<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 June 30, 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 (I.R.S. Employer Identification No.)
jurisdiction of
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
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and
December 31, 1995....................................... 3
Statements of Income for the Three Months and Six Months
Ended June 30, 1996 and 1995............................. 4
Statements of Partners' Capital for the Year Ended
December 31, 1995 and the Six Months
Ended June 30, 1996....................................... 5
Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995.............................. 6
Condensed Notes to Financial Statements................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 18
PART II. OTHER INFORMATION.................................................. 26
</TABLE>
2
<PAGE>
WELLS REAL ESTATE FUND II-OW
(A Georgia Public Limited Partnership)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
INVESTMENT IN JOINT VENTURE (Note 2) $1,395,459 $1,434,495
CASH AND CASH EQUIVALENTS 501 891
DUE FROM AFFILIATE 25,492 26,854
---------- ----------
Total Assets $1,421,452 $1,462,240
========== ==========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIABILITIES:
<S> <C> <C>
Withholdings and accounts payable $ 0 $ 385
Partnership distributions payable 25,592 26,959
---------- ----------
Total liabilities 25,592 27,344
---------- ----------
PARTNERS' CAPITAL:
Limited Partners:
Class A - 6,062 units $ 1,368,575 $1,372,620
Class B - 1,626 units 27,285 62,276
---------- ----------
Total partners' capital 1,395,860 1,434,896
---------- ----------
Total liabilities and
partners' capital $1,421,452 $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
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------- ----------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues:
Equity in income of joint venture
(Note 2) $ 4,874 $ 17,700 $ 14,327 $ 32,010
-------- -------- -------- --------
Expenses:
Partnership administration 0 0 0 248
-------- -------- -------- --------
Net income $ 4,874 $ 17,700 $ 14,327 $ 31,762
======== ======== ======== ========
Net income allocated to
Class A Limited Partners $ 22,374 $ 28,752 $ 49,318 $ 53,844
======== ======== ======== ========
Net loss allocated to
Class B Limited Partners $(17,500) $(11,052) $(34,991) $(22,082)
======== ======== ======== ========
Net income per Class A
Limited Partner Unit $ 3.69 $ 4.74 $ 8.14 $ 8.88
======== ======== ======== ========
Net loss per Class B
Limited Partner Unit $ (10.76) $ (6.80) $ (21.52) $ (13.58)
======== ======== ======== ========
Cash distribution per Class A
Limited Partner Unit $ 4.20 $ 4.39 $ 8.80 $ 8.37
======== ======== ======== ========
</TABLE>
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
SIX MONTHS ENDED JUNE 30, 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 49,318 0 (34,991) 14,327
Partnership distributions 0 (53,363) 0 0 (53,363)
----- ---------- ----- -------- ----------
BALANCE - June 30, 1996 6,062 $1,368,575 1,626 $ 27,285 $1,395,860
===== ========== ===== ======== ==========
</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>
June 30, 1996 June 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,327 $ 31,762
-------- --------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in income of joint venture (14,327) (32,010)
Distributions received from joint venture 54,725 49,334
Distributions to partners from accumulated earnings (54,725) (49,576)
Changes in assets and liabilities:
Withholdings and accounts payable (390) 753
Due to affiliate 0 (14,824)
-------- --------
Total adjustments (14,717) (46,323)
-------- --------
Net cash used in operating activities $ (390) $(14,561)
-------- --------
Net decrease in cash and cash equivalents $ (390) $(14,561)
Cash and cash equivalents, beginning of year 891 14,703
-------- --------
Cash and cash equivalents, end of period $ 501 $ 142
======== ========
</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 June 30, 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) an office/retail center currently being developed 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.
7
<PAGE>
(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.
(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.
8
<PAGE>
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 June 30,
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, one is a retail shopping
center, two are office buildings, one is an office/retail center, one is an
office/retail/restaurant center and one is a restaurant. As of June 30,
1996, these properties were 92.08% 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.
