Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002 or

For the transition period from                                                           to                                                           

Commission file number 0-17876

WELLS REAL ESTATE FUND II-OW

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12 (g) of the Act:

CLASS A UNITS

(Title of Class)

CLASS B UNITS

(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 ¨

Aggregate market value of the voting stock held by nonaffiliates: Not Applicable

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. serving as its 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 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) 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, upon receiving gross offering proceeds of $1,922,000 for 7,688 Class A and Class B limited partner units at $250 per unit from 219 limited partners.

Employees

The Partnership has no direct employees. The employees of Wells Capital and Wells Management Company, Inc. an affiliate of the General Partners, 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, 2002

Insurance

Wells Management Company, Inc. carries comprehensive liability and extended coverage with respect to all of the properties owned by the Partnership through its investment in Fund II-IIOW Associates. 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 interests in all properties through its investment in Fund II- IIOW Associates, a joint venture formed on March 1, 1988 between the Partnership and Wells Real Estate Fund II (“Wells Fund II”). The investment objectives of Wells Fund II are substantially identical to those of the Partnership. As of December 31, 2002, the Partnership’s equity interest in Fund II- IIOW Associates was approximately 5%, and the equity interest of Wells Fund II was approximately 95%. The Partnership does not have control over the operations of Fund II-IIOW Associates; however, it does exercise significant influence. Accordingly, the investment in Fund II-IIOW Associates is recorded using the equity method of accounting.

-1-

As of December 31, 2002, Fund II-IIOW Associates owned a 100% interest in the following property:

On October 1, 2001, Fund I-II-IIOW-VI-VII Associates, a joint venture among Wells Real Estate Fund I, Fund II-IIOW Associates, Wells Real Estate Fund VI, L.P. and Wells Real Estate Fund VII, L.P., sold the Cherokee Commons property to an unrelated third party. The Cherokee Commons property is a retail shopping center located in Cherokee County, Georgia. Of the $239,775 in net proceeds from the sale of this property that are attributable to the Partnership, approximately $80,000 have been expended for tenant improvements for Boeing at the Atrium, as further discussed below. The remaining portion of the sales proceeds attributable to the Partnership are held by Fund II-IIOW Associates and, therefore, included in due from affiliates in the accompanying balance sheet as of December 31, 2002.

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 footnotes to the financial statements included herein.

-2-

As of December 31, 2002, the lease expirations scheduled during each of the following ten years for all properties in which the Partnership owned an interest through the joint ventures described above, assuming no exercise of renewal options or termination rights, are summarized below:

The properties and joint ventures in which the Partnership owns an interest as of December 31, 2002 are further described below:

Louis Rose Building

On May 9, 1988, Fund II- IIOW Associates acquired the Louis Rose Building, a two-story office building, containing approximately 70,752 net leaseable square feet and, located on a 9.54 acre tract of land located in Charlotte, Mecklenburg County, North Carolina, for a gross purchase price of $8,550,000, including acquisition and closing costs.

The Louis Rose Building continues to remain vacant following the expiration of the First Union Bank lease on April 30, 2001. As a result, revenues have declined by approximately $ 845,000 annually as compared to this property at full occupancy. The submarket in which this property is located, University Research Park, contains approximately 2.2 million square feet of office space within approximately 32 buildings and is currently experiencing an overall average vacancy rate of approximately 30%. The over-supply of office space in the area has resulted in substantial downward pressure on rental rates for Class A office buildings; however, we are continuing our efforts to market this property to potential users of office space of this type. Significant leasing commissions and capital improvements are anticipated upon lease-up.

The average effective annual rental rate per square foot of the Louis Rose Building was $0 for 2002, $3.98 for 2001, $11.93 for 2000, $10.14 for 1999 and $6.49 for 1998.

Boeing at the Atrium

On April 3, 1989, Fund II-IIOW Associates formed a joint venture with Wells Real Estate Fund III, L.P. (“Wells Fund III”), a public Georgia limited partnership affiliated with the Partnership through common general partners, known as Fund II-III Associates— Atrium for the purpose of acquiring 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. The investment objectives of Wells Fund III are substantially identical to those of the Partnership.

