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 September 30, 2002 or |
| o | 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 (State or other jurisdiction of incorporation or organization) |
58-1678709 (I.R.S. Employer Identification Number) |
| 6200 The Corners Parkway, Suite 250, Atlanta, Georgia (Address of principal executive offices) |
30092 (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 o
FORM 10-Q
WELLS REAL ESTATE FUND II
(A Georgia Public Limited Partnership)
INDEX
| EXHIBIT INDEX | 19 |
| EXHIBIT 99.1 — CERTIFICATION OF CHIEF EXECUTIVE OFFICER | 20 |
| EXHIBIT 99.2 — CERTIFICATION OF CHIEF FINANCIAL OFFICER | 21 |
(A Georgia Public Limited Partnership)
BALANCE SHEETS
| (unaudited) September 30, 2002 |
December 31, 2001 |
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| ASSETS: | |||||||
| Investment in joint venture (Note 2) | $ | 16,029,937 | $ | 19,051,114 | |||
| Cash and cash equivalents | 551,253 | 45,875 | |||||
| Due from affiliates | 1,773,177 | 218,312 | |||||
| Prepaid expenses and other assets | 2,385 | 0 | |||||
| Total assets | $ | 18,356,752 | $ | 19,315,301 | |||
| LIABILITIES AND PARTNERS’ CAPITAL: | |||||||
| Liabilities: | |||||||
| Accounts payable | $ | 0 | $ | 3,051 | |||
| Partners’ capital: | |||||||
| Limited partners: | |||||||
| Class A—108,572 units | 18,356,752 | 19,312,250 | |||||
| Class B—30,221 units | 0 | 0 | |||||
| Total partners’ capital | 18,356,752 | 19,312,250 | |||||
| Total liabilities and partners’ capital | $ | 18,356,752 | $ | 19,315,301 | |||
The accompanying notes are an integral part of these balance sheets.
(A Georgia Public Limited Partnership)
STATEMENTS OF (LOSS) INCOME
| (unaudited) | (unaudited) | ||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
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| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| REVENUES: | |||||||||||||
| Equity in (loss) income of joint venture (Note 2) |
$ | (267,436 | ) | $ | (100,857 | ) | $ | (964,504 | ) | $ | 105,164 | ||
| Other income | 4,227 | 0 | 4,227 | 0 | |||||||||
| Interest income | 1,296 | 467 | 4,829 | 1,398 | |||||||||
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| $ | (261,913 | ) | $ | (100,390 | ) | $ | (955,448 | ) | $ | 106,562 | |||
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| EXPENSES: | |||||||||||||
| Partnership administration | 40 | 0 | 50 | 19 | |||||||||
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| NET (LOSS) INCOME | $ | (261,953 | ) | $ | (100,390 | ) | $ | (955,498 | ) | $ | 106,543 | ||
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| NET (LOSS) INCOME ALLOCATED TO CLASS A LIMITED PARTNERS |
$ | (261,953 | ) | $ | (100,390 | ) | $ | (955,498 | ) | $ | 106,543 | ||
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| NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | |||||
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| NET (LOSS) INCOME PER CLASS A LIMITED PARTNER UNIT |
$ | (2.41 | ) | $ | (0.92 | ) | $ | 8.80 | $ | 0.98 | |||
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| CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT |
$ | 0.00 | $ | 1.72 | $ | 0.00 | $ | 8.28 | |||||
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The accompanying notes are an integral part of these financial statements.
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2001
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
| Limited Partners | ||||||||||||||||
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| Class A | Class B | |||||||||||||||
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| Units | Amounts | Units | Amounts | Total Partners’ Capital |
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| 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 | (955,498 | ) | 0 | 0 | (955,498 | ) | |||||||||
| BALANCE, September 30, 2002 (unaudited) | 108,572 | $ | 18,356,752 | 30,221 | $ | 0 | $ | 18,356,752 | ||||||||
The accompanying notes are an integral part of these financial statements.
