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, 2004 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 or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 6200 The Corners Parkway, Norcross, Georgia |
30092-3365 | |
| (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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Wells Real Estate Fund II (the “Partnership”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Specifically, among others, we consider statements concerning projections of future operating results and cash flows, our ability to meet future obligations, and the amount and timing of future distributions to limited partners to be forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that this report is filed with the Securities and Exchange Commission. Neither the Partnership nor the general partners make any representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements. Actual results could differ materially from any forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to known and unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations; provide distributions to limited partners; and maintain the value of our real estate properties, may be significantly hindered. Some of the risks and uncertainties, although not all risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements follow:
General economic risks
| • | Adverse changes in general or local economic conditions; |
| • | Adverse economic conditions affecting the particular industry of one or more of our tenants. |
Real estate risks inherent in properties owned through joint ventures
| • | Ability to achieve appropriate occupancy levels resulting in sufficient rental amounts; |
| • | Supply of or demand for similar or competing rentable space, which may adversely impact retaining or obtaining new tenants upon lease expiration at acceptable rental amounts; |
| • | Tenant ability or willingness to satisfy obligations relating to our existing lease agreements; |
| • | Potential need to fund tenant improvements, lease-up costs, or other capital expenditures out of operating cash flow; |
| • | Increases in property operating expenses, including property taxes, insurance, and other costs not recoverable from tenants; |
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| • | Ability to secure adequate insurance at reasonable and appropriate rates to avoid uninsured losses or losses in excess of insured amounts; |
| • | Discovery of previously undetected environmentally hazardous or other undetected adverse conditions; |
| • | Unexpected costs of capital expenditures related to tenant build-out projects or other unforeseen capital expenditures; |
| • | Ability to sell a property when desirable at an acceptable return, including the ability of the purchaser to satisfy any continuing obligations. |
Other operational risks
| • | Our dependency on Wells Capital, Inc. (“Wells Capital”), our corporate general partner, its key personnel, and its affiliates for various administrative services; |
| • | Wells Capital’s ability to attract and retain high-quality personnel who can provide acceptable service levels to us and generate economies of scale for us over time; |
| • | Increases in our administrative operating expenses, including increased expenses associated with operating as a public company in the current regulatory environment; |
| • | Changes in governmental, tax, real estate, environmental, and zoning laws and regulations and the related costs of compliance; |
| • | Our ability to prove compliance with any governmental, tax, real estate, environmental, and zoning in the event that any such position is questioned by the respective authority; and |
| • | Actions of our joint venture partners including potential bankruptcy, business interests differing from ours, or other actions that may adversely impact the operations of joint ventures. |
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WELLS REAL ESTATE FUND II
| Page No. | ||||||
| PART I. |
FINANCIAL INFORMATION |
|||||
| Item 1. |
Financial Statements |
|||||
| Balance Sheets – June 30, 2004 (unaudited) and December 31, 2003 |
5 | |||||
| 6 | ||||||
| 7 | ||||||
| Statements of Cash Flows for the Six Months Ended June 30, 2004 (unaudited) and 2003 (unaudited) |
8 | |||||
| 9 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Conditions and Results of Operations |
14 | ||||
| Item 3. |
20 | |||||
| Item 4. |
20 | |||||
| PART II. |
21 | |||||
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BALANCE SHEETS
ASSETS
| June 30, 2004 (unaudited) |
December 31, 2003 | |||||
| Investment in Fund II and Fund II-OW (Note 2) |
$ | 12,479,429 | $ | 12,996,755 | ||
| Cash and cash equivalents |
130,572 | 130,245 | ||||
| Due from Fund II and Fund II-OW |
4,769,114 | 4,610,626 | ||||
| Total assets |
$ | 17,379,115 | $ | 17,737,626 | ||
| LIABILITIES AND PARTNERS’ CAPITAL | ||||||
| Liabilities: |
||||||
| Partnership distributions payable |
$ | 8,135 | $ | 8,135 | ||
| Partners’ capital: |
||||||
| Limited partners: |
||||||
| Class A—108,572 units outstanding |
17,370,980 | 17,729,491 | ||||
| Class B—30,221 units outstanding |
0 | 0 | ||||
| General partners |
0 | 0 | ||||
| Total partners’ capital |
17,370,980 | 17,729,491 | ||||
| Total liabilities and partners’ capital |
$ | 17,379,115 | $ | 17,737,626 | ||
See accompanying notes.
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STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| EQUITY IN LOSS OF FUND II AND FUND II-OW (Note 2) |
$ | (201,590 | ) | $ | (59,754 | ) | $ | (358,838 | ) | $ | (166,033 | ) | ||||
| OTHER INCOME |
288 | 4,254 | 327 | 4,302 | ||||||||||||
| NET LOSS |
$ | (201,302 | ) | $ | (55,500 | ) | $ | (358,511 | ) | $ | (161,731 | ) | ||||
| NET LOSS ALLOCATED TO CLASS A LIMITED PARTNERS |
$ | (201,302 | ) | $ | (55,500 | ) | $ | (358,511 | ) | $ | (161,731 | ) | ||||
| NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| NET INCOME (LOSS) PER LIMITED PARTNER UNIT: |
||||||||||||||||
| CLASS A |
$ | (1.85 | ) | $ | (0.51 | ) | $ | (3.30 | ) | $ | (1.49 | ) | ||||
| CLASS B |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
| DISTRIBUTION OF OPERATING CASH PER LIMITED PARTNER UNIT: |
||||||||||||||||
| CLASS A |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
| CLASS B |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
See accompanying notes.