The following describes the properties in which the Partnership owns an
interest through the Fund II-Fund II-OW Joint Venture as of June 30, 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 in 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
9
<PAGE>
The Charlotte Property (continued)
- ----------------------------------
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 for the quarter ended June 30,
1996 was 100% which was the rate for the same quarter in the five previous
years.
The average effective annual rental per square foot at the Charlotte Property
was $6.49 for second 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 Georgia public 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 June 30, 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.
The Atrium was first occupied in 1987 and contains approximately 119,000 net
leasable square feet. Each floor of the atrium was originally leased under a
separate lease to Lockheed Engineering and Science Company, Inc., a wholly-owned
subsidiary of the Lockheed Company, each of which leases had terms of
approximately eight years and expired June 30, 1996.
10
<PAGE>
The Atrium (continued)
- ----------------------
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 second
quarter of 1996 and each of the five years from 1991 through 1995.
As set forth above, the lease with Lockheed Company expired on June 30, 1996 and
although the Partnership has responded to various potential tenants regarding
leasing portions of the Atrium, no leases have been signed as of June 30, 1996.
It is anticipated that when leases are obtained for the Atrium, rental rates
will be lower than those paid by the previous tenant, and income could decrease
significantly under these new leases. In addition, such leases are likely to
require substantial tenant finish and refurbishment expenditures by the
Partnership which could further reduce future cash distribution 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 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.
11
<PAGE>
The Brookwood Grill Property (continued)
----------------------------------------
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% for the
second quarter of 1996 and the quarters ended June 30, 1995, 1994, 1993, and
1992. The average effective annual rental per square foot at the Brookwood
Grill is $30.21 for the second quarter 1996 and $30.21 for 1995, 1994, and 1993,
and $24.60 for 1992, the first year of occupancy.
As of June 30, 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.
In January 1995, the Fund II - Fund III Joint Venture contributed to the Fund
II, III, VI and VII Joint venture approximately 4.3 acres of land at the
intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County,
Georgia (the "Holcomb Bridge Property") including land improvements.
Development is almost completed on two buildings containing a total of
approximately 49,500 square feet. As of June 30, 1996, leases have been signed
with Bertucci's Restaurant Corporation for 5,935 square feet, Air Touch Cellular
for 3,046 square feet, Townsend Tax for 1,389 square feet, and Coldwell Banker,
4,801 square feet. Three tenants occupied the 880 Holcomb Bridge property as of
June 30, 1996 for an occupancy rate of 21%. The average effective annual rental
was $.0.81 per square foot for the second quarter of 1996.
As of June 30, 1996, Fund II - Fund III Joint Venture contributed $1,729,116 in
land and land improvements for an approximate 30.7% equity interest, Wells Fund
VI contributed $1,112,691 to the joint venture for an approximate 20.6% equity
interest, and Wells
12
<PAGE>
Fund II, III, VI and VII Joint Venture/Holcomb Bridge Road Property (continued)
- -------------------------------------------------------------------------------
Fund VII contributed $2,630,000 to the joint venture for an approximate 48.7%
equity interest. The total costs to develop the Holcomb Bridge Road Property is
currently estimated to be approximately $4,000,000, excluding land. It is
anticipated that of the remaining cost of approximately $257,000, $131,300 will
be contributed by Wells Fund VI and $125,700 by Wells Fund VII for an
anticipated equity interest of 48% by Wells Fund VII, 30% by the Fund II - Fund
III Joint Venture and 22% by Wells Fund VI. Wells Fund VI and Wells Fund VII
have reserved sufficient funds for this purpose.
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 June 30, 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. As
of June 30, 1996, 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 June 30, 1996, the Tucker
Property was 75% occupied by 31 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 for the quarters ended June 30 was 75%
in 1996, 96% in 1995, 93% in 1994, 87% in 1993, and 82% in 1992.
The average effective annual rental per square foot at the Tucker Property was
$11.14 for 1996, $12.61 for 1995, $12.63 for 1994, $11.37 for 1993, and $11.37
for 1992.
