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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2001 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to to
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Commission file number 0-17876
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Wells Real Estate Fund II-OW
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(Exact name of registrant as specified in its charter)
Georgia 58-1754703
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6200 The Corners Parkway, Suite 250, Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 449-7800
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12 (g) of the Act:
CLASS A UNITS
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(Title of Class)
CLASS B UNITS
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(Title of Class)
Indicate by check mark whether the registrant (1) has 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 [ ]
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Aggregate market value of the voting stock held by nonaffiliates: Not Applicable
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PART I
ITEM 1. BUSINESS
General
Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public limited
partnership with Leo F. Wells, III and Wells Capital, Inc. ("Wells Capital"), a
Georgia Corporation, serving as a General Partners. The Partnership was formed
on October 23, 1987, for the purpose of acquiring, developing, constructing,
owning, operating, improving, leasing, and otherwise managing income-producing
commercial or industrial properties for investment purposes. The Partnership has
two classes of limited partnership interests, Class A and Class B Units. Limited
Partners may vote to, among other things, (a) amend the partnership agreement,
subject to certain limitations, (b) change the business purpose or investment
objectives of the Partnership, and (c) add or remove a general partner. A
majority vote on any of the above described matters will bind the Partnership,
without the concurrence of the general partners. Each limited partnership unit
has equal voting rights, regardless of class.
On November 6, 1987, the Partnership commenced a public offering of its limited
partnership units pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933. The Partnership terminated its offering on September
7, 1988, and received gross proceeds of $1,922,000 representing subscriptions
from 219 Limited Partners, comprised of two classes of limited partnership
interests, Class A and Class B limited partnership units. Substantially all of
the Partnership's business is conducted through Fund II-Fund IIOW Associates, a
joint venture between the Partnership and Wells Real Estate Fund II ("Wells Fund
II"), a Georgia public limited partnership affiliated with the Partnership
through common general partners and management (the "Fund II-IIOW Joint
Venture").
Through its interest in the Fund II-IIOW Joint Venture, the Partnership owns
interests in properties through the following joint ventures: (i) Fund II-Fund
III Associates, a joint venture between the Fund II-IIOW Joint Venture and Wells
Real Estate Fund III, L.P. ("Wells Fund III") (the "Fund II-III Joint Venture");
(ii) Fund II-III-VI-VII Associates, a joint venture among the Fund II-III Joint
Venture, Wells Real Estate Fund VI, L.P.("Wells Fund VI"), and Wells Real Estate
Fund VII, L.P. ("Wells Fund VII") (the "Fund II-III-VI-VII Joint Venture");
(iii) Fund I-Fund II Joint Venture, a joint venture between the Fund II-IIOW
Joint Venture and Wells Real Estate Fund I ("Wells Fund I") (the "Tucker Joint
Venture"); and (iv) Fund I-II-IIOW-VI-VII Associates, a joint venture among
Wells Fund I, the Fund II- IIOW Joint Venture, Wells Fund VI and Wells Fund VII
(the "Fund I-II-IIOW-VI-VII Joint Venture").
As of December 31, 2001, the Partnership owned interests in the following
properties through its ownership in the foregoing joint ventures: (i) a
two-story office building located in Charlotte, North Carolina ("Louis Rose
Building"); (ii) a four-story office building located in metropolitan Houston,
Texas ("Boeing at the Atrium"); (iii) a restaurant located in Fulton County,
Georgia ("Brookwood Grill"); (iv) an office/retail center in Fulton County,
Georgia ("Holcomb Bridge Property"); and (v) a retail shopping and commercial
office complex located in Tucker, Georgia ("Heritage Place"). All of the
foregoing properties were acquired on an all cash basis.
The Fund I-II-IIOW-VI-VII Joint Venture sold Cherokee Commons, a shopping center
located in Cherokee County, Georiga, on October 1, 2001 for net sale proceeds of
$8,434,000 and a gain on the sale of $1,725,015. The Fund II-IIOW Joint Venture
was allocated a taxable gain of $111,419 and net sale proceeds of $4,601,723
from this transaction.
2
Employees
The Partnership has no direct employees. The employees of Wells Capital and
Wells Management Company, Inc. perform a full range of real estate services
including leasing and property management, accounting, asset management and
investor relations for the Partnership. See Item 11 "Compensation of General
Partners and Affiliates" for a summary of the fees paid to the General Partners
and their affiliates during the year ended December 31, 2001.
Insurance
Wells Management Company, Inc., an affiliate of the General Partners, carries
comprehensive liability and extended coverage with respect to all of the
properties owned by the Partnership through its investment in the Fund II-IIOW
Joint Venture. In the opinion of management, all such properties are adequately
insured.
Competition
The Partnership will experience competition for tenants from owners and managers
of competing projects which may include the General Partners and their
affiliates. As a result, the Partnership may provide free rent, reduced charges
for tenant improvements, and other inducements, all of which may have an adverse
impact on results of operations. At the time the Partnership elects to dispose
of its properties, the Partnership will also be in competition with sellers of
similar properties to locate suitable purchasers for its properties.
ITEM 2. PROPERTIES
The Partnership owns interest in all properties through its investment in the
Fund II-IIOW Joint Venture, formed on March 1, 1988. As of December 31, 2001,
the Partnership's equity interest in the Fund II-IIOW Joint Venture was
approximately 5%, and the equity interest of Wells Fund II was approximately
95%. The Partnership does not have control over the operations of the Joint
Venture; however, it does exercise significant influence. Accordingly, the
investment in joint venture is recorded using the equity method of accounting.
The following table shows lease expirations during each of the next ten years
for all leases at properties in which the Partnership owned an interest through
the joint ventures described above as of December 31, 2001, assuming no exercise
of renewal options or termination rights:
3
Partnership Percentage Percentage
Number Share of of Total of Total
Year of of Square Annualized Annualized Square Annualized
Lease Leases Feet Gross Base Gross Base Feet Gross Base
Expiration Expiring Expiring Rent (1) Rent (1) Expiring Rent
- ---------- -------- -------- ---------- ----------- ---------- -----------
2002(2) 12 156,955 $2,196,077 $57,789 70.05% 65.98%
2003 8 14,252 208,846 4,980 6.36 6.28
2004 13 23,448 393,464 8,325 10.47 11.82
2005 1 3,140 39,250 936 1.40 1.18
2006 5 15,069 295,043 3,125 6.73 8.87
2008 1 2,400 27,600 658 1.07 0.83
2010 1 3,531 55,790 1,330 1.58 1.68
2011 1 5,265 112,092 2,673 2.35 3.37
-------- -------- ---------- ----------- ---------- -----------
42 224,060 $3,328,162 $79,817 100.00% 100.00%
======== ======== ========== =========== ========== ===========
(1) Average monthly gross rent over the life of the lease, annualized.
(2) Includes expiration of Boeing lease (119,040 square feet).
The following describes the properties in which the Partnership owns an interest
as of December 31, 2001:
Louis Rose Building (previously known as First Union at Charlotte)
On May 9, 1988, the Fund II- IIOW Joint Venture acquired the Louis Rose
Building, a two-story building containing approximately 70,752 net
leaseable square feet, located on a 9.54 acre tract of land located in
Charlotte, Mecklenburg County, North Carolina for a purchase price of
$8,550,000.
On May 1, 1994, First Union Bank assumed occupancy of the Louis Rose
Building under a lease which expired on April 30, 2001. Since that date,
the property has been unoccupied. Currently, management is working with CB
Richard Ellis in attempts to secure a new tenant for the building.
The occupancy rates at the Louis Rose Building at year end were 0% in 2001
and 100% in 2000, 1999, 1998 and 1997. The average effective annual rental
rate per square foot at the Louis Rose Building was $3.98 for 2001, $11.93
for 2000, $10.14 for 1999, and $6.49 for 1998 and 1997.
Boeing at the Atrium
On April 3, 1989, Fund II-IIOW Joint Venture formed a joint venture (the
"Fund II-III Joint Venture") with Wells Fund III, a public Georgia limited
partnership affiliated with the Partnership through common general
partners.
In April 1989, the Fund II-III Joint Venture acquired a four-story office
building located on a 5.6 acre tract of land adjacent to the Johnson Space
Center in metropolitan Houston, in the City of Nassau Bay, Harris County,
Texas, known as Boeing at the Atrium.
On March 3, 1997, a lease was signed with The Boeing Company for the entire
building. The lease was for a period of five years with an option to renew
for an additional five year term. The rental rate was $12.25 per square
foot for the first three years of the lease term and $12.50 per
4
square foot for the final two years of initial lease term. The rate for the
optional five year term would be based upon the then current market rates.
The Fund II-IIOW Joint Venture is currently in negotiations to lease the
space that is currently occupied by Boeing. Tentatively, the lease
currently being negotiated will commence on September 1, 2002 for a term of
66 months with an option to renew for two additional five-year terms. The
rental rate would be $15.75 per square foot for the initial term of the
lease. The rates for the two optional five-year terms would be determined
based on the then current market rate. The tenant would have the option to
cancel the lease, without cause, at the end of the first three-year period,
provided it gives nine months notice. Additionally, the tenant would have
the option to expand into any available space.
As of December 31, 2001, the Fund II-IIOW Joint Venture and Wells Fund III
had made total capital contributions to the Fund II-III Joint Venture of
approximately $8,330,000 and $4,448,000, respectively, for the acquisition
and development of Boeing at the Atrium. As of December 31, 2001, the Fund
II-IIOW Joint Venture holds an equity interest of approximately 61%, and
Wells Fund III holds an equity interest of approximately 39%.
The occupancy rate at Boeing at the Atrium was 100% as of December 31,
2001, 2000, 1999, 1998, and 1997. The average effective rental rate per
square foot was $12.35 for 2001, $12.34 for 2000, $12.35 for 1999 and 1998,
and $7.77 for 1997.
The Brookwood Grill
On January 31, 1990, the Fund II-IIOW Joint Venture acquired a 5.8 acre
tract of undeveloped real property at the intersection of Warsaw Road and
Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Holcomb Bridge
Property") for $1,848,561, including acquisition expenses.
On September 20, 1991, the Fund II-IIOW Joint Venture contributed
approximately 1.5 acres of the Holcomb Bridge Property ("Brookwood Grill"),
along with its interest as landlord under the lease agreement referred to
below, as a capital contribution to the Fund II- III Joint Venture. As of
September 20, 1991, the Fund II-IIOW Joint Venture had expended
approximately $2,128,000 for the land acquisition and development of
Brookwood Grill.
As of September 20, 1991, a lease agreement was entered into with the
Brookwood Grill of Roswell, Inc. for the development of approximately 1.5
acres and the construction of a 7,440 square foot restaurant. This
restaurant, which opened early in March 1992, is similar in concept to
Houston's, Ruby Tuesday, and Friday's. The terms of the lease call for an
initial term of 9 years and 11 months, with two additional 10-year renewal
options. In January 2001, the tenant renewed a ten-year lease with a base
rental of $286,983 per year for years one through five, and $330,030 per
year for years six through ten. The Fund II-III Joint Venture has expended
approximately $1,100,000 for the development and construction of the
restaurant building together with parking areas, driveways, landscaping and
other improvements. In addition to the base rent described above, the
tenant is required to pay additional rent in amounts equal to a 12% per
annum return on all amounts expended for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% as of
December 31, 2001, 2000, 1999, 1998 and 1997. The average effective rental
rate per square foot was $31.56 for 2001, $30.22 for 2000 and 1999, and
$30.26 for 1998 and 1997.
5
As of December 31, 2001, the Fund II-IIOW Joint Venture and Wells Fund III
had made total contributions to the Fund II-III Joint Venture of
approximately $2,128,000 and $1,330,000, respectively, for the acquisition
and development of the Brookwood Grill. The Fund II-IIOW Joint Venture
holds an equity interest of approximately 62% in the Brookwood Grill, and
Wells Fund III holds an equity interest of approximately 38%.
On January 10, 1995, the remaining 4.3 undeveloped acres of land comprising
the Holcomb Bridge Property were contributed by Fund II-III Joint Venture
to a new joint venture, Fund II-III-VI and VII Associates. This property is
described below.
Holcomb Bridge Property
On January 10, 1995, Fund II-III Joint Venture entered into a joint venture
with Wells Fund VI and Wells Fund VII, Georgia public limited partnerships
having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited
partnership, and general partner of Wells Capital, as general partners,
known as the Fund II-III-VI-VII Joint Venture.
In January 1995, the Fund II-III Joint Venture contributed to the Fund
II-III-VI-VII Joint Venture approximately 4.3 acres of land at the
intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton
County, Georgia including land improvements for the development and
construction of two buildings with a total of 49,534 square feet.
