<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, 1997
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
One Seaport Plaza, New York, N.Y. 10292-0128
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 214-3500
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, 1997 is incorporated by reference into Parts 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 8 and 9.
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1 Business.......................................................................... 3
Item 2 Properties........................................................................ 4
Item 3 Legal Proceedings................................................................. 4
Item 4 Submission of Matters to a Vote of Limited Partners............................... 4
PART II
Item 5 Market for the Registrant's Units and Related Limited Partner Matters............. 4
Item 6 Selected Financial Data........................................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 5
Item 8 Financial Statements and Supplementary Data....................................... 5
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 5
PART III
Item 10 Directors and Executive Officers of the Registrant................................ 5
Item 11 Executive Compensation............................................................ 7
Item 12 Security Ownership of Certain Beneficial Owners and Management.................... 7
Item 13 Certain Relationships and Related Transactions.................................... 7
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 8
Financial Statements and Financial Statement Schedules............................ 8
Exhibits.......................................................................... 8
Reports on Form 8-K............................................................... 9
SIGNATURES................................................................................... 14
</TABLE>
2
<PAGE>
<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 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 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 prorations 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 evidenced certain concentrations of hazardous
materials discovered in an environmental review of the property. The property
continues to be monitored by the State environmental regulatory department, but
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property. The Registrant intends to sell the property
as soon as possible; however, no buyer for the property has been identified and
it is uncertain when any such sale will be consummated.
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 the anticipated current and future operating costs until
the liquidation of the Registrant. The Registrant intends to liquidate in 1998,
subject to and assuming the prior sale of the Hampton Park property, and will
distribute any remaining funds at such time.
Effective February 28, 1998, American Office Park Properties, Inc., a
subsidiary of Public Storage, Inc., terminated its management of the Hampton
Park property. The Registrant has entered into a management agreement
('Management Agreement') with Watson & Taylor Management, Inc. ('WTMI'), an
affiliate of the individual General Partners, effective March 1, 1998. WTMI will
be responsible for the day-to-day operation of the property, including the
supervision of the on-site managers and the establishment of rental policies and
rates for new rentals and renewals and will direct the marketing activity for
the property.
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.
3
<PAGE>
Item 2. Properties
As of December 31, 1997, the Registrant 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 1997(1) (in acres) Units 1997
- -------------------------------------- ------------------- ---------- -------- --------------------
<S> <C> <C> <C> <C>
Hampton Park (Capitol Heights,
Maryland)
Mini-warehouse 92.3% 5.87 130 $ 29 - $280
Commercial 68 $ 200 - $1,523
--------
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, 1997, 1996 and 1995, respectively, the
following properties' rental revenues exceeded 15% of the Registrant's total
revenue:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Hampton Park 95 % 17% *%
Arapaho -- 19 19
Arlington -- 16 17
</TABLE>
* Property's rental revenue was 15% or less of the Registrant's total revenue
for the year.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Limited Partners
None
PART II
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
As of March 5, 1998, there were 3,454 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.
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 1997 1996
------------------------------------ ----- -----
<S> <C> <C>
March 31 $ -- $3.71
June 30 -- 3.71
September 30 -- --
December 31 -- --
</TABLE>
4
<PAGE>
<PAGE>
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 the anticipated current and future operating costs until the liquidation of
the Registrant. The Registrant intends to liquidate in 1998, subject to and
assuming the prior sale of the Hampton Park property, and will distribute any
remaining funds at such time.
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 8 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
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 2,209,270 $ 2,841,354 $ 2,615,970 $ 2,461,721
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Net income $ 619,119 $ 489,304 $ 402,785 $ 347,081
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Limited partner net income per Unit $ 11.89 $ 9.40 $ 7.73 $ 6.66
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Total assets $14,325,486 $14,086,449 $14,263,400 $15,072,631
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Total distributions $ 580,329 $ 773,886 $ 1,044,203 $ 886,930
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Limited partner distributions per Unit $ 11.13 $ 14.86 $ 20.05 $ 17.03
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
* As of October 1, 1996, the Partnership adopted the liquidation basis of accounting in accordance
with generally accepted accounting principles and, therefore, there is no reporting of results of
operations for the three months ended December 31, 1996 and for the year ended December 31, 1997.
Total assets at December 31, 1996 and 1997 were $2,810,113 and $2,468,042, respectively.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to page 9 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 8
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.
