<PAGE>
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 March 31, 1996 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 0-17876
--------------------------------------------------------
Wells Real Estate Fund II-OW
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1754703
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3885 Holcomb Bridge Road, Norcross, 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
------- -------
<PAGE>
Form 10-Q
---------
Wells Real Estate Fund II-OW
----------------------------
Index
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets - March 31, 1996 and
December 31, 1995................................... 3
Statements of Income for the Three Months
Ended March 31, 1996 and 1995....................... 4
Statements of Partners' Capital for the Year Ended
December 31, 1995 and the Three Months
Ended March 31, 1996................................ 5
Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995....................... 6
Condensed Notes to Financial Statements............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................... 16
PART II. OTHER INFORMATION............................................ 23
</TABLE>
2
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
INVESTMENT IN JOINT VENTURE (Note 2) $1,416,077 $1,434,495
CASH AND CASH EQUIVALENTS 890 891
DUE FROM AFFILIATE 27,871 26,854
---------- ----------
Total Assets $1,444,838 $1,462,240
========== ==========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIABILITIES:
<S> <C> <C>
Withholdings and accounts payable $ 385 $ 385
Partnership distributions payable 27,975 26,959
---------- ----------
Total liabilities 28,360 27,344
---------- ----------
PARTNERS' CAPITAL:
Limited Partners:
Class A - 6,062 units $1,371,693 $1,372,620
Class B - 1.626 units 44,785 62,276
---------- ----------
Total partners' capital 1,416,478 1,434,896
---------- ----------
Total liabilities and partners' capital $1,444,838 $1,462,240
========== ==========
</TABLE>
See accompanying condensed notes to financial statements.
3
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF INCOME
Three Months Ended
------------------
March 31, 1996 March 31, 1995
-------------- --------------
[S] [C] [C]
REVENUES:
Equity in income of joint venture (Note 2) $ 9,453 $ 14,310
-------- --------
EXPENSES:
Partnership administration 0 248
-------- --------
NET INCOME $ 9,453 $ 14,062
======== ========
NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS $ 26,944 $ 25,092
======== ========
NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS $(17,491) $(11,030)
======== ========
NET INCOME PER CLASS A LIMITED PARTNER UNIT $ 4.45 $ 4.14
======== ========
NET LOSS PER CLASS B LIMITED PARTNER UNIT $ (10.76) $ (6.78)
======== --------
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT $ 4.60 $ 3.98
======== --------
See accompanying condensed notes to financial statements.
4
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Limited Partners
--------------------------------------------
Class A Class B Total
--------------------- --------------------- Partners'
Units Amount Units Amount Capital
-------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1994 6,062 $1,370,379 1,626 $113,335 $1,483,714
Net income (loss) 0 107,511 0 (51,059) 56,452
Partnership distributions 0 (105,270) 0 0 (105,270)
----- ---------- ----- -------- ----------
BALANCE, December 31, 1995 6,062 $1,372,620 1,626 $ 62,276 $1,434,896
Net income (loss) 0 26,944 0 (17,491) 9,453
Partnership distributions 0 (27,871) 0 0 (27,871)
----- ---------- ----- -------- ----------
BALANCE - March 31, 1996 6,062 $1,371,693 1,626 $ 44,785 $1,416,478
===== ========== ===== ======== ==========
</TABLE>
See accompanying condensed notes to financial statements.
5
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
STATEMENTS OF CASH FLOWS
- ----
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 9,453 $ 14,062
-------- --------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in income of joint venture (9,453) (14,310)
Distributions received from joint venture 26,853 25,457
Distributions to partners from accumulated earnings (26,854) (25,028)
Changes in assets and liabilities:
Withholdings and accounts payable 0 0
Due from limited partners 0 0
Due to affiliate 0 (14,824)
-------- --------
Total adjustments (9,454) (28,705)
-------- --------
Net cash provided by (used in) operating activities $ (1) $(14,643)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture $ 0 $ 0
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners in excess of accumulated earnings $ 0 $ 0
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (1) $(14,643)
CASH AND CASH EQUIVALENTS, beginning of year 891 14,703
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 890 $ 60
======== ========
</TABLE>
See accompanying condensed notes to financial statements.
6
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
Condensed Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(A) GENERAL
Wells Real Estate Fund II-OW (the "Partnership") is a Georgia public
limited partnership having Leo F. Wells, III and Wells Capital, Inc.,
as General Partners. The Partnership was formed on October 23, 1987,
for the purpose of acquiring, developing, constructing, owning,
operating, improving, leasing and otherwise managing for investment
purposes income-producing commercial or industrial properties.
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, and received gross proceeds of
$1,922,000 representing subscriptions from 219 Limited Partners,
composed of two classes of limited partnership interests, Class A and
Class B limited partnership units.
