10QSB 1 q151-04.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Quarter Ended: March 31, 2004 Commission file number: 0-14089 AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP (Exact Name of Small Business Issuer as Specified in its Charter) State of Delaware 93-0926134 (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 XV 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 REAL ESTATE FUND XV LIMITED PARTNERSHIP BALANCE SHEET MARCH 31, 2004 AND DECEMBER 31, 2003 (Unaudited) ASSETS 2004 2003 CURRENT ASSETS: Cash and Cash Equivalents $ 3,955,205 $ 2,770,726 Receivables 10,244 28,419 Note Receivable 100,000 100,000 ----------- ----------- Total Current Assets 4,065,449 2,899,145 ----------- ----------- INVESTMENTS IN REAL ESTATE: Land 585,947 585,947 Buildings and Equipment 1,677,236 1,677,236 Accumulated Depreciation (803,478) (790,350) ----------- ----------- 1,459,705 1,472,833 Real Estate Held for Sale 0 1,770,391 ----------- ----------- Net Investments in Real Estate 1,459,705 3,243,224 ----------- ----------- Total Assets $ 5,525,154 $ 6,142,369 =========== =========== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Payable to AEI Fund Management, Inc. $ 45,694 $ 84,957 Distributions Payable 3,116,808 1,111,101 ----------- ----------- Total Current Liabilities 3,162,502 1,196,058 ----------- ----------- PARTNERS' CAPITAL: General Partners 0 0 Limited Partners, $1,000 per Unit; 7,500 Units authorized and issued; 7,256 Units outstanding 2,362,652 4,946,311 ----------- ----------- Total Partners' Capital 2,362,652 4,946,311 ----------- ----------- Total Liabilities and Partners' Capital $ 5,525,154 $ 6,142,369 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP STATEMENT OF INCOME FOR THE PERIODS ENDED MARCH 31 (Unaudited) 2004 2003 RENTAL INCOME: $ 59,748 $ 62,929 EXPENSES: Partnership Administration - Affiliates 16,492 32,306 Partnership Administration and Property Management - Unrelated Parties 8,033 10,251 Depreciation 13,128 13,128 ----------- ----------- Total Expenses 37,653 55,685 ----------- ----------- OPERATING INCOME 22,095 7,244 OTHER INCOME: Interest Income 11,323 6,252 ----------- ----------- INCOME FROM CONTINUING OPERATIONS 33,418 13,496 Income From Discontinued Operations 508,788 946,190 ----------- ----------- NET INCOME $ 542,206 $ 959,686 =========== =========== NET INCOME ALLOCATED: General Partners $ 31,259 $ 987 Limited Partners 510,947 958,699 ----------- ----------- $ 542,206 $ 959,686 =========== =========== INCOME PER LIMITED PARTNERSHIP UNIT: Continuing Operations $ 4.56 $ 1.84 Discontinued Operations 65.86 130.19 ----------- ----------- Total $ 70.42 $ 132.03 =========== =========== Weighted Average Units Outstanding 7,256 7,261 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED MARCH 31 (Unaudited) 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 542,206 $ 959,686 Adjustments to Reconcile Net Income To Net Cash Provided by Operating Activities: Depreciation 13,128 23,223 Gain on Sale of Real Estate (503,677) (907,519) Decrease in Receivables 18,175 18,842 Increase (Decrease) in Payable to AEI Fund Management, Inc. (39,263) 132,885 ----------- ----------- Total Adjustments (511,637) (732,569) ----------- ----------- Net Cash Provided By Operating Activities 30,569 227,117 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Real Estate 0 (784,128) Proceeds from Sale of Real Estate 2,274,068 3,247,361 ----------- ----------- Net Cash Provided By Investing Activities 2,274,068 2,463,233 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Distributions Payable 2,005,707 134 Distributions to Partners (3,125,865) (98,748) ----------- ----------- Net Cash Used For Financing Activities (1,120,158) (98,614) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,184,479 2,591,736 CASH AND CASH EQUIVALENTS, beginning of period 2,770,726 461,388 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 3,955,205 $ 3,053,124 =========== =========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI REAL ESTATE FUND XV 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 $ 0 $ 4,791,259 $ 4,791,259 7,261.00 Distributions (987) (97,761) (98,748) Net Income 987 958,699 959,686 -------- ----------- ----------- ---------- BALANCE, March 31, 2003 $ 0 $ 5,652,197 $ 5,652,197 7,261.00 ======== =========== =========== ========== BALANCE, December 31, 2003 $ 0 $ 4,946,311 $ 4,946,311 7,256.00 Distributions (31,259) (3,094,606) (3,125,865) Net Income 31,259 510,947 542,206 -------- ----------- ----------- ---------- BALANCE, March 31, 2004 $ 0 $ 2,362,652 $ 2,362,652 7,256.00 ======== =========== =========== ========== The accompanying Notes to Financial Statements are an integral part of this statement. AEI REAL ESTATE FUND XV 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 Real Estate Fund XV Limited Partnership (Partnership) was formed to acquire and lease commercial properties to operating tenants. The Partnership's operations are managed by AEI Fund Management 86-A, 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 called for a subscription price of $1,000 per limited partnership unit, payable on acceptance of the offer. The Partnership commenced operations on October 3, 1986 when minimum subscriptions of 1,300 Limited Partnership Units ($1,300,000) were accepted. On December 30, 1986, the offering terminated when the maximum subscription limit of 7,500 Limited Partnership Units was reached. Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $7,500,000 and $1,000, respectively. During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 90% to the Limited Partners and 10% to the General Partners; provided, however, that such distributions to the General Partners will be subordinated to the Limited Partners first receiving an annual, noncumulative distribution of Net Cash Flow equal to 10% of their Adjusted Capital Contribution, as defined, and, provided further, that in no event will the General Partners receive less than 1% of such Net Cash Flow per annum. Distributions to the Limited Partners will be made pro rata by Units. AEI REAL ESTATE FUND XV 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 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, 100% to the Limited 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 XV LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (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. (4) Investments in Real Estate - 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 $675,053. (5) 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. (6) Note Receivable - On December 27, 2002, the Partnership received a Promissory Note for $100,000 as part of a lease termination settlement with Huntington Restaurants Group, Inc. (HRG), the lessee of the Denny's restaurant. The Note is guaranteed by the owners of HRG. The Note bears interest at an 8.0% rate. The principal and interest are due June 24, 2004. AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (7) Discontinued Operations - In May 2001, Huntington Restaurants Group, Inc. (HRG), the lessee of the Denny's restaurant in Greenville, Texas, notified the Partnership that it was experiencing financial problems and would not make the lease payments while they worked out a plan which would enable them to continue operations without seeking bankruptcy protection. In November 2002, HRG closed the restaurant due to continuing operating losses and indicated that if HRG was forced to file for bankruptcy protection, the Lease would be rejected. After reviewing the financial condition of HRG and its owners and the operating results of the property, in December 2002, the Partnership reached a settlement with the parties to terminate the Lease and release the owners from their Lease guarantee. The Partnership received a cash payment of $66,896 and a $100,000 Promissory Note from HRG, which was guaranteed by its owners. The Partnership applied $28,963 of the payment against unpaid real estate taxes. The balance of the settlement consideration of $137,933 was recognized as Lease Settlement Income for the year ended December 31, 2002. While the property was vacant, the Partnership was responsible for real estate taxes and other costs required to maintain the property. On December 30, 2002, the Partnership entered into an agreement to sell the property for $500,000 to an unrelated third party. In the fourth quarter of 2002, a charge to operations for real estate impairment of $220,837 was recognized, which was the difference between the book value at December 31, 2002 of $690,837 and the estimated net sale proceeds of $470,000. The charge was recorded against the cost of the land and building. On May 22, 2003, the sale closed with the Partnership receiving net sale proceeds of $467,789, which resulted in a net loss of $2,211. At the time of sale, the cost and related accumulated depreciation was $636,198 and $166,198, respectively. During the first quarter of 2003, the Partnership sold its 26.05% interest in the Champps Americana restaurant, in eight separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,776,832, which resulted in a net gain of $585,894. The total cost and related accumulated depreciation of the interests sold was $1,330,265 and $139,327, respectively. On February 1, 2003, the Partnership entered into an agreement to sell the JEMCARE Learning Center to the lessee. On March 7, 2003, the sale closed with the Partnership receiving net sale proceeds of $247,219, which resulted in a net gain of $9,595. At the time of sale, the cost and related accumulated depreciation was $417,213 and $179,589, respectively. On February 3, 2003, the Partnership entered into an agreement to sell the Children's World daycare center in West Chester, Ohio to an unrelated third party. On March 4, 2003, the sale closed with the Partnership receiving net sale proceeds of $1,223,310, which resulted in a net gain of $312,030. At the time of sale, the cost and related accumulated depreciation was $999,162 and $87,882, respectively. AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (7) Discontinued Operations - (Continued) On March 3, 2003, the Partnership purchased a parcel of land in Pharr, Texas for $781,000. The Partnership obtained title to the land in the form of an undivided fee simple interest. 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 $78,100. 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%. On September 30, 2003, after the development was completed, the Lease Agreement was amended to require annual rental payments of $200,600. Total acquisition costs, including the cost of the land, were $1,996,913. On December 23, 2003, the Partnership sold 10.8425% of the Johnny Carino's restaurant to an unrelated third party. The Partnership received net sale proceeds of $275,548, which resulted in a net gain of $60,048. The cost and related accumulated depreciation of the interest sold was $216,515 and $1,015, respectively. In January 2004, the Partnership sold its remaining 89.1575% interest in the Johnny Carino's restaurant, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,274,068, which resulted in a net gain of $503,677. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $1,770,391. On August 27, 2003, the Partnership purchased a 21% interest in a Garden Ridge retail store in Woodlands, Texas for $1,746,370. 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 $197,932. The remaining interests in the property were purchased by AEI Real Estate Fund XVIII Limited Partnership, AEI Income & Growth Fund XXII Limited Partnership and AEI Income & Growth Fund 24 LLC, affiliates of the Partnership. During the fourth quarter of 2003, the Partnership sold its interest in the Garden Ridge retail store, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,032,178, which resulted in a net gain of $299,527. The total cost and related accumulated depreciation of the interests sold was $1,746,370 and $13,719, respectively. In December 2003, the Partnership distributed $1,010,101 of net sale proceeds to the Limited and General Partners, which represented a return of capital of $137.82 per Limited Partnership Unit. In March 2004, the Partnership distributed $3,030,303 of net sale proceeds to the Limited and General Partners, which represented a return of capital of $413.45 per Limited Partnership Unit. AEI REAL ESTATE FUND XV LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Continued) (7) 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 $ 5,555 $ 54,017 Property Management Expenses (444) (5,251) Depreciation 0 (10,095) Gain on Disposal of Real Estate 503,677 907,519 --------- --------- Income from Discontinued Operations $ 508,788 $ 946,190 ========= ========= 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) Results of Operations For the three months ended March 31, 2004 and 2003, the Partnership recognized rental income from continuing operations of $59,748 and $62,929, respectively. For the three months ended March 31, 2004 and 2003, the Partnership incurred Partnership administration expenses to affiliated parties of $16,492 and $32,306, respectively. These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and correspondence to the Limited Partners. As the Partnership's asset base decreases due to property sales, it is allocated a smaller share of expenses that are allocated by AEI Fund Management, Inc. based on the relative assets of the funds under management. During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $8,033 and $10,251, 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 $675,053. For the three months ended March 31, 2004 and 2003, the Partnership recognized interest income of $11,323 and $6,252, respectively. In 2004, interest income increased due to the Partnership having more money invested in a money market account due to property sales. 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 $508,788, representing rental income less property management expenses of $5,111 and gain on disposal of real estate of $503,677. For the three months ended March 31, 2003, the Partnership recognized income from discontinued operations of $946,190, representing rental less property management expenses and depreciation of $38,671 and gain on disposal of real estate of $907,519. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) In May 2001, Huntington Restaurants Group, Inc. (HRG), the lessee of the Denny's restaurant in Greenville, Texas, notified the Partnership that it was experiencing financial problems and would not make the lease payments while they worked out a plan which would enable them to continue operations without seeking bankruptcy protection. In November 2002, HRG closed the restaurant due to continuing operating losses and indicated that if HRG was forced to file for bankruptcy protection, the Lease would be rejected. After reviewing the financial condition of HRG and its owners and the operating results of the property, in December 2002, the Partnership reached a settlement with the parties to terminate the Lease and release the owners from their Lease guarantee. The Partnership received a cash payment of $66,896 and a $100,000 Promissory Note from HRG, which was guaranteed by its owners. The Partnership applied $28,963 of the payment against unpaid real estate taxes. The balance of the settlement consideration of $137,933 was recognized as Lease Settlement Income for the year ended December 31, 2002. While the property was vacant, the Partnership was responsible for real estate taxes and other costs required to maintain the property. On December 30, 2002, the Partnership entered into an agreement to sell the property for $500,000 to an unrelated third party. In the fourth quarter of 2002, a charge to operations for real estate impairment of $220,837 was recognized, which was the difference between the book value at December 31, 2002 of $690,837 and the estimated net sale proceeds of $470,000. The charge was recorded against the cost of the land and building. On May 22, 2003, the sale closed with the Partnership receiving net sale proceeds of $467,789, which resulted in a net loss of $2,211. At the time of sale, the cost and related accumulated depreciation was $636,198 and $166,198, respectively. During the first quarter of 2003, the Partnership sold its 26.05% interest in the Champps Americana restaurant, in eight separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $1,776,832, which resulted in a net gain of $585,894. The total cost and related accumulated depreciation of the interests sold was $1,330,265 and $139,327, respectively. On February 1, 2003, the Partnership entered into an agreement to sell the JEMCARE Learning Center to the lessee. On March 7, 2003, the sale closed with the Partnership receiving net sale proceeds of $247,219, which resulted in a net gain of $9,595. At the time of sale, the cost and related accumulated depreciation was $417,213 and $179,589, respectively. On February 3, 2003, the Partnership entered into an agreement to sell the Children's World daycare center in West Chester, Ohio to an unrelated third party. On March 4, 2003, the sale closed with the Partnership receiving net sale proceeds of $1,223,310, which resulted in a net gain of $312,030. At the time of sale, the cost and related accumulated depreciation was $999,162 and $87,882, respectively. During the fourth quarter of 2003, the Partnership sold its interest in the Garden Ridge retail store in Woodlands, Texas, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,032,178, which resulted in a net gain of $299,527. The total cost and related accumulated depreciation of the interests sold was $1,746,370 and $13,719, respectively. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) On December 23, 2003, the Partnership sold 10.8425% of the Johnny Carino's restaurant in Pharr, Texas to an unrelated third party. The Partnership received net sale proceeds of $275,548, which resulted in a net gain of $60,048. The cost and related accumulated depreciation of the interest sold was $216,515 and $1,015, respectively. In January 2004, the Partnership sold its remaining 89.1575% interest in the Johnny Carino's restaurant, in five separate transactions, to unrelated third parties. The Partnership received total net sale proceeds of $2,274,068, which resulted in a net gain of $503,677. At December 31, 2003, the property was classified as Real Estate Held for Sale with a book value of $1,770,391. 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 $1,184,479 as a result of cash generated from the sale of property, which was partially offset by distributions of net sale proceeds paid to the Partners. During the three months ended March 31, 2003, the Partnership's cash balances increased $2,591,736 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 $227,117 in 2003 to $30,569 in 2004 as a result of a decrease in total rental and interest income in 2004 and net timing differences in the collection of payments from the lessees and the payment of expenses, which were partially offset by a decrease in Partnership administration and property management expenses in 2004. 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 $2,274,068 and $3,247,361. During the three months ended March 31, 2003, the Partnership expended $784,128 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 March 3, 2003, the Partnership purchased a parcel of land in Pharr, Texas for $781,000. The Partnership obtained title to the land in the form of an undivided fee simple interest. 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 $78,100. 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%. On September 30, 2003, after the development was completed, the Lease Agreement was amended to require annual rental payments of $200,600. Total acquisition costs, including the cost of the land, were $1,996,913. On August 27, 2003, the Partnership purchased a 21% interest in a Garden Ridge retail store in Woodlands, Texas for $1,746,370. 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 $197,932. The remaining interests in the property were purchased by AEI Real Estate Fund XVIII Limited Partnership, AEI Income & Growth Fund XXII Limited Partnership and AEI Income & Growth Fund 24 LLC, affiliates 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 in the fourth quarter of each year. For the three months ended March 31, 2004 and 2003, the Partnership declared distributions of $3,125,865 and $98,748, respectively, which were distributed 99% to the Limited Partners and 1% to the General Partners. The Limited Partners received distributions of $3,094,606 and $97,761 and the General Partners received distributions of $31,259 and $987 for the periods, respectively. In March 2004 and December 2003, the Partnership declared bonus distributions of $3,030,303 and $1,010,101, respectively, of net sale proceeds, which resulted in higher distributions in 2004 and a higher distribution payable at March 31, 2004. In December 2003, the Partnership distributed $1,010,101 of net sale proceeds to the Limited and General Partners, which represented a return of capital of $137.82 per Limited Partnership Unit. In March 2004, the Partnership distributed $3,030,303 of net sale proceeds to the Limited and General Partners, which represented a return of capital of $413.45 per Limited Partnership Unit. 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 total 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. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS. (Continued) During 2003, one Limited Partner redeemed five Partnership Units for $1,523 in accordance with the Partnership Agreement. The Partnership acquired these Units using Net Cash Flow from operations. In prior years, a total of 31 Limited Partners redeemed 239 Partnership Units for $145,751. The redemptions increase the remaining Limited Partners' ownership interest in the Partnership. As a result of this redemption payment and pursuant to the Partnership Agreement, the General Partners received a distribution of $15 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. PART II - OTHER INFORMATION (Continued) 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 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 - None. 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 Real Estate Fund XV Limited Partnership By: AEI Fund Management 86-A, 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)