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 10% 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 10% 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
5
<PAGE>
<PAGE>
General Partners, PBP's directors and executive officers and other persons who
own greater than 10% 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:
Name Position
Brian J. Martin 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
Frank W. Giordano Director
Nathalie P. Maio Director
BRIAN J. MARTIN, age 47, 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. Martin
also serves in various capacities for certain other affiliated companies. Mr.
Martin joined PSI in 1980. Mr. Martin is a member of the Pennsylvania Bar.
BARBARA J. BROOKS, age 49, 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 52, 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.
FRANK W. GIORDANO, age 55, 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 47, 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.
Thomas F. Lynch, III ceased to serve as President, Chief Executive Officer,
Chairman of the Board of Directors and a Director of Prudential-Bache
Properties, Inc. effective May 2, 1997. Effective May 2, 1997, Brian J. Martin
was elected President, Chief Executive Officer, Chairman of the Board of
Directors and a Director of Prudential-Bache Properties, Inc.
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.
Individual General Partners
GEORGE S. WATSON, age 57, is a financial specialist and a certified public
accountant. He has been instrumental in the success of The Community Minority
Business Advancement Program sponsored by the University of Texas at Austin
College and Graduate Schools of Business. Mr. Watson is a member of the Advisory
Council of the University of Texas at Austin Business School and a member of its
Chancellor's Council. Mr. Watson attended the University of Texas at Austin,
graduating summa cum laude in 1963 with a BBA in accounting and finance. He
received his MBA in accounting and finance from the University of Texas in 1965,
graduating first in his class and summa cum laude. He also has received various
awards and scholarships and is a member of many fraternal organizations
including Phi Kappa Phi, the honorary scholastic society. Mr. Watson has over 25
years of experience in real estate and financial investments.
6
<PAGE>
<PAGE>
A. STARKE TAYLOR, III, age 54, 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. Mr. Taylor is a member of the
boards of the Dallas Theological Seminary and the Northeast Texas Regional Board
of Young Life. He is president of Sovereign Corporation, a business investment
and finance organization. Mr. Taylor has over 25 years of experience in real
estate, insurance and financial investments.
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 5, 1998, 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 5, 1998, 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 5, 1998, no limited partner beneficially owns more than 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
1997.
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.
7
<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
Auditors--incorporated by reference to the Registrant's Annual
Report which is filed as an exhibit hereto
Report of Independent Auditors 2
Financial Statements:
Statements of Net Assets--December 31, 1997 and 1996 3
Statements of Changes in Net Assets--Year ended December 31, 1997
and three months ended December 31, 1996 3
Statements of Operations--Nine months ended September 30, 1996
and year ended December 31, 1995 4
Statements of Changes in Partners' Capital--Nine months ended
September 30, 1996 and year ended December 31, 1995 4
Statements of Cash Flows--Nine months ended September 30, 1996
and year ended December 31, 1995 5
Notes to Financial Statements 6
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, 1997
III--Real Estate and Accumulated Depreciation at December 31,
1997
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>
8
<PAGE>
<TABLE>
<S> <C> <C> <C>
10.05 Management Agreement dated March 1, 1998 by and between the
Registrant and Watson & Taylor Management, Inc., a Texas
corporation (filed herewith)
13.01 Registrant's Annual Report to Limited Partners for the year
ended December 31, 1997 (with the exception of the information
and data incorporated by reference in Items 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--None
</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.
9
<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 18,
1998, except for Note G as to which the date is March 1, 1998, included in the
1997 Annual Report to Limited Partners of Prudential-Bache/Watson & Taylor,
Ltd.-2.
Our report 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
March 30, 1998
10
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
December 31, 1997
<TABLE>
- -------------------------------------------------------------------------------------------------------
Allowance for Loss on Impairment of Assets
<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>
1995 $ 1,418,000 -- -- $ 1,418,000
1996 $ 1,418,000 -- -- $ 1,418,000(1)
1997 $ 1,418,000 -- -- $ 1,418,000(1)
- -------------------------------------------------------------------------------------------------------
(1) Shown as a direct deduction of carrying value of property held for sale.