As of March 31, 1996, the Partnership owned interests in the following
properties: (i) a retail shopping and commercial office complex located
in Tucker, Georgia, (ii) a shopping center located in Cherokee County,
Georgia, (iii) a two-story office building located in Charlotte, North
Carolina, (iv) a four-story office building located in metropolitan
Houston, Texas, (v) a restaurant located in Fulton County, Georgia, and
(vi) a retail shopping center currently being developing in Fulton
County, Georgia. All of the foregoing properties were acquired on an
all cash basis.
(B) BASIS OF PRESENTATION
The financial statements of Wells Real Estate Fund II-OW (the
"Partnership") have been prepared in accordance with instructions to
Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. These quarterly statements have not been examined
by independent accountants, but in the opinion of the General Partners,
the statements for the unaudited interim periods presented include all
adjustments, which are of a normal and recurring nature, necessary to
present a fair presentation of the results for such periods. For
further information, refer to the financial statements and footnotes
included in the Partnership's Form 10-K for the year ended December 31,
1995.
(C) EMPLOYEES
The Partnership has no direct employees. The employees of Wells
Capital, Inc., a General Partner of the Partnership, perform a full
range of real estate services including leasing and property
management, accounting, asset management and investor relations for the
Partnership.
7
<PAGE>
(D) INSURANCE
Wells Management Company, Inc., an affiliate of the General Partners,
carries comprehensive liability and extended coverage with respect to
all the properties owned directly or indirectly by the Partnership. In
the opinion of management of the registrant, the properties are
adequately insured.
(E) 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 be required to
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.
(F) INCOME TAXES
The Partnership has not requested a ruling from the Internal Revenue
Service to the effect that it will be treated as a partnership and not
an association taxable as a corporation for Federal income tax
purposes. The Partnership requested an opinion of counsel as to its tax
status, but such opinion is not binding upon the Internal Revenue
Service.
(G) STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash
equivalents include cash and short-term investments.
(2) INVESTMENTS IN JOINT VENTURE
----------------------------
FUND II - FUND II-OW JOINT VENTURE
----------------------------------
The Partnership owns all of its properties through a joint venture (the
"Fund II-Fund II-OW Joint Venture") formed on March 1, 1988, between the
Partnership and Wells Real Estate Fund II ("Wells Fund II"). Wells Fund II
is a Georgia public limited partnership affiliated with the Partnership
through common general partners. The investment objectives of Wells Fund II
are substantially identical to those of the Partnership. As of March 31,
1996, the Partnership's equity interest in the Fund II-Fund II-OW Joint
Venture was approximately 5%, and the equity interest of Wells Fund II was
approximately 95%. The Partnership does not have control over the operations
of the joint venture; however, it does exercise significant influence.
Accordingly, investment in joint venture is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping
centers, two are office buildings and one is a restaurant. As of March 31,
1996, these properties were 93.38% occupied, compared to 95.87% at December
31, 1995 and 97.34% at December 31, 1994, 66.90% at December 31, 1993,
93.76% at December 31, 1992, and 93.57% at December 31, 1991.
8
<PAGE>
THE FOLLOWING DESCRIBES THE PROPERTIES IN WHICH THE PARTNERSHIP OWNS AN
INTEREST THROUGH THE FUND II-FUND II-OW JOINT VENTURE AS OF MARCH 31, 1996:
The Charlotte Property
----------------------
On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two-story
building containing approximately 70,752 net leasable square feet, located
on a 9.54 acre tract of land located in Charlotte, Mecklenburg County, North
Carolina (the"Charlotte Property") for a purchase price of $8,550,000.
While the entire project was originally leased under a net lease to IBM, IBM
elected not to exercise its second three year option to extend its lease and
vacated the building effective September 30, 1993, after paying a $425,000
lease termination fee.
On May 1, 1994, First Union Bank assumed occupancy of the Charlotte Property
under a lease which expires April 30, 2001. The principal terms of the lease
provide for First Union's sole tenancy of the project as a regional operations
center for the initial term of seven years. Because First Union Bank invested
approximately $1 million on tenant improvements at the Charlotte Property, a
lower rental rate was accepted for the first five years. There are presently
no plans for improvement or further development of the project.
The annual base rent during the initial term is $412,705 payable in equal
monthly installments of $34,392.08 during the first two years, annual base
rent of $454,651 payable in equal monthly installments of $37,887..58 during
the third year, annual base rent of $489,650 payable in equal monthly
installments of $40,804.17 during the fourth year and annual base rent of
$524,625 payable in equal monthly installments of $43,718.75 during the fifth
year. Rental rates during the remaining two years of the lease term will be
determined by market rates.
The occupancy rates at the Charlotte Property as of March 31, 1996, December
31, 1995, and 1994 were 100%, 0% for the year ended December 31, 1993, and
100% for 1992 and 1991.
