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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
(Mark One)
 
        x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
or
 
        ¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE  ACT OF 1934
 
For the transition period from __________ to __________
 
Commission file number 0-18407
 
 
WELLS REAL ESTATE FUND III, L.P.
(Exact name of registrant as specified in its charter)
 
Georgia
  
58-1800833
(State of other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
6200 The Corners Parkway, Suite 250,
Atlanta, Georgia
  
30092
(Address of principal executive offices)
  
(Zip Code)
     
Registrant’s telephone number, including area code (770) 449-7800
 
(Former name, former address and former fiscal year, if changed since last report)
 
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  ¨
 

Table of Contents
 
Form 10-Q
Wells Real Estate Fund III, L.P.
(A Georgia Public Limited Partnership)
 
INDEX
 
           
Page No.
PART I.
          
Item 1.
        
  3
         
  4
         
  5
         
  6
         
  7
         
  8
Item 2.
        
13
PART II.
        
16
    
17
      
      
             

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Table of Contents
 
PART I.     FINANCIAL INFORMATION
 
Effective July 3, 2002, Wells Real Estate Fund III, L.P. (the “Partnership”) engaged Ernst & Young LLP (“Ernst & Young”) as its principal accountants to audit the Partnership’s financial statements. In accordance with the relief granted to former auditing clients of Arthur Andersen LLP in SEC Release No. 34-45589, Ernst & Young completed its review of the unaudited financial statements of the Partnership for the quarter ended March 31, 2002 pursuant to Rule 10-01(d) of Regulation S-X within the 60-day period allowed pursuant to the SEC Release, and no material modifications to the previously reported financial information were required.

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Table of Contents
 
WELLS REAL ESTATE FUND III, L.P.
 
(A Georgia Public Limited Partnership)
 
BALANCE SHEETS
 
 
    
(unaudited)
June 30,
2002
   
December 31,
2001
ASSETS:
              
Real estate, at cost:
              
Land
   
$
498,690
   
$
576,350
Building and improvements, less accumulated depreciation of $1,524,151 at June 30, 2002 and $1,434,858 at December 31, 2001
   
 
1,901,310
   
 
2,286,693
    
  
Total real estate
   
 
2,400,000
   
 
2,863,043
    
  
Cash and cash equivalents
   
 
379,967
   
 
134,766
Investment in joint ventures
   
 
10,800,682
   
 
10,655,517
Due from affiliates
   
 
0
   
 
334,616
Accounts receivable
   
 
7,049
   
 
0
Prepaid expenses and other assets
   
 
20,394
   
 
20,515
    
  
Total assets
   
$
13,608,092
   
$
14,008,457
    
  
LIABILITIES AND PARTNERS’ CAPITAL:
              
Liabilities:
              
Accounts payable
   
$
32,389
   
$
23,492
Due to affiliates
   
 
87,720
   
 
0
    
  
Total liabilities
   
 
120,109
   
 
23,492
    
  
Partners’ capital:
              
Limited partners:
              
Class A—19,635,965 units
   
 
13,487,983
   
 
13,984,965
Class B—2,544,540 units
   
 
0
   
 
0
    
  
Total partners’ capital
   
 
13,487,983
   
 
13,984,965
    
  
Total liabilities and partners’ capital
   
$
13,608,092
   
$
14,008,457
    
  
 
The accompanying notes are an integral part of these balance sheets.

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Table of Contents
 
WELLS REAL ESTATE FUND III, L.P.
 
(A Georgia Public Limited Partnership)
 
STATEMENTS OF (LOSS) INCOME
 
    
(unaudited)
Three Months Ended
   
(unaudited)
Six Months Ended
    
June 30, 2002
     
June 30, 2001
   
June 30, 2002
     
June 30, 2001
REVENUES:
                                
Rental income
   
$
47,446
 
   
$
56,764
   
$
96,701
 
   
$
174,419
Equity in (loss) income of joint ventures (Note 2)
   
 
(35,173
)
   
 
173,334
   
 
21,782
 
   
 
329,624
Interest income
   
 
624
 
   
 
30
   
 
3,171
 
   
 
2,469
    
  
  
  
    
 
12,897
 
   
 
230,128
   
 
121,654
 
   
 
506,512
    
  
  
  
EXPENSES:
                                
Operating costs-rental properties, net of tenant reimbursements
   
 
57,667
 
   
 