Fourteen tenants occupied the Holcomb Bridge Property as of December 31,
2001. At year-end, occupancy at the Holcomb Bridge Property was 89% in
2001, 92% in 2000, 100% in 1999, 94% in 1998 and 1997. The average
effective annual rental rate per square foot was $17.07 for 2001, $17.55
for 2000, $19.36 for 1999, $17.63 for 1998, and $13.71 for 1997.
As of December 31, 2001, Fund II-III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
24%, Wells Fund VI had contributed $1,929,541 for an equity interest of
approximately 27%, and Wells Fund VII had contributed $3,525,041 for an
equity interest of approximately 49%. The total cost to develop the Holcomb
Bridge Property was $5,454,582, excluding land.
Heritage Place
Heritage Place consists of a retail shopping center and a commercial office
building complex located in Tucker, DeKalb County, Georgia. The retail
shopping center contains approximately 29,858 net rentable square feet. The
commercial office space, which is divided into seven separate buildings,
contains approximately 67,465 net rentable square feet.
Heritage Place is owned by the Tucker Joint Venture, a joint venture
between the Fund II-IIOW Joint Venture and Wells Fund I. Both Wells Fund I
and the Fund II-IIOW Joint Venture have funded the cost of completing
Heritage Place through capital contributions made as progressive stages of
construction were completed. As of December 31, 2001, Wells Fund I had
contributed a total of $6,194,634, and the Fund II- IIOW Joint Venture had
contributed a total of $4,764,585 for the acquisition and development of
Heritage Place. As of December 31, 2001, Wells Fund I had an equity
interest of approximately 55% in Heritage Place, and the Fund II-IIOW Joint
Venture held an equity interest of approximately 45% in Heritage Place.
At year end, the occupancy rate at Heritage Place was 83% in 2001, 89% in
2000, 87% in 1999 94% in 1998 and 85% in 1997. No tenants occupied ten
percent or more of the total rentable
6
square footage of the property as of December 31, 2001. The principal
businesses, occupations, and professions of the tenants at Heritage Place
include retail shopping/commercial office services. The average effective
annual rental rate per square foot was $13.66 for 2001, $14.29 for 2000,
$14.11 for 1999, $12.76 for 1998 and $11.08 for 1997.
Heritage Place is currently being marketed for sale by The Dryman Team. The
management team is considering separating the retail portion of this
property from the office portion and creating a condominium for the office
buildings. The legal and site work have been completed so that the
management team can market this property to investors. The Partnership's
goal is to have this property sold by the end of 2002.
Cherokee Commons
The Fund I-II-IIOW-VI-VII Joint Venture, was formed for the purpose of
owning and operating Cherokee Commons which consists of a retail shopping
center located in metropolitan Atlanta, Cherokee County, Georgia and has
been expanded to consist of approximately 103,755 net leaseable square
feet. Cherokee Commons was initially developed through a joint venture
between Wells Fund I and the Fund II-IIOW Joint Venture, which contributed
Cherokee Commons to the Fund I-II-IIOW-VI-VII Joint Venture on August 1,
1995 to complete the required funding for the expansion.
As of September 30, 2001, Wells Fund I had contributed property with a book
value of $2,139,900, the Fund II-IIOW Joint Venture had contributed
property with a book value of $4,860,100, Wells Fund VI had contributed
cash in the amount of $953,798 and Wells Fund VII had contributed cash in
the amount of $953,798 to the Fund I-II-IIOW-VI-VII Joint Venture. As of
September 30, 2001, the equity interests in the Fund I-II-IIOW-VI-VII Joint
Venture were approximately as follows: Wells Fund I--24%, Fund II-IIOW
Joint Venture--54%, Wells Fund VI--11%, and Wells Fund VII--11%.
On October 1, 2001, the Fund I-II-IIOW-VI-VII Joint Venture sold Cherokee
Commons for net sale proceeds of $8,434,089 and a gain of $1,725,015 from
this sale. The Fund II-IIOW Joint Venture was allocated a taxable gain of
$111,419 and net sale proceeds of $4,601,723 from this transaction.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings or proceedings known to be
contemplated by governmental authorities involving the Partnership during 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Limited Partners during 2001.
7
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S UNITS AND RELATED SECURITY HOLDER MATTERS
As of February 28, 2002, the Partnership had 6,062 outstanding Class A Units
held by a total of 178 Limited Partners and 1,626 outstanding Class B Units held
by a total of 41 Limited Partners. The capital contribution per unit is $250.
There is no established public trading market for the Partnership's limited
partnership units, and it is not anticipated that a public trading market for
the units will develop. Under the Partnership Agreement, the General Partners
have the right to prohibit transfers of units.
Class A Unit holders are entitled to an annual 8% noncumulative distribution
preference over Class B Unit holders as to cash distributions from net cash from
operations, defined in the Partnership Agreement as cash flow, less adequate
cash reserves for other obligations of the Partnership for which there is no
provision, but are initially allocated none of the depreciation, amortization,
cost recovery and interest expense. These items are allocated to Class B Unit
holders until their capital account balances have been reduced to zero.
Cash available for distribution to the Limited Partners is distributed on a
quarterly basis unless Limited Partners elect to have their cash distributed
monthly. Cash distributions made to the Limited Partners during 2000 and 2001
were as follows:
Per Class A Per Class A Per Class B
Distribution Total Unit Unit Unit
for Quarter Cash Investment Return of Return of General
Ended Distributed Income Capital Capital Partner
- ------------------ ----------- ----------- ----------- ----------- -------
March 31, 2000 $26,527 $1.43 $2.95 $0.00 $0.00
June 30, 2000 27,474 1.20 3.33 0.00 0.00
September 30, 2000 27,474 0.96 3.57 0.00 0.00
December 31, 2000 26,342 1.05 3.30 0.00 0.00
March 31, 2001 26,521 1.90 2.47 0.00 0.00
June 30, 2001 13,261 0.00 2.19 0.00 0.00
September 30, 2001 10,411 0.00 1.72 0.00 0.00
December 31, 2001 0 0.00 0.00 0.00 0.00
8
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 2001, 2000, 1999, 1998, and 1997:
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Total assets $1,083,683 $1,109,652 $1,189,195 $1,255,377 $1,334,105
Total revenues 50,154 28,101 20,918 5,190 (18,601)
Net income (loss) 50,154 28,101 20,918 5,190 (18,601)
Net income (loss) allocated to Class A
Limited Partners 50,154 28,101 20,918 5,190 (18,601)
Net loss allocated to Class B Limited
Partners 0 0 0 0 0
Net income (loss) allocated to Class A
Limited Partner Unit $ 8.27 $ 4.64 $ 3.45 $ 0.86 $ (3.07)
Net loss per Class B Limited Partner
Unit 0.00 0.00 0.00 0.00 0.00
Cash distribution per Class A Limited
Partner Unit 8.28 17.79 15.63 13.96 6.03
Cash distribution per Class B Limited
Partner Unit 0.00 0.00 0.00 0.00 0.00
Cash distributions of $8.28 per unit were comprised of $1.90 from operating
income and $6.38 return of capital in 2001. The Partnership reserved cash
available for distribution in the fourth quarter of 2001 to fund anticipated
leasing commissions and tenant improvements upon execution of a lease at the
Louis Rose Building.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
selected financial data and the accompanying financial statements of the
Partnership and notes thereto.
Forward Looking Statements
This Report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of
1934, including discussion and analysis of the financial condition of the
Partnership, anticipated capital expenditures required to complete certain
projects, amounts of cash distributions anticipated to be distributed to Limited
Partners in the future and certain other matters. Readers of this Report should
be aware that there are various factors that could cause actual results to
differ materially from any forward-looking statement made in the Report, which
include construction costs which may exceed estimates, construction delays,
lease-up risks, inability to obtain new tenants upon the expiration of existing
leases, and the potential need to fund tenant improvements or other capital
expenditures out of operating cash flow.
Results of Operations
Refer to footnotes of audited Financial Statements where a complete summary of
operations is disclosed.
At year end, the properties in which the Fund II-IIOW Joint Venture owned an
interest were 60% occupied in 2001 as compared to 97% in 2000 and 1999, 95% in
1998 and 96% in 1997. The decrease in 2001 is primarily the result of the
vacancy of the Louis Rose Building.
9
Gross revenues of the Partnership were $50,154, $28,101, and $20,918 for the
years ended December 31, 2001, 2000, and 1999, respectively. The increase from
2000 and 2001 was primarily due to the gain on sale from Cherokee Commons, which
was partly offset by a decrease in equity in income from the Fund II-IIOW Joint
Venture resulting from the expiration of First Union's lease at the Louis Rose
Building, bad debt expense at the Holcomb Bridge Property and lower rental
income at Heritage Place. The decrease in revenue from First Union was partially
offset by increased rental rates at other properties and adjustments to the
common area maintenance billings at Boeing at the Atrium. In accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", Fund I-II-IIOW-VI-VII Joint
Venture reclassified the real estate assets of Cherokee Commons as "Held For
Sale" upon finalizing negotiations with the Purchaser in August 2001 and,
accordingly, stopped depreciating the related real estate assets at that time.
The increase in gross revenues from 1999 to 2000 was a result of increased
rental renewal rates at the Louis Rose Building.
Liquidity and Capital Resources
The Partnership's net cash provided by operating activities remained relatively
stable at $428 for the year ended December 31, 2001, compared to $471 and $229
for the years ended December 31, 2000 and 1999, respectively. Cash flows from
investing activities decreased to $76,589 for the year ended December 31, 2001,
as compared to $104,801 for the same period in 2000, primarily due to decreased
distributions received from the Fund II-IIOW Joint Venture as a result of the
vacancy at the Louis Rose Building, partially offset by additional income from
Cherokee Commons sale. Cash flows from investing activities increased to
$104,801 from $90,167 for the years ended December 31, 2000 and 1999,
respectively, due to the increase in distributions from joint ventures primarily
due to increased revenue from higher renewal rates at the Louis Rose Building.
Net cash used in financing activities was $76,541, $108,010 and $87,200 for the
years ended December 31, 2001, 2000 and 1999, respectively, and consists of
distributions to limited partners. The changes are in direct correlation with
the distributions received from joint ventures reflected in the cash flows from
investments above.
All distributions payable through December 31, 2001 have been paid from net
operating cash flows. The Fund II-IIOW Joint Venture's share of proceeds from
the sale of Cherokee Commons will not be distributed to the Limited Partners,
however, but are instead being utilized to fund anticipated tenant improvements
and external leasing commissions relating to the vacancy at the Louis Rose
Building and Boeing at the Atrium, described in Item 2 above. In addition,
quarterly cash distributions to Limited Partners are being temporarily suspended
in 2002 to ensure that the Fund II-IIOW Joint Venture will have sufficient funds
available for these purposes. Cash distributions payable to Limited Partners
holding Class A Units are anticipated to decline in 2002 and future years, as
properties are sold and the Fund II-IIOW Joint Venture's portfolio is
liquidated. The Partnership expects to continue to meet its short-term liquidity
requirements generally through net cash provided by operations which the
Partnership believes will continue to be adequate to meet operating
requirements.
Since properties are acquired on an all-cash basis, the Partnership has no
permanent long-term liquidity requirements.
The Partnership has previously made the decision to begin the process of selling
its properties. At this time, Heritage Place is being actively marketed for
sale. Management estimates that the fair market value of each of the properties
exceeds the carrying value of the corresponding real estate assets;
consequently, no impairment losses have been recorded. In the event that the net
sales proceeds are less than the carrying value of the properties sold, the
Partnership would recognize losses on the sales. Upon finalizing negotiations
with purchasers, management will reclassify the real estate assets of such
properties as "Held for Sale" and, pursuant to SFAS No. 121, discontinue
depreciation at that point. Management is not contractually or financially
obligated to sell any of its properties, and it is
10
management's current intent to fully realize the Partnership's investment in
real estate. The success of the Partnership's future operations and the ability
to realize the investment in its assets will be dependent on the Partnership's
ability to maintain rental rates, occupancy and an appropriate level of
operating expenses in future years. Management believes that the steps that it
is taking will enable the Partnership to realize its investment in its assets.
Inflation
The real estate market has not been affected significantly by inflation during
the past three years due to the relatively low inflation rate. There are
provisions in the majority of the tenant leases to protect the Partnership from
the impact of inflation. Most leases contain common area maintenance charges,
real estate tax and insurance reimbursements on a per square foot bases, or in
some cases, annual reimbursement of operating expenses above a certain per
square foot allowance. These provisions should reduce the Partnership's exposure
to increases in costs and operating expenses resulting from inflation. In
addition, a number of the Partnership's leases are for terms of less than five
years which may permit the Partnership to replace existing leases with new
leases at higher base rental rates if the existing leases are below market rate.