The average effective annual rental per square foot at the Charlotte Property
was $6.49 for first quarter 1996, $5.83 for 1995, $3.88 for 1994, $28.12 for
1993 and $15.69 for 1992 and 1991. The higher effective annual rental rate
for 1993 is due to the payment of $425,000 in lease termination fees by IBM.
The Atrium
----------
On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint venture
(the "Fund II-Fund III 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. The investment objectives of
Wells Fund III are substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired 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 "The Atrium at Nassau Bay", (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium
were derived from capital contributions made to the Fund II-Fund III Joint
Venture by the Fund II-Fund II-OW Joint Venture and Wells Fund III in the
amount of $8,327,856 and $2,538,000, respectively, for total initial capital
contributions of $10,865,856. As of March 31, 1996, the Fund II-Fund II-OW
Joint Venture and Wells Fund III had made total capital contributions to the
Fund II-Fund III Joint Venture of approximately $8,330,000 and $4,448,000,
respectively, for the acquisition and development of the Atrium. The Fund II-
Fund II-OW Joint Venture holds approximately 66% equity interest in the Fund
II-Fund III Joint Venture and Wells Funds III holds approximately 34% equity
interest in the Fund II-Fund III Joint Venture.
9
<PAGE>
The Atrium (continued)
----------------------
The Atrium was first occupied in 1987 and contains approximately 119,000 net
leasable square feet. Each floor of the atrium is currently under a separate
lease to Lockheed Engineering and Science Company, Inc., a wholly-owned
subsidiary of the Lockheed Company, each of which leases have terms of
approximately eight years and expire June 30, 1996. The leases do not contain
any provisions for extension. The Fund II-Fund III Joint Venture is
responsible for operating expenses of up to $4.50 per square foot for the
first four years and $4.75 per square foot for the remaining term. The tenant
under each lease is required to pay certain operating expenses including
expenses relating to its share of the building in excess of $4.50 per square
foot for the first four lease years and $4.75 per square foot for the
remaining term. Under the terms of each of the leases, the tenant is
responsible for all maintenance and repair work, as well as all utilities,
taxes, insurance and similar expenses with respect to the Atrium in excess of
the amounts specified above. The leases for each of the four floors of the
building are identical, except as to their base monthly rentals. The leases
for the Atrium currently provide for base rent of $185,298 per month until
expiration of said leases in June 1996.
The occupancy rate of the Atrium Property was 100% and the average effective
annual rental per square foot at the Atrium Property was $17.47 for the first
quarter of 1996 and each of the five years from 1991 through 1995.
As set forth above, the lease with Lockheed will expire June 30, 1996, and
renewal is not anticipated at this time. The Partnership has responded to
various potential tenants regarding leasing portions of the Atrium, should
Lockheed not renew. In the event that Lockheed does not renew its lease and
the Partnership is unable to lease a substantial portion of the Atrium
Property at rates at least comparable to the lease rates currently being paid
under the Lockheed lease, the income generated from the Atrium Property could
decrease significantly following the expiration of the Lockheed lease on June
30, 1996. In addition, even if the Partnership is able to obtain leases with
new tenants for the Lockheed Project, such leases are likely to require
substantial tenant finish and refurbishment expenditures by the Partnership,
which could have the effect of substantially reducing future cash
distributions to Limited Partners.
The Brookwood Grill Property
----------------------------
On January 31, 1990, the Fund II-Fund II-OW Joint Venture 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"). The Brookwood Grill Property is located about two miles west of
Georgia Highway 400 and approximately 20 radial miles north of the Atlanta
Central Business District. The fund II-Fund II-OW Joint Venture paid
$1,848,561 including acquisition expenses for the 5.8 acre tract of
undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed the
Brookwood Grill, along with its interest as landlord under the lease agreement
referred to below, as a capital contribution to the Fund II-Fund III Joint
Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture had
expended approximately $2,128,000 for the land acquisition and development of
the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the
Brookwood Grill of Roswell, Inc. for the development of approximately 1.5
acres and the construction of a 7,440 square foot restaurant. The terms
of the lease call for an initial term of 9 years and 11 months, with two
additional 10-year option periods. The agreement calls for a base rental
of $217,006 per year for years 1 through 5 with a 15% increase over the
remainder of the initial term. Rental rates for all option periods will
be based on the prevailing market values and rates for those periods.
Under the terms of the lease, the Fund II-Fund III Joint Venture was
required to make certain improvements for the development and
construction of the restaurant building together with parking areas,
driveways, landscaping and other improvements described in the plans
10
<PAGE>
The Brookwood Grill Property (continued)
----------------------------------------
and specifications. The Fund II-Fund III Joint Venture has expended
approximately $1,100,000 for such improvements. In addition to the base rent
described above, the tenant is required to pay "additional rent" in amounts
equal to a 12% per annum return on all amounts expended for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% for the
first quarter of 1996 and the year ended December 31, 1995, 1994, 1993, and
1992. The average effective rental per square foot at the Brookwood Grill is
$30.21 for the first quarter 1996 and $30.21 for 1995, 1994, and 1993, and
$24.60 for 1992, the first year of occupancy.