-3-

In March 2002, Boeing/Shuttle Division (“Boeing”) entered into a lease for the top three floors of the four-story Boeing at the Atrium, (94,203 sq ft) with annual rent of $1,483,698 commencing on September 1, 2002 for approximately six years. Boeing has since entered into the following three amendments: amendment #1—to lease an additional 296 square feet with annual rent of $4,662, commencing October 1, 2002, amendment #2—to lease an additional 11,515 square feet with annual rent of $181,365, commencing January 6, 2003, and amendment #3—to lease an additional 10,449 square feet with annual rent of $164,572, estimated to commence July 1, 2003. Upon commencement of the third expansion, occupancy will rise to 100%.

As of December 31, 2002, Fund II-IIOW Associates and Wells Fund III had equity interests in Fund II-III Associates-Atrium of approximately 61%, and 39% respectively.

The average effective rental rate per square foot was $6.05 for 2002, $12.35 for 2001, $12.34 for 2000, and $12.35 for 1999 and 1998.

Brookwood Grill

On January 31, 1990, Fund II-IIOW Associates 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 “Brookwood Grill Property”) for $1,848,561, including acquisition and closing costs. Concurrently, Fund II-IIOW Associates entered into a second joint venture agreement Wells Fund III, known as Fund II-III Associates-Brookwood Grill.

On September 20, 1991, Fund II-IIOW Associates contributed the Brookwood Grill Property, along with its interest as landlord under the lease agreement referred to below, as a capital contribution to Fund II-III Associates-Brookwood Grill. As of September 20, 1991, Fund II-IIOW Associates had expended approximately $2,128,000 for the land acquisition and development of Brookwood Grill.

In September 1991, a lease agreement was entered into with the Brookwood Grill of Roswell, Inc. for the development of approximately 1.5 acres and construction of a 7,440 square foot restaurant, which opened in March 1992, is similar in concept to Houston’s, Ruby Tuesday, and TGI Fridays’. The terms of the lease call for an initial term of 9 years and 11 months. Brookwood Grill entered into a ten year extension after the initial lease term, which expires on February 29, 2012. Pursuant to the terms of the current lease, the tenant has the option to exercise two additional five-year renewal options upon expiration. Fund II-III Associates-Brookwood has expended approximately $1,100,000 for the development and construction of the restaurant building together with parking areas, driveways, landscaping and other improvements.

The average effective rental rate per square foot was $27.04 for 2002, $31.56 for 2001, $30.22 for 2000 and 1999, and $30.26 for 1998.

As of December 31, 2002, Fund II-IIOW Associates and Wells Fund III had made total contributions to Fund II-III Associates-Brookwood of approximately $2,128,000 and $1,330,000, respectively, for the acquisition and development of the Brookwood Grill. Accordingly, Fund II-IIOW Associates holds an equity interest of approximately 62%, and Wells Fund III holds an equity interest of approximately 38% in Fund II-III Associates-Brookwood as of December 31, 2002.

On January 10, 1995, Fund II-III Associates-Brookwood contributed the remaining 4.3 undeveloped acres of land comprising the Brookwood Grill Property to a new joint venture, Fund II-III-VI-VII Associates, which is further described below.

-4-

Holcomb Bridge Property

In January 1995, Fund II-III Associates—Brookwood contributed to Fund II-III-VI-VII Associates approximately 4.3 acres of land at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (“the Brookwood Property”) including land improvements for the development and construction of two buildings with a total of 49,534 square feet. Once constructed, this property became known as the Holcomb Bridge Property.

As of December 31, 2002, nine tenants occupied approximately 60% of the Holcomb Bridge Property, with only one tenant, Bertucci’s Restaurant, occupying more than 10% of the space at 5,935 square feet. The Bertucci’s Restaurant lease currently requires annual base rental payments of $127,850 and expires on February 28, 2006. Occupancy declined by approximately 29% during 2002, which resulted in a corresponding decrease in revenues of approximately $203,000. Certain leases have been executed that provide for commencement in 2003, and will result in additional revenues of approximately $45,000 for 2003. Management is actively seeking replacement tenants for the vacant space at this property.

