<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-13518
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1933081
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Seaport Plaza, New York, N.Y. 10292-0116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 214-1016
Securities registered pursuant to Section 12(b) of the Act:
None
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
- --------------------------------------------------------------------------------
(Title of class)
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 CK No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [CK]
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Annual Report to Limited Partners for the year ended December
31, 1996 is incorporated by reference into Parts I, II and IV of this Annual
Report on Form 10-K.
Amended and Restated Certificate and Agreement of Limited Partnership,
included as part of the Registration Statement on Form S-11 (File No. 2-88785)
filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the
Securities Act of 1933, as amended, is incorporated by reference into Part IV of
this Annual Report on Form 10-K.
Index to exhibits can be found on pages 9 and 10.
<PAGE>
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF
THE ``SAFE HARBOR'' PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Annual Report on Form 10-K, the words ``Believe''
``Anticipates,'' ``Expects'' and similar expressions are intended to identify
forward-looking statements. Statements looking forward in time are included in
this Annual Report on Form 10-K pursuant to the ``Safe Harbor'' provision of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially, including, but not limited to, those set forth in ``Management's
Discussion and Analysis of Financial Condition and Results of Operations.''
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Registrant undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
2
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1 Business.......................................................................... 4
Item 2 Properties........................................................................ 5
Item 3 Legal Proceedings................................................................. 5
Item 4 Submission of Matters to a Vote of Limited Partners............................... 5
<CAPTION>
PART II
<S> <C> <C>
Item 5 Market for the Registrant's Units and Related Limited Partner Matters............. 5
Item 6 Selected Financial Data........................................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 6
Item 8 Financial Statements and Supplementary Data....................................... 6
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 6
<CAPTION>
PART III
<S> <C> <C>
Item 10 Directors and Executive Officers of the Registrant................................ 6
Item 11 Executive Compensation............................................................ 8
Item 12 Security Ownership of Certain Beneficial Owners and Management.................... 8
Item 13 Certain Relationships and Related Transactions.................................... 8
<CAPTION>
PART IV
<S> <C> <C>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Financial Statement Schedules............................ 9
Exhibits.......................................................................... 9
Reports on Form 8-K............................................................... 10
SIGNATURES................................................................................... 15
</TABLE>
3
<PAGE>
PART I
Item 1. Business
General
Prudential-Bache/Watson & Taylor, Ltd.-2 (the ``Registrant''), a Texas
limited partnership, was formed on November 14, 1983 and will terminate in
accordance with a vote of the limited partners as described below. The
Registrant was formed for the purpose of acquiring, developing, owning and
operating mini-storage and office/warehouse facilities with proceeds raised from
the initial sale of units of limited partnership interests (``Units''). The
Registrant's fiscal year for book and tax purposes ends on December 31.
On December 15, 1995, the Management Committee of the Registrant determined
to seek bids for all of the properties held by the Registrant. On June 13, 1996,
the Registrant entered into a contract with Public Storage, Inc., the property
manager of the Registrant's properties, for the sale of all the Registrant's
properties. This sale was subject to the approval by the limited partners
holding a majority of the limited partnership units and certain other conditions
and potential price adjustments.
In accordance with a consent statement dated September 17, 1996 (the
``Consent Statement''), the limited partners approved, on October 18, 1996, the
sale to Public Storage, Inc. of all eight miniwarehouse facilities owned by the
Registrant and the liquidation and dissolution of the Registrant. Seven of the
eight properties which were under contract were sold to Public Storage, Inc. and
its affiliates on December 16, 1996. The Registrant received, in cash, gross
sales proceeds of $16,000,000 reduced by certain selling expenses and
pro-rations of approximately $433,000. The gross sales price was in excess of
the appraised value of the properties.
The Registrant continues to own the Hampton Park property located in Capitol
Heights, Maryland. This property has evidenced certain concentrations of
hazardous materials which were discovered in an environmental review of the
property. The results of the environmental assessment have been reported to the
appropriate State environmental regulatory departments. It is uncertain at this
time what the State environmental regulatory departments will ultimately require
to resolve the environmental issue at the property, although currently the State
is requiring that the situation be monitored on a quarterly basis. Due to the
uncertainty of the environmental status of the property, Public Storage, Inc.
has decided not to proceed with the purchase of this property. Accordingly, it
is currently uncertain when the final sale of this property will occur.
A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet current and future operating costs until the liquidation
of the Registrant. The Registrant intends to liquidate in 1997, subject to the
prior sale of the Hampton Park property, and will distribute any remaining funds
at such time. There are no assurances that a buyer can be found for the Hampton
Park property until the environmental issue is resolved.
For more information regarding the Consent Statement, see Item 4 Submission
of Matters to a Vote of Limited Partners.
General Partners
The general partners of the Registrant are Prudential-Bache Properties, Inc.
(``PBP''), George S. Watson and A. Starke Taylor, III (collectively, the
``General Partners''). PBP is the Managing General Partner and is responsible
for the day-to-day operations of the Registrant and its investments. See Note E
of the financial statements in the Registrant's Annual Report which is filed as
an exhibit hereto.
Employees
The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partners and their affiliates
pursuant to the Partnership Agreement. See Note E of the financial statements in
the Registrant's Annual Report which is filed as an exhibit hereto.
4
<PAGE>
<PAGE>
Item 2. Properties
As of December 31, 1996, the Registrant has sold seven of its eight
properties and currently owns the following property:
<TABLE>
<CAPTION>
Average Monthly
Occupancy Rates Rental Rates
for the year ended Per Unit
December 31, Land Rentable as of December 31,
Property Location 1996(1) (in acres) Units 1996
- -------------------------------------- ------------------- ---------- -------- --------------------
<S> <C> <C> <C> <C>
Hampton Park (Capitol Heights,
Maryland)
Mini-warehouse 94.5% 5.87 130 $ 29 - $ 280
Commercial 68 $ 250 - $1,450
--------
198
--------
--------
</TABLE>
(1) Average occupancy rates are calculated by averaging the monthly occupancies
determined by dividing occupied square footage by available square footage
as of each month-end.