There is no assurance, however, that the Partnership would be able to replace
existing leases with new leases at higher base rentals.
Critical Accounting Policies
The Partnership's accounting policies have been established and conformed to in
accordance with accounting principles generally accepted in the United States
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to use judgment in the application of accounting policies,
including making estimates and assumptions. These judgments affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. If our judgment or
interpretation of the facts and circumstances relating to various transactions
had been different, it is possible that different accounting policies would have
been applied; thus, resulting in a different presentation of our financial
statements. Below is a discussion of the accounting policies that we consider to
be critical in that they may require complex judgment in their application or
require estimates about matters, which are inherently uncertain. Additional
discussion of accounting policies that we consider to be significant, including
further discussion of the critical accounting policies described below, is
presented in the notes to the Partnership's financial statements in Item 14(a).
Straight-Lined Rental Revenues
The Partnership recognizes rental income generated from all leases on real
estate assets in which the Partnership has an ownership interest, either
directly or through investments in joint ventures, on a straight-line basis over
the terms of the respective leases. If a tenant was to encounter financial
difficulties in future periods, the amount recorded as receivables may not be
realized.
Operating Cost Reimbursements
The Partnership generally bills tenants for operating cost reimbursements,
either directly or through investments in joint ventures, on a monthly basis at
amounts estimated largely based on actual prior period activity and the
respective lease terms. Such billings are generally adjusted on an annual basis
to reflect reimbursements owed to the landlord based on the actual costs
incurred during the period and the respective lease terms. Financial
difficulties encountered by tenants may result in receivable not being realized.
11
Real Estate
Management continually monitors events and changes in circumstances indicating
that the carrying amounts of the real estate assets in which the Partnership has
an ownership interest, either directly or through investments in joint ventures,
may not be recoverable. When such events or changes in circumstances are
present, management assesses the potential impairment by comparing the fair
market value of the asset, estimated at an amount equal to the future
undiscounted operating cash flows expected to be generated from tenants over the
life of asset and from its eventual disposition, to the carrying value of the
asset. In the event that the carrying amount exceeds the estimated fair market
value, the Partnership would recognize an impairment loss in the amount required
to adjust the carrying amount of the asset to its estimated fair market value.
Neither the Partnership nor its joint ventures have recognized impairment losses
on real estate assets in 2001, 2000 or 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Registrant and supplementary data are detailed
under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Partnership's accountants or other
reportable events during 2001.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
12
PART III
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP
Wells Capital, Inc.
Wells Capital Inc. ("Wells Capital") is a Georgia corporation formed in April
1984. The executive offices of Wells Capital are located at 6200 The Corners
Parkway, Norcross, Georgia 30092. Leo F. Wells, III is the sole Director and the
President of Wells Capital.
Leo F. Wells, III
Mr. Wells is a resident of Atlanta, Georgia, 58 years of age and holds a
Bachelor of Business Administration Degree in Economics from the University of
Georgia. Mr. Wells is the President and sole Director of Wells Capital. Mr.
Wells is the President of Wells & Associates, Inc., a real estate brokerage and
investment company formed in 1976 and incorporated in 1978, for which he serves
as principal broker. Mr. Wells is also the President. Sole Director and sole
shareholder of Wells Real Estate Funds, Inc., the parent company of Wells
Capital, and the sole Director and President of Wells Management Company, Inc.,
a property management company which he founded in 1983. In addition, Mr. Wells
is the President and Chairman of the Board of Wells Investment Securities, Inc.,
Wells & Associates, Inc., and Wells Management Company, Inc., which are
affiliates of the General Partners. From 1980 to February 1985, Mr. Wells served
as Vice-President of Hill-Johnson, Inc., a Georgia corporation engaged in the
construction business. From 1973 to 1976, he was associated with Sax Gaskin Real
Estate Company and from 1970 to 1973, he was a real estate salesman and property
manager for Roy D. Warren & Company, an Atlanta real estate company.
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
The following table summarizes the compensation and fees paid to the General
Partners and their affiliates during the year ended December 31, 2001:
------------
Name of Individual Capacities in Which Served Cash
------------
or Number in Group Form of Compensation Compensation
- ------------------------------ --------------------------- ------------
Property Manager-Management
Wells Management Company, Inc. And Leasing Fees $9,970(1)
Wells Capital, Inc. General Partner 0
Leo F. Wells, III General Partner 0
(1) The majority of these fees are not paid directly by the Partnership but are
paid by the joint venture entities which own properties to which the
property management and leasing services relate and include management and
leasing fees, some of which were accrued for accounting purposes in 2001
and paid in January, 2002.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No Limited Partner is known by the Partnership to own beneficially more than 5%
of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of February 28, 2002:
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
- -------------- ------------------- --------------------------- ----------------
Class A units Leo F. Wells, III 0 Units (IRA, 401 (k) and Less than 1%
Profit Sharing)
Class B units Leo F. Wells, III 0 Units (401 (k) and Profit Less than 1%
Sharing)
The General Partners did not receive any distributions from cash flows or sale
proceeds in 2001.
No arrangements exist which would, upon implementation, result in a change in
control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are compensation and fees paid or to be paid by the Partnership to
the General Partners and their affiliates in connection with the operation of
the Partnership.
Interest in Partnership Cash Flow and Net Sale Proceeds
The General Partners will receive a subordinated participation in distributions
from cash available for distribution equal to 10% of the total distribution for
such year payable only after the Limited Partners each receive distributions
from cash available for distribution equal to 8% of their adjusted capital
accounts in each fiscal year. In addition, after the Limited Partners receive
their distributions equal to 8% of their adjusted capital contributions and the
General Partners receive their distributions equal to 10% of the total
distributions for such year, the General Partners will receive a participation
of 10% of the additional distributions from cash available for distribution, 9%
of which shall be paid to the General Partners as a Partnership Management Fee.
The General Partners will also receive a subordinated participation in net sale
proceeds and net financing proceeds equal to 15% of the residual proceeds
available for distribution after the Limited Partners have received a return of
their adjusted capital contributions plus a 12% cumulative return on their
adjusted capital contributions. The General Partners did not receive any
distributions from net cash flow from operations or net sale proceeds for the
year ended December 31, 2001.
Property Management and Leasing Fees
Wells Management Company, Inc., an affiliate of the General Partners, will
receive compensation for supervising the management of the Partnership
properties equal to 6% (3% management and 3% leasing) of rental income. In no
event will such fees exceed the sum of (i) 6% of the gross receipts of each
property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of
development properties in an amount not to exceed the fee customarily charged in
arm's-length transactions by others rendering similar services in the same
geographic area for similar properties. With respect to properties leased on a
net
14
basis for a period of ten years or longer, property management fees will not
exceed 1% of gross revenues from such leases, plus a one-time initial leasing
fee of 3% of the gross revenues which are payable over the first five years of
the term of such net leases. Management and leasing fees are not paid directly
by the Partnership but by the joint venture entities which own the properties.
The Partnership's share of these fees which were paid to Wells Management
Company, Inc. totaled $9,970 for the year ended December 31, 2001.
Real Estate Commissions
In connection with the sale of Partnership properties, the General Partners or
their affiliates may receive commissions not exceeding the lesser of (A) 50% of
the commissions customarily charged by other brokers in arm's-length
transactions involving comparable properties in the same geographic area or (B)
3% of the gross sales price of the property, and provided that payments of such
commissions will be made only after Limited Partners have received prior
distributions totaling 100% of their capital contributions plus a 6% cumulative
return on their adjusted capital contributions. No real estate commissions were
paid to the General Partners or their affiliates for the year ended December 31,
2001.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. The financial statements are contained on pages F-2 through F-39 of this
Annual Report on Form 10-K, and the list of the financial statements
contained herein is set forth on page F-1, which is hereby incorporated by
reference.
2. The Exhibits filed in response to Item 601 of Regulation S-K are listed on
the Exhibit Index attached hereto.
(b) On October 16, 2001, the Partnership filed a Report on Form 8-K dated
October 1, 2001 reporting the sale of the Cherokee Commons Shopping Center
by the Fund I-II-IIOW-VI-VII Joint Venture.
(c) The exhibits filed in response to Item 601 of Regulation S-K are listed on
the Exhibit Index attached hereto.
(d) See (a) 2 above.
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
16
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 22nd day of March
2002.
Wells Real Estate Fund II-OW
(Registrant)
By: /s/Leo F. Wells, III
---------------------------------------------
Leo F. Wells, III
Individual General Partner and as President
and Chief Financial Officer of Wells Capital,
Inc., the Corporate General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant and in
the capacity as and on the date indicated.
Signature Title Date
- ----------------------- ---------------------------------- --------------
/s/Leo F. Wells, III
- -----------------------
Leo F. Wells, III Individual General Partner, March 22, 2002
President and Sole Director of
Wells Capital, Inc., the Corporate
General Partner
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material relating to an annual or other meeting of
security holders has been sent to security holders.
17
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- ------------------------------------------------------------------------------------- -----
Independent Auditors' Report F-2
Balance Sheets as of December 31, 2000 and 1999 F-3
Statements of Income (Loss) for the Years Ended December 31, 2000, 1999, and 1998 F-4
Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 F-6
Notes to Financial Statements for December 31, 2000, 1999, and 1998 F-7
Audited Financial Statements - Boeing at the Atrium F-33
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II-OW:
We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND II-OW
(a Georgia public limited partnership) as of December 31, 2001 and 2000 and the
related statements of income, partners' capital, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wells Real Estate Fund II-OW as
of December 31, 2001 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 25, 2002
F-2
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
ASSETS
INVESTMENT IN JOINT VENTURE $1,069,403 $1,082,280
CASH AND CASH EQUIVALENTS 1,603 1,127
DUE FROM AFFILIATE 12,677 26,245
---------- ----------
Total assets $1,083,683 $1,109,652
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable $ 1,048 $ 630
Partnership distributions payable 0 26,342
---------- ----------
Total liabilities 1,048 26,972
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' CAPITAL
Limited partners:
Class A--6,062 units 1,082,635 1,082,680
Class B--1,626 units 0 0
---------- ----------
Total partners' capital 1,082,635 1,082,680
---------- ----------
Total liabilities and partners' capital $1,083,683 $1,109,652
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-3
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
------- ------- -------
REVENUES:
Equity in income of joint venture $50,144 $27,996 $20,789
Interest income 10 105 0
Other income 0 0 129
------- ------- -------
NET INCOME $50,154 $28,101 $20,918
======= ======= =======
NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS $50,154 $28,101 $20,918
======= ======= =======
NET INCOME PER CLASS A LIMITED PARTNER UNIT $ 8.27 $ 4.64 $ 3.45
======= ======= =======
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT $ 8.28 $ 17.79 $ 15.63
======= ======= =======
The accompanying notes are an integral part of these statements.
F-4
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Limited Partners
-----------------------------------
Class A Class B Total
------------------ -------------- Partners'
Units Amount Units Amount Capital
----- ---------- ----- ------ ----------
BALANCE, December 31, 1998 6,062 $1,236,239 1,626 $ 0 $1,236,239
Net income 0 20,918 0 0 20,918
Partnership distributions 0 (94,762) 0 0 (94,762)
----- ---------- ----- ------ ----------
BALANCE, December 31, 1999 6,062 1,162,395 1,626 0 1,162,395
Net income 0 28,101 0 0 28,101
Partnership distributions 0 (107,816) 0 0 (107,816)
----- ---------- ----- ------ ----------
BALANCE, December 31, 2000 6,062 1,082,680 1,626 0 1,082,680
Net income 0 50,154 0 0 50,154
Partnership distributions 0 (50,199) 0 0 (50,199)
----- ---------- ----- ------ ----------
BALANCE, December 31, 2001 6,062 $1,082,635 1,626 $ 0 $1,082,635
===== ========== ===== ====== ==========
The accompanying notes are an integral part of these statements.