The average effective annual rental rate per square foot was $12.97 for 2002, $17.07 for 2001, $17.55 for 2000, $19.36 for 1999, and $17.63 for 1998.

As of December 31, 2002, the joint venture partners had contributed the following amounts and held the following equity interests in Fund II-III-VI-VII Associates: (i) Fund II-III Associates-Brookwood—$1,729,116, in land and improvements, for an interest of approximately 24%, (ii) Wells Fund VI -$1,929,541 for an interest of approximately 26%, (iii) Wells Real Estate Fund VII, L.P.—$3,525,041 for an interest of approximately 50%.

Heritage Place

Fund II-IIOW Associates entered into a joint venture agreement with Wells Real Estate Fund I (“Wells Fund I”), known as Fund I-II Associates-Tucker, for the purpose of developing, constructing, owning and operating Heritage Place, which is further described below. The investment objectives of Wells Fund I are substantially identical to those of the Partnership. Both Fund II-IIOW Associates and Wells Fund I have funded the cost of developing Heritage Place through capital contributions made as progressive stages of construction were completed. As of December 31, 2002, Fund II-IIOW Associates and Wells Fund I held equity interests of approximately 48% and 52%, respectively.

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 rentable square feet. The commercial office space, which is divided into seven separate buildings, contains approximately 67,465 rentable square feet.

No individual tenant occupied ten percent or more of the total rentable square footage of the property as of December 31, 2002. The principal businesses of the tenants at Heritage Place include primarily retail shopping and commercial office services.

The average effective annual rental rate per square foot was $12.66 for 2002, $13.66 for 2001, $14.29 for 2000, $14.11 for 1999, and $12.76 for 1998.

On January 23, 2003, Fund I-II Associates-Tucker entered into an agreement (the “Agreement”) to sell the retail shopping center portion of Heritage Place to an unrelated third-party for a gross selling price of $3,400,000. Pursuant to the terms of the Agreement, this transaction was subject to a due diligence period, which ended on February 22, 2003 without significant modifications to the Agreement. Accordingly, Fund I-II Associates-Tucker currently anticipates closing on this sale during the second quarter of 2003.

-5-

Cherokee Commons

Fund I-II-IIOW-VI-VII Associates 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 Fund II-IIOW Associates and Wells Fund I. On August 1, 1995 Cherokee Commons was contributed to Fund I-II-IIOW-VI-VII Associates for the expansion this perperty.

As of December 31 2002, Fund II-IIOW Associates had contributed property with a book value of $4,860,100, Wells Fund I had contributed property with a book value of $2,139,900, and Wells Fund VI and Wells Fund VII had each contributed cash in the amount of $953,798 to Fund I-II-IIOW-VI-VII Associates. As of December 31, 2002, the equity interests of the joint venture partners in Fund I-II-IIOW-VI-VII Associates were approximately as follows: Fund II-IIOW Associates—54%, Wells Fund I—24%, Wells Fund VI—11%, and Wells Fund VII—11%.

On October 1, 2001, Fund I-II-IIOW-VI-VII Associates sold Cherokee Commons for net sale proceeds of $8,434,089 and a gain of $1,725,015 from this sale. A taxable gain of $111,419 and net sale proceeds of $4,601,723 were attributable to Fund II-IIOW Associates as a result of 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 the fourth quarter of 2002.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Limited Partners during the fourth quarter of 2002.

(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.)

-6-

PART II

As of February 28, 2003, the Partnership had 6,062 outstanding Class A Units held by a total of 182 Limited Partners and 1,626 outstanding Class B Units held by a total of 40 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 2001 and 2002 were as follows:

The Partnership has reserved distributions to limited partners from the fourth quarter of 2001 through the fourth quarter of 2002 as a result of the vacancy of Louis Rose Place, beginning May 2001, and in order to fund tenant improvements and leasing costs incurred in connection with the Boeing lease renewal executed in March 2002.