54,453
   
 
101,208
 
   
 
103,664
Depreciation
   
 
44,786
 
   
 
47,799
   
 
89,293
 
   
 
92,857
Partnership administration
   
 
19,660
 
   
 
23,632
   
 
33,344
 
   
 
33,441
Management and leasing fees
   
 
3,477
 
   
 
7,294
   
 
6,919
 
   
 
22,098
Legal and accounting
   
 
3,126
 
   
 
2,665
   
 
9,748
 
   
 
13,315
Computer costs
   
 
2,003
 
   
 
5,507
   
 
4,434
 
   
 
5,507
Impairment loss
   
 
373,750
 
   
 
0
   
 
373,750
 
   
 
0
    
  
  
  
    
 
504,469
 
   
 
141,350
   
 
618,636
 
   
 
270,882
    
  
  
  
NET (LOSS) INCOME
   
$
(491,572
)
   
$
88,778
   
$
(496,982
)
   
$
235,630
    
  
  
  
NET (LOSS) INCOME ALLOCATED TO CLASS A LIMITED PARTNERS
   
$
(491,572
)
   
$
88,778
   
$
(496,982
)
   
$
235,630
    
  
  
  
NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS
   
$
0
 
   
$
0
   
$
0
 
   
$
0
    
  
  
  
NET (LOSS) INCOME PER CLASS A LIMITED PARTNER UNIT
   
$
(0.03
)
   
$
0.01
   
$
(0.03
)
   
$
0.01
    
  
  
  
NET LOSS PER CLASS B LIMITED PARTNER UNIT
   
$
0.00
 
   
$
0.00
   
$
0.00
 
   
$
0.00
    
  
  
  
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT
   
$
0.00
 
   
$
0.02
   
$
0.00
 
   
$
0.03
    
  
  
  
 
The accompanying notes are an integral part of these statements.

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Table of Contents
 
WELLS REAL ESTATE FUND III, L.P.
 
(A Georgia Public Limited Partnership)
 
STATEMENTS OF PARTNERS’ CAPITAL
 
FOR THE YEAR ENDED DECEMBER 31, 2001
 
AND THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
 
    
Limited Partners
   
Total
Partners’
Capital
  
    
Class A
     
Class B
   
    
Units
   
Amounts
     
Units
     
Amounts
   
BALANCE, December 31, 2000
   
19,635,965
   
$
14,512,162
 
   
2,544,540
     
$
0
   
$
14,512,162
 
Net income
   
0
   
 
375,442
 
   
0
     
 
0
   
 
375,442
 
Partnership distributions
   
0
   
 
(902,639
)
   
0
     
 
0
   
 
(902,639
)
    
  
  
    
  
BALANCE, December 31, 2001
   
19,635,965
   
 
13,984,965
 
   
2,544,540
     
 
0
   
 
13,984,965
 
Net loss
   
0
   
 
(496,982
)
   
0
     
 
0
   
 
(496,982
)
    
  
  
    
  
BALANCE, June 30, 2002 (unaudited)
   
19,635,965
   
$
13,487,983
 
   
2,544,540
     
$
0
   
$
13,487,983
 
    
  
  
    
  
 
The accompanying notes are an integral part of these statements.

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Table of Contents
 
WELLS REAL ESTATE FUND III, L.P.
 
(A Georgia Public Limited Partnership)
 
STATEMENTS OF CASH FLOWS
 
    
(unaudited)
Six Months Ended
  
    
June 30, 2002
     
June 30, 2001
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net (loss) income
   
$
(496,982
)
   
$
235,630
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                  
Equity in income of joint ventures
   
 
(21,782
)
   
 
(329,624
)
Depreciation
   
 
89,293
 
   
 
92,857
 
Impairment loss
   
 
373,750
 
         
Changes in assets and liabilities:
                  
Accounts receivable
   
 
(7,049
)
   
 
(3,703
)
Prepaid expenses and other assets
   
 
121
 
   
 
(5,928
)
Accounts payable
   
 
8,897
 
   
 
7,996
 
Due from affiliates
   
 
0
 
   
 
3,216
 
Due to affiliates
   
 
87,720
 
   
 
0
 
    
  
Net cash provided by operating activities
   
 
33,968
 
   
 
444
 
    
  
CASH FLOW FROM INVESTING ACTIVITIES:
                  