</TABLE>
11
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<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
---------- -------------- ------------ -------- -------------- ---------------
---------- -------------- ------------ -------- -------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Description Total Dates of Date
(Note A) (Note C) construction acquired
<S> <C> <C> <C>
- ----------------------------- ---------- ------------- --------
Hampton Park
(Capitol Heights, Maryland) $1,518,521 1985/86 1984
----------
----------
- ---------------------------------------------------------------------------------
</TABLE>
See notes on the following page
12
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
NOTES TO SCHEDULE III
December 31, 1997
<TABLE>
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
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 1,518,521 $22,792,224 $22,623,910
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
Deductions during the year--costs of properties
sold(1).............................................. -- (11,632,718) --
------------ ----------- -----------
Balance at close of year............................... $ 1,518,521 $ 1,518,521 $22,792,224
------------ ----------- -----------
------------ ----------- -----------
(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, net of depreciation, for Federal income tax purposes as of December
31, 1997 was $2,286,808.
<TABLE>
<CAPTION>
NOTE D--RECONCILIATION SUMMARY OF TRANSACTIONS--ACCUMULATED DEPRECIATION
Year ended December 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ -- $ 8,274,973 $ 7,511,313
Depreciation during the year charged to expense(1)..... -- -- 763,660
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
------------ ----------- -----------
------------ ----------- -----------
</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.
13
<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 31, 1998
----------------------------------------
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/ Brian J. Martin Date: March 31, 1998
-----------------------------------------
Brian J. Martin
President, Chief Executive Officer,
Chairman of the Board of Directors and Director
By: /s/ Barbara J. Brooks Date: March 31, 1998
-----------------------------------------
Barbara J. Brooks
Vice President-Finance and
Chief Financial Officer
By: /s/ Eugene D. Burak Date: March 31, 1998
-----------------------------------------
Eugene D. Burak
Vice President
By: /s/ Frank W. Giordano Date: March 31, 1998
-----------------------------------------
Frank W. Giordano
Director
By: /s/ Nathalie P. Maio Date: March 31, 1998
-----------------------------------------
Nathalie P. Maio
Director
14
<PAGE>
MANAGEMENT AGREEMENT
This Management Agreement, dated as of March 1, 1998 is entered into by and
between Watson&Taylor Management, Inc., a Texas corporation ("WTMI"), and
Prudential-Bache/Watson&Taylor, Ltd. - 2, a Texas limited partnership (the
"Partnership").
W I T N E S S E T H :
Whereas, the Partnership owns a combination retail, office-warehouse, office,
and self-service storage facility located in Capitol Heights, Prince George's
County, Maryland (the "Property"); and
Whereas, it is the intention of the Partnership that the Property be rented on
a space-by-space basis to corporations, partnerships, individuals, or other
entities for use as retail, office-warehouse, office, and storage facilities
for personal and business use; and
Whereas, WTMI is in the business of managing other facilities both similar and
dissimilar to the Property; and
Whereas, the Partnership desires that the Property be managed efficiently; and
Whereas, the Partnership desires to employ WTMI to manage the Property, and
WTMI desires to accept said employment, all in accordance with the terms of
this Agreement as hereinafter set forth;
Now, Therefore, in consideration for the mutual covenants herein contained, the
parties hereby agree as follows:
1. Employment.
(a) The Partnership hereby employs WTMI and WTMI hereby accepts such employment
as manager of the Property (subject to termination pursuant to Section 5
below), upon the terms and conditions hereinafter set forth.
(b) The Partnership acknowledges that WTMI is in the business of managing
mini-warehouse, office/showroom warehouse, and other properties both for its
own account and for others. It is hereby expressly agreed that WTMI and its
affiliates may continue to engage in such activities, may manage additional
facilities (whether or not such other facilities may be in direct or indirect
competition with the Partnership), and may in the future engage in other
business which may compete directly or indirectly with the Partnership.
(c) In the performance of its duties under this Agreement, WTMI shall occupy
the position of an independent contractor with respect to the Partnership.
Nothing contained herein shall be construed as making the parties hereto
partners or joint venturers, nor, except as expressly otherwise provided for
herein, construed as making WTMI an agent or employee of the Partnership.
2. Duties and Authority of WTMI.
(a) General Duties and Authority. Subject only to the restrictions and
limitations
<PAGE>
provided in paragraphs (n) and (o) of this Section 2 and the right
of the Partnership to terminate this Agreement as provided in Section 5 hereof,
WTMI shall have the sole and exclusive authority to fully and completely
supervise the Property and supervise and direct the business and affairs
associated or related to the daily operation thereof and to that end to cause
or direct the Partnership to execute such documents or instruments and hire or
discharge such employees as may be deemed reasonably necessary or advisable.