As of March 31, 1996, the Fund II-Fund II-OW Joint Venture and Wells Fund III
had made total contributions to the Fund II-Fund III Joint Venture of
approximately $2,128,000 and $1,330,000 respectively for the acquisition and
development of the Brookwood Grill. The Fund II-Fund II-OW Joint Venture
holds an approximately 62% equity interest in the Brookwood Grill Property and
Wells Fund III holds an approximately 38% equity interest in the project.
On January 10, 1995, the Fund II-Fund III Joint Venture contributed the
remaining 4.3 undeveloped acres of land comprising the 880 Property to a new
joint venture, Fund II, III, VI, and VII Associates. This property is
described below.
Fund II, III, VI and VII Joint Venture/Holcomb Bridge Road Property
-------------------------------------------------------------------
On January 10, 1995, Fund II-Fund III Joint Venture, the Wells Real Estate
Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited partnership having
Leo F. Wells, III and Wells Partners, L.P., a Georgia limited partnership, as
general partners and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a
Georgia public limited partnership having Leo F. Wells, III and Wells
Partners, L.P., a Georgia limited partnership, as general partners, entered
into a Joint Venture Agreement known as Fund II, III, VI and VII Associates
("Fund II, III, VI, and VII Joint Venture"). Wells Partners, L.P. is a
private limited partnership having Wells Capital, Inc., a General Partner of
the Partnership, as its sole general partner. The investment objectives of
Wells Fund VI and Wells Fund VII are substantially identical to those of the
Partnership.
The Fund II-Fund III Joint Venture contributed approximately 4.3 acres of land
at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton
County, Georgia (the "Holcomb Bridge Road Property") including land
improvements with a book value of $1,729,116 to the Fund II, III, VI and VII
Joint Venture. Development is underway on two buildings containing a total of
approximately 49,500 square feet. As of March 31, 1996 leases have been signed
with Bertucci's Restaurant Corporation for 5,935 square feet, Air Touch
Cellular for 3,046 square feet and Townsend Tax for 1,389 square feet. Three
tenants occupied the 880 Holcomb Bridge Property as of March 31, 1996 for an
occupancy rate of 21%. The average effective annual rental was $0.81 per
square foot for the first quarter of 1996.
As of March 31, 1996, Fund II and Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an approximate 33% equity interest,
Wells Fund VI had contributed $982,691 toward the construction for an
approximate 19% equity interest, and Wells Fund VII had contributed $2,500,000
for an approximate 48% equity interest. As of March 31, 1996, the Partnership
held an approximate 19% equity interest through the Fund II-II-OW Joint
Venture's in the Fund II, III, VI and VII Joint Venture. The total cost to
develop the Holcomb Bridge Road Property excluding land, is currently
estimated to be approximately $4,000,000, and it is anticipated that the
remaining approximate $517,000 will be contributed $260,000 by Wells Fund VI
and $257,000 by Wells Fund VII.
11
<PAGE>
Tucker Property
---------------
The Tucker Property consists of a retail shopping center and a commercial
office building complex located in Tucker, DeKalb County, Georgia (the "Tucker
Property"). The retail shopping center at the Tucker Property contains
approximately 29,858 net leasable square feet. The commercial office space at
the Tucker Property, which is divided into seven separate buildings, contains
approximately 67,465 net leasable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker
Property which was acquired by a joint venture (the "Tucker Joint Venture")
originally between the Partnership and Wells Real Estate Fund I ("Wells Fund
I"). Wells Fund I is a Georgia public limited partnership affiliated with the
Partnership through common general partners. The investment objectives of
Wells Fund I are substantially identical to those of the Partnership. Upon
the formation of the Fund II-Fund II-OW Joint Venture in March 1988, the
Partnership contributed its joint venture interest in the Tucker Joint Venture
to the Fund II-Fund II-OW Joint Venture as a part of its capital contribution.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded the
cost of completing the Tucker Property through capital contributions which
have been paid as progressive stages of construction were completed. As of
March 31, 1996, Wells Fund I had contributed a total of $6,399,854, and the
Fund II-Fund II-OW Joint Venture had contributed a total of $4,826,015 to the
Tucker Property and the Fund II-Fund II-OW Joint Venture had an approximately
45% equity interest in the Tucker Property. As of March 31, 1995, Wells Fund
I had an approximately 55% equity interest in the Tucker Property and Fund II-
Fund II-OW Joint Venture had an approximately 45% equity interest in the
Tucker Property. As of March 31, 1996, the Tucker Property was 84% occupied
by 34 tenants.