The Managing General Partner believes the Registrant's remaining property is
adequately insured.
For the years ended December 31, 1996, 1995 and 1994, respectively, the
following properties' rental revenues exceeded 15% of the Registrant's total
revenue:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Arapaho 19 % 19% 19%
Arlington 16 17 18
Hampton Park 17 * *
</TABLE>
* Property's rental revenue was 15% or less of the Registrant's total revenue
for the year.
No single tenant accounted for 10% or more of the total revenue for any of
the three years in the period ended December 31, 1996.
Item 3. Legal Proceedings
This information is incorporated by reference to Note G of the financial
statements in the Registrant's Annual Report which is filed as an exhibit
hereto.
Item 4. Submission of Matters to a Vote of Limited Partners
Pursuant to the Consent Statement dated September 17, 1996, the limited
partners of the Registrant approved, on October 18, 1996, the sale to Public
Storage, Inc. of all the Registrant's properties and the liquidation and
dissolution of the Registrant. The vote was 31,079 Units or 60.6% in favor, 334
Units or .7% against and 596 Units or 1.2% abstaining. Reference is made to the
Consent Statement dated September 17, 1996 which is incorporated by reference in
Item 14.
PART II
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
As of March 3, 1997, there were 3,502 holders of record owning 51,818 Units,
inclusive of 258, 130 and 130 equivalent limited partnership units held by PBP
and Messrs. Watson and Taylor, respectively. A significant secondary market for
the Units has not developed, and it is not expected that one will develop in the
future. There are also certain restrictions set forth in Section 17.3 of the
Partnership Agreement limiting the ability of a limited partner to transfer
Units. Consequently, holders of Units may not be able to liquidate their
investments in the event of an emergency or for any other reason.
5
<PAGE>
The following per Unit cash distributions were paid to limited partners on or
about 45 days after the end of the specified quarter and were made from current
and previously undistributed cash generated by the operations of the
Registrant's properties:
<TABLE>
<CAPTION>
Quarter Ended 1996 1995
------------------------------------ ----- -----
<S> <C> <C>
March 31 $3.71 $3.71
June 30 3.71 3.71
September 30 -- 3.71
December 31 -- 3.71
</TABLE>
In addition, a distribution of $300 per limited partnership unit was made on
December 19, 1996 representing the net proceeds from the sale of seven of the
Registrant's properties, reduced by a contingency reserve and funds required to
meet current and future operating costs until the liquidation of the Registrant.
The Registrant intends to liquidate in 1997, subject to the prior sale of the
Hampton Park property, and will distribute any remaining funds at such time.
The amount of limited partner distributions that represented a return of
capital on a generally accepted accounting principles (GAAP) basis was
approximately $282,000 for the year ended December 31, 1995. Also, the
distributions paid to limited partners for the year ended December 31, 1996
primarily represented a return of capital on a GAAP basis. Return of capital on
a GAAP basis is calculated as limited partner distributions less net income
allocated to limited partners.
Item 6. Selected Financial Data
The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 2 through 10 of the Registrant's
Annual Report which is filed as an exhibit hereto.
<TABLE>
<CAPTION>
Nine Months
Ended Year ended December 31,
September 30, -----------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,209,270 $ 2,841,354 $ 2,615,970 $ 2,461,721 $ 2,400,913
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Net income $ 619,119 $ 489,304 $ 402,785 $ 347,081 $ 355,077
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Limited partner net income per
Unit $ 11.89 $ 9.40 $ 7.73 $ 6.66 $ 6.82
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Total assets $14,325,486 $14,086,449 $14,263,400 $15,072,631 $15,732,923
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Total distributions $ 580,329 $ 773,886 $ 1,044,203 $ 886,930 $ 1,077,008
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Limited partner distributions per
Unit $ 11.13 $ 14.86 $ 20.05 $ 17.03 $ 20.68
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to page 11 of the Registrant's
Annual Report which is filed as an exhibit hereto.
Item 8. Financial Statements and Supplementary Data
The financial statements are incorporated by reference to pages 2 through 10
of the Registrant's Annual Report which is filed as an exhibit hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
There are no directors or executive officers of the Registrant. The
Registrant is managed by the Managing General Partner.
6
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
The Registrant, the Registrant's General Partners, PBP's directors and
executive officers and any persons holding more than ten percent of the
Registrant's Units are required to report their initial ownership of such Units
and any subsequent changes in that ownership to the Securities and Exchange
Commission on Forms 3, 4 and 5. Such General Partners, executive officers,
directors and other persons who own greater than ten percent of the Registrant's
Units are required by Securities and Exchange Commission regulations to furnish
the Registrant with copies of all Forms 3, 4 or 5 they file. All of these filing
requirements were satisfied on a timely basis. In making these disclosures, the
Registrant has relied solely on written representations of the General Partners,
PBP's directors and executive officers and other persons who own greater than
ten percent of the Registrant's Units or copies of the reports they have filed
with the Securities and Exchange Commission during and with respect to its most
recent fiscal year.
Prudential-Bache Properties, Inc., Managing General Partner
The directors and executive officers of PBP and their positions with regard
to managing the Registrant are as follows:
<TABLE>
<CAPTION>
Name Position
<S> <C>
Thomas F. Lynch, III President, Chief Executive Officer, Chairman of the
Board of Directors and Director
Barbara J. Brooks Vice President--Finance and Chief Financial Officer
Eugene D. Burak Vice President and Chief Accounting Officer
Brian J. Martin Vice President
Frank W. Giordano Director
Nathalie P. Maio Director
</TABLE>
THOMAS F. LYNCH, III, age 38, is the President, Chief Executive Officer,
Chairman of the Board of Directors and a Director of PBP. He is a Senior Vice
President of Prudential Securities Incorporated (``PSI''), an affiliate of PBP.