F-5
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,154 $ 28,101 $ 20,918
-------- --------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in income of joint venture (50,144) (27,996) (20,789)
Changes in accounts payable 418 366 100
-------- --------- --------
Total adjustments (49,726) (27,630) (20,689)
-------- --------- --------
Net cash provided by operating activities 428 471 229
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to joint venture (3,363) 0 0
Distributions received from joint venture 79,952 104,801 90,167
-------- --------- --------
Net cash provided by investing activities 76,589 104,801 90,167
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners in excess of accumulated earnings (64,288) (81,298) (76,671)
Distributions to partners from accumulated earnings (12,253) (26,712) (10,529)
-------- --------- --------
Net cash used in financing activities (76,541) (108,010) (87,200)
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 476 (2,738) 3,196
CASH AND CASH EQUIVALENTS, beginning of year 1,127 3,865 669
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of year $ 1,603 $ 1,127 $ 3,865
======== ========= ========
The accompanying notes are an integral part of these statements.
F-6
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Wells Real Estate Fund II-OW (the "Partnership") is a public limited
partnership organized on October 13, 1987 under the laws of the state of
Georgia. The general partners are Leo F. Wells, III and Wells Capital, Inc.
(the "Company"). The Partnership has two classes of limited partnership
interests, Class A and Class B units. Limited partners may vote to, among
other things, (a) amend the partnership agreement, subject to certain
limitations, (b) change the business purpose or investment objectives of
the Partnership, and (c) remove a general partner. A majority vote on any
of the above-described matters will bind the Partnership without the
concurrence of the general partners. Each limited partnership unit has
equal voting rights, regardless of class.
The Partnership was formed to acquire and operate commercial real
properties, including properties which are either to be developed, are
currently under development or construction, are newly constructed, or have
operating histories. The Partnership owns an interest in six properties
through a joint venture between the Partnership and Wells Real Estate Fund
II ("Fund II"), referred to as "Fund II and II-OW."
Through its investment in Fund II and II-OW, the Partnership owned
interests in the following properties during the periods audited: (i) a
retail shopping and commercial office complex located in Tucker, Georgia,
Heritage Place at Tucker ("Tucker"); (ii) a shopping center located in
Cherokee County, Georgia, known as the Cherokee Commons Shopping Center
("Cherokee Commons"); (iii) a four-story office building located in
metropolitan Houston, Texas, the Atrium at Nassau Bay ("The Atrium"); (iv)
a restaurant located in Fulton County, Georgia ("Brookwood Grill"); (v) an
office/retail center in Roswell, Georgia ("880 Holcomb Bridge"); and (vi)
an office building in Charlotte, North Carolina ("Louis Rose Place,"
formerly First Union). The Fund II and II-OW joint venture owns 100% of
Louis Rose Place. All remaining properties are owned by Fund II and II-OW
through investments in joint ventures with other Wells Real Estate Funds.
Use of Estimates and Factors Affecting the Partnership
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The Partnership recently began considering selling its properties.
Management estimates that the net realizable value of each of the
properties exceeds the carrying value of the corresponding real estate
assets; consequently, no impairment loss has been recorded. In the event
that the net sales proceeds are less than the carrying value of the
property sold, the Partnership would recognize a loss on the sale.
Management is not contractually or financially obligated to sell any of its
properties, and it is management's current intent to fully realize the
Partnership's investment in real estate. The success of the Partnership's
future operations and the ability to realize the investment in its assets
will be dependent
F-7
on the Partnership's ability to maintain rental rates, occupancy, and an
appropriate level of operating expenses in future years. Management
believes that the steps that it is taking will enable the Partnership to
realize its investment in its assets.
Income Taxes
The Partnership is not subject to federal or state income taxes; therefore,
none have been provided for in the accompanying financial statements. The
partners are required to include their respective shares of profits and
losses in their individual income tax returns.
Distribution of Net Cash From Operations
Cash available for distribution is distributed on a cumulative
noncompounded basis to limited partners quarterly. In accordance with the
partnership agreement, distributions are paid first to limited partners
holding Class A units until they have received an 8% per annum return on
their adjusted capital contributions, as defined. Cash available for
distribution is then distributed to limited partners holding Class B units
until they have received an 8% per annum return on their adjusted capital
contributions, as defined. Excess cash available for distribution will be
distributed to the general partners until each has received 10% of total
distributions to limited partners for the year. Any remaining cash
available for distribution is distributed 90% to the limited partners and
10% to the general partners.
Allocation of Net Income, Net Loss, and Gain on Sale
Net income is defined as net income recognized by the Partnership,
excluding deductions for depreciation and amortization. Net income, as
defined, of the Partnership will be allocated each year in the same
proportions that net cash from operations is distributed to the partners.
To the extent that the Partnership's net income in any year exceeds net
cash from operations, it will be allocated 99% to the limited partners and
1% to the general partners.
Net loss, depreciation, and amortization deductions for each fiscal year
will be allocated as follows: (a) 99% to the limited partners holding Class
B units and 1% to the general partners until their capital accounts are
reduced to zero, (b) then to any partner having a positive balance in
his/her capital account in an amount not to exceed such positive balance,
and (c) thereafter to the general partners.
Gain on the sale or exchange of the Partnership's properties will be
allocated as follows: (a) first, to partners having negative capital
accounts, if any, until all negative capital accounts have been restored to
zero; (b) then to the limited partners in proportion to and to the extent
of the excess of (i) each limited partner's adjusted capital contribution,
plus a cumulative 12% per annum return on his/her adjusted capital
contribution, less the sum of all prior distributions of cash flow from
operations previously made to such limited partner, over (ii) such limited
partner's capital account balance as of the sale date; (c) then to the
general partners in proportion to and to the extent of the excess of (i)
each general partner's adjusted capital contribution, over (ii) such
general partner's capital account balance as of the sale date; and (d)
thereafter 85% to the limited partners and 15% to the general partners.
Investment in Joint Venture
Basis of Presentation
The Partnership does not have control over the operations of Fund II
and II-OW; however, it does exercise significant influence.
Accordingly, the Partnership's investment in Fund II and II-OW is
recorded using the equity method of accounting. The joint ventures in
which Fund II and II-OW hold an ownership interest follow the same
accounting policies as Fund II and II-OW.
F-8
Real Estate Assets
Real estate assets held by Fund II and II-OW are stated at cost less
accumulated depreciation. Major improvements and betterments are
capitalized when they extend the useful life of the related asset. All
repairs and maintenance expenditures are expensed as incurred.
Management continually monitors events and changes in circumstances
which could indicate that carrying amounts of real estate assets may
not be recoverable. When events or changes in circumstances are
present which indicate that the carrying amounts of real estate assets
may not be recoverable, management assesses the recoverability of real
estate assets by determining whether the carrying value of such real
estate assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. Management has
determined that there has been no impairment in the carrying value of
real estate assets held by Fund II and II-OW or its affiliated joint
ventures as of December 31, 2001.
Depreciation is calculated using the straight-line method over 25
years. Tenant improvements are amortized over the life of the related
lease or real estate asset, whichever is shorter.
Revenue Recognition
All leases on real estate assets held by the joint venture are
classified as operating leases, and the related rental income is
recognized on a straight-line basis over the terms of the respective
leases.
Partners' Distributions and Allocations of Profit and Loss
Cash available for distribution and allocations of profit and loss to
the Partnership by Fund II and II-OW are made in accordance with the
terms of the respective joint venture agreement. Generally, these
items are allocated in proportion to the partners' respective
ownership interests. Cash is paid from the joint venture to the
Partnership on a quarterly basis.
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and
amortized on a straight-line basis over the terms of the related
leases. Deferred lease acquisition costs are included in prepaid
expenses and other assets, net, in Fund II and II-OW's balance sheets
presented in Note 3.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Partnership considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market
accounts.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year financial statement presentation.
2. RELATED-PARTY TRANSACTIONS
Due from affiliate at December 31, 2001 and 2000 represents the
Partnership's share of cash to be distributed from Fund II and II-OW for
the fourth quarters of 2001 and 2000, respectively.
F-9
The Partnership entered into a property management and leasing agreement
with Wells Management Company, Inc. ("Wells Management"), an affiliate of
the general partners. In consideration for supervising the management of
the Partnership's properties, the Partnership will generally pay Wells
Management management and leasing fees equal to (a) 3% of the gross
revenues for management and 3% of the gross revenues for leasing (aggregate
maximum of 6%) plus a separate fee for the one-time lease-up of newly
constructed properties in an amount not to exceed the fee customarily
charged in arm's-length transactions by others rendering similar services
in the same geographic area for similar properties or (b) in the case of
industrial and commercial properties which are leased on a long-term net
basis (ten or more years), 1% of the gross revenues except for initial
leasing fees equal to 3% of the gross revenues over the first five years of
the lease term.
The Partnership incurred management and leasing fees and lease acquisition
costs, at the joint venture level, of $9,970, $12,565, and $12,033 for the
years ended December 31, 2001, 2000, and 1999, respectively, which were
paid to Wells Management.
The Company performs certain administrative services for the Partnership,
such as accounting and other Partnership administration, and incurs the
related expenses. Such expenses are allocated among the various Wells Real
Estate Funds based on time spent on each fund by individual administrative
personnel. The related expenses have been allocated directly to Fund II and
II-OW, as substantially all of the operations of the Partnership and Fund
II are conducted through this joint venture. In the opinion of management,
such allocation is a reasonable estimation of such expenses.
The general partners are also general partners of other Wells Real Estate
Funds. As such, there may exist conflicts of interest where the general
partners in the capacity as general partners of other Wells Real Estate
Funds may be in competition with the Partnership for tenants in similar
geographic markets.
3. INVESTMENT IN JOINT VENTURE
On March 1, 1988, the Partnership entered into a joint venture agreement
with Wells Fund II. The joint venture, Fund II and II-OW, was formed for
the purpose of investing in commercial real properties. Fund II and II-OW
owns Louis Rose Place directly and has investments in several other joint
ventures. The Partnership's ownership percentage interest in Fund II and
II-OW was approximately 5% at December 31, 2001 and 2000.