-7-

ITEM 6.    SELECTED FINANCIAL DATA

The following sets forth a summary of the selected financial data as of and for the fiscal years ended December 31, 2002, 2001, 2000, 1999, and 1998:

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.

(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, leasing commissions or other capital expenditures or lease-up costs out of operating cash flows.

(b)    Results of Operations

Gross Revenues

Gross revenues of the Partnership were $(61,423), $50,154, and $28,101 for the years ended December 31, 2002, 2001, and 2000, respectively. The fluctuations in gross revenues of the Partnership are a direct result of the corresponding changes in equity in (loss) income of Fund II-IIOW Associates caused by the changes in the joint venture gross revenues and expenses further describe below.

-8-

Equity In (Loss) Income of Fund II-IIOW Associates

Gross Revenues of Fund II-IIOW Associates

The gross revenues of Fund II-IIOW Associates were $(210,433), $1,677,167 and $1,107,486 for 2002, 2001, and 2000, respectively. The 2002 decrease from 2001 resulted from a decline in rental and reimbursement income due to the vacancy of the Louis Rose Building beginning April 30, 2001 and a decrease in equity in (loss) income of joint ventures further described below. The 2001 increase from 2000 is primarily a result of the increase in equity in (loss) income of joint venture as further described below.

Gross Revenues of Joint Ventures In Which Fund II-IIOW Associates Holds an Interest

Gross revenues of the joint ventures in which the Fund II-IIOW Associates holds an interest decreased in 2002, as compared to 2001, primarily due to the sale of Cherokee Commons in 2001, which resulted in a total gain of approximately $1,725,000, and a reduction in rental and reimbursement revenues for Fund I-II-IIOW-VI-VII Associates going forward. Rental and reimbursement income also declined in 2002, as compared to 2001, and for Fund II-III Associates-Atrium, as Boeing was not required to pay rent during the build-out period related to the March 2002 lease renewal. Gross revenues increased in 2001, as compared to 2000, primarily due to the gain recognized on the sale of Cherokee Commons in 2001.

Expenses of Joint Ventures In Which Fund II-IIOW Associates Holds an Interest

The expenses of the joint ventures in which the Fund II-IIOW holds an interest decreased in 2002, as compared to 2001, primarily due to the sale of Cherokee Commons in 2001 and reductions in operating costs for Fund I-II-IIOW-VI-VII Associates going forward. Operating costs also declined for Boeing at the Atrium during the build-out period described above. The 2001 decrease from 2000 resulted primarily from reductions in all expenses for Fund I-II-IIOW-VI-VII Associates due to the sale of Cherokee Commons in the fourth quarter of 2001, and reductions in depreciation expense for Fund I-II Associates-Tucker and Fund II-III Associates-Atrium, as the useful lives of several capitalized tenant improvements expired in 2001.

Expenses of Fund II-IIOW Associates

The expenses of Fund II-IIOW Associates were $944,433, 732,844 and $580,244 for 2002, 2001, and 2000, respectively. The 2002 increase, as compared to 2001, is primarily due to additional fixed operating costs resulting from the vacancy of the Louis Rose Building beginning in 2001, as Louis Rose was required to pay generally all operating costs directly under the terms of its lease. Increases in administrative salaries, and legal and accounting fees also contributed to the 2002 increase from 2001. The 2001 increase from 2000 is primarily due to incurring additional fixed operating costs as a result of the partial year vacancy for the Louis Rose Building beginning in May 2001.

Expenses of the Partnership

All expenses of the Partnership were incurred by Fund II-IIOW Associates. According, net (loss) income reflected total revenues the Partnership at $(61,423), $50,154, and $28,101 for the years ended December 31, 2002, 2001, and 2000, respectively.

9

(c)    Liquidity and Capital Resources

Cash Flows From Operating Activities

Net cash flows provided by operating activities was $1,530, $428 and $471 for 2002, 2001, and 2000, respectively. The 2002 increase from 2001 resulted primarily from additional interest and other income received in 2002, as compared to 2001. The 2001 decrease from 2000 resulted primarily from a change in the timing of paying accounts payable and a reduction in interest income received in 2001, as compared to 2000.