(A Georgia Public Limited Partnership)
STATEMENTS OF CASH FLOWS
| (unaudited) Nine Months Ended |
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| September 30, 2002 |
September 30, 2001 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net (loss) income | $ | (955,498 | ) | $ | 106,543 | ||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
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| Equity in loss (income) of joint venture | 964,504 | (105,164 | ) | ||||
| Changes in assets and liabilities: | |||||||
| Accounts payable | (3,051 | ) | (6,137 | ) | |||
| Due from affiliates | 461 | 0 | |||||
| Prepaid expenses and other assets | (2,385 | ) | 187 | ||||
| Net cash provided by (used in) operating activities | 4,031 | (4,571 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Investment in joint ventures | (1,067,392 | ) | 0 | ||||
| Distributions received from joint ventures | 1,568,739 | 1,180,745 | |||||
| Net cash provided by investing activities | 501,347 | 1,180,745 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Partnership distributions from accumulated earnings | 0 | (320,380 | ) | ||||
| Partnership distributions in excess of accumulated earnings | 0 | (867,180 | ) | ||||
| Net cash used in financing activities | 0 | (1,187,560 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 505,378 | (11,386 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of year | 45,875 | 47,334 | |||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 551,253 | $ | 35,948 | |||
The accompanying notes are an integral part of these financial statements.
(A Georgia Public Limited Partnership)
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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)
| The Partnership owns interests in all of its real estate assets through joint ventures with other Wells Real Estate Funds. As of September 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 |
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| 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 |
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| 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 |
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| 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 expended for tenant improvements at 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 September 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, which commenced on September 1, 2002, extends for a term of 73 months and provides annual base rent payable of $1,483,697, or $15.75 per square foot. In October 2002, Boeing exercised an option to lease an additional 11,515 square feet comprising approximately half of the first floor for the same rental rate and lease term as that for the top three floors. The lease for the additional space on the first floor is estimated to commence in mid-November 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, 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 40%. 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. |
(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, noncumulative 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, noncumulative return on their respective adjusted capital contributions, as defined.
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| • | 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 this accounting standard, management reviews each of the properties in which the partnership holds an interest for impairment as events or changes in circumstances arise, which indicate that the carrying amounts of such assets may not be recoverable and the future undiscounted cash flows expected to be generated by such assets are less than the respective carrying amounts. If such assets are considered to be impaired, the Partnership records impairment losses and reduces the carrying amounts of the impaired assets to amounts that reflect 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. Material long-lived assets held for sale are separately identified in the balance sheets, and the related net operating income is segregated as income from discontinued operations in the statements of income. Depreciation is not recorded for long-lived assets held for sale. 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 assets for use in operations. Neither the Partnership nor its joint ventures have recognized impairment losses to date. |
2. INVESTMENT IN JOINT VENTURE
(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. For further information, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001. |
(b) Summary of Operations
| The following information summarizes the operations of the unconsolidated joint venture, in which the Partnership holds a direct ownership interest, for the three and nine months ended September 30, 2002 and 2001: |
| Total Revenues | Net Income | Partnership’s Share of Net Income* |
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| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund II-IIOW Associates |
$ | (98,643 | ) | $ | 88,646 | $ | (282,433 | ) | $ | (106,512 | ) | $ | (267,436 | ) | $ | (100,857 | ) | ||
| Total Revenues | Net Income | Partnership’s Share of Net Income* |
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| Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund II-IIOW Associates |
$ | (421,542 | ) | $ | 631,514 | $ | (1,018,583 | ) | $ | 111,062 | $ | (964,504 | ) | $ | 105,164 | ||||
| * | The Partnership’s share of income earned from its investments in the joint ventures presented in section (c) is recorded by Fund II-IIOW Associates as equity in (loss) income of joint ventures, which is classified as revenue. |
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
The following information summarizes the operations of the joint ventures, in which the Partnership holds interests through its ownership in Fund II-IIOW Associates, for the three and nine months ended September 30, 2002 and 2001:
| Total Revenues | Net Income | Fund II-IIOW Associates’ Share of Net Income* |
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| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund I-II Tucker Associates |
$ | 285,404 | $ | 309,535 | $ | 11,496 | $ | 36,301 | $ | 5,163 | $ | 16,303 | |||||||
| Fund I-II-IIOW-VI-VII Associates |
37,846 | 255,627 | 37,651 | 165,105 | 20,543 | 90,083 | |||||||||||||
| Fund II-III Associates-Atrium |
124,230 | 368,814 | (255,476 | ) | (88,199 | ) | (156,607 | ) | (54,066 | ) | |||||||||
| Fund II-III Associates Brookwood |
60,294 | ** | 59,155 | ** | 50,609 | 56,123 | 32,258 | 34,993 | |||||||||||
| $ | 507,774 | $ | 993,131 | $ | (155,720 | ) | $ | 169,330 | $ | (98,643 | ) | $ | 87,313 | ||||||
| Total Revenues | Net Income | Fund II-IIOW Associates’ Share of Net Income* |
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| Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund I-II Tucker Associates |
$ | 939,416 | $ | 993,851 | $ | 106,079 | $ | 184,020 | $ | 47,640 | $ | 82,643 | |||||||
| Fund I-II-IIOW-VI-VII Associates |
108,124 | 766,602 | 90,675 | 452,799 | 49,473 | 247,052 | |||||||||||||
| Fund II-III Associates-Atrium |
119,656 | 1,109,273 | (969,051 | ) | (126,659 | ) | (594,028 | ) | (77,642 | ) | |||||||||
| Fund II-III Associates Brookwood |
140,623 | ** | 171,690 | ** | 119,587 | 151,155 | 75,265 | 94,245 | |||||||||||
| $ | 1,307,819 | $ | 3,041,416 | $ | (652,710 | ) | $ | 661,315 | $ | (421,650 | ) | $ | 346,298 | ||||||
| * | The Partnership’s share of income earned from its investments in the joint ventures presented above is recorded by Fund II-IIOW Associates as equity in (loss) income of joint ventures, which is classified as revenue. |
| ** | The Partnership’s share of income earned from its investment in Fund II-III-VI-VI Associates, presented in Section (d), is recorded by Fund II-III Associates - Brookwood as equity in income of joint ventures, which is classified as revenue |
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
The following information summarizes the operations of the joint venture, in which the Partnership holds an interest through its ownership in Fund II-III Associates - - Brookwood, for the three and nine months ended September 30, 2002 and September 30, 2001:
| Total Revenues | Net Income | Fund II-III Associates – Brookwood’s Share of Net Income** |
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| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund II-III-VI-VII Associates |
$ | 140,100 | $ | 215,407 | $ | 20,320 | $ | 84,664 | $ | 4,891 | $ | 20,379 | |||||||
| Total Revenues | Net Income | Fund II-III Associates – Brookwood’s Share of Net Income** |
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| Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund II-III-VI-VII Associates |
$ | 498,567 | $ | 631,698 | $ | 140,517 | $ | 175,834 | $ | 33,823 | $ | 42,323 | |||||||
| ** | The Partnership’s share of income earned from its investment in Fund II-III-VI-VI Associates is recorded by Fund II-III Associates - Brookwood as equity in income of joint ventures, which is classified as revenue |
| The following information summarizes the operations of the property in which the Partnership holds an interest through its ownership in Fund II-IIOW Associates and is significant to the Partnership for the three and nine months ended September 30, 2002 and 2001. Audited financial statements of this property are included in the report filed for Partnership on Form 10-K filed for the year ended December 31, 2001: |
| Total Revenues | Net Income | Partnership’s Share of Net Income |
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| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Boeing at the Atrium | $ | 124,230 | $ | 368,814 | $ | (255,476 | ) | $ | (88,199 | ) | $ | (148,278 | ) | $ | (51,191 | ) | |||
| Total Revenues | Net Income | Partnership’s Share of Net Income |
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| Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Boeing at the Atrium | $ | 119,656 | $ | 1,109,273 | $ | (969,051 | ) | $ | (126,659 | ) | $ | (562,437 | ) | $ | (73,513 | ) | |||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 a deficit of $955,448 for the nine months ended September 30, 2002, from $106,562 for the nine months ended September 30, 2001, primarily due to the decrease in earnings generated from Fund II-IIOW Associates resulting from (i) the vacancy of the Louis Rose Building beginning in May 2001, (ii) a reduction in occupancy of Boeing at the Atrium beginning in December 2001, (iii) a reduction in income generated from Fund I-II-IIOW-VI-VII Associates relating to the sale of the Cherokee Commons property in the third quarter of 2001, (iv) a decrease in rental rates and an increase in legal fees related to lease negotiations for Brookwood Grill, (v) several uncollectible tenant receivables for Heritage Place that were written off in 2002, and (vi) a decrease in occupancy at Heritage Place and the Holcomb Bridge Property during the nine months ended September 30, 2002. |
| In March 2002, Boeing/Shuttle Division (“Boeing”) entered into a lease for the top three floors of the four-story Boeing at the Atrium, which commenced on September 1, 2002, extends for a term of 73 months and provides annual base rent payable of $1,483,697, or $15.75 per square foot. In October 2002, Boeing exercised an option to lease an additional 11,515 square feet comprising approximately half of the first floor for the same rental rate and lease term as that for the top three floors. The lease for the additional space on the first floor is estimated to commence in mid-November 2002. |
| Distributions |