Investment in real estate
   
 
0
 
   
 
(24,619
)
Investment in joint ventures
   
 
(254,800
)
   
 
(241,543
)
Distributions received from joint ventures
   
 
466,033
 
   
 
561,980
 
    
  
Net cash provided by investing activities
   
 
211,233
 
   
 
295,818
 
    
  
CASH FLOW FROM FINANCING ACTIVITIES:
                  
Partnership distributions paid
   
 
0
 
   
 
(320,191
)
    
  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
 
245,201
 
   
 
(23,929
)
CASH AND CASH EQUIVALENTS, beginning of year
   
 
134,766
 
   
 
409,476
 
    
  
CASH AND CASH EQUIVALENTS, end of period
   
$
379,967
 
   
$
385,547
 
    
  
 
The accompanying notes are an integral part of these statements.

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Table of Contents
 
WELLS REAL ESTATE FUND III, L.P.
 
(A Georgia Public Limited Partnership)
 
CONDENSED NOTES TO FINANCIAL STATEMENTS
 
JUNE 30, 2002 (UNAUDITED)
 
1.
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a)    Organization and Business
 
Wells Real Estate Fund III, L.P. (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, serving as the General Partners. The Partnership was formed on July 31, 1988 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise managing income-producing commercial properties for investment purposes. The Partnership has two classes of limited partnership interests, Class A and Class B units. The 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 partner unit has equal voting rights regardless of class.
 
On October 24, 1988, 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 offering was terminated on October 23, 1990 upon receiving and accepting $22,206,310 in limited partner capital contributions for a total of 22,206,310 Class A and Class B limited partner units at $1 per unit. From the original capital contributions, the Partnership has paid $1,554,442 in acquisition and advisory fees and acquisition expenses, paid $2,664,668 in selling commissions and organization and offering expenses, and invested $17,983,843 in the properties described below. In 1990 and 1991, the Partnership repurchased 6,128 and 19,677 limited partnership units, respectively.
 
As of June 30, 2002, the Partnership owned a 100% interest in Greenville Center, an office building located in Greenville, North Carolina. On July 1, 2002, the Partnership entered into an agreement (the “Agreement”) to sell Greenville Center to an unrelated third-party for a gross selling price of $2,400,000. A general decline in economic conditions in the Greenville, North Carolina area lead to a gradual decrease in occupancy at Greenville Center during the past year. As a result, the Partnership reduced the carrying amount of Greenville Center to its fair market value, as estimated based on the gross selling price per the Agreement, and recognized an impairment loss of $373,750 during the quarter ended June 30, 2002. Pursuant to the terms of the Agreement, this transaction is currently subject to a due diligence period not to exceed 90 days, during which the purchaser has the right to terminate the contract. Accordingly, there are no assurances that this sale will close.
 
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Table of Contents
 
The Partnership owns interests in the remainder of its real estate assets through joint ventures with other Wells Real Estate Funds. As of June 30, 2002, the Partnership owned interests in the following five properties through the affiliated joint ventures listed below:
 
Joint Venture
  
Joint Venture Partners
  
Properties
Fund II-III Associates—Atrium
  
—Fund II-IIOW Associates*
—Wells Real Estate Fund III, L.P.
  
1.  Boeing at the Atrium
    A four story office building
    located in Houston Texas
Fund II-III Associates—Brookwood
  
—Fund II-IIOW Associates*
—Wells Real Estate Fund III, L.P.
  
2.  Brookwood Grill
    A restaurant located in Fulton
    County, Georgia
Fund II-III-VI-VII Associates
  
—Fund II-III Associates—Brookwood
—Wells Real Estate Fund VI, L.P.
—Wells Real Estate Fund VII, L.P.
  
3.  Holcomb Bridge Property
    An office/retail center located in     Roswell, Georgia
Fund III-IV Associates
  
—Wells Real Estate Fund III, L.P.
—Wells Real Estate Fund IV, L.P.
  
4.  Stockbridge Village Shopping Center
    A retail shopping center located in
    Stockbridge, Georgia
5.  Reciprocal Group Building
    An office building located
    in Richmond, Virginia
* Fund II-IIOW Associates is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.
 
Each of the above properties was acquired on an all cash basis. For further information regarding the foregoing joint ventures and properties, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001.
 
