may acquire Units
from Limited Members who have tendered their Units to the
Company. Such Units may be acquired at a discount. The Company
will not be obligated to purchase in any year more than 2% of the
total number of Units outstanding on January 1 of such year. In
no event shall the Company be obligated to purchase Units if, in
the sole discretion of the Managing Member, such purchase would
impair the capital or operation of the Company.
Until capital is invested in properties, the Company will
remain extremely liquid. After completion of property
acquisitions, the Company will attempt to maintain a cash reserve
of only approximately .5% of subscription proceeds. Because
properties are purchased for cash and leased under triple-net
leases, this is considered adequate to satisfy most
contingencies.
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 Member of the Company 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 Member concluded that, as of the end of
the period covered by this report, the disclosure controls and
procedures of the Company 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 Company's
internal controls during the most recent period covered by this
report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Company is a party or of which the Company's property is
subject.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
(a) As of March 31, 2006, there were no holders of record
of the registrant's LLC Units. There is no other class of
security outstanding or authorized. The registrant's Units are
not a traded security in any market. During the period covered
by this report, the Company did not sell any equity securities
that are not registered under the Securities Act of 1933.
(b) The registration statement for the offering (No. 333-
125266) was declared effective on October 20, 2005. The offering
commenced on October 20, 2005 and is ongoing. AEI Securities,
Inc. (ASI) is the dealer manager of the offering. The
registration statement covers 10,000,000 Units of limited
liability company interest at an aggregate price of up to $100
million. The registration statement indicated that the Company
would not be capitalized, and all subscription funds would be
held in escrow, until the Company had received subscriptions for
150,000 units ($1,500,000). At March 31, 2006, the Company had
not received the minimum amount of subscriptions.
(c) Beginning in March 2009, pursuant to Section 7.7 of
the Operating Agreement, each Limited Member has the right to
present Units to the Company for purchase by submitting notice to
the Managing Member during January or July of each year. The
purchase price of the Units is equal to 80% of the net asset
value of the Units, as of the first business day of January or
July of each year, as determined by the Managing Member in
accordance with the provisions of the Operating Agreement. Units
tendered to the Company during January and July are redeemed on
April 1st and October 1st, respectively, of each year subject to
the following limitations. The Company will not be obligated to
purchase in any year more than 2% of the total number of Units
outstanding on January 1 of such year. In no event shall the
Company be obligated to purchase Units if, in the sole discretion
of the Managing Member, such purchase would impair the capital or
operation of the Company. During the period covered by this
report, the Company did not purchase any Units.
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
10.1 Assignment and Assumption of Lease and Guaranty dated
April 3, 2006 between the Company and AEI Fund Management
XVII, Inc. relating to the Property at 6959 East 21st
Street, Wichita, Kansas (incorporated by reference to
Exhibit 10.1 of Form 8-K filed April 15, 2006).
31.1 Certification of Chief Executive Officer of Managing
Member 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 Managing
Member 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 Managing Member pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: May 5, 2006 AEI Income & Growth Fund 26 LLC
By: AEI Fund Management XXI, Inc.
Its: Managing Member
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)