10-Q 1 sf16110q.txt PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2 -- 6/30/2003 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 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 Identification incorporation or organization) No.) 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 N/A -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check CK 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 CK whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes __ No _CK_ Part I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2 (a limited partnership) STATEMENTS OF NET ASSETS (in process of liquidation) (Unaudited)

STATEMENT OF CHANGES IN NET ASSETS (in process of liquidation) (Unaudited)

2 PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2 (a limited partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2003 (Unaudited) A. General These financial statements have been prepared without audit. In the opinion of Prudential-Bache Properties, Inc. ('Managing General Partner') ('PBP'), the statements of net assets as of June 30, 2003 and December 31, 2002 contain all adjustments necessary to state fairly such information in accordance with the liquidation basis of accounting. Prudential-Bache/Watson & Taylor, Ltd.-2 (the 'Partnership') first adopted the liquidation basis of accounting as of October 1, 1996. Accordingly, the net assets of the Partnership are stated at liquidation value, i.e., the assets have been valued at their estimated fair values, net of selling expenses, and the liabilities include estimated amounts to be incurred through the date of liquidation of the Partnership, which is in conformity with accounting principles generally accepted in the United States. Due to the nature of the Hampton Park environmental issue (see further discussion below), the date of liquidation is uncertain; however, the Partnership has utilized a March 31, 2004 date for purposes of estimating costs through the conclusion of liquidation reflecting the Managing General Partner's best estimate. 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. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002. B. Partnership Liquidation In accordance with a consent statement dated September 17, 1996, the limited partners approved, during October 1996, the proposed sale of all eight miniwarehouse facilities owned by the Partnership to Public Storage, Inc. ('Public') and the liquidation and dissolution of the Partnership. Seven of the eight properties were sold to Public during December 1996. The Partnership continues to own the Hampton Park property located in Capitol Heights, Maryland as it was not sold to Public after Phase I and Phase II Environmental Site Assessments performed during 1996 by MACTEC Engineering and Consulting, Inc. ('MACTEC') identified detectable levels of tetrachloroethene ('PCE') in the soil and ground water samples collected at the site. MACTEC, at the Partnership's request, reported the PCE release to the Maryland Department of the Environment ('MDE'). On November 21, 2000, MDE reached a determination that it was appropriate to undertake an active remedial measure at the site. MACTEC, at the request of the Partnership, submitted an application to enter the site into MDE's Voluntary Cleanup Program ('VCP') during March 2001. During a meeting on May 16, 2001 between the Partnership, MACTEC and MDE, to discuss MDE's comments on the Partnership's application, it was determined that the Partnership would perform a non-invasive Phase I Environmental Site Assessment Update ('Phase I Activities') and would subsequently, upon review and agreement with MDE, move to perform certain Phase II invasive sampling and analytical procedures ('Phase II Activities') with the anticipation of entering the site into the VCP. During the first quarter of 2002, MDE notified the Partnership that its responses to all previous comments on Phase I Activities have been resolved. Additionally, MACTEC completed the fieldwork for Phase II activities (under a work plan that MDE reviewed) during 2002. The procedures and findings were documented in a Phase II Site Characterization and Risk Assessment Report (the 'Report') that was sent to MDE, for review, on February 13, 2003. During April 2003, MDE requested supplemental soil-gas sampling procedures be performed. These procedures are presently being performed. After the supplemental procedures are completed and once the site is formally entered into the VCP, MDE provides direction regarding future monitoring, assessment or remediation activities at the site that may be required of the Partnership or a prospective buyer. As of June 30, 2003, the Statement of Net Assets reflects an accrued liability of $500,000 which represents the Partnership's best estimate of the obligation regarding the environmental issues mentioned above. The amount includes costs associated with an active remediation program over a five-year period. It is reasonably possible that the loss exposure will be in excess of the amount accrued and will be material to the Partnership and may possibly change in the 3 near future as MDE has not yet provided direction regarding requirements to resolve the environmental issue at the property. The General Partners intend to offer the Hampton Park property to a select group of potential buyers which specialize in the purchase of contaminated properties, and others, albeit at a discount to take into account remediation and monitoring costs. It is the intention of the Partnership to obtain from any potential buyer as complete an indemnification as possible for any liability in connection with remediation of the contamination of the property. Due to the environmental problem and MDE oversight, it is uncertain when any such sale could be consummated. The Partnership's liquidation and dissolution will proceed upon the sale of the Hampton Park property. Net assets in liquidation increased $44,000 and $70,000 during the six and three months ended June 30, 2003, respectively. These increases resulted from income from operations of the Hampton Park property, and, to a lesser extent, interest income. The year-to-date increase was partially offset by an additional expense accrual of $97,000 recorded within estimated liquidation costs during the quarter ended March 31, 2003. This additional accrual reflected a change in the date utilized for estimating liquidation costs from December 31, 2003 to March 31, 2004 and accrued $7,500 for the costs of the supplemental soil-gas sampling procedures requested by MDE (see discussion above). C. 