13
<PAGE>
Cherokee Property
- -----------------
The Cherokee Property consists of a retail shopping 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.
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 June 30, 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 June 30, 1996, the equity
interests in the Cherokee Property were approximately as follows: Wells Fund I
- - 24%, Fund II-Fund II-OW Joint Venture - 54%, 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 June
30, 1996, the Cherokee Property was approximately 95% occupied by 20 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 at the same rental rate
as the original lease.
14
<PAGE>
Cherokee Property (continued)
-----------------------------
The occupancy rate at the Cherokee Property for the quarters ended June 30, 1996
was 95% in 1996 and 1995, 86% in 1994, 88% in 1993, and 87% in 1992.
The average effective annual rental per square foot at the Cherokee Property was
$8.61 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 June 30, 1996.
The following summarizes the condensed financial statements of the Fund II-Fund
II-OW Joint Venture:
15
<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>
June 30, 1995 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 $1,704,617 in 1996 and $1,382,129 in 1995. 6,066,500 6,250,334
----------- -----------
Total real estate assets 7,434,356 7,618,190
Investment in joint ventures 18,650,258 19,207,510
Cash and cash equivalents 30,042 72,419
Due from affiliates 432,550 415,195
Accounts receivable 102,484 95,202
Prepaid expenses and other assets 98,683 97,894
----------- -----------
Total assets $26,748,373 $27,506,410
=========== ===========
</TABLE>
Liabilities and Partners' Capital
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,769 $ 0
Partnership distributions payable 480,078 505,711
Due to affiliates 5,582 4,616
----------- -----------
Total liabilities 487,429 510,327
----------- -----------
Partners' Capital:
Wells Real Estate Fund II 24,865,484 25,561,588
Wells Real Estate Fund II-OW 1,395,460 1,434,495
----------- -----------
Total partners' capital 26,260,944 26,996,083
----------- -----------
Total liabilities and partners' capital $26,748,373 $27,506,410
=========== ===========
</TABLE>
16
<PAGE>
Fund II and II-OW
(A Georgia Joint Venture)
Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $114,717 $114,717 $229,434 $229,434
Equity in income of joint ventures 136,497 305,151 344,941 581,822
Interest income 100 114 202 317
-------- -------- -------- --------
251,314 419,982 574,577 811,573
-------- -------- -------- --------
Expenses:
Management and leasing fees 6,883 6,883 13,766 13,766
Lease acquisition costs 4,588 4,588 9,177 9,177
Operating costs - rental property 7,486 15,828 11,111 19,578
Depreciation 91,916 48,570 183,833 97,139
Legal and accounting 25,150 (2,007) 38,448 22,137
Computer costs 622 1,340 1,803 4,615
Partnership administration 22,872 12,967 46,623 42,330
-------- -------- -------- --------
159,517 88,169 304,761 208,742
-------- -------- -------- --------
Net income $ 91,797 $331,813 $269,816 $602,831
======== ======== ======== ========
Net income allocated to
Wells Real Estate Fund II $86,923 $314,113 $255,489 $570,820
======= ======== ======== ========
Net income allocated to
Wells Real Estate Fund II-OW $ 4,874 $ 17,700 $ 14,327 $ 32,010
======= ======== ======== ========
</TABLE>
17
<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 June 30, 1996, the developed properties owned by the Fund II-Fund II-
OW Joint Venture, including the Holcomb Bridge Road Property which is
substantially complete, were 92% occupied, as compared to 98% occupied as
of June 30, 1995.
Gross revenues of the Partnership were $4,874 for the quarter ended June
30, 1996, as compared to $17,700 for the quarter ended June 30, 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. Accounting expenses increased for the three and six month
periods ended June 30, 1996 as compared to the same periods of 1995 due to
payment of fees for tax preparation and additional audit fees due to
increased regulatory requirements imposed by the SEC. Depreciation expenses
increased from 1995 to 1996 due to the change in the estimated useful lives
of buildings and improvements from 40 years to 25 years which was effective
December 31, 1995.