The following is a roll forward of the Partnership's investment in the
joint venture for the years ended December 31, 2001 and 2000:
2001 2000
----------- -----------
Investment in joint venture, beginning of year $ 1,082,280 $ 1,159,995
Equity in income of joint venture 50,144 27,996
Contribution to joint venture 3,363 0
Distributions from joint venture (66,384) (105,711)
----------- -----------
Investment in joint venture, end of year $ 1,069,403 $ 1,082,280
=========== ===========
F-10
Following are the financial statements for Fund II and II-OW:
Fund II and II-OW
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
----------- -----------
Assets
Real estate assets, at cost:
Land $ 1,367,856 $ 1,367,856
Building and improvements, less accumulated depreciation of
$3,716,818in 2001 and $3,359,119 in 2000 4,064,300 4,411,999
----------- -----------
Total real estate assets 5,432,156 5,779,855
Investment in joint ventures 14,688,192 14,576,863
Cash and cash equivalents 24,544 144,731
Due from affiliates 241,954 352,673
Prepaid expenses and other assets 0 8,234
----------- -----------
Total assets $20,386,846 $20,862,356
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 6,261 $ 5,089
Partnership distributions payable 260,068 494,260
----------- -----------
Total liabilities 266,329 499,349
----------- -----------
Partners' capital:
Wells Real Estate Fund II 19,051,114 19,280,727
Wells Real Estate Fund II-OW 1,069,403 1,082,280
----------- -----------
Total partners' capital 20,120,517 20,363,007
----------- -----------
Total liabilities and partners' capital $20,386,846 $20,862,356
=========== ===========
F-11
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
---------- ---------- --------
Revenues:
Rental income $ 281,357 $ 844,071 $717,676
Equity in income of joint ventures 1,365,921 251,609 242,690
Interest income 2,139 11,806 367
---------- ---------- --------
1,649,417 1,107,486 960,733
---------- ---------- --------
Expenses:
Depreciation 357,699 367,667 367,667
Partnership administration 110,877 83,868 88,859
Legal and accounting 49,619 45,824 42,899
Management and leasing fees 23,134 69,128 61,295
Operating costs 144,002 1,484 366
Computer costs 19,763 12,273 8,148
---------- ---------- --------
705,094 580,244 569,234
---------- ---------- --------
Net income $ 944,323 $ 527,242 $391,499
========== ========== ========
Net income allocated to Wells Real Estate Fund II $ 894,179 $ 499,246 $370,710
========== ========== ========
Net income allocated to Wells Real Estate Fund II-OW $ 50,144 $ 27,996 $ 20,789
========== ========== ========
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Wells Real Wells Real Total
Estate Estate Partners'
Fund II Fund II-OW Capital
------------ ----------- ------------
Balance, December 31, 1998 $ 22,019,064 $ 1,235,838 $ 23,254,902
Net income 370,710 20,789 391,499
Partnership distributions (1,723,185) (96,632) (1,819,817)
------------ ----------- ------------
Balance, December 31, 1999 20,666,589 1,159,995 21,826,584
Net income 499,246 27,996 527,242
Partnership distributions (1,885,108) (105,711) (1,990,819)
------------ ----------- ------------
Balance, December 31, 2000 19,280,727 1,082,280 20,363,007
Net income 894,179 50,144 944,323
Partnership contributions 60,001 3,363 63,364
Partnership distributions (1,183,793) (66,384) (1,250,177)
------------ ----------- ------------
Balance, December 31, 2001 $ 19,051,114 $ 1,069,403 $ 20,120,517
============ =========== ============
F-12
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 944,323 $ 527,242 $ 391,499
----------- ----------- -----------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation 357,699 367,667 367,667
Equity in income of joint ventures (1,365,921) (251,609) (242,690)
Changes in assets and liabilities:
Accounts receivable 0 2,149 21,035
Prepaid expenses and other assets 8,234 16,239 18,355
Accounts payable 1,172 5,089 0
Due to affiliates 0 0 (8,988)
----------- ----------- -----------
Total adjustments (998,816) 139,535 155,379
----------- ----------- -----------
Net cash (used in) provided by operating
activities (54,493) 666,777 546,878
----------- ----------- -----------
Cash flows from investing activities:
Investment in real estate (10,000) 0 0
Distributions received from joint ventures 1,365,311 1,289,394 1,219,061
----------- ----------- -----------
Net cash provided by investing activities 1,355,311 1,289,394 1,219,061
----------- ----------- -----------
Cash flows from financing activities:
Contributions from joint venture partners 63,364 0 0
Distributions to joint venture partners (1,484,369) (1,973,681) (1,698,065)
----------- ----------- -----------
Net cash used in financing activities (1,421,005) (1,973,681) (1,698,065)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (120,187) (17,510) 67,874
Cash and cash equivalents, beginning of year 144,731 162,241 94,367
----------- ----------- -----------
Cash and cash equivalents, end of year $ 24,544 $ 144,731 $ 162,241
=========== =========== ===========
The following is a roll forward of Fund II and II-OW investment in the joint
venture for the years ended December 31, 2001 and 2000:
2001 2000
------------ ------------
Investment in joint venture, beginning of year $ 14,576,863 $ 15,654,420
Equity in income of joint venture 1,365,921 251,609
Distributions from joint venture (1,254,592) (1,329,166)
------------ ------------
Investment in joint venture, end of year $ 14,688,192 $ 14,576,863
============ ============
F-13
Fund II and II-OW's investment and percentage ownership in other joint
ventures at December 31, 2001 and 2000 are summarized as follows:
2001 2000
--------------------- ---------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
Fund I and II--Tucker $ 3,800,920 48% $ 3,894,846 48%
Fund I, II, II-OW, VI, and VII
Associates--Cherokee 4,620,682 56 3,814,737 56
Fund II and III Associates--The Atrium 4,558,840 64 5,054,727 64
Fund II and III Associates--Brookwood Grill 1,707,750 62 1,812,553 62
----------- -----------
$14,688,192 $14,576,863
=========== ===========
The following are descriptions of the joint ventures in which Fund II and
II-OW has investments.
Fund I and II--Tucker
Tucker and Cherokee Commons were previously held in two joint ventures
between Fund II and II-OW and Wells Real Estate Fund I ("Fund I"), which
were formed for the purpose of owning, developing, and operating Cherokee
Commons and Tucker. In 1991, the Tucker and Cherokee Commons joint ventures
were merged into a new joint venture, the Fund I and II Tucker--Cherokee
joint venture. Under the terms of the joint venture agreement, the
ownership interests of Fund I and Fund II and II-OW in each individual
property remained unchanged.
On August 1, 1995, the Fund I and II--Tucker--Cherokee joint venture
assigned its ownership in Cherokee Commons to the Fund I, II, II-OW, VI,
and VII Associates--Cherokee joint venture, a joint venture between Fund I,
Fund II and II-OW, Wells Real Estate Fund VI, L.P. ("Fund VI"), and Wells
Real Estate Fund VII, L.P. ("Fund VII"). Upon the assignment of Cherokee
Commons, the joint venture was renamed Fund I and II--Tucker. Tucker is a
retail shopping center containing approximately 29,858 square feet and a
commercial office building complex containing approximately 67,465 square
feet in Tucker, DeKalb County, Georgia.
F-14
Following are the financial statements for Fund I and II--Tucker:
Fund I and II--Tucker
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---------- ----------
Assets
Real estate assets, at cost:
Land $3,260,887 $3,260,887
Building and improvements, less accumulated depreciation of
$4,363,519 in 2001 and $3,896,844 in 2000 5,246,515 5,459,417
---------- ----------
Total real estate assets 8,507,402 8,720,304
Cash and cash equivalents 152,975 117,239
Accounts receivable 103,861 222,778
Prepaid expenses and other assets, net 137,437 110,525
---------- ----------
Total assets $8,901,675 $9,170,846
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 79,839 $ 69,099
Partnership distributions payable 163,584 236,990
Due to affiliates 686,464 632,762
---------- ----------
Total liabilities 929,887 938,851
---------- ----------
Partners' capital:
Wells Real Estate Fund I 4,170,868 4,337,149
Fund II and II-OW 3,800,920 3,894,846
---------- ----------
Total partners' capital 7,971,788 8,231,995
---------- ----------
Total liabilities and partners' capital $8,901,675 $9,170,846
========== ==========
F-15
Fund I and II--Tucker
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
---------- ---------- ----------
Revenues:
Rental income $1,327,608 $1,390,599 $1,373,213
Interest income 1,511 601 447
---------- ---------- ----------
1,329,119 1,391,200 1,373,660
---------- ---------- ----------
Expenses:
Operating costs, net of reimbursements 398,970 434,738 464,001
Depreciation 483,844 491,806 491,386
Management and leasing fees 131,700 121,946 158,269
Partnership administration 44,514 37,480 29,109
Legal and accounting 15,757 6,824 5,739
Bad debt expense 19,464 27,097 0
---------- ---------- ----------
1,094,249 1,119,891 1,148,504
---------- ---------- ----------
Net income $ 234,870 $ 271,309 $ 225,156
========== ========== ==========
Net income allocated to Wells Real Estate Fund I $ 129,390 $ 149,464 $ 124,039
========== ========== ==========
Net income allocated to Fund II and II-OW $ 105,480 $ 121,845 $ 101,117
========== ========== ==========
Fund I and II--Tucker
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Wells Real Fund II Total
Estate and Partners'
Fund I II-OW Capital
----------- ----------- -----------
Balance, December 31, 1998 $ 4,758,591 $ 4,156,811 $ 8,915,402
Net income 124,039 101,117 225,156
Partnership distributions (300,690) (199,736) (500,426)
----------- ----------- -----------
Balance, December 31, 1999 4,581,940 4,058,192 8,640,132
Net income 149,464 121,845 271,309
Partnership distributions (394,255) (285,191) (679,446)
----------- ----------- -----------
Balance, December 31, 2000 4,337,149 3,894,846 8,231,995
Net income 129,390 105,480 234,870
Partnership distributions (295,671) (199,406) (495,077)
----------- ----------- -----------
Balance, December 31, 2001 $ 4,170,868 $ 3,800,920 $ 7,971,788
=========== =========== ===========
F-16
Funds I and II--Tucker
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 234,870 $ 271,309 $ 225,156
--------- --------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 483,844 491,806 491,386
Changes in assets and liabilities:
Accounts receivable 118,917 (97,006) (29,410)
Prepaid expenses and other assets, net (26,912) 5,340 6,316
Accounts payable and accrued expenses 10,740 1,302 2,833
Due to affiliates 53,702 44,418 39,712
--------- --------- ---------
Total adjustments 640,291 445,860 510,837
--------- --------- ---------
Net cash provided by operating activities 875,161 717,169 735,993
Cash flows from investing activities:
Investment in real estate (270,942) (115,341) (260,522)
Cash flows from financing activities:
Distributions to joint venture partners (568,483) (608,206) (401,234)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 35,736 (6,378) 74,237
Cash and cash equivalents, beginning of year 117,239 123,617 49,380
--------- --------- ---------
Cash and cash equivalents, end of year $ 152,975 $ 117,239 $ 123,617
========= ========= =========
Supplemental disclosure of noncash activities:
Write-off of fully depreciated real estate assets $ 17,169 $ 0 $ 0
========= ========= =========
Fund I, II, II-OW, VI, and VII Associates--Cherokee
Fund I, II, II-OW, VI, and VII Associates--Cherokee (or the "Cherokee Joint
Venture") was formed in August 1995 for the purpose of owning and operating
Cherokee Commons, a retail shopping center containing approximately 103,755
square feet, located in Cherokee County, Georgia. Until the formation of
this joint venture, Cherokee Commons was part of the Fund I and II
Tucker--Cherokee Joint Venture. Concurrent with the formation of Fund I,
II, II-OW, VI, and VII Associates--Cherokee, Cherokee Commons was
transferred from the Fund I and II Tucker--Cherokee Joint Venture to the
Cherokee Joint Venture. Percentage ownership interests in the Cherokee
Joint Venture were determined at the time of formation based on relative
capital contributions. Under the terms of the joint venture agreement, Fund
VI and Fund VII each contributed approximately $1 million in return for an
11% ownership interest. Fund I's ownership interest in the Cherokee Joint
Venture changed from 31% to 24%, and Fund II and II-OW joint venture's
ownership interest changed from 69% to 55%. The $2 million in cash
contributed to the Cherokee Joint Venture was used to fund an expansion of
the property for an existing tenant. On October 1, 2001, the Cherokee Joint
Venture sold Cherokee Commons for net proceeds of $8,434,089 and recognized
a gain of $1,725,015 on the sale. Management has determined that additional
sources of funds will be required to fund tenant improvements at The Atrium
and Louis Rose Place properties. Accordingly, it is anticipated that the
Partnership's share of the net proceeds from the sale of Cherokee Commons
will be invested in such tenant improvements and, therefore, not
distributed to the limited partners.
