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, 2002 or ---------------------------------------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------ --------------------------- Commission file number 0-25739 ---------------------------------------------------------- WELLS REAL ESTATE INVESTMENT TRUST, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 58-2328421 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 6200 The Corners Pkwy., 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 --- ---
FORM 10-Q WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets--March 31, 2002 and December 31, 2001 3 Statements of Income for the Three Months Ended March 31, 2002 and 2001 4 Statements of Shareholders' Equity for the Year Ended December 31, 2001 and the Three Months Ended March 31, 2002 5 Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 6 Condensed Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION 18 </TABLE> - 2 -
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> March 31, December 31, 2002 2001 ------------ ------------ <S> <C> <C> REAL ESTATE ASSETS, at cost: Land $ 94,273,542 $ 86,246,985 Building and improvements, less accumulated depreciation of $30,558,906 in 2002 and $24,814,454 in 2001 563,639,005 472,383,102 Construction in progress 8,827,823 5,738,573 ------------ ------------ Total real estate assets 666,740,370 564,368,660 INVESTMENT IN JOINT VENTURES 76,811,543 77,409,980 CASH AND CASH EQUIVALENTS 187,022,573 75,586,168 INVESTMENT IN BONDS 22,000,000 22,000,000 ACCOUNTS RECEIVABLE 7,697,487 6,003,179 DEFERRED PROJECT COSTS 7,739,896 2,977,110 DEFERRED LEASE ACQUISITION COSTS, net 1,868,674 1,525,199 DUE FROM AFFILIATES 1,820,241 1,692,727 PREPAID EXPENSES AND OTHER ASSETS, net 1,584,942 718,389 DEFERRED OFFERING COSTS 244,761 0 ------------ ------------ Total assets $973,530,487 $752,281,412 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Notes payable $ 11,071,586 $ 8,124,444 Obligation under capital lease 22,000,000 22,000,000 Accounts payable and accrued expenses 8,570,735 8,727,473 Dividends payable 3,657,498 1,059,026 Due to affiliates 990,923 2,166,161 Deferred rental income 1,567,241 661,657 ------------ ------------ Total liabilities 47,857,983 42,738,761 ------------ ------------ MINORITY INTEREST OF UNIT HOLDER IN OPERATING PARTNERSHIP 200,000 200,000 SHAREHOLDERS' EQUITY: ------------ ------------ Common shares, $.01 par value; 125,000,000 shares authorized, 109,331,764 shares issued and 108,472,526 shares outstanding at March 31, 2002, and 83,761,469 shares issued and 83,206,429 shares outstanding at December 31, 2001 1,093,317 837,614 Additional paid-in capital 966,577,500 738,236,525 Cumulative distributions in excess of earnings (33,555,824) (24,181,092) Treasury stock, at cost, 859,238 shares at March 31, 2002 and 555,040 shares at December 31, 2001 (8,592,377) (5,550,396) Other comprehensive loss (50,112) 0 ------------ ------------ Total shareholders' equity 925,472,504 709,342,651 ------------ ------------ Total liabilities and shareholders' equity $973,530,487 $752,281,412 ============ ============ The accompanying condensed notes are an integral part of these consolidated financial statements. </TABLE> - 3 -
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, March 31, 2002 2001 ----------- ----------- REVENUES: Rental income $16,738,163 $ 9,860,085 Equity in income of joint ventures 1,206,823 709,713 Interest income 1,113,715 99,915 Take out fee 134,102 0 ----------- ----------- 19,192,803 10,669,713 ----------- ----------- EXPENSES: Depreciation 5,744,452 3,187,179 Management and leasing fees 899,495 565,714 Operating costs, net of reimbursements 624,698 1,091,185 General and administrative 529,031 175,107 Interest expense 440,001 2,160,426 Amortization of deferred financing costs 175,462 214,757 ----------- ----------- 8,413,139 7,394,368 ----------- ----------- NET INCOME $10,779,664 $ 3,275,345 =========== =========== EARNINGS PER SHARE Basic and diluted $ 0.11 $ 0.10 =========== =========== The accompanying condensed notes are an integral part of these consolidated financial statements. - 4 -
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 AND FOR THE THREE MONTHS ENDED MARCH 31, 2002 <TABLE> <CAPTION> Cumulative Common Common Additional Distributions Treasury Stock Stock Paid-In in Excess of Retained Stock Shares Amount Capital Earnings Earnings Shares ----------- ---------- ------------ -------------- ------------ -------- <S> <C> <C> <C> <C> <C> <C> BALANCE, December 31, 2000 31,509,807 $ 315,097 $275,573,339 $ (9,133,855) $ 0 (141,297) Issuance of common stock 52,251,662 522,517 521,994,103 0 0 0 Treasury stock purchased 0 0 0 0 0 (413,743) Net income 0 0 0 0 21,723,967 0 Dividends ($.76 per share) 0 0 0 (15,047,237) (21,723,967) 0 Sales commissions and discounts 0 0 (49,246,118) 0 0 0 Other offering expenses 0 0 (10,084,799) 0 0 0 ----------- ---------- ------------ ------------ ------------ -------- BALANCE, December 31, 2001 83,761,469 837,614 738,236,525 (24,181,092) 0 (555,040) Issuance of common stock 25,570,295 255,703 255,447,240 0 0 0 Treasury stock purchased 0 0 0 0 0 (304,198) Net income 0 0 0 0 10,779,664 0 Dividends ($.19 per share) 0 0 0 (9,374,732) (10,779,664) 0 Sales commissions and discounts 0 0 (24,579,655) 0 0 0 Other offering expenses 0 0 (2,526,610) 0 0 0 Gain/(loss) on interest rate swap 0 0 0 0 0 0 ----------- ---------- ------------ ------------ ------------ -------- BALANCE, March 31, 2002 109,331,764 $1,093,317 $966,577,500 $(33,555,824) $ 0 (859,238) =========== ========== ============ ============ ============ ======== <CAPTION> Other Total Treasury Comprehensive Shareholders' Stock Amount Income Equity ------------ -------------- ------------- <S> <C> <C> <C> BALANCE, December 31, 2000 $(1,412,969) $ 0 $265,341,612 Issuance of common stock 0 0 522,516,620 Treasury stock purchased (4,137,427) 0 (4,137,427) Net income 0 0 21,723,967 Dividends ($.76 per share) 0 0 (36,771,204) Sales commissions and discounts 0 0 (49,246,118) Other offering expenses 0 0 (10,084,799) ----------- -------- ------------ BALANCE, December 31, 2001 (5,550,396) 0 709,342,651 Issuance of common stock 0 0 255,702,943 Treasury stock purchased (3,041,981) 0 (3,041,981) Net income 0 0 10,779,664 Dividends ($.19 per share) 0 0 (20,154,396) Sales commissions and discounts 0 0 (24,579,655) Other offering expenses 0 0 (2,526,610) Gain/(loss) on interest rate swap 0 (50,112) (50,112) ----------- -------- ------------ BALANCE, March 31, 2002 $(8,592,377) $(50,112) $925,472,504 =========== ======== ============ </TABLE> The accompanying condensed notes are an integral part of these consolidated financial statements. - 5 -
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended ------------------------------ March 31, March 31, 2002 2001 ------------- ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,779,664 $ 3,275,345 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of joint ventures (1,206,823) (709,713) Depreciation 5,744,452 3,187,179 Amortization of deferred financing costs 175,462 214,757 Amortization of deferred leasing costs 72,749 75,837 Deferred lease acquisition costs paid (400,000) 0 Changes in assets and liabilities: Accounts receivable (1,694,308) (264,416) Due from affiliates (13,740) 0 Deferred rental income 905,584 (142,888) Prepaid expenses and other assets, net (1,092,127) 2,481,643 Accounts payable and accrued expenses (156,738) 96,828 Due to affiliates (626) 20,742 ------------- ------------ Net cash provided by operating activities 13,113,549 8,235,314 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in real estate (104,051,998) (2,703,858) Investment in joint ventures 0 (5,749) Deferred project costs paid (9,461,180) (2,288,936) Distributions received from joint ventures 1,691,486 734,286 ------------- ------------ Net cash used in investing activities (111,821,692) (4,264,257) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 2,947,142 5,800,000 Repayment of notes payable 0 (56,923,187) Dividends paid to shareholders (17,555,924) (6,213,236) Issuance of common stock 255,702,943 66,174,705 Sales commissions paid (24,579,655) (6,212,824) Offering costs paid (3,327,977) (1,961,945) Treasury stock purchased (3,041,981) (776,555) ------------- ------------ Net cash (used in) provided by financing activities 210,144,548 (113,042) ------------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 111,436,405 3,858,015 CASH AND CASH EQUIVALENTS, beginning of year 75,586,168 4,298,301 ------------- ------------ CASH AND CASH EQUIVALENTS, end of period $ 187,022,573 $ 8,156,316 ============= ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Deferred project costs applied to real estate assets $ 4,080,388 $ 1,430,111 ============= ============ Deferred project costs due to affiliate $ 496,134 $ 0 ============= ============ Interest rate swap $ (50,112) $ 0 ============= ============ Deferred offering costs due to affiliate $ 244,761 $ 0 ============= ============ Other offering costs due to affiliate $ 141,761 $ 0 ============= ============ Write-off of deferred offering costs due to affiliate $ 0 $ 709,686 ============= ============ </TABLE> The accompanying condensed notes are an integral part of these consolidated financial statements. - 6 -
WELLS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARY CONDENSED NOTES TO FINANCIAL STATEMENTS MARCH 31, 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Wells Real Estate Investment Trust, Inc. (the "Company") is a Maryland corporation formed on July 3, 1997, which qualifies as a real estate investment trust ("REIT"). Substantially all of the Company's business is conducted through Wells Operating Partnership, L.P. ("Wells OP"), a Delaware limited partnership organized for the purpose of acquiring, developing, owning, operating, improving, leasing, and otherwise managing income producing commercial properties for investment purposes on behalf of the Company. The Company is the sole general partner of Wells OP. On January 30, 1998, the Company commenced its initial public offering of up to 16,500,000 shares of common stock at $10 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933. The Company commenced active operations on June 5, 1998, upon receiving and accepting subscriptions for 125,000 shares. The Company terminated its initial public offering on December 19, 1999 at which time gross proceeds of approximately $132,181,919 had been received from the sale of approximately 13,218,192 shares. The Company commenced its second public offering of shares of common stock on December 20, 1999, which was terminated on December 19, 2000 after receipt of gross proceeds of approximately $175,229,193 from the sale of approximately 17,522,919 shares from the second public offering. The Company commenced its third public offering of the shares of common stock on December 20, 2000. As of March 31, 2002, the Company has received gross proceeds of approximately $785,906,526 from the sale of approximately 78,590,653 shares from its third public offering. Accordingly, as of March 31, 2002, the Company has received aggregate gross offering proceeds of approximately $1,093,317,638 from the sale of 109,331,764 shares of its common stock to 27,900 investors. After payment of $37,965,419 in acquisition and advisory fees and acquisition expenses, payment of $125,647,820 in selling commissions and organization and offering expenses, capital contributions to joint ventures and acquisitions expenditures by Wells OP of $735,821,825 for property acquisitions, and common stock redemptions of $8,592,377 pursuant to the Company's share redemption program, the Company was holding net offering proceeds of $185,290,197 available for investment in properties, as of March 31, 2002. - 7 -
(b) Properties As of March 31, 2002, the Company owned interests in 44 properties listed in the table below through its ownership in Wells OP. As of March 31, 2002, all of these properties were 100% leased. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------------ Property Property % Purchase Square Annual Name Tenant Location Owned Price Feet Rent ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- <S> <C> <C> <C> <C> <C> <C> Dana Detroit Building Dana Corporation Detroit, MI 100% $23,650,000 112,480 $2,330,600 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Dana Kalamazoo Dana Corporation Kalamazoo, MI 100% $18,300,000 147,004 $1,842,800 Building ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Novartis Building Novartis Opthalmics, Inc. Atlanta, GA 100% $15,000,000 100,087 $1,426,240 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Transocean Houston Transocean Deepwater Houston, TX 100% $22,000,000 103,260 $2,110,035 Building Offshore Drilling, Inc. Newpark Resources, Inc. 52,731 $1,153,227 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Andersen Building Arthur Andersen LLP Sarasota, FL 100% $21,400,000 157,704 $1,988,454 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Windy Point Buildings TCI Great Lakes, Inc. Schaumburg, IL 100% $89,275,000 129,157 $1,940,404 The Apollo Group, Inc. 28,322 $ 242,948 Global Knowledge Network 22,028 $ 358,094 Zurich American Insurance 300,000 $4,718,285 Various other tenants 8,884 $ 129,947 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Convergys Building Convergys Customer Tamarac, FL 100% $13,255,000 100,000 $1,144,176 Management Group, Inc. ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- ADIC Buildings Advanced Digital Parker, CO 68.2% 12,954,213 148,200 $1,124,868 Information Corporation ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Lucent Building Lucent Technologies, Inc. Cary, NC 100% $17,650,000 120,000 $1,813,500 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Ingram Micro Building Ingram Micro, L.P. Millington, TN 100% $21,050,000 701,819 $2,035,275 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Nissan Property Nissan Motor Acceptance Irving, TX 100% $ 5,545,700(1) 268,290 $4,225,860(2) Corporation ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- IKON Buildings IKON Office Solutions, Inc. Houston, TX 100% $20,650,000 157,790 $2,015,767 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- State Street Building SSB Realty, LLC Quincy, MA 100% $49,563,000 234,668 $6,922,706 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- AmeriCredit Building AmeriCredit Financial Orange Park, FL 68.2% $12,500,000 85,000 $1,322,388 Services Corporation ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Comdata Building Comdata Network, Inc. Nashville, TN 55.0% $24,950,000 201,237 $2,443,647 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- AT&T Oklahoma AT&T Corp. Oklahoma City, OK 55.0% $15,300,000 103,500 $1,242,000 Buildings Jordan Associates, Inc. 25,000 $ 294,504 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Metris Minnesota Metris Direct, Inc. Minnetonka, MN 100% $52,800,000 300,633 $4,960,445 Building ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Stone & Webster Stone & Webster, Inc. Houston, TX 100% $44,970,000 206,048 $4,533,056 Building SYSCO Corporation 106,516 $2,130,320 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Motorola Plainfield Motorola, Inc. South Plainfield, 100% $33,648,156 236,710 $3,324,427 Building NJ ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Quest Building Quest Software, Inc. Irvine, CA 15.8% $ 7,193,000 65,006 $1,287,119 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Delphi Building Delphi Automotive Systems, Troy, MI 100% $19,800,000 107,193 $1,937,664 LLC ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Avnet Building Avnet, Inc. Tempe, AZ 100% $13,250,000 132,070 $1,516,164 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Siemens Building Siemens Automotive Corp. Troy, MI 56.8% $14,265,000 77,054 $1,371,946 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Motorola Tempe Motorola, Inc. Tempe, AZ 100% $16,000,000 133,225 $1,913,999 Building ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- ASML Building ASM Lithography, Inc. Tempe, AZ 100% $17,355,000 95,133 $1,927,788 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Dial Building Dial Corporation Scottsdale, AZ 100% $14,250,000 129,689 $1,387,672 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Metris Tulsa Building Metris Direct, Inc. Tulsa, OK 100% $12,700,000 101,100 $1,187,925 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Cinemark Building Cinemark USA, Inc. Plano, TX 100% $21,800,000 65,521 $1,366,491 The Coca-Cola Co. 52,587 $1,354,524 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Gartner Building The Gartner Group, Inc. Ft. Myers, FL 56.8% $ 8,320,000 62,400 $ 830,968 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Videojet Technologies Videojet Technologies, Inc. Wood Dale, IL 100% $32,630,940 250,354 $3,376,743 Chicago (formerly known as the "Marconi Building") ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Johnson Matthey Johnson Matthey, Inc. Tredyffrin 56.8% $ 8,000,000 130,000 $841,750 Building Township, PA ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Alstom Power Richmond Alstom Power, Inc. Midlothian, VA 100% $11,400,000 99,057 $1,225,963 Building ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Sprint Building Sprint Communications Leawood, KS 56.8% $ 9,500,000 68,900 $1,062,949 Company, L.P. ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- EYBL CarTex Building EYBL CarTex, Inc. Greenville, SC 56.8% $ 5,085,000 169,510 $ 543,845 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Matsushita Building Matsushita Avionics Systems Lake Forest, CA 100% $18,431,206 144,906 $1,995,704 Corporation ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- AT&T Pennsylvania Pennsylvania Cellular Harrisburg, PA 100% $12,291,200 81,859 $1,442,116 Building Telephone Corp. ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- PwC Building PricewaterhouseCoopers, LLP Tampa, FL 100% $21,127,854 130,091 $2,093,382 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Fairchild Building Fairchild Technologies Fremont, CA 77.5% $ 8,900,000 58,424 $ 922,444 U.S.A., Inc. ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Cort Furniture Cort Furniture Rental Fountain Valley, 44.0% $ 6,400,000 52,000 $ 834,888 Building Corporation CA ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Iomega Building Iomega Corporation Ogden City, UT 3.7% $ 5,025,000 108,250 $ 539,958 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Interlocken Building ODS Technologies, L.P. and Broomfield, CO 3.7% $ 8,275,000 51,975 $1,031,003 GAIAM, Inc. ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Ohmeda Building Ohmeda, Inc. Louisville, CO 3.7% $10,325,000 106,750 $1,004,517 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Alstom Power Alstom Power, Inc. Knoxville, TN 3.7% $ 7,900,000 84,404 $1,106,519 Knoxville Building ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- Avaya Building Avaya, Inc. Oklahoma City, OK 3.7% $ 5,504,276 57,186 $ 536,977 ----------------------- ----------------------------- ------------------- ---------- ------------ --------- ---------- </TABLE> (1) This represents the costs incurred by Wells OP to purchase the land. Total costs to be incurred for development of the Nissan Property are currently estimated to be $42,259,000. (2) Annual rent does not take effect until construction of the building is completed and the tenant is occupying the building. - 8 -