Distributions to the Partnership from Fund II-Fund II-OW Joint Venture for
the three-month periods ended June 30, 1996 and June 30, 1995 were $25,492
and $26,621 respectively.
The Partnership made cash distributions to the Limited Partners holding
Class A Units of $4.20 per unit for the second quarter of 1996 as compared
to $4.39 per unit for the second quarter of 1995. No cash distributions
were made by the Partnership to the Limited Partners
18
<PAGE>
holding Class B Units. Cash distributions for the second quarter of 1996 were
made from investment income and do not represent a return of capital.
As of June 30, 1996, the Fund II-Fund II-OW Joint Venture had used all of the
remaining funds available for investment in properties.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
19
<PAGE>
As of June 30, 1996, the Partnership owned interests in the following properties
through the Fund II-Fund II-OW Joint Venture:
Charlotte Property
- ------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $114,717 $114,717 $229,434 $229,434
Expenses:
Depreciation 91,916 48,570 183,833 97,139
Management and leasing expenses 16,060 16,060 22,943 22,943
Other operating expenses (1,485) 366 11,112 19,578
-------- -------- -------- --------
106,491 64,996 217,888 139,660
-------- -------- -------- --------
Net income $ 8,226 $ 49,721 $ 11,546 $ 89,774
======== ======== ======== ========
Occupied % 100% 100% 100% 100%
Partnership Ownership % 5.3% 5.3% 5.3% 5.3%
Cash generated to the Fund II-
Fund II-OW Joint Venture* $100,181 $ 94,776 $188,466 $176,446
Net income allocated to the
Fund II-Fund II-OW Joint Venture* $ 8,226 $ 49,721 $ 11,546 $ 89,774
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income was stable for the three and six months ended June 30, 1996 and
1995. The decrease in net income for the three and six month periods of 1996
compared to 1995 was primarily due to the increase in depreciation expenses
which resulted from the change in fourth quarter, 1995 in estimated useful lives
of buildings and improvements previously discussed under the "General" section
of "Results of Operations and Changes in Financial Conditions". Cash generated
to the Joint Venture for the three month and six month periods ended June 30,
1996 increased over the same periods of 1995 due primarily to decreased
administrative expenses at the property.
20
<PAGE>
<TABLE>
<CAPTION>
The Atrium
- ----------
Three Months Ended Six Months Ended
------------------------------ ----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $519,837 $519,837 $1,039,673 $1,039,073
Interest income 7,632 8,841 15,318 15,104
-------- -------- ---------- ----------
527,469 528,678 1,054,991 1,054,777
-------- -------- ---------- ----------
Expenses:
Depreciation 168,619 117,029 337,097 234,058
Management and leasing expenses 35,690 35,690 71,380 71,380
Other operating expenses 147,609 61,323 233,551 132,027
-------- -------- ---------- ----------
351.918 214,042 642,028 437,465
-------- -------- ---------- ----------
Net income $175,551 $314,636 $ 412,963 $ 617,312
======== ======== ========== ==========
Occupied % 100% 100% 100% 100%
Partnership Ownership % 3.5% 3.5% 3.5% 3.5%
Cash distributions to the Fund II-
Fund II-OW Joint Venture* $267,288 $278,764 $ 560,919 $ 589,042
Net income allocated to the
Fund II-Fund II-OW Joint Venture* $115,162 $206,402 $ 270,904 $ 404,957
</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 and six month periods
ended June 30, 1996 and 1995. The increases in depreciation expenses for the
three and six months ended June 30, 1996 over the same periods of 1995 are 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
Changes in Financial Conditions". The increase in operating expenses to
$147,609 for the three month period ended June 30, 1996, compared to the same
three month period of 1995, is primarily due to reimbursement paid to tenant of
excess expenses upon termination of the lease with Lockheed. Operating expenses
increased for the six month period of 1996 over 1995 for the reason mentioned
above and additional expenditures in the first quarter of 1996 for engineering
and professional fees relating to attempting to obtain a new tenant for the
property.