Cash Flows From Investing Activities

Net cash flows provided by investing activities was $19,977, $76,589, and $104,801 for 2002, 2001, and 2000, respectively. The 2002 decrease from 2001 is primarily due to a contribution of $1,213,516 made to Fund II-IIOW Associates in order to fund the Partnership’s interest in the tenant build-out and leasing costs incurred in connection with the new Boeing lease. The 2001 decreased from 2000 is primarily due to a decrease in distributions received from Fund II-IIOW Associates as a result of the vacancy at the Louis Rose Building beginning in 2001.

Cash Flows Used in Financing Activities

Net cash flows used in financing activities was $0, $76,541 and $108,010 for 2002, 2001, and 2000, respectively, all of which consists of distributions paid to limited partners. The Partnership reserved all operating distributions to limited partners in 2002 in order to fund the build-out of Boeing at the Atrium and absorb additional fixed operating costs incurred for Louis Rose Building, which was vacant for all of 2002. The 2001 decrease from 2000 is commensurate with the reduction in distributions received from Fund II-IIOW Associates due to the reduction in operating cash flows generated by the joint ventures in which Fund II-IIOW held an interest as described in the previous section.

Distributions

The Partnership made distributions to the limited partners holding Class A units of $0.00, $8.28 and $17.79 per unit for the years ended December 31, 2002, 2001 and 2000, respectively. No distributions have been made to the limited partners holding Class B units

The General Partners anticipate that distributions per unit to limited partners holding Class A Units will reinstated following the re-leasing the Louis Rose Building and funding related leasing costs and tenant improvements. Distributions accrued for the fourth quarter of 2002 to the limited partners holding Class A Units were paid in February 2003. No cash distributions were made to limited partners holding Class B Units.

Sales Proceeds

$79,650 of the Partnership’s share of the proceeds from the sale of the Cherokee Commons property has been expended on tenant improvements for Boeing at the Atrium as further described in the following section. The remaining portion of the sales proceeds attributable to the Partnership is held in reserve by Fund II-IIOW Associates.

Rather than distributing net sales proceeds to the limited partners, the General Partners intend to establish a reserve and use a portion of these reserves to fund tenant improvements and leasing costs anticipated to be required in connection with leasing of the Louis Rose Building and, additionally, will evaluate the capital needs of the existing properties in which the Partnership holds an interest, through investments in joint ventures, in consideration of the best interests of the limited partners. The General Partners anticipate distributing the reserves not otherwise utilized to the partners in accordance with the terms of the Partnership Agreement during 2003.

10

(d)     Related-Party Transactions

Management and Leasing Fees

Wells Management Company, Inc., an affiliate of the General Partners, receives compensation for supervising the management of the Partnership’s properties owned through joint ventures 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 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, at the joint venture level, of $4,170, $9,970, and $12,565 for the years ended December 31, 2002, 2001 and 2000, respectively

Administration Reimbursements

Wells Capital, Inc. and its affiliates perform 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. All such administrative costs for the partnership are recorded at the joint venture level. During 2002, 2001 and 2000, the Fund II-IIOW Associates reimbursed $54,083, $41,770 and $34,119, respectively, to Wells Capital, Inc. and its affiliates for these services.

Conflicts of Interests

The general partners of the Partnership are also general partners of other Wells Real Estate Funds. As such, there may exist conflicts of interest where the general partners in their capacity as general partners of other Wells Real Estate Funds may be in competition with the Partnership for tenants in similar geographic markets.

(e)     Inflation

The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. However, there are provisions in the majority of tenant leases, which would protect the Partnership from the impact of inflation. These provisions include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.

(f)     Application of Critical Accounting Policies

The Partnership’s accounting policies have been established to conform with 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 management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have

-11-

been applied; thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of the Partnership’s results of operations to those of companies in similar businesses.

Below is a discussion of the accounting policies that management considers to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain. Additional discussion of accounting policies that management considers to be significant, including further discussion of the critical accounting policies described below, is presented in Note 1 to the Partnership’s financial statements included in this report.