Such duties and authority shall include those set forth as follows which are
not in limitation of the foregoing.
(b) Renting of Property. WTMI shall establish policies and procedures for
directing the marketing activities of personnel engaged by or on behalf of the
Partnership. WTMI shall have the sole discretion, which discretion shall be
exercised in good faith, to establish the terms and conditions of occupancy by
the tenants of the Property, and WTMI is hereby authorized to direct and
control the Partnership employees, or those employed on behalf of the
Partnership, in entering into rental agreements on behalf of, in the name of,
and for the account of the Partnership with such tenants and in collecting
rent from such tenants. WTMI shall cause the Partnership to advertise in such
media and to the extent that it deems necessary and appropriate.
(c) Repair, Maintenance, and Improvements. WTMI shall make and execute, or
supervise and have control over the making and executing of all decisions
concerning the acquisition of furniture, fixtures, equipment, and supplies for
the Property, and the purchase, lease, or other acquisition of the same on
behalf of, in the name of, and for the account of the Partnership. WTMI shall
make and execute, or supervise and have control over the making and executing,
of all decisions concerning the maintenance, repair, and landscaping of the
Property; and shall negotiate and contract for and supervise the installation
of all capital improvements related to the Property. However, all capital
improvements shall be subject to Partnership Approval.
(d) Personnel. WTMI, or personnel engaged on behalf of the Partnership acting
pursuant to the direction of WTMI, shall select all vendors, suppliers,
contractors, subcontractors, and employees with respect to the Property and
shall hire, discharge, and supervise all labor and employees required for the
operation (including billing and collections) and maintenance of the Property,
including attorneys, accountants, consultants, and clerical employees; all such
acts shall be on behalf of, in the name of, and for the account of the
Partnership and any employees so hired shall be carried on the payroll of
either WTMI or a corporation organized to employ such personnel. Employees
shall be limited to on-site resident managers and relief managers unless
agreed otherwise. All personnel employed on behalf of the Partnership shall
be supervised by WTMI
(e) Agreements. WTMI shall negotiate and execute on behalf of and in the name
of the Partnership such agreements which WTMI deems necessary or advisable for
the furnishing of utilities, services, concessions, and supplies, for the
maintenance, repair, and operation of the Property and such other agreements
which may benefit the Property or be incidental to the matters for which WTMI
is responsible hereunder. All contracts shall be limited to a period of one
year and shall be cancelable upon 30 days notice without penalty.
(f) Other Decisions. WTMI shall make all policy decisions, and shall have
control over the making of all of the more routine decisions, in connection
with the daily operation of the Property.
<PAGE>
(g) Regulations and Permits. WTMI shall use its best efforts to cause all
things to be done, on behalf of, in the name of, and for the account of the
Partnership, on the Property necessary to comply with any statute, ordinance,
law, regulation, or order of any governmental or regulatory body having
jurisdiction over the Property, respecting the use of the Property or the
maintenance and operation thereof, and with all orders and requirements of the
local fire marshall or any other body which may hereafter exercise similar
functions. WTMI shall cause the Partnership to apply for and attempt to
obtain and maintain, on behalf of, in the name of, and for the account of the
Partnership, all licenses and permits required or advisable (in the sole
judgement of WTMI) in connection with the management and operation of the
Property.
(h) Accounting. WTMI shall establish, supervise, direct, and maintain the
operation of an accounting system and shall cause to be prepared and delivered
to the Partnership, financial statements as follows:
(i) On or before fifteen (15) days after the close of each month, a statement
of operations showing the results of operation of the Property for the
preceding month and of the fiscal year-to-date.
(ii) On or before thirty (30) days after the close of the fiscal year, a
balance sheet and related statement of operations showing the results of the
operation of the Property during said fiscal year.
(i) Deposits and Disbursements. WTMI shall establish bank accounts in the name
of the Partnership and shall deposit or cause personnel engaged on behalf of
the Partnership to deposit therein all receipts and monies arising from the
operation of the Property or otherwise received for and on behalf of the
Partnership. WTMI shall disburse Partnership funds from said accounts on
behalf and in the name of the Partnership in such amounts and at such times as
disbursement of such revenues for payment of payroll, or employee leasing
expense, and other obligations of the Partnership is required.