Mr. Lynch also serves in various capacities for other affiliated companies. Mr.
Lynch joined PSI in November 1989.
BARBARA J. BROOKS, age 48, is the Vice President--Finance and Chief Financial
Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also serves in
various capacities for other affiliated companies. She has held several
positions within PSI since 1983. Ms. Brooks is a certified public accountant.
EUGENE D. BURAK, age 51, is a Vice President of PBP. He is a First Vice
President of PSI. Prior to joining PSI in September 1995, he was a management
consultant for three years and was with Equitable Capital Management Corporation
from March 1990 to May 1992. Mr. Burak is a certified public accountant.
BRIAN J. MARTIN, age 46, is a Vice President of PBP. He is a Senior Vice
President of PSI, which he joined in 1980. Mr. Martin is a Manager in the
Specialty Finance Asset Management Group and also serves in various capacities
for certain other affiliated companies. Mr. Martin is a member of the
Pennsylvania Bar.
FRANK W. GIORDANO, age 54, is a Director of PBP. He is a Senior Vice
President of PSI and an Executive Vice President and General Counsel of
Prudential Mutual Fund Management LLC, an affiliate of PSI. Mr. Giordano also
serves in various capacities for other affiliated companies. He has been with
PSI since July 1967.
NATHALIE P. MAIO, age 46, is a Director of PBP. She is a Senior Vice
President and Deputy General Counsel of PSI and supervises non-litigation legal
work for PSI. She joined PSI's Law Department in 1983; presently, she also
serves in various capacities for other affiliated companies.
There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and executive officers have
indefinite terms.
7
<PAGE>
<PAGE>
Individual General Partners
George S. Watson, age 56, is a financial specialist and a certified public
accountant. He is also a member of the board of directors of Lyco Energy
Corporation as well as the Advisory Council of the University of Texas Business
School and a member of its Chancellor's Council. Mr. Watson attended the
University of Texas in Austin, graduating summa cum laude in 1963 with a B.B.A.
in accounting and finance. He received his M.B.A. in accounting and finance from
the University of Texas in 1965, graduating first in his class and summa cum
laude. He has received various awards and scholarships and is a member of many
fraternal organizations including Phi Kappa Phi, the honorary scholastic
fraternity.
A. Starke Taylor, III, age 53, holds a bachelor of business administration
degree from Southern Methodist University which was awarded in 1966. He is past
president of the North Dallas Chamber of Commerce. Active in the community, Mr.
Taylor is the chairman of the board of Priority One, an international missionary
organization, the founding chairman of the board of the Park Central Athletic
Association, a member of the Dallas regional board of the Salvation Army, and a
board member of the Dallas Theological Seminary. Mr. Taylor was recognized in
1983 by D Magazine as one of Dallas's 10 most outstanding young business
leaders.
The two individual General Partners are not related.
Item 11. Executive Compensation
The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to either individual General Partner or to directors and officers
of the Managing General Partner for their services. Certain officers and
directors of the Managing General Partner receive compensation from affiliates
of the Managing General Partner, not from the Registrant, for services performed
for various affiliated entities, which may include services performed for the
Registrant; however, the Managing General Partner believes that any compensation
attributable to services performed for the Registrant is immaterial. See also
Item 13 Certain Relationships and Related Transactions for information regarding
reimbursement to the General Partners for services provided to the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 3, 1997, no individual General Partner or director or officer of
the Managing General Partner owns directly or beneficially any interest in the
voting securities of the Managing General Partner.
As of March 3, 1997, no individual General Partner or director or officer of
the Managing General Partner owns directly or beneficially any of the Units
issued by the Registrant. However, the General Partners have contributed to the
Registrant and, based on such contribution, they received ``equivalent units''
entitling them to participate in the distributions to the limited partners and
in the Registrant's profits and losses in the same proportion that the General
Partners' capital contribution bears to the total capital contributions of the
limited partners. The Managing General Partner has retained its right to receive
funds from the Registrant, such as General Partner distributions and
reimbursement of expenses, but has waived its right to share in any limited
partner cash distributions and allocations of Registrant's profits and losses
based upon such equivalent units.
As of March 3, 1997, no limited partner beneficially owns more than five
percent (5%) of the outstanding Units issued by the Registrant.
Item 13. Certain Relationships and Related Transactions
The Registrant has and will continue to have certain relationships with the
General Partners and their affiliates. However, there have been no direct
financial transactions between the Registrant and the individual General
Partners or the directors or officers of the Managing General Partner during
1996.
Reference is made to Notes A and E of the financial statements in the
Registrant's Annual Report which is filed as an exhibit hereto, which identify
the related parties and discuss the services provided by these parties and the
amounts paid or payable for their services.
8
<PAGE>
<PAGE>
PART IV
<TABLE>
<CAPTION>
Page
Number in
Annual Report
<S> <C> <C> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Report of Independent Audi-
tors--Incorporated by reference to the Registrant's Annual Report
which is filed as an exhibit hereto
Report of Independent Auditors 2
Financial Statements:
Statement of Net Assets--December 31, 1996 3
Statement of Financial Condition--December 31, 1995 3
Statement of Changes in Net Assets--Three months ended December
31, 1996 4
Statements of Operations--Nine months ended September 30, 1996
and two years ended December 31, 1995 4
Statements of Changes in Partners' Capital--Nine months ended
September 30, 1996 and two years ended December 31, 1995 5
Statements of Cash Flows--Nine months ended September 30, 1996
and two years ended December 31, 1995 6
Notes to Financial Statements 7
2. Financial Statement Schedules and Consent of Independent Auditors
Consent of Independent Auditors
Schedules:
II--Valuation and Qualifying Accounts and Reserves--Three years
ended December 31, 1996
III--Real Estate and Accumulated Depreciation at December 31,
1996
Notes to Schedule III--Real Estate and Accumulated Depreciation
All other schedules have been omitted because they are not
applicable or the required information is included in the
financial statements and the notes thereto.