| The Partnership has reserved distributions to the Class A limited partners for the first, second and third quarters of 2002 due to the reasons described in the preceding section. Distributions were made to the limited partners holding Class A units of $8.28 per unit with respect to the nine months ended September 30, 2001. Such distributions have been made from net cash from operations and distributions received from investments in joint ventures. No cash distributions have been made to the limited partners holding Class B units or to the General Partners. |
| The General Partners’ guidance with regard to future operating cash distributions to the limited partners holding Class A units is that such distributions are likely to be reinstated following the re-leasing the Louis Rose Building and funding related leasing costs and tenant improvements, which is further discussed in the following section. |
(c) Liquidity and Capital Resources
| Net cash flows from operating activities increased to $4,031 provided for the nine months ended September 30, 2002, from a deficit of $4,571 used for nine months ended September 30, 2001, primarily due to an increase in interest income earned on higher average cash balances in 2002. Cash flows from investing activities decreased to $501,347 for the nine months ended September 30, 2002, from $1,180,745 for the same period in 2001, as a result of contributing capital to Fund II-III Associates – Atrium for the purpose of funding tenant improvements for Boeing at the Atrium, partially offset by proceeds from the sale of Cherokee Commons, which the Partnership received in the second quarter of 2002. Net cash used in financing activities was $0 for the nine months ended September 30, 2002, as compared to $1,187,560 for the nine months ended September 30, 2001, as a result of the General Partners’ decision to reserve cash otherwise available for distribution to Class A limited partners in order to fund anticipated tenant improvements and other leasing costs for Boeing at the Atrium and Louis Rose Place. |
| The Partnership expects to continue to meets its short-term liquidity requirements, generally through the use of net cash from operations and distributions received from investments in joint ventures. The General Partners believe that such sources will continue to provide adequate cash flows for the purposes of meeting the Partnership’ operating requirements. |
| Rather than being distributed to the limited partners, the Partnership’s share of the net proceeds generated from the sale of Cherokee Commons is currently being held as reserves in order to fund leasing costs as well as actual and anticipated tenant improvements for Boeing at the Atrium and the Louis Rose Building, respectively. As set forth in the preceding section, the General Partners anticipate reinstating distributions to limited partners holding Class A units following the re-leasing of the Louis Rose Building and funding all tenant improvements and other related lease-up costs. |
(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 include provisions designed to protect the Partnership from the impact of inflation and increases in costs and other operating expenses, including common area maintenance, real estate tax and insurance reimbursement billings to tenants either on a per square foot basis or above a certain allowance per square foot annually. In addition, a number of the tenant leases in which the Partnership holds an interest are for remaining terms of less than five years, which may allow the joint ventures discussed in Note 1 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 joint ventures would be able to replace existing leases with new leases at 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. |
| 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 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 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 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. Neither the Partnership nor its joint ventures have recognized impairment losses to date. |
ITEM 4. 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. |
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | The Exhibits to this report are set forth on the Exhibit Index to Third Quarter Form 10-Q attached hereto. | |
| (b) | During the third quarter of 2002, the Registrant filed (i) a Current Report on Form 8-K dated July 3, 2002 disclosing the appointment of Ernst & Young LLP as the principal accountant to audit the financial statements of the Registrant; and (ii) a Current Report on Form 8-K dated September 30, 2002 disclosing the sale of the Greenville Center. |
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 II (Registrant) | |||
By: |
WELLS CAPITAL, INC. (Corporate General Partners) | ||
November 13, 2002 |
/s/ LEO F. WELLS, III | ||
| Leo F. Wells, III President |
November 13, 2002 |
/s/ DOUGLAS P. WILLIAMS | ||
| Douglas P. Williams Principal Financial Officer of Wells Capital, Inc. |
CERTIFICATIONS
I, Leo F. Wells, III, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of the Partnership; | ||
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared, | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the board of directors of the corporate General Partner: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: November 13, 2002 |
By: | /s/ LEO F. WELLS, III | |
| Leo F. Wells, III Principal Executive Officer | |||
CERTIFICATIONS
I, Douglas P. Williams, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of the Partnership; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | ||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared, | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the board of directors of the corporate General Partner: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: November 13, 2002 |
By: | /s/ DOUGLAS P. WILLIAMS | |
| Douglas P. Williams Principal Financial Officer | |||
EXHIBIT INDEX
TO
THIRD QUARTER FORM 10-Q
OF
WELLS REAL ESTATE FUND II
| 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 |