Investment in Real Estate Assets

The Partnership’s management is required to make subjective assessments as to the useful lives of its depreciable assets. The Partnership considers the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of the Partnership’s assets by class are as follows:

In the event that management uses inappropriate useful lives or methods for depreciation, the Partnership’s net income would be misstated.

Valuation of Real Estate Assets

Management continually monitors events and changes in circumstances that could indicate 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 indicators of potential impairment are present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate assets to the fair value and recognizes an impairment loss. Management has determined that there has been no impairment in the carrying value of real estate assets held by the Partnership at December 31, 2002 and 2001.

Projections of expected future cash flows requires management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property, and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flows and fair value, and could result in the overstatement of the carrying value of real estate assets held by the joint ventures and net income of the Partnership.

-12-

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since the Partnership does not borrow any money or make any foreign investments, it is not subject to risks relating to interest rate or foreign currency exchange rate fluctuations.

(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)

-13-

PART II – OTHER INFORMATION

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements of the Registrant and supplementary data are detailed under Item 15(a) and filed as part of the report on the pages indicated.

There were no disagreements with the Partnership’s independent public accountants during the two years ended December 31, 2002.

On May 16, 2002, the general partners dismissed Arthur Andersen LLP (Andersen) as the Partnership’s independent public accountants effective immediately.

Andersen’s reports on the financial statements of the Partnership for the year ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the years ended December 31, 2001 and 2000 and through the date of Andersen’s dismissal, there were no disagreements with Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen’s satisfaction, would have caused Andersen to make reference to the subject matter in connection with its report on the financial statements of the Partnership for such year and there were no reportable events as set forth in Item 304(a)(1)(v) of Regulation S-K.

On July 3, 2002, the Partnership engaged Ernst & Young, LLP (Ernst & Young) to audit the financial statements of the Partnership, effective immediately. During the fiscal year ended December 31, 2001, and through the date of appointment of Ernst & Young as the Partnership’s independent public accountants, the Partnership did not consult Ernst & Young with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the financial statements of the Partnership, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)

-14-

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, 59 years of age and holds a Bachelor of Business Administration Degree in Economics from the University of Georgia. Mr. Wells is the President, sole Director and sole shareholder of Wells Real Estate Funds, Inc., which is the parent company of Wells Capital, Wells & Associates, Inc., Wells Management Company, Inc. and Wells Investment Securities, Inc. 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, 2002:

15

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, 2003:

The General Partners did not receive any distributions from cash flows or sale proceeds in 2002.

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, 2002.

Property Management and Leasing Fees

Wells Management Company, Inc., an affiliate of the General Partners, receives compensation for supervising the management of the Partnership’s properties owned through joint ventures 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 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

-16-

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 $4,170 for the year ended December 31, 2002.

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, 2002.

ITEM 14.     CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Partnership carried out an evaluation, under the supervision and with the participation of management of Wells Capital, Inc., the corporate General Partner of the Partnership, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures pursuant to Rule 13a – 14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Partnership’s disclosure controls and procedures were effective.

There were no significant changes in the Partnership’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation.

-17-

PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

-18-

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.

-19-

CERTIFICATIONS

I, Leo F. Wells, III, certify that:

-20-

CERTIFICATIONS

I, Douglas P. Williams, certify that:

-21-

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.

22

EXHIBIT INDEX

TO

2002 FORM 10-K

OF

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.