F-17
Following are the financial statements for Fund I, II, II-OW, VI, and VII
Associates--Cherokee:
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---------- ----------
Assets
Real estate assets, at cost:
Land $ 0 $1,219,704
Building and improvements, less accumulated depreciation of $0 in 2001 and
$3,606,079 in 2000 0 5,624,924
---------- ----------
Total real estate assets 0 6,844,628
Cash and cash equivalents 8,455,308 214,940
Accounts receivable 54,871 31,356
Prepaid expenses and other assets 21,528 100,866
---------- ----------
Total assets $8,531,707 $7,191,790
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 30,777 $ 23,716
Refundable security deposits 0 23,839
Partnership distributions payable 77,142 197,191
Due to affiliates 149,898 137,334
---------- ----------
Total liabilities 257,817 382,080
---------- ----------
Partners' capital:
Wells Real Estate Fund I 1,840,011 1,498,120
Fund II and II-OW 4,620,682 3,814,737
Wells Real Estate Fund VI 907,949 749,777
Wells Real Estate Fund VII 905,248 747,076
---------- ----------
Total partners' capital 8,273,890 6,809,710
---------- ----------
Total liabilities and partners' capital $8,531,707 $7,191,790
========== ==========
F-18
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
----------- -------- --------
Revenues:
Rental income $ 758,302 $965,305 $945,222
Interest income 69,626 78 68
Other income 1,008 0 0
Gain on sale of real estate 1,725,015 0 0
----------- -------- --------
2,553,951 965,383 945,290
----------- -------- --------
Expenses:
Depreciation 254,448 442,250 447,969
Operating costs, net of reimbursements (65,676) 24,557 37,583
Partnership administration 15,627 23,352 24,882
Management and leasing fees 67,560 74,422 94,149
Legal and accounting 18,357 6,180 5,624
Bad debt expense 8,682 0 0
----------- -------- --------
298,998 570,761 610,207
----------- -------- --------
Net income $ 2,254,953 $394,622 $335,083
=========== ======== ========
Net income allocated to Wells Real Estate Fund I $ 541,707 $ 94,800 $ 80,496
=========== ======== ========
Net income allocated to Fund II and II-OW $ 1,230,326 $215,310 $182,825
=========== ======== ========
Net income allocated to Wells Real Estate Fund VI $ 241,460 $ 42,256 $ 35,881
=========== ======== ========
Net income allocated to Wells Real Estate Fund VII $ 241,460 $ 42,256 $ 35,881
=========== ======== ========
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Wells Real Fund II Wells Real Wells Real Total
Estate and Estate Estate Partners'
Fund I II-OW Fund VI Fund VII Capital
----------- ----------- ---------- ---------- -----------
Balance, December 31, 1998 $ 1,741,492 $ 4,295,663 $ 844,160 $ 841,460 $ 7,722,775
Net income 80,496 182,825 35,881 35,881 335,083
Partnership distributions (203,855) (425,383) (83,483) (83,483) (796,204)
----------- ----------- --------- --------- -----------
Balance, December 31, 1999 1,618,133 4,053,105 796,558 793,858 7,261,654
Net income 94,800 215,310 42,256 42,256 394,622
Partnership distributions (214,813) (453,678) (89,037) (89,038) (846,566)
----------- ----------- --------- --------- -----------
Balance, December 31, 2000 1,498,120 3,814,737 749,777 747,076 6,809,710
Net income 541,707 1,230,326 241,460 241,460 2,254,953
Partnership distributions (199,816) (424,381) (83,288) (83,288) (790,773)
----------- ----------- --------- --------- -----------
Balance, December 31, 2001 $ 1,840,011 $ 4,620,682 $ 907,949 $ 905,248 $ 8,273,890
=========== =========== ========= ========= ===========
F-19
Fund I, II, II-OW, VI, and VII Associates--Cherokee
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
----------- --------- ---------
Cash flows from operating activities:
Net income $ 2,254,953 $ 394,622 $ 335,083
----------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 254,448 442,250 447,969
Gain on sale of real estate (1,725,015) 0 0
Changes in assets and liabilities:
Accounts receivable (56,972) (3,653) 7,814
Prepaid expenses and other assets, net 12,961 (11,020) 1,133
Accounts payable and accrued expenses, and
refundable security deposits (29,563) 12,694 (72,272)
Due to affiliates 12,564 15,062 13,005
----------- --------- ---------
Total adjustments (1,531,577) 455,333 397,649
----------- --------- ---------
Net cash provided by operating activities 723,376 849,955 732,732
----------- --------- ---------
Cash flows from investing activities:
Net proceeds from the sale of real estate 8,434,089 0 0
Investment in real estate (6,275) 0 (14,148)
----------- --------- ---------
Net cash provided by (used in) investing
activities 8,427,814 0 (14,148)
----------- --------- ---------
Cash flows from financing activities:
Distributions to joint venture partners (910,822) (841,555) (734,858)
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents 8,240,368 8,400 (16,274)
Cash and cash equivalents, beginning of year 214,940 206,540 222,814
----------- --------- ---------
Cash and cash equivalents, end of year $ 8,455,308 $ 214,940 $ 206,540
=========== ========= =========
Fund II and III Associates
On April 3, 1989, Fund II and II-OW entered into a joint venture agreement
with Wells Real Estate Fund III, L.P. ("Fund III"). The new joint venture,
Fund II and III Associates--The Atrium, was formed for the purpose of
investing in commercial and industrial real properties. In April 1989, Fund
II and III Associates--The Atrium acquired The Atrium. The Atrium was fully
occupied from inception through June 1996, at which time the previous
tenant's lease expired. In March 1997, a lease was signed with a new tenant
for the entire building, and the new tenant began paying rent in May 1997.
The lease term was for five years with an option to renew for an additional
five years. A no-cause cancellation provision became effective at the end
of the first three-year period. If this no-cause cancellation were
exercised, the tenant would be required to pay unamortized, up-front tenant
improvement costs. The costs of completing the required tenant improvements
and outside broker commissions were funded out of reserves and
contributions by Fund II and II-OW and Fund III.
On January 31, 1990, Fund II and II-OW entered into a second joint venture
agreement with Fund III. The new joint venture, Fund II and III
Associates--Brookwood Grill, was formed for the purpose of investing in
commercial and industrial real properties. In 1991, Fund II and II-OW
contributed its interest in a parcel of land known as 880 Holcomb Bridge
located in Roswell, Georgia, to Fund II and III Associates--Brookwood
Grill. The property is a 5.8-acre tract of land. A restaurant was developed
on 1.5 acres of 880 Holcomb Bridge and is currently operating as the
Brookwood Grill restaurant. During 1995, the remaining 4.3 acres of 880
Holcomb Bridge were transferred at cost to the Fund II, III, VI, and VII
Associates joint venture, a joint venture partnership between Fund II and
III Associates--Brookwood Grill, Fund VI, and Fund VII. Fund II and III
Associates--Brookwood Grill's investment in this transferred parcel
F-20
of 880 Holcomb Bridge was $1,210,117 and $1,305,317 at December 31, 2001 and
2000, respectively, which represents a 24% interest for each year.
Following are the financial statements for Fund II and III Associates--The
Atrium:
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---------- ----------
Assets
Real estate assets, at cost:
Land $1,504,743 $1,504,743
Building and improvements, less accumulated depreciation of
$7,889,603 in 2001 and $7,113,487 in 2000 5,572,282 6,274,702
---------- ----------
Total real estate assets 7,077,025 7,779,445
Cash and cash equivalents 211,954 240,314
Accounts receivable 5,346 23,202
Prepaid expenses and other assets, net 78,954 123,399
---------- ----------
Total assets $7,373,279 $8,166,360
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 100,365 $ 104,321
Partnership distributions payable 169,050 149,227
---------- ----------
Total liabilities 269,415 253,548
---------- ----------
Partners' capital:
Fund II and II-OW 4,558,840 5,054,727
Wells Real Estate Fund III 2,545,024 2,858,085
---------- ----------
Total partners' capital 7,103,864 7,912,812
---------- ----------
Total liabilities and partners' capital $7,373,279 $8,166,360
========== ==========
F-21
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Loss
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
----------- ----------- -----------
Revenues:
Rental income $ 1,470,144 $ 1,468,784 $ 1,470,144
Other income 0 0 4,000
Interest income 7,730 0 0
----------- ----------- -----------
1,477,874 1,468,784 1,474,144
----------- ----------- -----------
Expenses:
Depreciation 776,116 877,240 867,720
Operating costs, net of reimbursements 598,010 723,744 692,066
Management and leasing fees 190,978 185,035 179,762
Partnership administration 37,886 14,841 23,278
Legal and accounting 9,002 5,250 5,250
----------- ----------- -----------
1,611,992 1,806,110 1,768,076
----------- ----------- -----------
Net loss $ (134,118) $ (337,326) $ (293,932)
=========== =========== ===========
Net loss allocated to Fund II and II-OW $ (82,214) $ (206,781) $ (180,180)
=========== =========== ===========
Net loss allocated to Wells Real Estate Fund III $ (51,904) $ (130,545) $ (113,752)
=========== =========== ===========
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Total
Fund II Wells Real Partners'
II-OW Fund III Capital
----------- ----------- -----------
Balance, December 31, 1998 $ 6,181,461 $ 3,569,416 $ 9,750,877
Net loss (180,180) (113,752) (293,932)
Partnership distributions (385,541) (243,401) (628,942)
----------- ----------- -----------
Balance, December 31, 1999 5,615,740 3,212,263 8,828,003
Net loss (206,781) (130,545) (337,326)
Partnership distributions (354,232) (223,633) (577,865)
----------- ----------- -----------
Balance, December 31, 2000 5,054,727 2,858,085 7,912,812
Net loss (82,214) (51,904) (134,118)
Partnership distributions (413,673) (261,157) (674,830)
----------- ----------- -----------
Balance, December 31, 2001 $ 4,558,840 $ 2,545,024 $ 7,103,864
=========== =========== ===========
F-22
Fund II and III Associates--The Atrium
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- ----------- ---------
Cash flows from operating activities:
Net loss $(134,118) $ (337,326) $(293,932)
--------- ----------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 776,116 877,240 867,720
Changes in assets and liabilities:
Accounts receivable 17,856 6,816 (11,904)
Prepaid expenses and other assets, net 44,445 89,744 89,745
Accounts payable (3,956) 102,520 (2,786)
--------- ----------- ---------
Total adjustments 834,461 1,076,320 942,775
--------- ----------- ---------
Net cash provided by operating activities 700,343 738,994 648,843
Cash flows from investing activities:
Investment in real estate assets (73,696) (58,200) (23,401)
Cash flows from financing activities:
Distributions to joint venture partners (655,007) (529,650) (665,154)
--------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (28,360) 151,144 (39,712)
Cash and cash equivalents, beginning of year 240,314 89,170 128,882
--------- ----------- ---------
Cash and cash equivalents, end of year $ 211,954 $ 240,314 $ 89,170
========= =========== =========
F-23
Following are the financial statements for Fund II and III Associates--Brookwood
Grill:
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---------- ----------
Assets
Real estate assets, at cost:
Land $ 745,223 $ 745,223
Building and improvements, less accumulated depreciation of
$490,320 in 2001 and $437,759 in 2000 782,493 835,054
---------- ----------
Total real estate assets 1,527,716 1,580,277
Investment in joint venture 1,210,117 1,305,317
Cash and cash equivalents 22,272 57,515
Due from affiliate 32,501 69,758
Accounts receivable 8,927 38,714
Prepaid expenses and other assets, net 3,188 6,344
---------- ----------
Total assets $2,804,721 $3,057,925
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 2,553 $ 4,580
Due to affiliate 0 917
Partnership distributions payable 63,358 145,528
---------- ----------
Total liabilities 65,911 151,025
---------- ----------
Partners' capital:
Fund II and II-OW 1,707,750 1,812,553
Wells Real Estate Fund III 1,031,060 1,094,347
---------- ----------
Total partners' capital 2,738,810 2,906,900
---------- ----------
Total liabilities and partners' capital $2,804,721 $3,057,925
========== ==========
F-24
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
-------- --------- ---------
Revenues:
Rental income $234,810 $ 224,801 $ 224,801
Equity in income of joint venture 63,326 55,489 81,669
Other income 2,580 0 0
-------- --------- ---------
300,716 280,290 306,470
-------- --------- ---------
Expenses:
Depreciation 52,561 54,014 54,014
Operating costs, net of reimbursements 21,828 (13,375) (11,565)
Management and leasing fees 28,673 25,320 30,096
Partnership administration 13,986 14,019 5,853
Legal and accounting 3,509 5,869 5,252
-------- --------- ---------
120,557 85,847 83,650
-------- --------- ---------
Net income $180,159 $ 194,443 $ 222,820
======== ========= =========
Net income allocated to Fund II and II-OW $112,329 $ 121,235 $ 138,928
======== ========= =========
Net income allocated to Wells Real Estate Fund III $ 67,830 $ 73,208 $ 83,892
======== ========= =========
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Fund II Wells Real Total
and Estate Partners'
II-OW Fund III Capital
----------- ----------- -----------
Balance, December 31, 1998 $ 2,042,176 $ 1,233,003 $ 3,275,179
Net income 138,928 83,892 222,820
Partnership distributions (253,721) (153,210) (406,931)
----------- ----------- -----------
Balance, December 31, 1999 1,927,383 1,163,685 3,091,068
Net income 121,235 73,208 194,443
Partnership distributions (236,065) (142,546) (378,611)
----------- ----------- -----------
Balance, December 31, 2000 1,812,553 1,094,347 2,906,900
Net income 112,329 67,830 180,159
Partnership distributions (217,132) (131,117) (348,249)
----------- ----------- -----------
Balance, December 31, 2001 $ 1,707,750 $ 1,031,060 $ 2,738,810
=========== =========== ===========
F-25
Fund II and III Associates--Brookwood Grill
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 180,159 $ 194,443 $ 222,820
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 52,561 54,014 54,014
Equity in income of joint venture (63,326) (55,489) (81,669)
Changes in assets and liabilities:
Accounts receivable 29,787 2,346 25,958
Prepaid expenses and other assets, net 3,156 5,568 5,568
Accounts payable (2,027) 4,580 (1,200)
Due to affiliates (917) (1,488) (1,489)
--------- --------- ---------
Total adjustments 19,234 9,531 1,182
--------- --------- ---------
Net cash provided by operating activities 199,393 203,974 224,002
Cash flows from investing activities:
Distributions received from joint venture 195,783 147,198 173,171
Cash flows from financing activities:
Distributions to joint venture partners (430,419) (359,284) (405,502)
--------- --------- ---------
Net decrease in cash and cash equivalents (35,243) (8,112) (8,329)
Cash and cash equivalents, beginning of year 57,515 65,627 73,956
--------- --------- ---------
Cash and cash equivalents, end of year $ 22,272 $ 57,515 $ 65,627
========= ========= =========
Fund II, III, VI, and VII Associates
On January 1, 1995, the Fund II and III Associates--Brookwood Grill joint
venture entered into a joint venture agreement with Fund VI and Fund VII to
form Fund II, III, VI, and VII Associates for the purpose of acquiring,
developing, operating, and selling real properties. During 1995, Fund II
and III Associates--Brookwood Grill contributed a 4.3-acre tract of land
from its 880 Holcomb Bridge property to the Fund II, III, VI, and VII
Associates joint venture. Development of two retail and office buildings
containing a total of approximately 49,500 square feet was substantially
complete in 1996.