Wells OP owns interests in properties directly and through equity ownership in the following joint ventures: <TABLE> <CAPTION> - ------------------------------ ---------------------------------- ----------------------------------- Joint Venture Joint Venture Partners Properties Held by Joint Venture - ------------------------------ ---------------------------------- ----------------------------------- <S> <C> <C> Fund XIII-REIT Joint Venture Wells Operating Partnership, L.P. The AmeriCredit Building Wells Real Estate Fund XIII, L.P. The ADIC Buildings - ------------------------------ ---------------------------------- ----------------------------------- Fund XII-REIT Joint Venture Wells Operating Partnership, L.P. The Siemens Building Wells Real Estate Fund XII, L.P. The AT&T Oklahoma Buildings The Comdata Building - ------------------------------ ---------------------------------- ----------------------------------- Fund XI-XII-REIT Joint Wells Operating Partnership, L.P. The EYBL CarTex Building Venture Wells Real Estate Fund XI, L.P. The Sprint Building Wells Real Estate Fund XII, L.P. The Johnson Matthey Building The Gartner Building - ------------------------------ ---------------------------------- ----------------------------------- Fund IX-X-XI-REIT Joint Wells Operating Partnership, The Alstom Power Knoxville Building Venture L.P. The Ohmeda Building Wells Real Estate Fund IX, L.P. The Interlocken Building Wells Real Estate Fund X, L.P. The Avaya Building Wells Real Estate Fund XI, L.P. The Iomega Building - ------------------------------ ---------------------------------- ----------------------------------- Wells/Fremont Associates Wells Operating Partnership, L.P. The Fairchild Building Joint Venture (the "Fremont Fund X-XI Joint Venture Joint Venture") - ------------------------------ ---------------------------------- ----------------------------------- Wells/Orange County Wells Operating Partnership, L.P. The Cort Building Associates Joint Venture Fund X-XI Joint Venture (the "Orange County Joint Venture") - ------------------------------ ---------------------------------- ----------------------------------- Fund VIII-IX-REIT Joint Wells Operating Partnership, L.P. Quest Building Venture Fund VIII-IX Joint Venture - ------------------------------ ---------------------------------- ----------------------------------- </TABLE> (c) Critical Accounting Policies The Company's accounting policies have been established in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied; thus, resulting in a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters which are inherently uncertain. Revenue Recognition The Company recognizes rental income generated from all leases on real estate assets in which the Company has an ownership interest, either directly or through investments in joint ventures, on a straight-line basis over the terms of the respective leases. If a tenant was to encounter financial difficulties in future periods, the amount recorded as a receivable may not be realized. Operating Cost Reimbursements The Company generally bills tenants for operating cost reimbursements, either directly or through investments in joint ventures, on a monthly basis at amounts estimated largely based on actual prior period activity and the respective lease terms. Such billings are generally adjusted on an annual basis to reflect reimbursements owed to the landlord based on the actual costs incurred during the period and the respective lease terms. Financial difficulties encountered by tenants may result in receivables not being realized. - 9 -
Real Estate Management continually monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets in which the Company has an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When such events or changes in circumstances are present, management assesses the potential impairment by comparing the fair market value of the asset, estimated at an amount equal to the future undiscounted operating cash flows expected to be generated from tenants over the life of the asset and from its eventual disposition, to the carrying value of the asset. In the event that the carrying amount exceeds the estimated fair market value, the Company would recognize an impairment loss in the amount required to adjust the carrying amount of the asset to its estimated fair market value. Neither the Company nor its joint ventures have recognized impairment losses on real estate assets in 2002 or 2001. Deferred Project Costs Wells Capital, Inc. (the "Advisor") expects to continue to fund 100% of the acquisition and advisory fees and acquisition expenses and recognize related expenses, to the extent that such costs exceed 3.5% of cumulative capital raised (subject to certain overall limitations described in the prospectus), on behalf of the Company. The Company records acquisition and advisory fees and acquisition expenses by capitalizing deferred project costs and reimbursing the Advisor in an amount equal to 3.5% of cumulative capital raised to date. As the Company invests its capital proceeds, deferred project costs are applied to real estate assets, either directly or through contributions to joint ventures, at an amount equal to 3.5% of each investment and depreciated over the useful lives of the respective real estate assets. Acquisition and advisory fees and acquisition expenses paid as of March 31, 2002, amounted to $37,965,419 and represented approximately 3.5% of shareholders' capital contributions received. These fees are allocated to specific properties as they are purchased or developed and are included in capitalized assets of the joint venture, or real estate assets. Deferred project costs at March 31, 2002 and December 31, 2001, represent fees paid, but not yet applied to properties. Deferred Offering Costs The Advisor expects to continue to fund 100% of the organization and offering costs and recognize related expenses, to the extent that such costs exceed 3% of cumulative capital raised, on behalf of the Company. Organization and offering costs include items such as legal and accounting fees, marketing and promotional costs, and printing costs, and specifically exclude sales costs and underwriting commissions. The Company records offering costs by accruing deferred offering costs, with an offsetting liability included in due to affiliates, at an amount equal to the lesser of 3% of cumulative capital raised to date or actual costs incurred from third-parties less reimbursements paid to the Advisor. As the actual equity is raised, the Company reverses the deferred offering costs accrual and recognizes a charge to stockholders' equity upon reimbursing the Advisor. As of March 31, 2002, the Advisor had paid offering expenses on behalf of the Company in an aggregate amount of $23,230,560, of which the Advisor had been reimbursed $22,021,962, which did not exceed the 3% limitation. Deferred offering costs in the accompanying balance sheet represent costs incurred by the Advisor which will be reimbursed by the Company. (d) Distribution Policy The Company will make distributions each taxable year (not including a return of capital for federal income tax purposes) equal to at least 90% of its real estate investment trusts taxable income. The Company intends to make regular quarterly distributions to holders of the shares. Distributions will be made to those shareholders who are shareholders as of the record date selected by the Directors. The Company currently calculates quarterly dividends based on the daily record and dividend declaration dates; thus, shareholders are entitled to receive dividends immediately upon the purchase of shares. - 10 -
Dividends to be distributed to the shareholders are determined by the Board of Directors and are dependent on a number of factors related to the Company, including funds available for payment of dividends, financial condition, capital expenditure requirements and annual distribution requirements in order to maintain the Company's status as a REIT under the Code. Operating cash flows are expected to increase as additional properties are added to the Company's investment portfolio. (e) Income Taxes The Company has made an election under Section 856 (C) of the Internal Revenue Code of 1986, as amended (the "Code"), to be taxed as a Real Estate Investment Trust ("REIT") under the Code beginning with its taxable year ended December 31, 1998. As a REIT for federal income tax purposes, the Company generally will not be subject to federal income tax on income that it distributes to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially adversely affect the Company's net income and net cash available to distribute to shareholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to continue to operate in the foreseeable future in such a manner so that the Company will remain qualified as a REIT for federal income tax purposes. (f) Employees The Company has no direct employees. The employees of the Advisor and Wells Management Company, Inc., perform a full range of real estate services including leasing and property management, accounting, asset management and investor relations for the Company. (g) Insurance Wells Management Company, Inc., an affiliate of the Company and the Advisor, carries comprehensive liability and extended coverage with respect to all the properties owned directly or indirectly by the Company. In the opinion of management, the properties are adequately insured. (h) Competition The Company will experience competition for tenants from owners and managers of competing projects, which may include its affiliates. As a result, the Company 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 Company elects to dispose of its properties, the Company will also be in competition with sellers of similar properties to locate suitable purchasers for its properties. (i) Statement of Cash Flows For the purpose of the statement of cash flows, the Company 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. (j) Basis of Presentation Substantially all of the Company's business is conducted through Wells OP. On December 31, 1997, Wells OP issued 20,000 limited partner units to the Advisor in exchange for a capital contribution of $200,000. The Company is the sole general partner in Wells OP; consequently, the accompanying consolidated balance sheet of the Company includes the amounts of the Company and Wells OP. The Advisor, a limited partner, is not currently receiving distributions from its investment in Wells OP. - 11 -
The consolidated financial statements of the Company 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 Board of Directors, 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. Results for interim periods are not necessarily indicative of full year results. For further information, refer to the financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2001. 2. INVESTMENT IN JOINT VENTURES (a) Basis of Presentation As of March 31, 2002, the Company owned interests in 17 properties in joint ventures with related entities through its ownership in Wells OP, which owns interests in seven such joint ventures. The Company does not have control over the operations of these joint ventures; however, it does exercise significant influence. Accordingly, investment in joint ventures is recorded using the equity method. (b) Summary of Operations The following information summarizes the operations of the unconsolidated joint ventures in which the Company, through Wells OP, had ownership interests as of March 31, 2002 and 2001, respectively. There were no additional investments in joint ventures made by the Company during the three months ended March 31, 2002. <TABLE> <CAPTION> Wells OP's Share of Net Total Revenues Net Income Income --------------------------- ---------------------------- --------------------------- Three