-23-

-24-

-25-

-26-

INDEX TO FINANCIAL STATEMENTS

F-1

Report of Independent Auditors

The Partners

Wells Real Estate Fund II-OW

We have audited the accompanying balance sheet of Wells Real Estate Fund II-OW (a Georgia public limited partnership) as of December 31, 2002 and the related statements of income (loss), partners’ capital, and cash flows for the year then ended. 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 audit. The financial statements of Wells Real Estate Fund II-OW as of December 31, 2001, and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations and whose report dated January 25, 2002 expressed an unqualified opinion on those financial statements before the restatement adjustments described in Note 1.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Wells Real Estate Fund II-OW at December 31, 2002 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

As discussed above, the financial statements of Wells Real Estate Fund II-OW as of December 31, 2001 and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been restated. We audited the adjustments described in Note 1 that were applied to restate the 2001 and 2000 financial statements. Our procedures included (a) agreeing the restatement adjustment amounts to the corresponding accounts maintained in the underlying records of the Partnership, and (b) testing the application of the adjustments to the previously reported amounts. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of Wells Real Estate Fund II-OW other than with respect to such restatement adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

/s/ Ernst & Young LLP

Atlanta, Georgia

January 24, 2003

F-2

(The following is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the financial statements of Wells Real Estate Fund II-OW for the fiscal year ended December 31, 2001 included in the previous year’s Form 10-K filing. This audit report has not been reissued by Arthur Andersen in connection with the filing of this form 10-K for the fiscal year ended December 31, 2002.)

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-3

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

See accompanying notes.

F-4

WELLS REAL ESTATE FUND II-OW

(A Georgia Limited Partnership)

STATEMENTS OF INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes.

F-5

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

STATEMENTS OF PARTNERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes.

F-6

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes.

F-7

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

DECEMBER 31, 2002, 2001 AND 2000

NOTES TO FINANCIAL STATEMENTS

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 presented (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

The preparation of the Partnership’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates

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.

F-8

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

DECEMBER 31, 2002, 2001 AND 2000

NOTES TO FINANCIAL STATEMENTS—(Continued)

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, subject to the requirement to initially allocate gain on sale to limited partners holding Class B units until they have been allocated an amount equal to the net cash available for distribution previously received by limited partners holding Class A units on a per unit basis; (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 the joint venture; however, it does exercise significant influence. Accordingly, the Partnership’s investment in the joint venture is recorded using the equity method of accounting, whereby original investments are recorded at cost and subsequently adjusted for contributions, distributions and net income (loss) attributable to the Partnership, as further described below.

F-9

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

DECEMBER 31, 2002, 2001 AND 2000

NOTES TO FINANCIAL STATEMENTS—(Continued)

Allocation of Income and Distributions

Pursuant to the terms of the joint venture agreement, all income and distributions are allocated to joint venture partners in accordance with their respective ownership interests. Distributions of net cash from operations is distributed to the joint venture partners on a quarterly basis.

Real Estate Assets

The joint venture’s real estate assets are stated at cost less accumulated depreciation. Major improvements and betterments are capitalized when they extend the useful lives of the related assets. All repairs and maintenance expenditures are expensed as incurred. Depreciation for buildings and improvements 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.

Management continually monitors events and changes in circumstances that could indicate that carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present, management assesses the recoverability of the assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future cash flows expected from the use and eventual disposition of the asset. In the event the expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate assets to the fair value and recognizes an impairment loss. Management has determined that there has been no impairment in the carrying value of real estate assets held by the Joint Venture to date.

Revenue Recognition

The joint venture’s leases typically include renewal options, escalation provisions and provisions requiring tenants to reimburse the joint venture for a pro rata share of operating costs incurred. All of the joint venture’s leases are classified operating leases, and the related rental income, including scheduled rental rate increases (other than scheduled increases based on the Consumer Price Index) is recognized on a straight-line basis over the terms of the respective leases. Rental revenues collected in advance are recorded as deferred rent.

F-10

WELLS REAL ESTATE FUND II-OW

(A Georgia Public Limited Partnership)

DECEMBER 31, 2002, 2001 AND 2000

NOTES TO FINANCIAL STATEMENTS—(Continued)

Rental Income

The future minimum rental income due Fund I and II Tucker under noncancelable operating leases at December 31, 2002 is as follows:

One tenant contributed 12% of rental income for the year ended December 31, 2002.

The future minimum rental income due Fund II and III Associates—The Atrium under noncancelable operating leases at December 31, 2002 is as follows:

One tenant at The Atrium contributed 100% of rental income for the year ended December 31, 2002 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, 2002 is as follows: