Back to GetFilings.com



Table of Contents
 
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 0-16518
 
 
WELLS REAL ESTATE FUND II
(Exact name of registrant as specified in its charter)
 
Georgia
  
58-1678709
(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 II
(A Georgia Public Limited Partnership)
 
INDEX
 
           
Page No.
PART I.
          
Item 1.
        
  3
         
  4
         
  5
         
  6
         
  7
         
  8
Item 2.
        
14
PART II.
        
17
    
18
      
      
             

2

Table of Contents
 
PART I.    FINANCIAL INFORMATION
 
Effective July 3, 2002, Wells Real Estate Fund II (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.

3

Table of Contents
 
WELLS REAL ESTATE FUND II
 
(A Georgia Public Limited Partnership)
 
BALANCE SHEETS
 
    
(unaudited)
June 30,
2002
   
December 31,
2001
ASSETS:
              
Investment in joint venture (Note 2)
   
$
15,073,898
   
$
19,051,114
Cash and cash equivalents
   
 
681,793
   
 
45,875
Due from affiliates
   
 
2,860,629
   
 
218,312
Prepaid expenses and other assets
   
 
2,385
   
 
0
    
  
Total assets
   
$
18,618,705
   
$
19,315,301
    
  
LIABILITIES AND PARTNERS’ CAPITAL:
              
Liabilities:
              
Accounts payable
   
$
0
   
$
3,051
 
Partners’ capital:
              
Limited partners:
              
Class A—108,572 units
   
 
18,618,705
   
 
19,312,250
Class B—30,221 units
   
 
0
   
 
0
    
  
Total partners’ capital
   
 
18,618,705
   
 
19,312,250
    
  
Total liabilities and partners’ capital
   
$
18,618,705
   
$
19,315,301
    
  
 
The accompanying notes are an integral part of these balance sheets.
 

4

Table of Contents
 
WELLS REAL ESTATE FUND II
 
(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:
                                
Equity in (loss) income of joint venture (Note 2)
   
$
(381,628
)
   
$
195
   
$
(697,068
)
   
$
206,021
Interest income
   
 
3,362
 
   
 
489
   
 
3,533
 
   
 
931
    
  
  
  
    
 
(378,266
)
   
 
684
   
 
(693,535
)
   
 
206,952
    
  
  
  
EXPENSES:
                                
Partnership administration
   
 
10
 
   
 
19
   
 
10
 
   
 
19
    
  
  
  
NET (LOSS) INCOME
   
$
(378,276
)
   
$
665
   
$
(693,545
)
   
$
206,933
    
  
  
  
NET (LOSS) INCOME ALLOCATED TO CLASS A LIMITED PARTNERS
   
$
(378,276
)
   
$
665
   
$
(693,545
)
   
$
206,933
    
  
  
  
NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS
   
$
0
 
   
$
0
   
$
0
 
   
$
0
    
  
  
  
NET (LOSS) INCOME PER CLASS A LIMITED PARTNER UNIT
   
$
(3.48
)
   
$
0.01
   
$
(6.39
)
   
$
1.91
    
  
  
  
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
 
   
$
2.19
   
$
0.00
 
   
$
6.56
    
  
  
  
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 

5

Table of Contents
 
WELLS REAL ESTATE FUND II
 
(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
       
    
Class A
     
Class B
   
Total
Partners’
  
    
Units
   
Amounts
     
Units
     
Amounts
   
Capital
  
BALANCE, December 31, 2000
   
108,572
   
$
19,307,522
 
   
30,221
     
$
0
   
$
19,307,522
 
 
Net income
   
0
   
 
895,814
 
   
0
     
 
0
   
 
895,814
 
Partnership distributions
   
0
   
 
(891,086
)
   
0
     
 
0
   
 
(891,086
)
    
  
  
    
  
BALANCE, December 31, 2001
   
108,572
   
 
19,312,250
 
   
30,221
     
 
0
   
 
19,312,250
 
 
Net loss
   
0
   
 
(693,545
)
   
0
     
 
0
   
 
(693,545
)
    
  
  