There are no tenants in the project occupying ten percent or more of the
rentable square footage. The principal businesses, occupations, and
professions carried on in the building are typical retail shopping/commercial
office services.
The occupancy rate at the Tucker Property was 84% for the first quarter of
1996, and as of December 31, 83% in 1995, 96% in 1994, 89% in 1993, 80% in
1992 and 83% in 1991.
The average effective annual rental per square foot at the Tucker Property was
$11.76 for 1996, $12.61 for 1995, $12.63 for 1994, $11.37 for 1993, $11.37 for
1992, and $9.77 for 1991.
Cherokee Property
-----------------
The Cherokee Property consists of a retail chopping center known as "Cherokee
Commons Shopping Center" located in metropolitan Atlanta, Cherokee County,
Georgia (the "Cherokee Property"). The Cherokee Property consists of
approximately 103,755 net leasable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee
Property through a joint venture (the "Cherokee Joint Venture") between the
Wells Fund II-Fund II-OW and Wells Fund I.
12
<PAGE>
Cherokee Property (continued)
-----------------------------
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I, Wells
Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited
partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia
limited partnership, as general partners, and Wells Real Estate Fund VII, L.P.
("Wells Fund VII"), a Georgia public limited partnership having Leo F. Wells,
III and Wells Partners, L.P., a Georgia limited partnership, as general
partners entered into a joint venture agreement known as Fund I, II, II-OW, VI
and VII Associates (the "Fund I, II, II-OW, VI, VII Joint Venture"), which was
formed to own and operate the Cherokee Property. Wells Partners, L.P. is a
private limited partnership having Wells Capital, Inc., a General Partnership,
as its sole general partner. The investment objectives of Wells Fund I, Wells
Fund VI and Wells Fund VII are substantially identical to those of the
Partnership.
As of March 31, 1996, Wells Fund I had contributed property with a book value
of $2,139,900, the Fund II-Fund II-OW Joint Venture had contributed property
with a book value of $4,860,100, Wells Fund VI had contributed cash in the
amount of $953,718 and Wells Fund VII had contributed cash in the amount of
$953,798 to the Fund I, II, II-OW, VI, VII Joint Venture. As of March 31,
1996, the equity interests in the Cherokee Property were as follows: Wells
Fund I - 23%, Fund II-Fund II-OW Joint Venture - 55%, Wells Fund VI - 11% and
Wells Fund VII - 11%.
The Cherokee Property is anchored by a 67,115 square foot lease with Kroger
Food/Drug which expires in 2011. Kroger's original lease was for 45,528
square feet. In 1994, Kroger expanded to the current 67,115 square feet which
is approximately 65% of the total rentable square feet in the property. As of
March 31, 1996, the Cherokee Property was approximately 95% occupied by 19
tenants, including Kroger.
Kroger, a retail grocery chain, is the only tenant occupying ten percent or
more the rentable square footage. The other tenants in the shopping center
provide typical retail shopping services.
The Kroger lease provides for an annual rent of $392,915 which increased to
$589,102 on August 16, 1995 due to the expansion from 45,528 square feet to
67,115 square feet. The lease expires March 31, 2011 with Kroger entitled to
five successive renewals each for a term of five years.
The occupancy rate at the Cherokee Property was 95% for the first quarter of
1996, and as of December 31, 94% in 1995, 91% in 1994, 89% in 1993, 88% in
1992 and 85% in 1991.
The average effective annual rental per square foot at the Cherokee Property
was $8.58 for 1996, $7.50 for 1995, $5.33 for 1994, $6.47 for 1993, $6.46 for
1992, and $6.52 for 1991.
For further information regarding the foregoing properties, refer to the
Partnership's Form 10-K for the year ended December 31, 1995.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operation" for a summary and discussion of the operations of the properties
described above during the quarter ended March 31, 1996.