In March 2002, Boeing/Shuttle Division (“Boeing”) entered into a lease for the top three floors of the four-story Boeing at the Atrium Building. The annual base rent payable for this space is $1,483,697 ($15.75 per square foot). The Boeing lease will commence on September 1, 2002 and extends for a term of 73 months. Boeing also has an option to lease the remaining space available on the first floor of the Boeing at the Atrium exercisable through October, 2002.
 
(b)    Basis of Presentation
 
The financial statements of the Partnership have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. The quarterly statements included herein have not been examined by independent accountants. However, in the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments, that are of a normal and recurring nature and necessary to fairly present the results for those periods. For further information, refer to the financial statements and footnotes included in the report filed for the Partnership on Form 10-K for the year ended December 31, 2001.
 
(c)    Distribution of Net Cash From Operations
 
As defined by the partnership agreement, cash available for distributions is distributed quarterly on a cumulative non-compounded basis to limited partners as follows:

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Table of Contents
 
 
•
 
First, to the Class A limited partners until such limited partners have received an 8% per annum return on their respective adjusted capital contributions, as defined.
 
 
•
 
Second, to the Class B limited partners until such limited partners have received an 8% per annum return on their respective adjusted capital contributions, as defined.
 
 
•
 
Third, to the general partners until such partners have received distributions equal to 10% of the total net cash distributed from operations per annum.
 
 
•
 
Thereafter, to the limited partners and the General Partners allocated on a basis of 90% and 10%, respectively.
 
(d)    Impairment of Real Estate Assets
 
On January 1, 2002, the Partnership adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under the new guidance, management reviews each of the properties in which it holds an interest for impairment when there is an event or change in circumstances that indicates the carrying amount of the asset may not be recoverable and the future undiscounted cash flows expected to be generated by the asset are less than its carrying amount. If such assets are considered to be impaired, the Partnership records impairment losses and reduces the carrying amount of impaired assets to an amount that reflects the fair value of the assets at the time impairment is evident. Management also reviews estimated selling prices of assets held for sale and records impairment losses to reduce the carrying amount of assets held for sale when the carrying amounts exceed the estimated selling prices less costs to sell. Also, material long-lived assets held for sale are separately identified in the balance sheets and their related net operating income is segregated as income from discontinued operations in the statements of income. In addition, depreciation of long-lived assets held for sale is not recorded. If an asset held for sale reverts to an asset used in operations, the asset will be measured at the lower of the original carrying cost, adjusted for the forgone depreciation, or the fair value at the date of the decision to hold the asset.
 
2.
 
INVESTMENT IN JOINT VENTURES
 
(a)    Basis of Presentation
 
The Partnership does not have control over the operations of the joint ventures described in Note 1; however, it does exercise significant influence. Accordingly, investments in joint ventures are recorded using the equity method of accounting. Interim results for 2002 are not necessarily indicative of results for the year. For further information, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001.
 
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Table of Contents
 
(b)    Summary of Operations
 
The following information summarizes the operations of the unconsolidated joint ventures in which the Partnership held ownership interests for the three and six months ended June 30, 2002 and 2001:
 
    
Total Revenues
     
Net Income
     
Partnership’s
Share of Net Income
  
    
Three Months Ended
     
Three Months Ended
     
Three Months Ended
  
    
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
  
Fund II-III Associates—Atrium
   
$
(93,695
)
   
$
368,822
 
   
$
(444,614
)
   
$
(43,965
)
   
$
(172,066
)
   
$
(17,015
)
Fund II-III Associates—Brookwood
   
 
29,880
*
   
 
56,298
*
   
 
43,392
 
   
 
37,343
 
   
 
16,337
 
   
 
19,711
 
Fund III—IV Associates
   
 
461,813
 
   
 
478,462
 
   
 
210,718
 
   
 
298,257
 
   
 
120,556
 
   
 
170,638
 
    
  
  
  
  
  
    
$
397,998
 
   
$
903,582
 
   
$
(190,504
)
   
$
291,635
 
   
$
(35,173
)
   
$
173,334
 
    
  
  
  
  
  
    
Total Revenues
     
Net Income
     
Partnership’s
Share of Net Income
  
    
Six Months Ended
     
Six Months Ended
     
Six Months Ended
  
    
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
  
Fund II-III Associates—Atrium
   
$
(4,573
)
   
$
740,459
 
   
$
(713,575
)
   
$
(38,460
)
   
$
(276,153
)
   
$
(14,884
)
Fund II-III Associates —Brookwood
   
 
79,339
*
   
 
112,535
*
   
 
68,978
 
   
 
73,088
 
   
 
25,970
 
   
 
35,780
 
Fund III-IV Associates
   
 
936,683
 
   
 
905,224
 
   
 
475,366
 
   
 
539,625
 
   
 
271,965
 
   
 
308,728
 
    
  
  
  
  
  
    
$
1,011,449
 
   
$
1,758,218
 
   
$
(169,231
)
   
$
574,253
 
   
$
21,782
 
   
$
329,624
 
    
  
  
  
  
  
    
Total Revenues
     
Net Income
     
Partnership’s
Share of Net Income
  
    
Three Months Ended
     
Three Months Ended
     
Three Months Ended
  
    
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
  
Fund II-III-VI-VII Associates
   
$
179,692
 
   
$
205,914
 
   
$
59,368
 
   
$
62,363
 
   
$
5,379
*
   
$
5,651
*
    
  
  
  
  
  
    
Total Revenues
     
Net Income
     
Partnership’s
Share of Net Income
  
    
Six Months Ended
     
Six Months Ended
     
Six Months Ended
  
    
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
  
Fund II-III-VI-VII Associates
   
$
358,468
 
   
$
416,291
 
   
$
120,197
 
   
$
91,170
 
   
$
10,890
*
   
$
8,262
*
    
  
  
  
  
  
 
 
*
 
The Partnership’s share of income earned from its investment in Fund II-III-VI-VII Associates is recorded by Fund II-III Associates—Brookwood as equity in income of joint ventures, which is classified as revenue.

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Table of Contents
 
The following information summarizes the operations of the property, which is owned by one of the above joint ventures and significant to the Partnership, for the three and six months ended June 30, 2002 and 2001. Audited financial statements of this property are included in the report filed for the Partnership on Form 10-K for the year ended December 31, 2001:
 
    
Total Revenues
   
Net Income
   
Partnership’s
Share of Net Income
    
Three Months Ended
   
Three Months Ended
   
Three Months Ended
    
June 30,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
Reciprocal Group Building
   
$
145,563
   
$
144,583
   
$
33,395
   
$
86,839
   
$
19,105
   
$
49,681
    
  
  
  
  
  
    
Total Revenues
   
Net Income
   
Partnership’s
Share of Net Income
    
Six Months Ended
   
Six Months Ended
   
Six Months Ended
    
June 30,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
Reciprocal Group Building
   
$
289,172
   
$
240,972
   
$
87,225
   
$
116,687
   
$
49,901
   
$
66,757
    
  
  
  
  
  
 
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Table of Contents
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                     OPERATIONS
 
The following discussion and analysis should be read in conjunction with the Partnership’s accompanying financial statements and notes thereto.
 
(a)
 
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 statements made in this report, including construction costs that 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 flows.
 
(b)
 
Results of Operations
 
Revenues
Gross revenues decreased to $121,654 for the six months ended June 30, 2002, compared to $506,512 for the same period in 2001, due to a reduction in occupancy at Greenville Center experienced during the preceding twelve months and decreased equity in income generated from joint ventures resulting from (i) a reduction in occupancy of Boeing at the Atrium beginning in December 2001, (ii) reduced rental rates for Brookwood Grill, (iii) decreases in occupancy of the Holcomb Bridge Property experienced during the preceding twelve months, (iv) decreased operating cost reimbursement billings to tenants at the Reciprocal Group Building, partially offset by (i) an increase in occupancy of the Reciprocal Group Building and (ii) receivables due from tenants at the Holcomb Bridge Property, which were written-off in 2001 and collected in 2002. Tenants are billed for operating cost reimbursements at estimate amounts, which are reconciled as tenants are billed (credited) for the net annual under (over) billings in the following year.
 
Expenses
 
Expenses decreased to $618,636 for the six months ended June 30, 2002, compared to $270,882 for the same period in 2001, primarily due to recognizing an impairment loss of $373,750 in connection with reducing the carrying amount of Greenville Center to its fair market value, as further described above, decreases in net operating costs, management and leasing fees related to the decrease in occupancy of Greenville Center and a decrease in legal and accounting fees, largely due to a change in the timing of services rendered during 2002 compared to 2001.
 