(j) Collection. WTMI shall supervise and direct personnel engaged on behalf of
the Partnership in the collection and billing of all accounts payable and due
to the Partnership with respect to the Property and shall be responsible for
establishing policies and procedures to minimize the amount of bad debts.
(k) Legal Actions. WTMI shall cause to be instituted, on behalf of, and in
the name of the Partnership any and all legal actions or proceedings WTMI
deems necessary or advisable to collect charges, rent, or other income due to
the Partnership with respect to the Property or to oust or dispossess tenants
or other persons unlawfully in possession under any lease, license, concession
agreement, or otherwise, and to collect damages for breach thereof or default
thereunder by such tenant, licensee, concessionaire, or occupant. The costs of
all such legal actions or proceedings shall be borne by the Partnership.
(l) Insurance. WTMI shall use its best efforts to assure that there is
obtained and kept in force, at the expense of the Partnership, fire,
comprehensive, liability, and other insurance policies in amounts generally
carried with respect to similar facilities.
(m) Taxes. WTMI shall disburse from Partnership funds all taxes, and
assessments properly levied on the Partnership with respect to the Property,
on behalf of, in the name of and
<PAGE>
for the account of the Partnership. WTMI
shall use its best efforts to assure that the Partnership maintains and
implements a procedure for review by the Partnership of all amounts assessed
on the Property.
(n) Restrictions. Notwithstanding anything to the contrary set forth in this
Section 2, WTMI shall not be required to do, or cause to be done, anything for
the account of the Partnership (i) which may make WTMI liable to third parties;
(ii) which may not be commenced, undertaken, or completed because of
insufficient funds available in the accounts established pursuant to this
Section; or (iii) which may, under applicable law, constitute an impermissible
delegation of the General Partners' duties and responsibilities, including but
not limited to, the purchase or construction of capital improvements, the sale
or disposition of all or substantially all of the Partnership's assets, and
any action which may result in a change in the Partnership's primary business;
or (iv) which may not be commenced, undertaken, or completed because of acts
of God, strikes, governmental regulations or laws, acts of war, riots, or
other types of events beyond the control of WTMI whether similar or dissimilar
to the foregoing.
(o) Limitations on WTMI's Authority. Notwithstanding anything to the contrary
set forth in this Section 2, WTMI shall not, without obtaining the prior
written consent of the Partnership, (i) rent space at the Property by written
lease agreement for a term in excess of two years; or (ii) alter the buildings
or other structures of the Property in any material manner.
3. Duties of the Partnership.
The Partnership hereby agrees to cooperate with WTMI in the performance of its
duties under this Agreement and to that end, upon the request of WTMI, to
provide reasonable temporary office space for WTMI on the premises of the
Property, give WTMI access to all files, books, and records of the Partnership
relevant to the Property, and execute all documents or instruments and hire and
discharge such employees as WTMI in its sole judgement deems necessary or
advisable to enable it to fulfill its duties under this Agreement. Such
employees shall include, but not necessarily be limited to resident managers,
relief managers, and administrative personnel.
4. Compensation of WTMI.
Management Fee. Except as otherwise provided in paragraph (b) hereof, the
Partnership shall pay to WTMI as the full amount due for the services herein
provided a management fee equal to 4.5% of the "Gross Revenue" derived from or
connected with the Property. The Term "Gross Revenue" shall mean all receipts
of the Property (whether or not received by WTMI on behalf of or for the
account of the Property or Partnership) arising from the operation of the
Property, including without limitation, rental payments of leasers of space in
the Property, vending machine or concessionaire net revenues, maintenance
charges, if any, paid by the tenants of the Property in addition to basic
rent, parking fees, if any, and all money, whether or not described herein,
paid for the use of the Property. Gross Revenue shall be determined on a cash
basis. Gross Revenue shall not include security deposits collected until such
time as the security deposits or the portion thereof is forfeited and applied
to rent and other charges. The management fee for each month shall be paid
promptly after the end of such month and shall be calculated on the basis of
the Gross Revenue for such month.
<PAGE>
5. Termination.
Upon 60 Days written notice to the other party, either party may terminate this
Agreement with or without cause. Additionally, the Partnership may terminate
this Agreement upon the Partnership's sale of the Property.
6. Indemnification.
The Partnership hereby agrees to indemnify and hold WTMI, all companies
affiliated with WTMI; all officers, directors, and employees of WTMI harmless
from any and all reasonable costs and expenses, reasonable attorney's fees,
suits, liabilities, judgments, damages, and claims in connection with the
management of the Property (including the loss of use thereof following any
damage, injury, or destruction), arising from any cause except for the
misconduct, negligence, or negligent omissions on the part of WTMI or such
other persons and entities. WTMI; all persons affiliated with WTMI; all
officers, directors and employees of WTMI; and any affiliated persons also
shall not be liable for any error of judgement or for any mistake of fact
or law, or for anything which it may do or refrain from doing hereinafter,
except in cases of willful misconduct or negligence. WTMI hereby agrees to
indemnify and hold the Partnership harmless from any and all reasonable costs
and expenses, reasonable attorney's fees, suits, liabilities, judgments,
damages, and claims in connection with the management of the Property arising
from the willful misconduct or negligence of WTMI or any of its affiliates.
7. Assignment.
Neither this Agreement nor any right hereunder shall be assignable by the
Partnership and any attempt to do so shall be void ab initio.
8. Headings.
The headings contained herein are for convenience or reference only and are
not intended to define, limit, or describe the scope or intent of any
provision of this Agreement.
9. Governing Law.
The validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties shall be governed by
the laws of the State of New York.
10. Notices.
Any notice required or permitted herein to be given in writing and shall be
deemed given when personally delivered or when placed in the United States
mails, first class postage prepaid, to the respective addresses of the parties
set forth below their signatures on the signature page hereof, or to such other
address as any party may give to the other in writing, or by facsimile.
11. Severability.
Should any term or provision hereof be deemed invalid, void, or unenforceable
either in its entirety or in a particular application, the remainder of the
Agreement shall nonetheless remain in full force and effect and, if the subject
term or provision is deemed to be invalid,
<PAGE>
void, or unenforceable only with
respect to a particular application, such term or provision shall remain in
full force and effect with respect to all other applications.
12. Successors.
This Agreement shall be binding upon and inure to the benefit of the
respective parties hereto and their permitted assigns and successors in
interest.
In Witness Whereof, the parties hereto have executed this Agreement as of the
date first above written.
Watson & Taylor Management, Inc.
By: /s/ Ralph A. Defeo
______________________________________________
Ralph A. DeFeo, President
3939 Belt Line Road, Suite 770
Dallas, Texas 75244-2222
Prudential-Bache/Watson & Taylor, Ltd. - 2
By: Prudential-Bache Properties, Inc.
Managing General Partner
By: /s/ Brian J. Martin
______________________________________________
Brian J. Martin, President
One Seaport Plaza, 28th Floor
New York, NY 10292-0128
<PAGE>
1997
- --------------------------------------------------------------------------------
Prudential-Bache/ Annual
Watson & Taylor, Ltd.-2 Report
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
1997 Annual Report
1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-2
We have audited the accompanying statements of net assets in process of
liquidation of Prudential-Bache/Watson & Taylor, Ltd.-2 as of December 31, 1997
and 1996, and the related statements of changes in net assets in process of
liquidation for the year ended December 31, 1997 and for the three months ended
December 31, 1996. In addition, we have audited the accompanying statements of
operations, changes in partners' capital and cash flows for the nine months
ended September 30, 1996 and the year ended December 31, 1995. Our audit also
included the financial statement schedules listed in the Index at Item 14(a).
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 process of liquidation of
Prudential-Bache/Watson & Taylor, Ltd.-2 as of December 31, 1997 and 1996, the
changes in its net assets in process of liquidation for the year ended December
31, 1997 and for the three months ended December 31, 1996, and the results of
its operations and cash flows for the nine months ended September 30, 1996 and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects the financial information
set forth therein.
As discussed in Note B to the financial statements, the Partnership adopted the
liquidation basis of accounting on October 1, 1996.