    
  
BALANCE, June 30, 2002 (unaudited)
   
108,572
   
$
18,618,705
 
   
30,221
     
$
0
   
$
18,618,705
 
    
  
  
    
  
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 

6

Table of Contents
 
WELLS REAL ESTATE FUND II
 
(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
   
$
(693,545
)
   
$
206,933
 
Adjustments to reconcile net income to net cash used in operating activities:
                  
Equity in loss (income) of joint venture
   
 
697,068
 
   
 
(206,021
)
Changes in assets and liabilities:
                  
Accounts payable
   
 
(3,051
)
   
 
(5,584
)
Due from affiliates
   
 
461
 
   
 
0
 
Prepaid expenses and other assets
   
 
(2,385
)
   
 
(974
)
    
  
Net cash used in operating activities
   
 
(1,452
)
   
 
(5,646
)
    
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                  
Investment in joint ventures
   
 
(457,919
)
   
 
0
 
Distributions received from joint ventures
   
 
1,095,289
 
   
 
978,232
 
    
  
Net cash provided by investing activities
   
 
637,370
 
   
 
978,232
 
    
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Partnership distributions paid
   
 
0
 
   
 
(950,075
)
    
  
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
 
635,918
 
   
 
22,511
 
 
CASH AND CASH EQUIVALENTS, beginning of year
   
 
45,875
 
   
 
47,334
 
    
  
CASH AND CASH EQUIVALENTS, end of period
   
$
681,793
 
   
$
69,845
 
    
  
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 

7

Table of Contents
WELLS REAL ESTATE FUND II
 
(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 II (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 June 23, 1986 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 September 8, 1986, 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 $34,948,250 for 139,793 Class A and Class B limited partner units at $250 per unit from 4,440 limited partners.
 
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
 

8

Table of Contents
The Partnership owns interests in all 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 I-II Tucker Associates
  
—Wells Real Estate Fund I
—Fund II-IIOW Associates
  
1.  Heritage Place
 A retail shopping and  commercial office complex  located in Tucker, Georgia
Fund II-IIOW Associates
  
—Wells Real Estate Fund II
—Wells Real Estate Fund IIOW
  
2.  Louis Rose Building
 A two story office building  located in Charlotte, North  Carolina
Fund II-III Associates—Atrium
  
—Fund II-IIOW Associates
—Wells Real Estate Fund III, L.P.
  
3.  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.
  
4.  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.
  
5.  Holcomb Bridge Property
     An office/retail center located in      Roswell, Georgia
 
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. $4,275,780 of the proceeds from the sale of the Cherokee Commons property are attributable to the Partnership, a portion of which have been invested in tenant improvements for Boeing at the Atrium, as further discussed below. The remaining portion of the sales proceeds is included in due from affiliates in the accompanying balance sheet as of June 30, 2002. Currently, management intends to use a portion of these proceeds to fund tenant improvements and leasing costs anticipated to be required in connection with the leasing of the Louis Rose Building and Boeing at the Atrium.
 
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.
 
The Louis Rose Building located in Charlotte, North Carolina continues to remain vacant. The submarket in which this property is located (University Research Park), which contains approximately 2.2 million square feet of office space in 32 buildings, is currently experiencing an overall average vacancy rate of 24%. This over-supply of office space in the immediate area has

9

Table of Contents
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.
 
(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. Interim results for 2002 are not necessarily indicative of results for the year. 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)
 
Distributions of Net Cash From Operations
 
As defined by the partnership agreement, cash available for distribution is distributed quarterly on a cumulative non-compounded basis to the limited partners as follows:
 
 
•
 
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 each has received 10% of the total distributions paid to limited partners per annum.
 
 
•
 
Thereafter, to the limited partners and the General Partners allocated on a basis of 90% and 10%, respectively.
 
(d)
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform with the current period financial statement presentation.
 
(e)
 
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

10

Table of Contents
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.
 
At this time, Heritage Place is being actively marketed for sale. In the event that the net sales proceeds are less than the carrying value of the properties sold, the Partnership would recognize losses on the sales.