As a result, net (loss) income decreased to $(496,982) for the six months ended June 30, 2002 from $235,630 for the same period in 2001.
 
Distributions
Cash distributions to limited partners holding Class A units were $0.03 per unit for the six months ended June 30, 2001. Cash distributions were reserved for the six months ended June 30, 2002 in order to fund tenant improvements for Boeing at the Atrium. Management anticipates continuing to reserve funds otherwise distributable to Class A limited partners for at least the third quarter of 2002 in order to fund such costs. No cash distributions were made to Class B Limited Partners or the General Partners.

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(c)
 
Liquidity and Capital Resources
 
Net cash flows provided from operating activities increased to $33,968 for the six months ended June 30, 2002, from $444 provided for the six months ended June 30, 2001, primarily due receiving cash from affiliated partners to be invested in Boeing at the Atrium, as discussed further in the previous section. Net cash provided by investing activities decreased to $211,233 for 2002 compared to $295,818 for 2001 as a result of reserving distributions at the joint venture level in order to fund tenant improvements for the Reciprocal Group Building in 2001, partially offset by an investment in Boeing at the Atrium for the purpose of funding tenant improvements related to re-leasing 76% of the building to Boeing. Net cash used in financing activities decreased to $0 for 2002 compared to $320,191 for 2001 as a result of withholding funds otherwise distributable in order to fund tenant improvements for Boeing at the Atrium in 2002.
 
As the Partnership was formed for the purpose of acquiring, owning and operating income-producing real properties and has invested all of its funds available for investment the properties described above, it is unlikely that the Partnership will acquire interests in any additional properties. The Partnership expects to continue to meets its short-term liquidity requirements generally from net cash provided by operations and received from joint ventures.
 
(d)
 
Inflation
 
The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. Most tenant leases contain provisions for common area maintenance, real estate tax and insurance reimbursements from tenants either on a per square foot basis, or above a certain allowance per square foot annually, which should reduce the Partnership’s exposure to increases in costs and other operating expenses resulting from the impact of inflation. In addition, a number of the Partnership’s leases are for remaining terms of less than five years, which may allow the Partnership to enter into new leases at higher base rental rates in the event that market rental rates rise above the existing lease rates. There is no assurance, however, that the Partnership would be able to replace existing leases with new leases containing higher base rental rates.
 
(e)
 
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 judgments in the application of accounting policies, including making estimates and assumptions. These judgments may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements presented and the reported amounts of revenues and expenses during the respective 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.
 
The accounting policies that we consider to be critical, in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain, are discussed below. For further information related to the Partnership’s accounting policies, including the critical accounting policies described below, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001.

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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 its investments in joint ventures on a straight-line basis over the terms of the respective leases. Should tenants encounter financial difficulties in future periods, the amounts recorded as receivables may not be fully realized.
 
Operating Cost Reimbursements
The Partnership generally bills tenants for operating cost reimbursements either directly or through its investments in joint ventures on a monthly basis at amounts estimated largely based on actual prior period activity and the respective tenant 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 tenant lease terms. Should tenants encounter financial difficulties in future periods, the amounts recorded as receivables may not be fully realized.
 
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 ownership interests either directly or through its 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 underlying assets, estimated at amounts equal to the future undiscounted operating cash flows expected to be generated from tenants over the life of the assets and from their eventual disposition, to the carrying value of the assets. 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.

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PART II—OTHER INFORMATION
 
ITEM 6(b)    During the second quarter of 2002, the Registrant filed a Current Report on Form 8-K dated May 16, 2002 disclosing the dismissal of Arthur Andersen LLP as its independent public accountants.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
WELLS REAL ESTATE FUND III, L.P.
(Registrant)
Date:    August 12, 2002
      
By:
  
/s/  LEO F. WELLS, III                                    
               
Leo F. Wells, III, as Individual
General Partner and as President
of Wells Capital, Inc., the
General Partner of Wells Partners, L.P.
 
Date:    August 12, 2002
      
By:
  
/s/  DOUGLAS P. WILLIAMS                            
               
As Chief Financial Officer

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EXHIBIT INDEX
TO
SECOND QUARTER FORM 10-Q
OF
WELLS REAL ESTATE FUND III, L.P.
 
Exhibit
No.
   
Description
99.1
   
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2
   
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 

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