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STATEMENTS OF PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
AND THE SIX MONTHS ENDED JUNE 30, 2004 (unaudited)
| Limited Partners |
General Partners |
Total Partners’ Capital |
||||||||||||||||
| Class A |
Class B |
|||||||||||||||||
| Units |
Amounts |
Units |
Amounts |
|||||||||||||||
| BALANCE, December 31, 2002 |
108,572 | $ | 18,219,859 | 30,221 | $ | 0 | $ | 0 | $ | 18,219,859 | ||||||||
| Net loss |
0 | (490,368 | ) | 0 | 0 | 0 | (490,368 | ) | ||||||||||
| BALANCE, December 31, 2003 |
108,572 | 17,729,491 | 30,221 | 0 | 0 | 17,729,491 | ||||||||||||
| Net loss |
0 | (358,511 | ) | 0 | 0 | 0 | (358,511 | ) | ||||||||||
| BALANCE, June 30, 2004 |
108,572 | $ | 17,370,980 | 30,221 | $ | 0 | $ | 0 | $ | 17,370,980 | ||||||||
See accompanying notes.
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STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (358,511 | ) | $ | (161,731 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Equity in loss of Fund II and Fund II-OW |
358,838 | 166,033 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts payable |
0 | (2,857 | ) | |||||
| Total adjustments |
358,838 | 163,176 | ||||||
| Net cash provided by operating activities |
327 | 1,445 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Investment in Fund II and Fund II-OW |
0 | (283,597 | ) | |||||
| Net cash used in investing activities |
0 | (283,597 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
327 | (282,152 | ) | |||||
| CASH AND CASH EQUIVALENTS, beginning of period |
130,245 | 411,485 | ||||||
| CASH AND CASH EQUIVALENTS, end of period |
$ | 130,572 | $ | 129,333 | ||||
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
| Partnership distributions payable |
$ | 0 | $ | 8,135 | ||||
See accompanying notes.
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CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | General |
Wells Real Estate Fund II (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, a Georgia corporation, serving as its general partners (collectively, the “General Partners”). The Partnership was formed on June 23, 1986 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing, and 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) add or remove a general partner. A majority vote on any of the above-described matters will bind the Partnership without the concurrence of the General Partners. Each limited partnership unit generally has equal voting rights regardless of class.
On September 8, 1986, the Partnership commenced an offering of up to $50,000,000 of Class A or Class B limited partnership units ($250.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The offering was terminated on September 7, 1988, at which time the Partnership had sold approximately 139,793 Class A Units and Class B Units representing capital contributions of $34,948,250 from investors who were admitted to the Partnership as limited partners. Following the termination of the offering, the Partnership repurchased 1,000 limited partnership units.
The Partnership owns interests in all of its real estate assets through a joint venture, Fund II and Fund II-OW, which owns interests in real estate assets both directly and through joint ventures with other Wells Real Estate Funds. During the periods presented, the Partnership owned interests in the following five properties through the affiliated joint ventures listed below (the “Joint Ventures”):
| Joint Venture | Joint Venture Partners | Properties | ||
| Fund II and Fund II-OW (“Fund II-IIOW Associates”) |
• Wells Real Estate Fund II • Wells Real Estate Fund II-OW |
1. Louis Rose Building A two-story office building located in Charlotte, North Carolina | ||
| Fund I and Fund II Tucker (“Fund I-II Tucker Associates”) |
• Wells Real Estate Fund I • Fund II-IIOW Associates |
2. Heritage Place(1) A commercial office complex located in Tucker, Georgia | ||
| Fund II and Fund III Associates (“Fund II-III Associates “) |
• 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 4. Brookwood Grill(2) A restaurant located in Roswell, Georgia | ||
| Fund II, III, VI and VII Associates (“Fund II-III-VI-VII Associates”) |
• Fund II-III Associates • Wells Real Estate Fund VI, L.P. • Wells Real Estate Fund VII, L.P. |
5. Holcomb Bridge Property(2) An office/retail center located in Roswell, Georgia |
| (1) | The retail portion of Heritage Place was sold in April 2003. |
| (2) | Properties were sold in July 2004. |
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Each of the aforementioned properties was acquired on an all-cash basis. The investment objectives of each of the joint venture partners listed in the above table are substantially identical to those of the Partnership. Approval of the other joint venture partners is required for any major decision or any action that would materially affect the Joint Ventures, or their real property investments. For further information regarding the Joint Ventures and foregoing properties, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2003.
On April 7, 2003, Fund I-II Tucker Associates sold the retail portion of Heritage Place, which comprises approximately 30% of the total premises, to an unrelated third party for a gross selling price of $3,400,000. As a result of this sale, net sales proceeds of approximately $1,461,000, and a gain of approximately $133,000 were allocated to the Partnership.
| (b) | Basis of Presentation |
The financial statements of the Partnership have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. 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 such periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2003.
| (c) | Allocations of Net Income, Net Loss, and Gain on Sale |
For the purpose of determining allocations per the partnership agreement, net income is defined generally as net income recognized by the Partnership, excluding deductions for depreciation, amortization, and cost recovery and gain on the sale of assets. Net income, as defined, of the Partnership is generally allocated each year in the same proportions that net cash from operations is distributed to the limited partners holding Class A Units and the General Partners. To the extent 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 are 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 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 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, less the sum of all prior distributions of cash flow from operations previously made to such General Partners, 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.