F-26
The following are the financial statements for Fund II, III, VI, and VII
Associates:
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---------- ----------
Assets
Real estate assets, at cost:
Land $1,325,242 $1,325,242
Building and improvements, less accumulated depreciation of $1,969,078 in
2001 and $1,654,520 in 2000 3,749,081 4,063,639
---------- ----------
Total real estate assets 5,074,323 5,388,881
Cash and cash equivalents 151,109 88,044
Accounts receivable 27,391 151,886
Prepaid expenses and other assets, net 86,575 158,872
---------- ----------
Total assets $5,339,398 $5,787,683
========== ==========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 47,605 $ 82,072
Partnership distributions payable 136,570 154,874
---------- ----------
184,175 236,946
---------- ----------
Partners' capital:
Fund II and III Associates--Brookwood Grill 1,210,117 1,305,317
Wells Real Estate Fund VI 1,350,182 1,456,417
Wells Real Estate Fund VII 2,594,924 2,789,003
---------- ----------
Total partners' capital 5,155,223 5,550,737
---------- ----------
Total liabilities and partners' capital $5,339,398 $5,787,683
========== ==========
F-27
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Income
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
-------- -------- --------
Revenues:
Rental income $845,597 $869,390 $953,952
Other income 0 0 23,843
Interest income 2,566 0 0
-------- -------- --------
848,163 869,390 977,795
-------- -------- --------
Expenses:
Depreciation 314,558 355,293 415,165
Operating costs, net of reimbursements 77,354 70,693 68,691
Management and leasing fees 103,277 111,567 129,798
Legal and accounting 12,389 4,513 4,952
Partnership administration 21,691 22,646 19,891
Bad debt expense 55,802 74,145 0
-------- -------- --------
585,071 638,857 638,497
-------- -------- --------
Net income $263,092 $230,533 $339,298
======== ======== ========
Net income allocated to Fund II and III Associates--Brookwood Grill $ 63,326 $ 55,489 $ 81,669
======== ======== ========
Net income allocated to Wells Real Estate Fund VI $ 70,667 $ 61,921 $ 91,135
======== ======== ========
Net income allocated to Wells Real Estate Fund VII $129,099 $113,123 $166,494
======== ======== ========
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Partners' Capital
for the Years Ended December 31, 2001, 2000, and 1999
Fund II
and III
Associates-- Wells Wells Real Total
Brookwood Real Estate Estate Partners'
Grill Fund VI Fund VII Capital
------------ ----------- ---------- ----------
Balance, December 31, 1998 $1,507,807 $1,682,380 $3,201,805 $6,391,992
Net income 81,669 91,135 166,494 339,298
Partnership distributions (182,885) (204,085) (372,836) (759,806)
---------- ---------- ---------- ----------
Balance, December 31, 1999 1,406,591 1,569,430 2,995,463 5,971,484
Net income 55,489 61,921 113,123 230,533
Partnership distributions (156,763) (174,934) (319,583) (651,280)
---------- ---------- ---------- ----------
Balance, December 31, 2000 1,305,317 1,456,417 2,789,003 5,550,737
Net income 63,326 70,667 129,099 263,092
Partnership distributions (158,526) (176,902) (323,178) (658,606)
---------- ---------- ---------- ----------
Balance, December 31, 2001 $1,210,117 $1,350,182 $2,594,924 $5,155,223
========== ========== ========== ==========
F-28
Fund II, III, VI, and VII Associates
(A Georgia Joint Venture)
Statements of Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 263,092 $ 230,533 $ 339,298
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 314,558 355,293 415,165
Changes in assets and liabilities:
Accounts receivable 124,495 10,578 (51,004)
Prepaid expenses and other assets, net 72,297 54,571 20,522
Accounts payable and accrued expenses (34,467) (5,854) (104,146)
--------- --------- ---------
Total adjustments 476,883 414,588 280,537
--------- --------- ---------
Net cash provided by operating activities 739,975 645,121 619,835
Cash flows from investing activities:
Investment in real estate 0 0 (19,772)
Cash flows from financing activities:
Distributions to joint venture partners (676,910) (746,481) (719,447)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 63,065 (101,360) (119,384)
Cash and cash equivalents, beginning of year 88,044 189,404 308,788
--------- --------- ---------
Cash and cash equivalents, end of year $ 151,109 $ 88,044 $ 189,404
========= ========= =========
4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL
The Partnership's income tax basis net income for the years ended December
31, 2001, 2000, and 1999 is calculated as follows:
2001 2000 1999
-------- ------- -------
Financial statement net income $ 50,154 $28,101 $20,918
Increase (decrease) in net income resulting from:
Depreciation expense for financial reporting purposes in excess of
amounts for income tax purposes 29,902 33,612 35,061
Expenses deductible when paid for income tax purposes, accrued for
financial reporting purposes 2,771 1,352 1,149
Rental income recognized for income tax purposes (less than) in
excess of amounts for financial reporting purposes 978 116 (349)
Gain on sale of property for income tax purposes (43,171) 0 0
Involuntary conversion for income tax purposes 0 0 0
Meals and entertainment 87 38 52
-------- ------- -------
Income tax basis net income $ 40,721 $63,219 $56,831
======== ======= =======
F-29
The Partnership's income tax partners' capital at December 31, 2001, 2000,
and 1999 computed as follows:
2001 2000 1999
----------- ---------- ----------
Financial statement partners' capital $ 1,082,635 $1,082,680 $1,162,395
Increase (decrease) in partners' capital resulting from:
Depreciation expense for financial reporting purposes
in excess of amounts for income tax purposes 200,921 171,019 137,407
Joint venture change in ownership (1,427) (1,427) (1,427)
Accumulated expenses deductible when paid for income
tax purposes, accrued for financial reporting
purposes 34,867 32,096 30,744
Accumulated rental income accrued for financial
reporting in excess of amounts for income tax
purposes (5,335) (6,313) (6,429)
Partnership distributions payable 0 26,342 26,536
Other (3,008) (3,095) (3,133)
Gain on sale of property for income tax purposes (43,171) 0 0
----------- ---------- ----------
Income tax basis partners' capital $ 1,265,482 $1,301,302 $1,346,093
=========== ========== ==========
5. RENTAL INCOME
The future minimum rental income due from the Partnership's respective
ownership interest in the joint venture under noncancelable operating
leases at December 31, 2001 is as follows:
Year ending December 31:
2002 $ 62,362
2003 33,647
2004 26,537
2005 21,152
2006 20,359
Thereafter 74,886
--------
$238,943
========
Three tenants contributed approximately 37%, 13%, and 12% of rental income,
which is included in equity in income of joint ventures. In addition, three
tenants will contribute approximately 61%, 14%, and 12% of future minimum rental
income.
The future minimum rental income due Fund I and II Tucker under noncancelable
operating leases at December 31, 2001 is as follows:
Year ending December 31:
2002 $1,158,289
2003 900,721
2004 615,863
2005 431,008
2006 397,257
Thereafter 775,652
----------
$4,278,790
==========
F-30
One tenant contributed 11% of rental income for the year ended December 31,
2001. In addition, two tenants will contribute approximately 24% and 12% of
future minimum rental income.
The future minimum rental income due Fund II and III Associates--The Atrium
under noncancelable operating leases at December 31, 2001 is as follows:
Year ending December 31:
2002 $620,000
2003 0
2004 0
2005 0
2006 0
Thereafter 0
--------
$620,000
========
One tenant at The Atrium contributed 100% of rental income for the year
ended December 31, 2001 and will contribute 100% of future minimum rental
income.
The future minimum rental income due Fund II and III Associates--Brookwood
Grill under noncancelable operating leases at December 31, 2001 is as
follows:
Year ending December 31:
2002 $ 280,744
2003 286,983
2004 286,983
2005 286,983
2006 322,855
Thereafter 1,705,155
----------
$3,169,703
==========
One tenant contributed 100% of rental income for the year ended December
31, 2001 and will contribute 100% of future minimum rental income.
The future minimum rental income due Fund II, III, VI, and VII Associates
under noncancelable operating leases at December 31, 2001 is as follows:
Year ending December 31:
2002 $ 604,859
2003 319,952
2004 285,696
2005 167,194
2006 21,308
Thereafter 0
----------
$1,399,009
==========
Three tenants contributed approximately 15%, 15%, and 14% of rental income
for the year ended December 31, 2001. In addition, four tenants will
contribute approximately 38%, 17%, 13%, and 11% of future minimum rental
income.
F-31
6. QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial
information for the years ended December 31, 2001 and 2000:
2001 Quarters Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $11,552 $ 11 $(5,654) $44,245
Net income 11,552 11 (5,654) 44,245
Net income allocated to Class A limited partners 11,552 11 (5,654) 44,245
Net income per Class A limited partner unit
outstanding (a) $ 1.91 $0.00 $ (0.93) $ 7.29
Distribution per Class A limited partner unit
outstanding (a) 4.37 2.19 1.72 0.00
(a) The totals of the four quarterly amounts for the year ended
December 31, 2001 do not equal the totals for the year. This
difference resulted from rounding differences between
quarters.
2000 Quarters Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $8,632 $7,300 $5,825 $6,344
Net income 8,632 7,300 5,825 6,344
Net income allocated to Class A limited partners 8,632 7,300 5,825 6,344
Net income per Class A limited partner unit
outstanding $ 1.42 $ 1.21 $ 0.96 $ 1.05
Distribution per Class A limited partner unit
outstanding 4.38 4.53 4.53 4.35
7. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against the Partnership or the Company. In
the normal course of business, the Partnership or the Company may become
subject to such litigation or claims.
F-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wells Real Estate Fund II,
Wells Real Estate Fund II-OW, and
Wells Real Estate Fund III, L.P.:
We have audited the accompanying balance sheets of BOEING AT THE ATRIUM as of
December 31, 2001 and 2000 and the related statements of loss, partners'
capital, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the building's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Boeing at the Atrium as of
December 31, 2001 and 2000 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
Atlanta, Georgia
January 25, 2002
F-33
BOEING AT THE ATRIUM
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
ASSETS
REAL ESTATE ASSETS:
Land $1,504,743 $1,504,743
Building and improvements, less accumulated depreciation of $7,889,603 in
2001 and $7,113,487 in 2000 5,572,282 6,274,702
---------- ----------
Total real estate assets 7,077,025 7,779,445
CASH AND CASH EQUIVALENTS 211,954 240,314
Accounts receivable 5,346 23,202
PREPAID AND OTHER ASSETS, NET 78,954 123,399
---------- ----------
Total assets $7,373,279 $8,166,360
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Distributions payable to partners $ 124,050 $ 149,227
Accounts payable 100,366 104,321
---------- ----------
Total liabilities 224,416 253,548
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
PARTNERS' CAPITAL:
Wells Real Estate Fund II 4,187,690 4,631,085
Wells Real Estate Fund II-OW 398,736 423,642
Wells Real Estate Fund III, L.P. 2,562,437 2,858,085
---------- ----------
Total partners' capital 7,148,863 7,912,812
---------- ----------
Total liabilities and partners' capital $7,373,279 $8,166,360
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-34
BOEING AT THE ATRIUM
STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
----------- ----------- ----------
REVENUES:
Rental income $ 1,470,144 $ 1,468,784 $1,470,144
----------- ----------- ----------
Interest Income 7,730 0 0
----------- ----------- ----------
1,477,874 1,468,784 1,470,144
----------- ----------- ----------
EXPENSES:
Depreciation 776,116 877,240 867,719
Operating costs, net of reimbursements 635,897 738,585 711,346
Management and leasing fees 190,978 185,035 179,762
Legal and accounting 9,002 5,250 5,250
----------- ----------- ----------
1,611,993 1,806,110 1,764,077
----------- ----------- ----------
NET LOSS $ (134,119) $ (337,326) $ (293,933)
=========== =========== ==========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND II $ (77,843) $ (195,784) $ (170,613)
=========== =========== ==========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND II-OW $ (4,372) $ (10,997) $ (9,568)
=========== =========== ==========
NET LOSS ALLOCATED TO WELLS REAL ESTATE FUND III, L.P. $ (51,904) $ (130,545) $ (113,752)
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-35
BOEING AT THE ATRIUM
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Wells Real
Wells Real Wells Real Estate Total
Estate Estate Fund III Partners'
Fund II Fund II-OW L.P. Capital
---------- ---------- ---------- ----------
BALANCE, December 31, 1998 $5,697,944 $483,517 $3,569,416 $9,750,877
Net loss (170,613) (9,568) (113,752) (293,933)
Distributions (365,069) (20,472) (243,400) (628,941)
---------- -------- ---------- ----------
BALANCE, December 31, 1999 5,162,262 453,477 3,212,264 8,828,003
Net loss (195,784) (10,997) (130,545) (337,326)
Distributions (335,393) (18,839) (223,633) (577,865)
---------- -------- ---------- ----------
BALANCE, December 31, 2000 4,631,085 423,641 2,858,086 7,912,812
Net loss (77,843) (4,372) (51,904) (134,119)
Distributions (365,553) (20,533) (243,744) (629,830)
---------- -------- ---------- ----------
BALANCE, December 31, 2001 $4,187,689 $398,736 $2,562,438 $7,148,863
========== ======== ========== ==========
The accompanying notes are an integral part of these statements.