The lease with Lockheed Company expired on June 30, 1996, and although the
Partnership has responded to various potential tenants regarding leasing
portions of the Atrium, no leases have been signed as of June 30, 1996. It is
anticipated that when leases are obtained for the Atrium, rental rates will be
lower than those paid by the previous tenant, and income could decrease
significantly under these new leases. In addition, such leases are likely to
require further tenant finish and refurbishment expenditures by the Partnership
which could substantially reduce future cash distributions to Limited Partners.
21
<PAGE>
The Brookwood Grill Property
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 56,187 $54,850 $112,375 $112,375
Equity loss of joint venture (20,990) 0 (26,423) 0
-------- ------- -------- --------
35,197 54,850 85,952 112,375
-------- ------- -------- --------
Expenses:
Depreciation 13,503 14,665 27,006 29,330
Management and leasing expenses 5,727 6,989 12,695 14,279
Other operating expenses 17,387 8,286 35,276 18,831
-------- ------- -------- --------
36,617 29,940 74,977 62,440
-------- ------- -------- --------
Net (loss) income $ (1,420) $24,910 $ 10,975 $ 49,935
======== ======= ======== ========
Occupied % 100% 100% 100% 100%
Partnership Ownership % 3.31% 3.31% 3.31% 3.31%
Cash distributions to the Fund II-
Fund II-OW Joint Venture* $ 21,982 $24,407 $ 39,118 $ 48,886
Net income (loss) allocated to the
Fund II-Fund II-OW Joint Venture* $ (885) $15,531 $ 6,843 $ 31,134
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income remained relatively stable for the three and six month periods
ended June 30, 1996 and 1995. The decrease in depreciation for the three and
six month periods ended June 30 is due primarily to the contribution of land and
land improvements to the Fund II-III-VI-VII Joint Venture. The increase in
operating expenses for the three month period ended June 30, 1996, over the same
three months of 1995, is primarily due to decreased reimbursements from tenant
for property taxes. The increase in other operating expenses for the six months
ended June 30, 1996, over the same period of 1995, is the result of decreased
property tax reimbursements stated above and a reimbursement to the tenant in
first quarter 1996 of administrative charges paid in 1995. Net income decreased
for both the three and six month periods of 1996 compared to 1995 for the
reasons cited above and due to the net loss generated by the Fund II, III, VI,
VII Joint Venture.
22
<PAGE>
<TABLE>
<CAPTION>
Holcomb Bridge Road Property/Fund II, III, VI, VII
- --------------------------------------------------
Three Months Ended Six Month Ended
------------------- ----------------
June 30, 1996 June 30, 1996
------------------- ----------------
<S> <C> <C>
Revenues:
Rental income $ 43,754 $ 53,175
Expenses:
Depreciation 77,822 83,942
Management and leasing expenses 5,029 6,080
Other operating expenses 28,894 47,733
-------- --------
111,745 137,755
-------- --------
Net loss $(67,991) $(84,580)
======== ========
Occupied % 20.9% 20.9%
Partnership Ownership % in the Fund II, III, VI, VII
Joint Venture 1.02% 1.02%
Cash distribution to the Fund II-Fund III Joint Venture* $ 0 $ 0
Net loss allocated to the Fund II-Fund III Joint Venture* $(20,990) $(26,423)
</TABLE>
The Partnership holds a 3.31% 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 June 30, 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 June 30, 1995, no comparative figures are
available for the quarter.