The following summarizes the condensed financial statements of the Fund II-
Fund II-OW Joint Venture:
13
<PAGE>
Following are the financial statements for Fund II and II-OW:
Fund II and II-OW
(A Georgia Joint Venture)
Balance Sheets
Assets
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 1996 December 31, 1995
-------------- -----------------
Real estate assets, at cost:
<S> <C> <C>
Land $ 1,367,856 $ 1,367,856
Building and improvements, less accumulated depreciation
of $1,612,701 in 1996 and $1,284,990 in 1995. 6,158,417 6,250,334
----------- -----------
Total real estate assets 7,526,273 7,618,190
Investment in joint ventures 18,946,310 19,207,510
Cash and cash equivalents 45,045 72,419
Due from affiliates 469,644 415,195
Accounts receivable 93,053 95,202
Prepaid expenses and other assets 99,086 97,894
----------- -----------
Total assets $27,179,411 $27,506,410
=========== ===========
</TABLE>
Liabilities and Partners' Capital
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Accounts payable and accrued expenses $ 0 $ 0
Partnership distributions payable 524,877 505,711
Due to affiliates 5,309 4,616
----------- -----------
Total liabilities 530,186 510,327
----------- -----------
Partners' Capital:
Wells Real Estate Fund II 25,233,148 25,561,588
Wells Real Estate Fund II-OW 1,416,077 1,434,495
----------- -----------
Total partners' capital 26,649,225 26,996,083
----------- -----------
Total liabilities and partners' capital $27,179,411 $27,506,410
=========== ===========
</TABLE>
14
<PAGE>
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Three Months Ended
------------------------------
March 31, 1996 March 31, 1995
-------------- --------------
Revenues:
Rental income $114,717 $114,717
Equity in income of joint ventures 208,444 276,671
Interest income 102 203
-------- --------
323,263 391,591
======== ========
Expenses:
Management and leasing fees 6,883 6,883
Lease acquisition costs 4,589 4,589
Operating costs - rental property 3,625 3,750
Depreciation 91,917 48,569
Legal and accounting 13,298 24,144
Computer costs 1,181 3,275
Partnership administration 23,751 29,363
-------- --------
145,244 120,573
-------- --------
Net income 178,019 271,018
-------- --------
Net income allocated to Wells Real Estate Fund II $168,566 $256,708
======== ========
Net income allocated to Wells Real Estate Fund II-OW $ 9,459 $ 14,310
======== ========
</TABLE>
15
<PAGE>
(2) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
---------------------------------------------------------------------------
OPERATION
---------
The following discussion and analysis should be read in conjunction with
the accompanying financial statements of the Partnership and notes thereto.
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
statement made in the Report, which include construction costs which 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 flow.
RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL CONDITIONS
---------------------------------------------------------
GENERAL
-------
As of March 31, 1996, the developed properties owned by the Fund II-Fund
II-OW Joint Venture, including the Holcomb Bridge Road Property which is
not yet fully developed, were 93% leased, as compared to 98% occupied as of
March 31, 1995.
Gross revenues of the Partnership were $9,453 for the quarter ended March
31, 1996, as compared to $14,310 for the quarter ended March 31, 1995. The
decrease in gross revenues for 1996 was due primarily to the decrease in
equity in income from the joint venture.
Administrative expenses of the Partnership are incurred at the joint
venture level. Depreciation expense increased from 1995 to 1996 due to
change in the estimated useful lives of buildings and improvements from 40
years to 25 years which was effective in fourth quarter 1995.
Distributions to the Partnership from Fund II-FundII-OW Joint Venture for
the three-month periods ended March 31, 1996 and March 31, 1995 were
$27,871 and $24,376 respectively.
The Partnership made cash distributions to the Limited Partners holding
Class A Units of $4.60 per unit for the first quarter of 1996 as compared
to $3.98 per unit for the first quarter of 1995. No cash distributions were
made by the Partnership to the Limited Partners holding Class B Units.
As of March 31, 1996, the Fund II-Fund II-OW Joint Venture had used all of
the remaining funds available for investment in properties.
The Partnership is required to maintain working capital reserves in an
amount equal to the cash operating expenses estimated by the General
Partners to be required to operate the Partnership for a six-month period
not to exceed 3% or be reduced below 1% of Limited Partners' capital
contributions. The General Partners believe that the Partnership's working
capital reserves will be adequate, and it is not anticipated that the
Partnership will have needs for additional capital or liquid assets.
16
<PAGE>
As of March 31, 1996, the Partnership owned interests in the following
properties through the Fund II-Fund II-OW Joint Venture:
<TABLE>
<CAPTION>
CHARLOTTE PROPERTY
- ------------------
Three Months Ended
-------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Revenues:
Rental income $114,717 $114,717
Expenses:
Depreciation 91,917 48,569
Management and leasing expenses 6,883 6,883
Other operating expenses 12,597 19,212
-------- --------
111,397 74,664
-------- --------
Net income $ 3,320 $ 40,053
======== --------
Occupied % 100% 100%
Partnership Ownership % 5.3% 5.3%
Cash generated to the Fund II-Fund II-OW
Joint Venture* $ 88,285 $ 77,358
Net income (loss) allocated to the Fund II-Fund
II-OW Joint Venture* $ 3,320 $ 40,053
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income was stable for the three months ended March 31, 1996 and 1995.
The decrease in net income for the first period of 1996 compared to 1995 was
primarily due to the increase in depreciation expense which resulted from the
change in estimated useful lives of buildings and improvements as previously
discussed under the "General" section of "Results of Operations and Changes in
Financial Conditions". Other operating expenses decreased from $19,212 for the
quarter ended March 31, 1995 to $12,597 for the same period of 1996 due
primarily to the decrease in administrative expenses for the period.