/s/ Ernst & Young LLP
New York, New York
February 18, 1998, except for Note G
as to which the date is March 1, 1998
2
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(limited partnership)
STATEMENTS OF NET ASSETS
(in process of liquidation)
<TABLE>
<CAPTION>
December 31,
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property held for sale $1,518,521 $1,518,521
Cash and cash equivalents 870,538 1,227,972
Other assets 78,983 63,620
---------- ----------
Total assets 2,468,042 2,810,113
---------- ----------
LIABILITIES
Estimated liquidation costs 377,989 385,000
Other liabilities -- 368,769
Due to affiliates, net -- 47,022
---------- ----------
Total liabilities 377,989 800,791
---------- ----------
Net assets available to limited and general partners $2,090,053 $2,009,322
---------- ----------
---------- ----------
Limited and equivalent partnership units issued and outstanding 51,818 51,818
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(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
Net income from liquidating activities 80,731 -- 80,731
------------ --------- ------------
Net assets--December 31, 1997 $ 2,090,053 $ -- $ 2,090,053
------------ --------- ------------
------------ --------- ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
STATEMENTS OF OPERATIONS
(going concern basis)
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental income $ 2,190,501 $2,822,490
Interest 18,769 18,864
------------- ------------
2,209,270 2,841,354
------------- ------------
EXPENSES
Property operating 772,224 1,039,761
General and administrative 631,977 298,370
Real estate taxes 185,950 250,259
Depreciation -- 763,660
------------- ------------
1,590,151 2,352,050
------------- ------------
Net income $ 619,119 $ 489,304
------------- ------------
------------- ------------
ALLOCATION OF NET INCOME
Limited partners $ 612,928 $ 484,411
------------- ------------
------------- ------------
General partners $ 6,191 $ 4,893
------------- ------------
------------- ------------
Net income per limited partnership unit $ 11.89 $ 9.40
------------- ------------
------------- ------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
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, 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 these statements.
</TABLE>
4
<PAGE>
PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
(a limited partnership)
STATEMENTS OF CASH FLOWS
(going concern basis)
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income and deposits received $2,199,943 $ 2,836,953
Interest received 18,769 18,864
Property operating expenses paid (776,748) (1,023,664 )
Real estate taxes paid (200,963) (244,205 )
General and administrative expenses paid (435,568) (235,304 )
-------------- ------------
Net cash provided by operating activities 805,433 1,352,644
CASH FLOWS FROM INVESTING ACTIVITIES
Property improvements (49,491) (168,314 )
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners (580,329) (773,886 )
-------------- ------------
Net increase in cash and cash equivalents 175,613 410,444
Cash and cash equivalents at beginning of period 957,903 547,459
-------------- ------------
Cash and cash equivalents at end of period $1,133,516 $ 957,903
-------------- ------------
-------------- ------------
- ------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 619,119 $ 489,304
-------------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- 763,660
Changes in:
Other assets (13,933) (7,951 )
Accounts payable and accrued expenses 197,792 37,441
Due to affiliates, net (5,907) 41,723
Accrued real estate taxes (15,013) 6,053
Unearned rental income 14,787 (3,836 )
Deposits due to tenants 8,588 26,250
-------------- ------------
Total adjustments 186,314 863,340
-------------- ------------
Net cash provided by operating activities $ 805,433 $ 1,352,644
-------------- ------------
-------------- ------------
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
5
<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 evidenced certain concentrations of hazardous
materials discovered in an environmental review of the property. The property
continues to be monitored by the State environmental regulatory department, but
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property. The Partnership intends to sell the
property as soon as possible; however, no buyer for the property has been
identified and it is uncertain when any such sale will be consummated.
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 the anticipated current and future operating costs until
the liquidation of the Partnership. The Partnership intends to liquidate in
1998, subject to and assuming 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.
B. Summary of Significant Accounting Policies
Basis of accounting
The Partnership adopted the liquidation basis of accounting effective October
1, 1996. Accordingly, the net assets of the Partnership at December 31, 1996 and
December 31, 1997 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. Prior to October 1, 1996,
the books and records of the Partnership were maintained on a going-concern
accrual basis of accounting. The Partnership's fiscal year for both book and tax
purposes ends on December 31.
Property
Effective December 31, 1995, the Partnership reclassified its properties from
held for use to held for sale and ceased depreciating the properties for
financial reporting purposes only. Properties held for sale are recorded at the
lower of carrying amount or estimated fair value less costs to sell.
6
<PAGE>
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 as of December 31, 1997 and 1996 consisted solely
of Hampton Park, a miniwarehouse facility located in Capitol Heights, Maryland.