3. Exhibits
Description:
2.01 Consent Statement dated September 17, 1996 (1)
3.01 Amended and Restated Certificate and Agreement of Limited
Partnership (2)
3.02 Amendment Number 8 to Amended and Restated Certificate and
Agreement of Limited Partnership (3)
4.01 Revised Form of Certificate of Limited Partnership Interest
(4)
10.01 Management Agreement (2)
10.02 Property Management Agreement dated as of November 1, 1988
by and between the Registrant and Public Storage Commercial
Properties Group, Inc. (4)
10.03 Property Management Agreement dated as of November 1, 1988
by and between the Registrant and Public Storage
Management, Inc. (4)
10.04 Agreement Relating to General Partner Interests (2)
</TABLE>
9
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
13.01 Registrant's Annual Report to Limited Partners for the year
ended December 31, 1996 (with the exception of the information
and data incorporated by reference in Items 3, 7 and 8 of
this Annual Report on Form 10-K, no other information or
data appearing in the Registrant's Annual Report is to be
deemed filed as part of this report)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
Registrant's Current Report on Form 8-K dated December 16, 1996,
as filed with the Securities and Exchange Commission on January
23, 1997, relating to Item 2 regarding the sale of the
Registrant's properties to Public Storage, Inc.
</TABLE>
- ------------------
(1) Filed on the Registrant's Proxy Statement on Schedule 14A and incorporated
herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-11 (No. 2-88785)
and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Form 10-Q for the quarter ended March
31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 10-K for the year ended December
31, 1988 and incorporated herein by reference.
10
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-2
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Prudential-Bache/Watson & Taylor, Ltd.-2 of our report dated February 7,
1997, except for Note G, as to which the date is March 5, 1997, included in the
1996 Annual Report to Limited Partners of Prudential-Bache/Watson & Taylor,
Ltd.-2.
Our audits also included the financial statement schedules of
Prudential-Bache/Watson & Taylor, Ltd.-2 listed in Item 14(a). These schedules
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
New York, New York
February 7, 1997, except for Note G,
as to which the date is March 5, 1997
11
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
December 31, 1996
- --------------------------------------------------------------------------------
Allowance for Loss on Impairment of Assets
<TABLE>
<CAPTION>
Deductions - Amounts
Year Ended Balance at Additions - Amounts Written-off During Balance at
December 31, Beginning of Year Reserved During Year Year End of Year
- ------------ ----------------- -------------------- -------------------- -----------
<S> <C> <C> <C> <C>
1994 $ 1,418,000 -- -- $ 1,418,000
1995 $ 1,418,000 -- -- $ 1,418,000
1996 $ 1,418,000 -- -- $ 1,418,000(1)
- -------------------------------------------------------------------------------------------------------
(1) Shown as a direct deduction of carrying value of remaining property.
</TABLE>
12
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
<TABLE>
<CAPTION>
Amount at which carried at
close of year
-----------------------------------------------
Initial cost to Permanent
Registrant Costs writedown of
(Note B) capitalized impaired assets
----------------------------- subsequent and accumulated
Description Buildings and to Buildings and depreciation
(Note A) Land Improvements acquisition Land Improvements (Notes C & D)
- ----------------------------- ---------- -------------- ------------ -------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Hampton Park
(Capitol Heights, Maryland) 925,595 -- 3,274,366 926,441 3,273,520 2,681,440
---------- -------------- ------------ -------- -------------- ---------------
$ 925,595 $ -- $ 3,274,366 $926,441 $3,273,520 $ 2,681,440
---------- -------------- ------------ -------- -------------- ---------------
---------- -------------- ------------ -------- -------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Description Total Date(s) of Date
(Note A) (Note C) construction acquired
- ----------------------------- ---------- ------------- --------
<S> <C> <C> <C>
Hampton Park
(Capitol Heights, Maryland) 1,518,521 1985/86 1984
----------
$1,518,521
----------
----------
- ---------------------------------------------------------------------------------
</TABLE>
See notes on the following page
13
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
NOTES TO SCHEDULE III
December 31, 1996
NOTE A--There are no mortgages, deeds of trust or similar encumbrances against
the remaining property.
NOTE B--Initial cost represents the initial purchase price of the property
including acquisition fees.
NOTE C--RECONCILIATION SUMMARY OF TRANSACTIONS--REAL ESTATE
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year............................ $22,792,224 $22,623,910 $22,494,603
Allocation of accumulated depreciation against the
carrying amount of the properties based upon the
reclassification of the properties as held for sale... (8,274,973) -- --
Allocation of allowance for loss on impairment of assets
against the carrying amount of the properties based
upon the reclassification of the properties as held
for sale.............................................. (1,418,000) -- --
Additions during the year--property improvements 51,988 168,314 129,307
Deductions during the year--costs of properties
sold(1)............................................... (11,632,718) -- --
----------- ----------- -----------
Balance at close of year................................ $ 1,518,521 $22,792,224 $22,623,910
----------- ----------- -----------
----------- ----------- -----------
(1) In December 1996, the Registrant sold all of its properties except for Hampton Park.
</TABLE>
The aggregate cost of land, buildings and improvements, and furniture and
fixtures for Federal income tax purposes as of December 31, 1996 was $2,508,000.
NOTE D--RECONCILIATION SUMMARY OF TRANSACTIONS--ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year............................ $ 8,274,973 $ 7,511,313 $ 6,778,084
Depreciation during the year charged to expense(1)...... -- 763,660 733,229
Allocation of accumulated depreciation against the
carrying amount of the properties based upon the
reclassification of the properties as held for sale... (8,274,973) -- --
----------- ----------- -----------
Balance at close of year................................ $ -- $ 8,274,973 $ 7,511,313
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(1) The Partnership ceased depreciating the properties for financial
reporting purposes when the properties were reclassified as held for sale as of
December 31, 1995.
14
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Prudential-Bache/Watson & Taylor, Ltd.-2
By: Prudential-Bache Properties, Inc.,
A Delaware corporation,
Managing General Partner
By: /s/ Eugene D. Burak Date: March 27, 1997
----------------------------------------
Eugene D. Burak
Vice President and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the General Partner) and on
the dates indicated.
By: Prudential-Bache Properties, Inc.,
A Delaware corporation,
Managing General Partner
By: /s/ Thomas F. Lynch, III Date: March 27, 1997
-----------------------------------------
Thomas F. Lynch, III
President, Chief Executive Officer,
Chairman of the Board of Directors and
Director
By: /s/ Barbara J. Brooks Date: March 27, 1997
-----------------------------------------
Barbara J. Brooks
Vice President-Finance and
Chief Financial Officer
By: /s/ Eugene D. Burak Date: March 27, 1997
-----------------------------------------
Eugene D. Burak
Vice President
By: /s/ Frank W. Giordano Date: March 27, 1997
-----------------------------------------
Frank W. Giordano
Director
By: /s/ Nathalie P. Maio Date: March 27, 1997
-----------------------------------------
Nathalie P. Maio
Director
15
<PAGE>
<PAGE>
1996
- --------------------------------------------------------------------------------
Prudential-Bache/ Annual
Watson & Taylor, Ltd.-2 Report
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
1996 Annual Report
1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-2
We have audited the accompanying statement of net assets in process of
liquidation of
Prudential-Bache/Watson & Taylor, Ltd.-2 as of December 31, 1996, and the
related statement of changes in net assets in process of liquidation for the
three months then ended. In addition, we have audited the accompanying statement
of financial condition, as of December 31, 1995, and the related statements of
operations, changes in partners' capital, and cash flows for each of the two
years in the period ended December 31, 1995 and for the nine months ended
September 30, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets in liquidation of Prudential-Bache/Watson
& Taylor, Ltd.-2 as of December 31, 1996, the changes in its net assets in
liquidation for the three months then ended, its financial condition as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995, and for the nine months
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note B to the financial statements, in 1995, the Partnership
changed its method of accounting for the carrying value of real estate by
adopting Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
/s/ Ernst & Young LLP
New York, New York
February 7, 1997, except for Note G,
as to which the date is March 5, 1997
2
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(limited partnership)
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
(in process of liquidation)
<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Property held for sale $ 1,518,521
Cash and cash equivalents 1,227,972
Other assets 63,620
-----------
Total assets 2,810,113
-----------
LIABILITIES
Estimated liquidation costs 385,000
Other liabilities 368,769
Due to affiliates, net 47,022
-----------
Total liabilities 800,791
-----------
Contingencies
Net assets available to limited and general partners $ 2,009,322
-----------
-----------
Limited and equivalent partnership units issued and outstanding 51,818
-----------
-----------
- -------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(going concern basis)
<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Property held for sale $13,099,251
Cash and cash equivalents 957,903
Other assets 29,295
-----------
Total assets $14,086,449
-----------
-----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued real estate taxes $ 105,458
Accounts payable and accrued expenses 114,004
Unearned rental income 46,166
Due to affiliates, net 66,280
Deposits due to tenants 88,910
-----------
Total liabilities 420,818
-----------
Partners' capital
Limited partners (51,818 limited and equivalent units issued and outstanding) 13,729,712
General partners (64,081)
-----------
Total partners' capital 13,665,631
-----------
Total liabilities and partners' capital $14,086,449
-----------
-----------
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
3
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996
(in process of liquidation)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets--October 1, 1996 $ 13,768,114 $(63,693 ) $ 13,704,421
Gain on sale of properties 3,472,042 61,300 3,533,342
Net income from liquidating activities 236,833 2,393 239,226
Distributions (15,467,667) -- (15,467,667)
------------ --------- ------------
Net assets--December 31, 1996 $ 2,009,322 $ -- $ 2,009,322
------------ --------- ------------
------------ --------- ------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND THE TWO YEARS ENDED DECEMBER 31, 1995 AND 1994
(going concern basis)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental income $2,190,501 $2,822,490 $2,604,144
Interest 18,769 18,864 11,826
---------- ---------- ----------
2,209,270 2,841,354 2,615,970
---------- ---------- ----------
EXPENSES
Property operating 772,224 1,039,761 938,587
General and administrative 631,977 298,370 277,636
Real estate taxes 185,950 250,259 263,733
Depreciation -- 763,660 733,229
---------- ---------- ----------
1,590,151 2,352,050 2,213,185
---------- ---------- ----------
Net income $ 619,119 $ 489,304 $ 402,785
----------
- ---------- ----------
---------- ---------- ----------
ALLOCATION OF NET INCOME
Limited partners $ 612,928 $ 484,411 $ 398,757
---------- ---------- ----------
---------- ---------- ----------
General partners $ 6,191 $ 4,893 $ 4,028
---------- ---------- ----------
---------- ---------- ----------
Net income per limited partnership unit $ 11.89 $ 9.40 $ 7.73
---------- ---------- ----------
---------- ---------- ----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
4
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(going concern basis)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' capital (deficit)--December 31, 1993 $14,646,452 $(54,821 ) $14,591,631
Net income 398,757 4,028 402,785
Distributions (1,033,761) (10,442 ) (1,044,203)
----------- --------- -----------
Partners' capital (deficit)--December 31, 1994 14,011,448 (61,235 ) 13,950,213
Net income 484,411 4,893 489,304
Distributions (766,147) (7,739 ) (773,886)
----------- --------- -----------
Partners' capital (deficit)--December 31, 1995 13,729,712 (64,081 ) 13,665,631
Net income 612,928 6,191 619,119
Distributions (574,526) (5,803 ) (580,329)
----------- --------- -----------
Partners' capital (deficit)--September 30, 1996 $13,768,114 $(63,693 ) $13,704,421
----------- --------- -----------
----------- --------- -----------
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement
</TABLE>
5
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND THE TWO YEARS ENDED DECEMBER 31, 1995 AND 1994
(going concern basis)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income and deposits received $2,199,943 $2,836,953 $ 2,643,526
Interest received 18,769 18,864 11,826
Property operating expenses paid (776,748) (1,023,664) (1,000,891)
Real estate taxes paid (200,963) (244,205) (261,994)
General and administrative expenses paid (435,568) (235,304) (357,496)
---------- ---------- -----------
Net cash provided by operating activities 805,433 1,352,644 1,034,971
CASH FLOWS FROM INVESTING ACTIVITIES
Property improvements (49,491) (168,314) (129,307)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners (580,329) (773,886) (1,063,610)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 175,613 410,444 (157,946)
Cash and cash equivalents at beginning of period 957,903 547,459 705,405
---------- ---------- -----------
Cash and cash equivalents at end of period $1,133,516 $ 957,903 $ 547,459
---------- ---------- -----------
---------- ---------- -----------
- ----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 619,119 $ 489,304 $ 402,785
---------- ---------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- 763,660 733,229
Changes in:
Other assets (13,933) (7,951) 47,363
Accounts payable and accrued expenses 197,792 37,441 (94,526)
Due to affiliates, net (5,907) 41,723 (47,638)
Accrued real estate taxes (15,013) 6,053 1,739
Unearned rental income 14,787 (3,836) (5,984)
Deposits due to tenants 8,588 26,250 (1,997)
---------- ---------- -----------
Total adjustments 186,314 863,340 632,186
---------- ---------- -----------
Net cash provided by operating activities $ 805,433 $1,352,644 $ 1,034,971
---------- ---------- -----------
---------- ---------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
6
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache/Watson & Taylor, Ltd.-2 (the ``Partnership'') is a Texas
limited partnership formed on November 14, 1983 which will terminate in
accordance with a vote of the limited partners as described below. The
Partnership was formed for the purpose of acquiring, developing, owning and
operating mini-storage and office/warehouse facilities. The general partners of
the Partnership are Prudential-Bache Properties, Inc. (``PBP''), a wholly-owned
subsidiary of Prudential Securities Group Inc., George S. Watson, and A. Starke
Taylor, III (collectively, the ``General Partners''). PBP is the Managing
General Partner and is responsible for the day-to-day operations of the
Partnership and its investments.
On December 15, 1995, the Management Committee of the Partnership determined
to seek bids for all the properties held by the Partnership. On June 13, 1996,
the Partnership entered into a contract with Public Storage, Inc., the property
manager of the Partnership's properties, for the sale of all the Partnership's
properties. This sale was subject to the approval by the limited partners
holding a majority of the limited partnership units and certain other conditions
and potential price adjustments.
In accordance with a consent statement dated September 17, 1996 (the
``Consent Statement''), the limited partners approved, on October 18, 1996, the
sale to Public Storage, Inc. of all eight miniwarehouse facilities owned by the
Partnership and the liquidation and dissolution of the Partnership. Seven of the
eight properties which were under contract were sold to Public Storage, Inc. and
its affiliates on December 16, 1996. The Partnership received, in cash, gross
sales proceeds of $16,000,000 reduced by certain selling expenses and
pro-rations of approximately $433,000. The gross sales price was in excess of
the appraised value of the properties and resulted in a gain on sale of
approximately $3,533,000 for financial reporting purposes.
The Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland. This property has evidenced certain concentrations of
hazardous materials which were discovered in an environmental review of the
property. The results of the environmental assessment have been reported to the
appropriate State environmental regulatory departments. It is uncertain at this
time what the State environmental regulatory departments will ultimately require
to resolve the environmental issue at the property, although currently the State
is requiring that the situation be monitored on a quarterly basis. Due to the
uncertainty of the environmental status of the property, Public Storage, Inc.
has decided not to proceed with the purchase of this property. Accordingly, it
is currently uncertain when the final sale of this property will occur.
A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet current and future operating costs until the liquidation
of the Partnership. The Partnership intends to liquidate in 1997, subject to the
prior sale of the Hampton Park property, and will distribute any remaining funds
at such time. There are no assurances that a buyer can be found for the Hampton
Park property until the environmental issue is resolved. Estimated costs
expected to be incurred through the date of liquidation of the Partnership have
been accrued in the accompanying financial statements.
B. Summary of Significant Accounting Policies
Basis of accounting
As a result of the pending liquidation of the Partnership, the Partnership
changed from the going-concern basis and adopted the liquidation basis of
accounting effective October 1, 1996. Accordingly, the net assets of the
Partnership at December 31, 1996 are stated at liquidation value, i.e., the
assets have been valued at their estimated net realizable values and the
liabilities include estimated amounts to be incurred through the date of
liquidation of the Partnership. The actual remaining net proceeds from
liquidation will depend upon a variety of factors and are likely to differ from
the estimated amounts reflected in the accompanying financial statements.