17
<PAGE>
THE ATRIUM
- ----------
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Revenues:
Rental income $519,836 $519,836
Interest income 7,686 6,263
-------- --------
527,522 526,099
-------- --------
Expenses:
Depreciation 168,478 117,029
Management and leasing expenses 35,690 35,690
Other operating expenses 85,942 70,704
-------- --------
290,110 223,423
-------- --------
Net income $237,412 $302,676
======== ========
Occupied % 100% 100%
Partnership Ownership % 3.5% 3.5%
Cash distributions to the Fund II-Fund II-OW
Joint Venture* $293,631 $310,278
Net income allocated to the Fund II-Fund
II-OW Joint Venture* $155,742 $198,555
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental and interest income remained stable for the three month period ended
March 31, 1996 and 1995. The increase in depreciation expense for the three
months ended March 31, 1996 over the same period of 1995 is due to the change in
the estimated useful lives of buildings and improvements as previously discussed
under the "General" section of "Results of Operations and Change in Financial
Conditions". The increase in operating expenses to $85,942 as of March 31, 1996
compared to $70,704 as of March 31, 1995 is primarily due to expenditures for
engineering and professional fees related to obtaining a new tenant for the
property.
The lease with Lockheed Company will expire on June 30, 1996, and renewal is not
anticipated at this time. The Partnership has responded to various potential
tenants regarding leasing portions of the Atrium should Lockheed not renew. In
the event that Lockheed does not renew its lease and the Partnership is unable
to lease a substantial portion of the Atrium Property at rates at least
comparable to the lease rates currently being paid under the Lockheed lease, the
income generated from the Atrium Property could decrease significantly following
the expiration of the Lockheed lease on June 30, 1996. In addition, even if the
Partnership is able to obtain leases with new tenants for the Lockheed Project,
such leases are likely to require substantial tenant finish and refurbishment
expenditures by the Partnership, which could have the effect of substantially
reducing future cash distributions to Limited Partners.
18
<PAGE>
THE BROOKWOOD GRILL PROPERTY
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
<S> <C> <C>
March 31, 1996 March 31, 1995
-------------- --------------
Revenues:
Rental income $56,188 $57,525
Equity in loss of joint venture (5,433) 0
------- -------
50,755 57,525
------- -------
Expenses:
Depreciation 13,503 14,665
Management and leasing expenses 6,968 7,290
Other operating expenses 17,889 10,545
------- -------
38,360 32,500
------- -------
Net income $12,395 $25,025
======= -------
Occupied % 100% 100%
Partnership Ownership % 3.3% 3.3%
Cash distributed to the Fund II-Fund II-OW
Joint Venture* $17,136 $24,479
Net income allocated to the Fund II-Fund
II-OW Joint Venture* $ 7,728 $15,603
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income has remained relatively stable for the three months ended March
31, 1996 as compared to 1995. The decrease in depreciation for the first
quarter of 1996 over the same period of 1995 is due primarily to the
contribution of land improvements to the Fund II-III-VI-VII Joint Venture. The
increase in operating expenses for the first quarter of 1996 over the same
period of 1995 is due primarily to a reimbursement to tenants of administrative
charges for the prior year. Net income decreased from $25,025 as of March 31,
1995 to $12,395 as of March 31, 1996 due primarily to the tenant reimbursement
discussed above and the equity loss generated by the Fund II, III, VI, VII Joint
Venture as discussed on the following page.
19
<PAGE>
880 HOLCOMB BRIDGE - FUND II, III, VI, VII
- -------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, 1996
-------------------
<S> <C>
Revenues:
Rental income $ 9,421
Expenses:
Depreciation 6,120
Management and leasing expenses 1,051
Other operating expenses 18,839
---------
26,010
---------
Net loss ($16,589)
=========
Occupied % 21%
Partnership Ownership % in the Fund II-Fund III Joint Venture 1.08%
Cash distribution to the Fund II-Fund III Joint Venture $ 0
Net loss allocated to the Fund II-Fund III Joint Venture ($ 5,433)
</TABLE>
The Partnership holds a 1.08% ownership in the Fund II-Fund III Joint Venture.
In January 1995, the Fund II-Fund III Joint Venture contributed 4.3 acres of
land and land improvements at 880 Holcomb Bridge Road (the "Holcomb Bridge Road
Property") to the Fund II, III, VI, and VII Joint Venture. Development is being
completed on two buildings with a total of approximately 49,500 square feet.
As of March 31, 1996, three tenants are occupying approximately 10,370 square
feet of space in the retail building under leases of varying lengths. Since the
property was not developed as of March 31, 1995, no comparative figures are
available for the quarter.
As of March 31, 1996, the Fund II-Fund III Joint Venture contributed $1,729,116
in land and improvements for an approximate 32.75% equity interest, Wells Fund
VI contributed $982,691 toward the construction for an approximate 19.48% equity
interest, and Wells Fund VII contributed $2,500,000 for an approximate 47.77%
equity interest. The total cost to develop the Holcomb Bridge Road Project is
currently estimated to be approximately $4,000,000, excluding land. It is
anticipated that of the remaining cost of approximately $517,000, $260,000 will
be contributed by Wells Fund VI and $257,000 by Wells Fund VII for an
anticipated equity interest of 48.1% by Wells Fund VII, 30.2% by the Fund II-
Fund III Joint Venture and 21.7% by Wells Fund VI.