D. Net Income From Liquidating Activities
Net income from liquidating activities consisted of the following:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1997 December 31, 1996
----------------- ------------------
<S> <C> <C>
Rental and other income $ 483,910 $ 699,656
----------------- ------------------
Property operating expenses 258,987 370,952
General and administrative expenses 53,840 (295,522)
Estimated liquidation expenses 90,352 385,000
----------------- ------------------
403,179 460,430
----------------- ------------------
Net income from liquidating activities $ 80,731 $ 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, 1997, 1996 and 1995 were $57,000, $140,000 and
$104,000, respectively.
Affiliates of Messrs. Watson and Taylor, the individual General Partners,
also perform certain administrative and monitoring functions on behalf of the
Partnership. Costs incurred in 1996 and 1995 were $39,000 and $24,000,
respectively.
7
<PAGE>
<PAGE>
In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of December 31, 1997 for the estimated costs expected to
be incurred to liquidate the Partnership. Included in these estimated
liquidation costs is $123,000 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, 1997.
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, 1997.
F. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income (loss) for tax reporting purposes:
<TABLE>
<CAPTION>
For the year ended December 31
---------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ---------
Net income per financial statements $ 80,731(a) $4,391,687(b) $ 489,304
Tax gain on sale of property in excess of book amount -- 3,997,311 --
Estimated liquidation costs, deducted for books not tax 90,352 385,000 --
Estimated liquidation costs, deducted for tax not book (118,714) -- --
Rent received in advance, net of reversal of prior year
amount -- (46,167) (3,836)
Bad debt (recovery) provision for book purposes -- -- (25,000)
Tax depreciation and amortization in excess of book
amounts (138,810) (913,542) (234,947)
---------- ---------- ---------
Tax basis net income (loss) $ (86,441) $7,814,289 $ 225,521
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
(a) Represents net income from liquidating activities which is reflected in
the Statement of Changes in Net Assets.
(b) Represents gain on sale of properties ($3,533,342) and net income from
liquidating activities ($239,226) which are reflected in the Statement of
Changes in Net Assets and net income from operations ($619,119) which is
reflected in the Statement of Operations.
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
Effective February 28, 1998, American Office Park Properties, Inc., a
subsidiary of Public Storage, Inc., terminated its management of the Hampton
Park property. The Partnership has entered into a management agreement
('Management Agreement') with Watson & Taylor Management, Inc. ('WTMI'), an
affiliate of the Individual General Partners, effective March 1, 1998. WTMI will
be responsible for the day-to-day operation of the property, including the
supervision of the on-site managers and the establishment of rental policies and
rates for new rentals and renewals and will direct the marketing activity for
the property. The Management Agreement may be terminated by either party with 60
days' written notice, with or without cause, and can be terminated upon a sale
of the property. WTMI will receive 4.5% of the property's gross revenues (as
defined in the Management Agreement) as a management fee.
8
<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 evidenced certain concentrations of hazardous
materials discovered in an environmental review of the property. The property
continues to be monitored by the State environmental regulatory department but
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property. The Partnership intends to sell the
property as soon as possible; however, no buyer for the property has been
identified and it is uncertain when any such sale will be consummated.
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 the anticipated current and future operating costs until
the liquidation of the Partnership. The Partnership intends to liquidate in
1998, subject to and assuming 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.
Results of Operations
As a result of the Partnership adopting the liquidation basis of accounting
in accordance with generally accepted accounting principles as of October 1,
1996 and thus not reporting results of operations thereafter, and the sale of
substantially all of the properties in October 1996, there is no management
discussion comparing the corresponding 1997 and 1996 periods.
All significant fluctuations between 1995 and 1996 were due to comparing 9
months in 1996 on a going-concern basis to 12 months in 1995, the sale of
substantially all the Partnership's properties during 1996 and the accrual at
year-end 1996 of estimated costs relating to the liquidation of the Partnership.
9
<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
10
<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-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Dec-31-1997
<PERIOD-TYPE> 12-Mos
<CASH> 870,538
<SECURITIES> 0
<RECEIVABLES> 78,983
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 949,521
<PP&E> 1,518,521
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,468,042
<CURRENT-LIABILITIES> 377,989
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,090,053
<TOTAL-LIABILITY-AND-EQUITY> 2,468,042
<SALES> 0
<TOTAL-REVENUES> 0<F1>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>Registrant adopted the liquidation basis of accounting
on October 1, 1996, and, accordingly, does not reflect
operations subsequent to October 1, 1996. See Note A to the
financial statetments for further details.
</TABLE>