7
<PAGE>
<PAGE>
Property
Effective December 31, 1995, the Partnership adopted Statement of Financial
Accounting Standards (``SFAS'') No. 121, ``Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. For properties
that are held for sale, SFAS No. 121 states that they should be recorded at the
lower of carrying amount or estimated fair value less costs to sell. On December
15, 1995, the Management Committee of the Partnership determined to seek bids
for all of the properties held by the Partnership. Accordingly, effective
December 31, 1995, the Partnership had reclassified its properties from held for
use to held for sale and had ceased depreciating the properties for financial
statement purposes only. The adoption of SFAS No. 121 had no material effect on
the financial position of the Partnership as of December 31, 1995.
Prior to December 31, 1995, property investments were carried at the lower of
the carrying amount or estimated amounts recoverable through future operations
and sale of the property. Property investments were depreciated using the
straight-line method over their estimated economic lives which range from 5 to
25 years depending on property type.
Income taxes
The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual partners. The Partnership may be subject to other
state and local taxes in jurisdictions in which it operates.
Profit and loss allocations and distributions
Net income from operations is allocated and cash from operations is
distributed 99% to the limited partners and 1% to the General Partners. Net loss
from operations is allocated 92% to the limited partners and 8% to the General
Partners.
Income from a Terminating Sale, as defined in the Partnership Agreement, is
allocated first to all partners having negative capital account balances, to the
extent of such balances, and then to the limited partners until their capital
accounts equal their Adjusted Capital Contribution plus a Cumulative Preference
as those terms are defined in the Partnership Agreement. However, the minimum
allocation to the General Partners of income from a Terminating Sale shall not
be less than 1%. Sales proceeds from a Terminating Sale are first used for the
payment of any debts or obligations of the Partnership, then any balance
remaining is distributed to the partners having positive capital account
balances.
Net income per limited partnership unit is based on 51,560 limited and
equivalent units outstanding, which excludes 258 equivalent units held by PBP
(see Note E) for which PBP has waived all of its rights therein.
C. Property Held for Sale
The Partnership's property consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- -----------
<S> <C> <C>
Arlington-Arlington, Texas $ -- $ 2,640,040
Arapaho-Richardson, Texas -- 2,219,881
South May/I-240-Oklahoma City, Oklahoma -- 1,331,989
Santa Fe/79th St.-Oklahoma City, Oklahoma -- 836,911
South May/44th St.-Oklahoma City, Oklahoma -- 754,917
Timbercrest-Tulsa, Oklahoma -- 2,911,633
Cherry Hill-Cherry Hill, New Jersey -- 897,174
Hampton Park-Capitol Heights, Maryland 1,518,521 1,506,706
---------- -----------
$1,518,521 $13,099,251
---------- -----------
---------- -----------
</TABLE>
In December 1996, the Partnership sold all of its properties except for
Hampton Park.
8
<PAGE>
<PAGE>
D. Net Income From Liquidating Activities
Net income from liquidating activities for the three months ended December
31, 1996 consisted of:
<TABLE>
<S> <C>
Rental and other income $ 699,656
---------
Property operating expenses 370,952
General and administrative expenses (295,522)
Estimated liquidation expenses 385,000
---------
460,430
---------
Net income from liquidating activities $ 239,226
---------
---------
</TABLE>
The credit balance for general and administrative expenses resulted from the
reclassification in the three months ended December 31, 1996 of certain Consent
Statement costs which arose in the nine months ended September 30, 1996. These
consent costs were reclassified as a reduction of the gain on sale of the
property during the three months ended December 31, 1996.
E. Related Parties
PBP and its affiliates perform services for the Partnership which include,
but are not limited to: accounting and financial management, transfer and
assignment functions, asset management, investor communications, printing and
other administrative services. PBP and its affiliates receive reimbursements for
costs incurred in connection with these services, the amount of which is limited
by the provisions of the Partnership Agreement. The costs and expenses incurred
on behalf of the Partnership which are reimbursable to PBP and its affiliates
for the years ended December 31, 1996, 1995 and 1994 were approximately
$140,000, $104,000 and $95,000, respectively.
Affiliates of Messrs. Watson and Taylor, the individual General Partners,
also perform certain administrative and monitoring functions on behalf of the
Partnership. In 1994, the Partnership recorded approximately $31,000 for the
reimbursement of certain prior periods' general, administrative and monitoring
expenses incurred by affiliates of the individual General Partners.
Approximately $39,000 and $24,000 were incurred in 1996 and 1995, respectively.
In conjunction with the adoption of the liquidation basis of accounting, the
Partnership has recorded an accrual as of December 31, 1996 for the estimated
costs expected to be incurred to liquidate the Partnership. Included in these
estimated liquidation costs is $140,000 expected to be payable to the General
Partners and their affiliates during the anticipated remaining liquidation
period. The actual charges to be incurred by the Partnership will depend
primarily upon the length of time required to liquidate the Partnership's
remaining net assets, and may differ from the amounts accrued as of December 31,
1996.
PBP and the individual General Partners of the Partnership, own 258, 130 and
130 equivalent limited partnership units, respectively. PBP receives funds from
the Partnership, such as General Partner distributions and reimbursement of
expenses, but has waived all of its rights resulting from its ownership of
equivalent limited partnership units. Accordingly, the 258 units owned by PBP
have been excluded from the calculation of net income per limited partnership
unit and distributions per limited partnership unit.
Prudential Securities Incorporated (``PSI''), an affiliate of PBP, owns 180
limited partnership units at December 31, 1996.
9
<PAGE>
<PAGE>
F. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for tax reporting purposes:
<TABLE>
<CAPTION>
For the year ended December 31
--------------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Net income per financial statements $4,391,687(a) $ 489,304 $ 402,785
Tax gain on sale of property in excess of book amount 3,997,311 -- --
Estimated liquidation costs, deducted for books not tax 385,000 -- --
Rent received in advance, net of reversal of prior year
amount (46,167) (3,836) (5,984)
Bad debt (recovery) provision for book purposes -- (25,000) (15,000)
Tax depreciation and amortization in excess of book amounts (913,542) (234,947) (357,299)
---------- --------- ---------
Tax basis net income $7,814,289 $ 225,521 $ 24,502
---------- --------- ---------
---------- --------- ---------
</TABLE>
(a) Includes gain on sale of properties ($3,533,342) and net income for
liquidating activities ($239,226) which are reflected in the Statement of
Changes in Net Assets.
The differences between the tax basis and book basis of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments and the initial charge to partners' capital of syndication costs,
for book purposes, when the Partnership was formed.
G. Subsequent Event
On March 5, 1997, a lawsuit captioned Madison Partnership Liquidity Investors
VIII, LLC (``Madison'') v. Prudential-Bache Properties, Inc. was filed in the
Court of Chancery in the State of Delaware. The suit alleges a breach of
contract with Madison and a breach of fiduciary duty to Madison, as well as
intentional interference with the contract between Madison and the purported
tendering limited partners. The suit seeks injunctive and declaratory relief
demanding that the Partnership's transfer agent effectuate the purported
transfers to Madison, pursuant to the tender offer made by Madison to the
limited partners. The lawsuit does not name the Partnership as a defendant but
does name the Partnership's Managing General Partner. The distribution amounts
in excess of Madison's tender offer price, with respect to the Units that are
the subject of this lawsuit, have been escrowed by the Partnership's transfer
agent pending a resolution of this issue. The Managing General Partner is
preparing an answer to the complaint at this time.
10
<PAGE>
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
In accordance with the Consent Statement dated September 17, 1996, the
limited partners approved, on October 18, 1996, the sale to Public Storage, Inc.
of all eight miniwarehouse facilities owned by the Partnership and the
liquidation and dissolution of the Partnership. Seven of the eight properties
which were under contract were sold to Public Storage, Inc. and its affiliates
on December 16, 1996. The Partnership received, in cash, gross sales proceeds of
$16,000,000 reduced by certain selling expenses and pro-rations of approximately
$433,000. The gross sales price was in excess of the appraised value of the
properties and resulted in a gain on sale of approximately $3,533,000 for
financial reporting purposes.
The Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland. This property has evidenced certain concentrations of
hazardous materials which were discovered in an environmental review of the
property. The results of the environmental assessment have been reported to the
appropriate State environmental regulatory departments. It is uncertain at this
time what the State environmental regulatory departments will ultimately require
to resolve the environmental issue at the property, although currently the State
is requiring that the situation be monitored on a quarterly basis. Due to the
uncertainty of the environmental status of the property, Public Storage, Inc.
has decided not to proceed with the purchase of this property. Accordingly, it
is currently uncertain when the final sale of this property will occur.
A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet current and future operating costs until the liquidation
of the Partnership. The Partnership intends to liquidate in 1997, subject to the
prior sale of the Hampton Park property, and will distribute any remaining funds
at such time. Estimated costs expected to be incurred through the date of
liquidation of the Partnership have been accrued in the accompanying financial
statements. There are no assurances that a buyer can be found for the Hampton
Park property until the environmental issue is resolved.
Results of Operations
All significant fluctuations between 1995 and 1996 were due to comparing nine
months in 1996 on a going-concern basis to twelve months in 1996, the sale of
substantially all the Partnership's properties during 1996 and the accrual of
estimated costs relating to the liquidation of the Partnership.
1995 vs 1994
Net income increased by $87,000 for the year ended December 31, 1995 as
compared to the year ended December 31, 1994 for the reasons discussed below.
Rental income increased by approximately $218,000 for the year ended December
31, 1995 as compared to the year ended December 31, 1994. Rental income
increased primarily due to improved rental rates at all properties. In addition,
all of the properties except Arlington, South May/I-240 and Santa Fe had an
increase in average occupancies.
Property operating expenses increased by approximately $101,000 for the year
ended December 31, 1995 compared to the year ended December 31, 1994. These
increases were due to higher property level payroll costs at all properties
except Santa Fe, higher utility expense at all properties except South May/I-240
and Arapaho, and increased insurance expense primarily at Arlington and Hampton
Park. These increases were partially offset by decreases in repairs and
maintenance expense especially at Arapaho, Timbercrest, South May/I-240 and
Cherry Hill. Management fees also increased because they are based on rental
income. In addition, leasing commissions have increased since more of the
commercial units have been leased.
General and administrative expenses increased by approximately $21,000 for
the year ended December 31, 1995 as compared to the year ended December 31,
1994. The increases are primarily due to increased professional fees and higher
costs associated with administering the Partnership.
11
<PAGE>
<PAGE>
OTHER INFORMATION
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential-Bache/Watson & Taylor, Ltd.-2
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
12
<PAGE>
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PBW&T2/171650
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for P-B Watson & Taylor Ltd 2
and is qualified in its entirety by reference
to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000737296
<NAME> P-B Watson & Taylor Ltd 2
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<PERIOD-TYPE> 12-Mos
<CASH> 1,227,972
<SECURITIES> 0
<RECEIVABLES> 63,620
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,291,592
<PP&E> 1,518,521
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,810,113
<CURRENT-LIABILITIES> 800,791
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,009,322
<TOTAL-LIABILITY-AND-EQUITY> 2,810,113
<SALES> 0
<TOTAL-REVENUES> 2,209,270<F1>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,590,151<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 619,119<F1>
<EPS-PRIMARY> 11.89<F1>
<EPS-DILUTED> 0
<FN>
<F1>Reflects operations for the nine months ended September 30, 1996
when the liquidation basis of accounting was adopted. See Note B to the
financial statetments for further details.
</TABLE>