20
<PAGE>
TUCKER PROPERTY
- ---------------
<TABLE>
<CAPTION>
Three Months Ended
--------------------
<S> <C> <C>
March 31, 1996 March 31, 1995
-------------- --------------
Revenues:
Rental income $286,147 $321,964
Interest income 252 1,351
-------- --------
286,399 323,315
-------- --------
Expenses:
Depreciation 103,800 60,007
Management and leasing expenses 32,087 35,791
Other operating expenses 115,916 162,578
-------- --------
251,803 258,376
-------- --------
Net income $ 34,596 $ 64,939
======== --------
Occupied % 83% 96%
Partnership Ownership % 2.4% 2.4%
Cash distributions to the Fund II-Fund II-OW
Joint Venture* $ 61,674 $ 56,782
Net income allocated to the Fund II-Fund
II-OW Joint Venture* $ 15,537 $ 29,164
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income decreased from 1995 to 1996 due primarily to decreased tenant
occupancy. Operating expenses decreased in 1996 over 1995 due to decrease in
utilities and other repairs and maintenance. The increase in depreciation
expense for 1996 as compared to 1995 is a result of the change in the estimated
useful lives of buildings and improvements as previously discussed under the
"General" section of "Results of Operation and Changes in Financial Conditions".
Net income of the property decreased to $34,596 in 1996 from $64,939 in 1995 due
to increased depreciation and decreased occupancy as discussed above.
The property was 83% leased as of March 31, 1996 as compared to 96% as of March
31, 1995 due to three tenants vacating space totaling 9,884 square feet.
21
<PAGE>
CHEROKEE COMMONS SHOPPING CENTER
- --------------------------------
<TABLE>
<CAPTION>
Three Months Ended
--------------------
<S> <C> <C>
March 31, 1996 March 31, 1995
-------------- --------------
Revenues:
Rental income $222,621 $145,838
Interest income 19 25
-------- --------
222,640 145,863
-------- --------
Expenses:
Depreciation 107,183 45,527
Management and leasing expenses 12,634 7,068
Other operating expenses 48,872 45,225
-------- --------
168,689 97,818
-------- --------
Net income $ 53,951 $ 48,045
======== --------
Occupied % 95% 94%
Partnership Ownership % 2.9% 3.7%
Cash distributions to the Fund II-Fund II-OW
Joint Venture* $ 97,203 $ 24,580
Net income allocated to the Fund II-Fund II-OW
Joint Venture* $ 29,436 $ 33,348
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income increased in 1996 over 1995 due to the Kroger expansion which was
completed in November, 1994. However, the additional rent was billed
retroactively and paid in September, 1995. The increase in depreciation expense
for 1996 as compared to 1995 is a result of the change in the estimated useful
lives of buildings and improvements as previously discussed under the "General"
section of "Results of Operations and Changes in Financial Conditions".
Management and leasing expenses increased in 1996 as compared to 1995 due to the
increased revenue. Net income of the property increased to $53,951 in 1996 from
$48,045 in 1995 due to the increase in revenue.
A lease amendment executed with Kroger in 1994 provided for the expansion of its
existing store at the Cherokee Commons Shopping Center from 45,528 square feet
to 66,918 square feet. In November, 1994, construction was completed on the
Kroger expansion and remodeling of the center. The total cost for both the
Kroger expansion and remodeling of the Center was $2,807,367. The costs of this
expansion were funded in the following amounts: Wells Fund I - $94,679, the
Fund II-Fund II-OW Joint Venture - $805,092 Wells Fund VI - $953,798, and Wells
Fund VII -$953,798 as of March 31, 1996. Due to these additional investments,
the Partnership's ownership percentage in the Cherokee Commons Shopping Center
decreased from 3.7% in 1995 to 2.9% as of March 31, 1996. Wells Fund VI and
Wells Fund VII did not make their respective capital contributions until August,
1995.
22
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6(B).No reports on Form 8-K were filed during the first quarter of 1996.
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-OW
(Registrant)
Dated: May 13, 1996 By: /s/Leo F. Wells, III
---------------------------------
Leo F. Wells, III, as Individual
General Partner and as President,
Sole Director and Chief Financial
Officer of Wells Capital, Inc., the
Corporate General Partner
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 890
<SECURITIES> 1,416,077
<RECEIVABLES> 27,871
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,444,838
<CURRENT-LIABILITIES> 28,360
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,416,478
<TOTAL-LIABILITY-AND-EQUITY> 1,444,838
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