F-36
BOEING AT THE ATRIUM
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
--------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(134,119) $ (337,326) $(293,933)
--------- ---------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 776,116 877,240 867,719
Changes in assets and liabilities:
Accounts receivable 17,856 6,816 (11,904)
Prepaid expenses and other assets, net 44,445 89,744 89,745
Accounts payable (3,955) 102,520 (2,786)
--------- ---------- ---------
Total adjustments 834,462 1,076,320 942,774
--------- ---------- ---------
Net cash provided by operating activities 700,343 738,994 648,841
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate assets (73,696) (58,200) (23,400)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to partners (655,007) (529,650) (665,153)
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,360) 151,144 (39,712)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 240,314 89,170 128,882
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 211,954 $ 240,314 $ 89,170
========= ========== =========
The accompanying notes are an integral part of these statements.
F-37
BOEING AT THE ATRIUM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Boeing at the Atrium ("Atrium") is a four-story office building located in
Houston, Harris County, Texas. The building is owned by Fund II and III
Associates, a joint venture between Wells Real Estate Fund II ("Fund II"),
Wells Real Estate Fund II-OW ("Fund II-OW"), and Wells Real Estate Fund
III, L.P. ("Fund III). Fund II owns 58% of Atrium, Fund II-OW owns 3% of
Atrium, and Fund III owns 39% of Atrium at December 31, 2000. Allocation of
net loss and distributions are made in accordance with ownership
percentages.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Income Taxes
Atrium is not deemed to be a taxable entity for federal income tax
purposes.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation. Major
improvements and betterments are capitalized when they extend the useful
life of the related asset. All repairs and maintenance are expensed as
incurred.
Management continually monitors events and changes in circumstances which
could indicate that carrying amounts of real estate assets may not be
recoverable. When events or changes in circumstances are present which
indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of real estate assets
by determining whether the carrying value of such real estate assets will
be recovered through the future cash flows expected from the use of the
asset and its eventual disposition. Management has determined that there
has been no impairment in the carrying value of Atrium as of December 31,
2001.
Depreciation is calculated using the straight-line method over 25 years.
Revenue Recognition
The lease on Atrium is classified as an operating lease, and the related
rental income is recognized on a straight-line basis over the term of the
lease.
F-38
Deferred Lease Acquisition Costs
Costs incurred to procure operating leases are capitalized and amortized on
a straight-line basis over the terms of the related leases.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, Atrium considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include cash and
short-term investments. Short-term investments are stated at cost, which
approximates fair value, and consist of investments in money market
accounts.
2. RENTAL INCOME
The future minimum rental income due to Atrium under noncancelable
operating leases at December 31, 2001 is as follows:
Year ending December 31:
2002 $620,000
2003 0
2004 0
2005 0
2006 0
Thereafter 0
--------
$620,000
========
One tenant contributed 100% of rental income for the year ended December
31, 2001 and represents 100% of the future minimum rental income above.
This tenant has the option to renew an additional five-year lease term upon
the expiration of the current lease during 2002.
3. RELATED-PARTY TRANSACTIONS
Fund II and II-OW and Fund III entered into a property management agreement
with Wells Management Company, Inc. ("Wells Management"), an affiliate of
Fund II and II-OW and Fund III. In consideration for supervising the
management of Atrium, Fund II and II-OW and Fund III will generally pay
Wells Management management and leasing fees equal to (a) 3% of the gross
revenues for management and 3% of the gross revenues for leasing (aggregate
maximum of 6%) plus a separate fee for the one-time initial lease-up of
newly constructed properties in an amount not to exceed the fee customarily
charged in arm's-length transactions by others rendering similar services
in the same geographic area for similar properties or (b) in the case of
commercial properties which are leased on a long-term net basis (ten or
more years), 1% of the gross revenues except for initial leasing fees equal
to 3% of the gross revenues over the first five years of the lease term.
Atrium incurred management and leasing fees of $101,233, $95,290, and
$90,018 for the years ended December 31, 2001, 2000, and 1999,
respectively, which were paid to Wells Management.
4. COMMITMENTS AND CONTINGENCIES
Management, after consultation with legal counsel, is not aware of any
significant litigation or claims against Atrium or its partners. In the
normal course of business, Atrium or its partners may become subject to
such litigation or claims.
F-39
EXHIBIT INDEX
-------------
(Wells Real Estate Fund II-OW)
The following documents are filed as exhibits to this report. Those
exhibits previously filed and incorporated herein by reference are identified
below by an asterisk. For each such asterisked exhibit, there is shown below the
description of the previous filing. Exhibits which are not required for this
report are omitted.
Exhibit
Number Description of Document
- ------- -----------------------
*4 Restated and Amended Certificate and Agreement of Limited Partnership
of Wells Real Estate Fund II-OW (Registration Statement of Wells Real
Estate Fund II-OW, Exhibit B to the Prospectus, File No. 33-17977)
*10(a) Management Agreement between Registrant and Wells Management Company,
Inc. (Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the
fiscal year ended December 31, 1990, File No. 0-17876)
*10(b) Leasing and Tenant Coordination Agreement between Registrant and Wells
Management Company, Inc. (Exhibit to Form 10-K of Wells Real Estate
Fund II-OW for the fiscal year ended December 31, 1990, File No.
0-17876)
*10(c) Purchase Agreement for the acquisition of Heritage Place at Tucker
dated April 25, 1986 (Exhibit 10(f) to Form 10-K of Wells Real Estate
Fund I for the fiscal year ended December 31, 1990, File No. 0-14463)
*10(d) Joint Venture Agreement of Fund I and Fund II Tucker dated January 9,
1987 (Exhibit 10(g) to Form 10-K of Wells Real Estate Fund I for the
fiscal year ended December 31, 1990, File No. 0-14463)
*10(e) Purchase Agreement for the acquisition of the Cherokee Commons
Shopping Center dated December 31, 1986 (Exhibit 10(h) to Form 10-K of
Wells Real Estate Fund I for the fiscal year ended December 31, 1990,
File No. 0-14463)
*10(f) Joint Venture Agreement of Fund I and Fund II Cherokee dated June 27,
1987 (Exhibit 10(i) to Form 10-K of Wells Real Estate Fund I for the
fiscal year ended December 31, 1990, File No. 0-14463)
*10(g) Fund II - Fund II-OW Joint Venture Agreement dated March 1, 1988
(Exhibit 10(g) to Form 10-K of Wells Real Estate Fund II for the
fiscal year ended December 31, 1990, File No. 0-16518)
*10(h) Lease with IBM dated March 17, 1987 (Exhibit 10(h) to Form 10-K of
Wells Real Estate Fund II for the fiscal year ended December 31, 1990,
File No. 0-16518)
*10(i) Purchase Agreement for the Acquisition of the Atrium at Nassau Bay
dated March 1, 1989 (Exhibit 10(i) to Form 10-K of Wells Real Estate
Fund II for the fiscal year ended December 31, 1990, File No. 0-16518)
*10(j) Joint Venture Agreement of Fund II and Fund III Associates dated March
1, 1989 (Exhibit to Post-Effective Amendment No. 2 to Registration
Statement of Wells Real Estate Fund III, L.P., File No. 33-24063)
*10(k) First Amendment to Joint Venture Agreement of Fund II and Fund III
Associates dated April 1, 1989 (Exhibit 10(k) to Form 10-K of Wells
Real Estate Fund II for the fiscal year ended December 31, 1990, File
No. 0-16518)
*10(l) Leases with Lockheed Engineering and Sciences Company, Inc. (Exhibit
10(l) to Form 10-K of Wells Real Estate Fund II for the fiscal year
ended December 31, 1990, File No. 0-16518)
*10(m) Cost Sharing Agreement between Registrant, Wells Fund II and the Fund
II - Fund II-OW Joint Venture dated January 1, 1990 (Exhibit 10(m) to
Form 10-K of Wells Real Estate Fund II for the fiscal year ended
December 31, 1990, File No. 0-16518)
*10(n) Amended and Restated Joint Venture Agreement of Fund I and Fund II
Tucker-Cherokee dated January 1, 1991 (Exhibit 10(j) to Form 10-K of
Wells Real Estate Fund I for the fiscal year ended December 31, 1991,
File No. 0-14463)
*10(o) Amended and Restated Joint Venture Agreement of Fund II and Fund III
Associates (Exhibit 10(o) to Form 10-K of Wells Real Estate Fund II
for the fiscal year ended December 31, 1991, File No. 0-16518)
*10(p) Land and Building Lease Agreement between Fund II and Fund II-OW and
Brookwood Grill of Roswell, Inc. (Exhibit 10(p) to Form 10-K of Wells
Real Estate Fund II for the fiscal year ended December 31, 1991, File
No. 0-16518)
*10(q) Assignment and Assumption of Lease dated September 20, 1991 between
Fund II and Fund II-OW and Fund II and Fund III Associates (Exhibit
10(q) to Form 10-K of Wells Real Estate Fund II for the fiscal year
ended December 31, 1991, File No. 0-16518)
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*10(r) Lease Modification Agreement No. 3 with The Kroger Co. dated December
21, 1993 (Exhibit 10(k) to Form 10-K of Wells Real Estate Fund I for
the fiscal year ended December 31, 1993, File No. 0-14463)
*10(s) Lease Agreement with First Union National Bank of N.C. dated March 31,
1994, and First Amendment to Lease Agreement dated April 14, 1994
(Exhibit 10(s) to Form 10-K of Wells Real Estate Fund II for the
fiscal year ended December 31, 1994, File No. 0-16518)
*10(t) Joint Venture Agreement of Fund II, III, VI and VII Associates dated
January 10, 1995 (Exhibit 10(w) to Form 10-K of Wells Real Estate Fund
VI, L.P. for the fiscal year ended December 31, 1995, File No.
0-23656)
*10(u) Joint Venture Agreement of Fund I, II, II-OW, VI and VII Associates
dated August 1, 1995 (Exhibit 10(ii) to Form 10-K of Wells Real Estate
Fund VI, L.P. for the fiscal year ended December 31, 1995, File No.
0-23656)
*10(v) First Amendment to Amended and Restated Joint Venture Agreement of
Fund I and Fund II Tucker (formerly Fund I and Fund II
Tucker-Cherokee) dated August 1, 1995 (Exhibit 10(m) to Form 10-K of
Wells Real Estate Fund I for the fiscal year ended December 31, 1995,
File No. 0-14463)
*10(w) Custodial Agency Agreement between Wells Real Estate Fund II-OW and
NationsBank of Georgia, N.A. dated January 10, 1995 (Exhibit to Form
10-K of Wells Real Estate Fund II-OW for the fiscal year ended
December 31, 1995, File No. 0-17876)
*10(x) Amended and Restated Custodial Agency Agreement between Wells Real
Estate Fund II-OW and NationsBank of Georgia, N.A. dated August 1,
1995 (Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the
fiscal year ended December 31, 1995, File No. 0-17876)
*10(y) Amendment to Amended and Restated Certificate and Agreement of Limited
Partnership of Wells Real Estate Fund II-OW dated January 1, 2000
(Exhibit to Form 10-K of Wells Real Estate Fund II-OW for the fiscal
year ended December 31, 2000, File No. 0-17876)
*10(z) Purchase and Sale Agreement for the sale of Cherokee Commons Shopping
Center dated August 6, 2001 (Exhibit 10(p) to the Form 10-K of Wells
Real Estate Fund I for the fiscal year ended December 31, 2001, File
No. 0-14463)
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