As of June 30, 1996, the Fund II-Fund III Joint Venture contributed $1,729,116
in land and improvements for an approximate 32.7% equity interest, Wells Fund VI
contributed $982,691 for an approximate 19.5% equity interest, and Wells Fund
VII contributed $2,500,000 for an approximate 47.8% 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 $257,000, $131,300 will be contributed by Wells
Fund VI and $125,700 by Wells Fund VII for an anticipated equity interest of
48.7% by Wells Fund VII, 30.7% by the Fund II-Fund III Joint Venture and 20.6%
by Wells Fund VI. Wells Fund VI and Wells Fund VII have reserved sufficient
funds for this purpose.
23
<PAGE>
<TABLE>
<CAPTION>
Tucker Property
- ---------------
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $255,854 $322,051 $542,001 $644,015
Interest income 127 1,099 379 2,449
-------- -------- -------- --------
255,981 323,150 542,380 646,464
-------- -------- -------- --------
Expenses:
Depreciation 104,428 60,007 208,228 120,013
Management and leasing expenses 30,297 32,009 62,384 67,800
Other operating expenses 140,584 135,553 256,500 298,131
-------- -------- -------- --------
275,309 227,569 527,112 485,944
-------- -------- -------- --------
Net income (loss) $(19,328) $ 95,581 $ 15,268 $160,520
======== ======== ======== ========
Occupied % 75% 96% 75% 96%
Partnership Ownership % 2.39% 2.39% 2.39% 2.39%
Cash distributions to the Fund II-
Fund II-OW Joint Venture* $ 36,458 $ 69,141 $ 98,132 $125,923
Net income (loss) allocated to the
Fund II-Fund II-OW Joint Venture* $ (8,680) $ 42,925 $ 6,857 $ 72,089
</TABLE>
*The Partnership holds a 5% ownership in the Fund II-Fund II-OW Joint Venture.
Rental income decreased in 1996 from 1995 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
expenses for 1996 as compared to 1995 are 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 in 1996 as compared to 1995
due to increased depreciation and decreased occupancy as discussed above.
The property was 75% leased, as of June 30, 1996, as compared to 96% leased, as
of June 30, 1995, due to three tenants vacating space totaling 9,884 square
feet. Although no leases have been signed, every effort is being made to re-
lease this space.
24
<PAGE>
<TABLE>
<CAPTION>
Cherokee Commons Shopping Center
- --------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $223,987 $147,679 $446,608 $293,517
Interest income 18 70 37 95
-------- -------- -------- --------
224,005 147,749 446,645 293,612
-------- -------- -------- --------
Expenses:
Depreciation 107,461 45,717 214,644 91,244
Management and leasing expenses 13,276 7,401 25,910 14,469
Other operating expenses 46,632 36,597 95,504 81,820
-------- -------- -------- --------
167,369 89,715 336,058 187,533
-------- -------- -------- --------
Net income $ 56,636 $ 58,034 $110,587 $106,079
======== ======== ======== ========
Occupied % 95% 95% 95% 95%
Partnership Ownership % 2.90% 3.69% 2.90% 3.69%
Cash distributions to the Fund II-
Fund II-OW Joint Venture* $106,822 $ 56,758 $204,025 $ 81,339
Net income allocated to the
Fund II-Fund II-OW Joint Venture* $ 30,901 $ 40,293 $ 60,337 $ 73,641
</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 increases in depreciation
expenses for 1996 as compared to 1995 are the 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. Other operating expenses increased in 1996
due to increased repairs and maintenance. Net income of the property remained
relatively stable due to the increase in revenue which was offset by the
increase in expenses.
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 June 30, 1996. Due to these additional investments,
the Partnership's ownership percentage in the Cherokee Commons Shopping Center
decreased from 3.69% in 1995 to 2.90% as of June 30, 1996. Wells Fund VI and
Wells Fund VII did not make their respective capital contributions until August,
1995.
25
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6(B).No reports on Form 8-K were filed during the second 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: August 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
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 501
<SECURITIES> 1,395,459
<RECEIVABLES> 25,492
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,421,452
<CURRENT-LIABILITIES> 25,592
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,395,860
<TOTAL-LIABILITY-AND-EQUITY> 1,421,452
<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>