Months Ended Three Months Ended Three Months Ended --------------------------- ---------------------------- --------------------------- March 31, March 31, March 31, March 31, March 31, March 31, 2002 2001 2002 2001 2002 2001 ---------- ---------- ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Fund IX-X-XI-REIT Joint Venture $1,379,059 $1,449,856 $ 554,268 $ 638,435 $ 20,572 $ 23,696 Cort Joint Venture 212,006 199,586 129,750 133,753 56,658 58,406 Fremont Joint Venture 225,161 225,178 135,948 142,612 105,365 110,530 Fund XI-XII-REIT Joint Venture 858,219 847,030 497,149 514,277 282,197 291,918 Fund XII-REIT Joint Venture 1,670,863 947,943 805,513 445,321 442,726 208,634 Fund VIII-IX-REIT Joint Venture 323,746 267,624 160,696 105,033 273,931 16,529 Fund XIII-REIT Joint Venture 700,648 0 401,674 0 25,374 0 ---------- ---------- ---------- ---------- ---------- -------- $5,369,702 $3,937,217 $2,684,998 $1,979,431 $1,206,823 $709,713 ========== ========== ========== ========== ========== ======== </TABLE> 3. INVESTMENTS IN REAL ESTATE As of March 31, 2002, the Company, through its ownership in Wells OP, owns 27 properties directly. The following describes acquisitions made directly by Wells OP during the three months ended March 31, 2002. - 12 -
The Andersen Building On January 11, 2002, Wells OP purchased the Andersen Building, a three-story office building containing approximately 157,700 rentable square feet on a 9.8 acre tract of land located in Sarasota County, Florida for a purchase price of $21,400,000, excluding closing costs. The Andersen Building is leased to Arthur Andersen LLP ("Andersen"). The current term of the Andersen lease is 10 years, which commenced on November 11, 1998 and expires on October 31, 2009. Andersen has the right to extend the initial 10-year term of its lease for two additional five-year periods at 90% of the then-current market rental rate. The current annual base rent payable under the Andersen lease is $1,988,454. Andersen has the option to purchase the Andersen Building prior to the end of the fifth lease year for $23,250,000 and again at the expiration of the initial lease term for $25,148,000. The Transocean Houston Building On March 15, 2002, Wells OP purchased the Transocean Houston Building, a six story office building containing approximately 156,000 rentable square feet located in Houston, Harris County, Texas for a purchase price of $22,000,000, excluding closing costs. The Transocean Houston Building is 100% leased to Transocean Deepwater Offshore Drilling, Inc. ("Transocean") and Newpark Drilling Fluids, Inc. ("Newpark"). The Transocean lease is a triple net lease which covers approximately 103,260 square feet commencing in December 2001 and expiring in March 2011. The initial annual base rent payable under the Transocean lease is $2,110,035. Transocean has the option to extend the initial term of its lease for either (1) two additional five-year periods, or (2) one additional ten-year period, at the then-current market rental rate. In addition, Transocean has an expansion option and a right of first refusal for up to an additional 51,780 rentable square feet. The Newpark lease covers approximately 52,731 rentable square feet and is a net lease that commenced in August 1999 and expires in August 2009. The current annual base rent payable under the Newpark lease is $1,153,227. The Novartis Atlanta Building On March 28, 2002, Wells OP purchased the Novartis Atlanta Building, a four-story office building containing approximately 100,000 rentable square feet located in Duluth, Fulton County, Georgia for a purchase price of $15,000,000, excluding closing costs. The Novartis Atlanta Building is 100% leased to Novartis Opthalmics, Inc. ("Novartis"). The Novartis lease is a net lease which commenced in August 2001 and expires in July 2011. Novartis Corporation, the parent of Novartis, has guaranteed the lease. The current annual base rent payable is $1,426,240. Novartis, at its option, may extend the initial term of its lease for three additional five-year periods at the then-current market rental rate. In addition, Novartis may terminate the lease at the end of the fifth lease year by paying a $1,500,000 termination fee. The Dana Corporation Buildings On March 29, 2002, Wells OP purchased all of the membership interests in Dana Farmington Hills, LLC and Dana Kalamazoo, LLC, which respectively owned a three-story office and research development building containing approximately 112,400 rentable square feet located in Farmington Hills, Oakland County, Michigan (the "Dana Detroit Building") and a two-story office and industrial building containing approximately 147,000 rentable square feet located in Kalamazoo, Kalamazoo County, Michigan (the "Dana Kalamazoo Building") for an aggregate purchase price of $41,950,000, excluding closing costs. The Dana Detroit Building is 100% leased to the Dana Corporation ("Dana") under a net lease that commenced in October 2001 and expires in October 2021. The current annual base rent payable under the Dana lease for Detroit is $2,330,600. Dana may, at its option, extend the initial term of its lease for - 13 -
six additional five-year periods at the then-current market rental rate. Additionally, Dana may terminate the lease after the eleventh year of its initial lease term subject to certain conditions. The Dana Kalamazoo Building is also 100% leased to Dana. The Dana lease for Kalamazoo is a net lease which commenced in October 2001 and expires in October 2011. The current annual base rent payable is $1,842,800. Dana has the option to extend the initial term of the Dana lease in Kalamazoo for six additional five-year periods at the then-current market rental rate. Additionally, Dana may terminate the lease at any time after the sixth year of the initial lease term and before the end of the nineteenth lease year, subject to certain conditions. 4. NOTES PAYABLE Notes payable consists of (i) $7,655,600 of draws on a line of credit from SouthTrust Bank secured by a first mortgage against the Cinemark, ASML, Dial, PwC, Motorola Tempe and Avnet Buildings and (ii) $3,415,986 outstanding on the construction loan from Bank of America which is being used to fund the development of the Nissan Property. 5. DUE TO AFFILIATES Due to affiliates consists of amounts due to the Advisor for Acquisitions and Advisory Fees and Acquisition Expenses, deferred offering costs, and other operating expenses paid on behalf of the Company. Also included in due to affiliates is the amount due to the Fund VIII-IX Joint Venture related to the Matsushita lease guarantee, which is explained in detail in the financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2001. Payments of $601,963 have been made as of March 31, 2002 toward funding the obligation under the Matsushita agreement. 6. COMMITMENTS AND CONTINGENCIES Take Out Purchase and Escrow Agreement An affiliate of the Advisor ("Wells Exchange") has developed a program (the "Wells Section 1031 Program") involving the acquisition by Wells Exchange of income-producing commercial properties and the formation of a series of single member limited liability companies for the purpose of facilitating the resale of co-tenancy interests in such real estate properties to be owned in co-tenancy arrangements with persons ("1031 Participants") who are looking to invest the proceeds from a sale of real estate held for investment in another real estate investment for purposes of qualifying for like-kind exchange treatment under Section 1031 of the Code. Each of these properties will be financed by a combination of permanent first mortgage financing and interim loan financing obtained from institutional lenders. Following the acquisition of each property, Wells Exchange will attempt to sell co-tenancy interests to 1031 Participants, the proceeds of which will be used to pay off the interim financing. In consideration for the payment of a Take Out Fee to the Company, and following approval of the potential property acquisition by the Company's Board of Directors, it is anticipated that Wells OP will enter into a contractual relationship providing that, in the event that Wells Exchange is unable to sell all of the co-tenancy interests in that particular property to 1031 Participants, Wells OP will purchase, at Wells Exchange's cost, any co-tenancy interests remaining unsold at the end of the offering period. As a part of the initial transaction in the Wells Section 1031 Program, and in consideration for the payment of a take out fee in the amount of $137,500 to the Company, Wells OP entered into a take out purchase and escrow agreement dated April 16, 2001 providing, among other things, that Wells OP would be obligated to acquire, at Wells Exchange's cost, any unsold co-tenancy interests in the building known as the Ford Motor Credit Complex which remained unsold at the expiration of the offering of Wells Exchange on April 15, 2002. On April 12, 2002, Wells Exchange paid off the interim financing on the Ford Motor - 14 -
Credit Complex and, accordingly, Wells OP has been released from its prior obligations under the take out purchase and escrow agreement relating to such property. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the accompanying financial statements of the Company and notes thereto. Forward Looking Statements This Report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including discussion and analysis of the financial condition of the Company, anticipated capital expenditures required to complete certain projects, amounts of anticipated cash distributions to shareholders in the future and certain other matters. Readers of this Report should be aware that there are various factors that could cause actual results to differ materially from any forward-looking statements made in the Report, which include changes in general economic conditions, changes in real estate conditions, construction costs which may exceed estimates, construction delays, increases in interest rates, 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. Liquidity and Capital Resources During the three months ended March 31, 2002, the Company received aggregate gross offering proceeds of $255,702,943 from the sale of 25,570,293 shares of its common stock. After payment of $8,843,134 in acquisition and advisory fees and acquisition expenses, payment of $27,106,265 in selling commissions and organization and offering expenses, and common stock redemptions of $3,041,981 pursuant to the Company's share redemption program, the Company raised net offering proceeds of $216,711,563 during the first quarter of 2002, of which $185,290,197 remained available for investment in properties at quarter end. During the three months ended March 31, 2001, the Company received aggregate gross offering proceeds of $66,174,704 from the sale of 6,617,470 shares of its common stock. After payment of $2,288,933 in acquisition and advisory fees and acquisition expenses, payment of $8,175,768 in selling commissions and organizational and offering expenses, and common stock redemptions of $776,555 pursuant to the Company's share redemption program, the Company raised net offering proceeds of $54,933,448 during the first quarter of 2001, of which $5,952,930 was available for investment in properties at quarter end. The significant increase in capital resources available to the Company is due to significantly increased sales of its common stock during the first quarter of 2002. As of March 31, 2002, the Company owned interests in 44 real estate properties either directly or through its interests in joint ventures. These properties are generating operating cash flow sufficient to cover the Company's operating expenses and pay dividends to shareholders. Dividends declared for the first quarter of 2002 and the first quarter of 2001 were approximately $0.194 and $0.188 per share, respectively. Although there is no assurance, management of the Company anticipates that dividend distributions to shareholders will continue in 2002 at a level at least comparable with 2001 dividend distributions. Cash Flows From Operating Activities The Company's net cash provided by operating activities was $13,113,549 and $8,235,314 for the three months ended March 31, 2002 and 2001, respectively. The increase in net cash provided by operating - 15 -
activities was due primarily to the net income generated by additional properties acquired during 2002 and 2001. Cash Flows Used In Investing Activities The Company's net cash used in investing activities was $111,821,692 and $4,264,257 for the three months ended March 31, 2002 and 2001, respectively. The increase in net cash used in investing activities was due primarily to investments in properties and the payment of related deferred project costs, partially offset by distributions received from joint ventures. Cash Flows From Financing Activities The Company's net cash provided by financing activities was $210,144,548 for the three months ended March 31, 2002 and net cash used in financing activities for the three months ended March 31, 2001 was $113,042. The increase in net cash provided by financing activities was due primarily to the raising of additional capital and the lack of debt payments which were $56.9 million in the prior year. The Company raised $255,702,943 in offering proceeds for the three months ended March 31, 2002, as compared to $66,174,705 for the same period in 2001. Additionally, the Company paid dividends totaling $17.6 million compared to $6.2 million in the first quarter of 2002 and 2001, respectively. Results of Operations As of March 31, 2002, the Company's real estate properties were 100% leased to tenants. Gross revenues were $19,192,803 and $10,669,713 for the three months ended March 31, 2002 and 2001, respectively. Gross revenues for the three months ended March 31, 2002 and 2001 were attributable to rental income, interest income earned on funds held by the Company prior to the investment in properties, and income earned from joint ventures. The increase in revenues in 2002 was primarily attributable to the purchase of additional properties for $104,051,998 during 2002 and the purchase of additional properties for $227,933,858 in the last three quarters of 2001. The purchase of additional properties also resulted in an increase in expenses which totaled $8,413,139 for the three months ended March 31, 2002, as compared to $7,394,368 for the three months ended March 31, 2001. Expenses in 2002 and 2001 consisted primarily of depreciation, interest expense, management and leasing fees and general and administrative costs. As a result, the Company's net income also increased from $3,275,345 for the three months ended March 31, 2001 to $10,779,664 for the three months ended March 31, 2002. Funds from Operations Funds from Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), generally means net income, computed in accordance with GAAP excluding extraordinary items (as defined by GAAP) and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures and subsidiaries. The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT. However, the Company's calculation of FFO, while consistent with NAREIT's definition, may not be comparable to similarly titled measures presented by other REITs. Adjusted Funds from Operations ("AFFO") is defined as FFO adjusted to exclude the effects of straight-line rent adjustments, deferred loan cost amortization and other non-cash and/or unusual items. Neither FFO nor AFFO represent cash generated from operating activities in accordance with GAAP and should not be considered as alternatives to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. - 16 -
The following table reflects the calculation of FFO and AFFO for the three months ended March 31, 2002 and 2001, respectively: <TABLE> <CAPTION> Three Months Ended Three Months Ended March 31, 2002 March 31, 2001 ------------------ ------------------ <S> <C> <C> FUNDS FROM OPERATIONS: Net income $10,779,664 $ 3,275,345 Add: Depreciation of real assets 5,744,452 3,187,179 Amortization of deferred leasing costs 72,749 75,837 Depreciation and amortization - unconsolidated partnerships 706,176 299,116 ----------- ----------- Funds from operations (FFO) 17,303,041 6,837,477 Adjustments: Loan cost amortization 175,462 214,757 Straight line rent (1,038,378) (616,465) Straight line rent - unconsolidated partnerships (99,315) (39,739) Lease acquisition fees paid- unconsolidated partnerships 0 (2,356) ----------- ----------- Adjusted funds from operations (AFFO) $16,340,810 $ 6,393,674 =========== =========== WEIGHTED AVERAGE SHARES: BASIC AND DILUTED 95,130,210 34,359,444 =========== =========== </TABLE> Inflation The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. However, there are provisions in the majority of tenant leases which would protect the Company from the impact of inflation. These provisions include reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. Critical Accounting Policies The Company's reported results of operations are impacted by management judgments related to application of accounting policies. A discussion of the accounting policies that management considers to be critical, in that they may require complex judgment in their application or require estimates about matters which are inherently uncertain, is included in Footnote 1 to the financial statements. - 17 -
PART II. OTHER INFORMATION ITEM 6 (b.) The Registrant filed the following reports on Form 8-K during the first quarter of 2002: (i) Current Report on Form 8-K dated December 21, 2001, which was filed with the Commission on January 4, 2002, reporting the acquisitions of the Convergys Building located in Tamarac, Florida, the ADIC Buildings located in Parker, Colorado, and the Windy Point Buildings located in Schaumburg, Illinois; (ii) Amendment No. 1 to Form 8-K dated December 21, 2001, which was filed with the Commission on January 31, 2002, providing the required financial statements of the Registrant relating to the acquisitions of the Convergys Building located in Tamarac, Florida, the ADIC Buildings located in Parker, Colorado, and the Windy Point Buildings located in Schaumburg, Illinois; and (iii) Current Report of Form 8-K dated March 28, 2002, reporting the acquisitions by the Registrant of the Transocean Houston Building located in Houston, Texas, the Novartis Building located in Atlanta, Georgia, and the Dana Corporation Buildings located in Detroit, Michigan and Kalamazoo, Michigan. 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 INVESTMENT TRUST, INC. (Registrant) Dated: May 14, 2002 By: /s/ Douglas P. Williams ----------------------------------------- Douglas P. Williams Treasurer and Principal Financial Officer - 18 -