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. In February 2003, Prudential Financial, Inc. ('Prudential') and Wachovia Corp. ('Wachovia') announced an agreement to combine each company's respective retail securities brokerage and clearing operations within a new firm, which will be headquartered in Richmond, Virginia. Under the agreement, Prudential will have a 38% ownership interest in the new firm and Wachovia will own 62%. The transaction, which includes the securities brokerage, securities clearing, and debt capital markets operations of Prudential Securities Incorporated ('PSI'), but does not include the equity sales, trading and research operations or commodity brokerage and derivative operations of PSI (which were renamed Prudential Equity Group, Inc. upon closing), closed July 1, 2003. PBP will continue to be an indirect wholly owned subsidiary of Prudential. Affiliates of Messrs. Watson and Taylor, the individual General Partners, also perform certain administrative and monitoring functions on behalf of the Partnership for which they receive cost reimbursement. Additionally, Watson & Taylor Management, Inc., an affiliate of the individual General Partners and the Partnership's property manager, receives 4.5% of the property's gross revenues (as defined in the management agreement) as a management fee. Such management fees totalled $13,000 for both the six months ended June 30, 2003 and 2002, respectively, and totalled $7,000 for both the three months ended June 30, 2003 and 2002, respectively. In conjunction with the liquidation basis of accounting, the Partnership has recorded an accrual as of June 30, 2003 and December 31, 2002 for the estimated costs expected to be incurred to liquidate the Partnership. Included in these estimated liquidation costs is $89,000 and $164,000 as of June 30, 2003 and December 31, 2002, respectively, expected to be payable to the General Partners and their affiliates during the anticipated remaining liquidation periods. See Notes A and B for a further discussion regarding the Partnership's estimated liquidation costs. 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 June 30, 2003. PBP and the two 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 are not part of the 51,560 limited and equivalent units which receive distributions and allocations of the Partnership's profits and losses. Prudential Equity Group, an affiliate of PBP, owns 180 limited partnership units at June 30, 2003. Prudential Equity Group is an indirect wholly-owned subsidiary of Prudential Financial, Inc. 4 PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2 (a limited partnership) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources In accordance with a consent statement dated September 17, 1996, the limited partners approved, during October 1996, the proposed sale of all eight miniwarehouse facilities owned by the Partnership to Public Storage, Inc. ('Public') and the liquidation and dissolution of the Partnership. Seven of the eight properties were sold to Public during December 1996. The Partnership continues to own the Hampton Park property located in Capitol Heights, Maryland as it was not sold to Public after Phase I and Phase II Environmental Site Assessments performed during 1996 by MACTEC Engineering and Consulting, Inc. ('MACTEC') identified detectable levels of tetrachloroethene ('PCE') in the soil and ground water samples collected at the site. MACTEC, at the Partnership's request, reported the PCE release to the Maryland Department of the Environment ('MDE'). On November 21, 2000, MDE reached a determination that it was appropriate to undertake an active remedial measure at the site. MACTEC, at the request of the Partnership, submitted an application to enter the site into MDE's Voluntary Cleanup Program ('VCP') during March 2001. During a meeting on May 16, 2001 between the Partnership, MACTEC and MDE, to discuss MDE's comments on the Partnership's application, it was determined that the Partnership would perform a non-invasive Phase I Environmental Site Assessment Update ('Phase I Activities') and would subsequently, upon review and agreement with MDE, move to perform certain Phase II invasive sampling and analytical procedures ('Phase II Activities') with the anticipation of entering the site into the VCP. During the first quarter of 2002, MDE notified the Partnership that its responses to all previous comments on Phase I Activities have been resolved. Additionally, MACTEC completed the fieldwork for Phase II activities (under a work plan that MDE reviewed) during 2002. The procedures and findings were documented in a Phase II Site Characterization and Risk Assessment Report (the 'Report') that was sent to MDE, for review, on February 13, 2003. During April 2003, MDE requested supplemental soil-gas sampling procedures be performed. These procedures are presently being performed. After the supplemental procedures are completed and once the site is formally entered into the VCP, MDE provides direction regarding future monitoring, assessment or remediation activities at the site that may be required of the Partnership or a prospective buyer. As of June 30, 2003, the Statement of Net Assets reflects an accrued liability of $500,000 which represents the Partnership's best estimate of the obligation regarding the environmental issues mentioned above. The amount includes costs associated with an active remediation program over a five-year period. It is reasonably possible that the loss exposure will be in excess of the amount accrued and will be material to the Partnership and may possibly change in the near future as MDE has not yet provided direction regarding requirements to resolve the environmental issue at the property. The General Partners intend to offer the Hampton Park property to a select group of potential buyers which specialize in the purchase of contaminated properties, and others, albeit at a discount to take into account remediation and monitoring costs. It is the intention of the Partnership to obtain from any potential buyer as complete an indemnification as possible for any liability in connection with remediation of the contamination of the property. Due to the environmental problem and MDE oversight, it is uncertain when any such sale could be consummated. The General Partners intend to liquidate the Partnership subject to the Hampton Park property first being sold, and will distribute any remaining funds at such time. In conjunction with the liquidation basis of accounting, the Partnership has recorded an accrual as of June 30, 2003 for the estimated costs expected to be incurred to liquidate the Partnership. Due to the nature of the Hampton Park environmental issue, the date of liquidation is uncertain. However, the Partnership has utilized a March 31, 2004 date for purposes of estimating costs through the conclusion of liquidation reflecting the Managing General Partner's best estimate and giving consideration to the progress that has been made with MDE (see discussion above). 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 June 30, 2003. Net assets in liquidation increased $44,000 and $70,000 during the six and three months ended June 30, 2003, respectively. These increases resulted from income from operations of the Hampton Park property, 5 and, to a lesser extent, interest income. The year-to-date increase was partially offset by an additional expense accrual of $97,000 recorded within estimated liquidation costs during the quarter ended March 31, 2003. This additional accrual reflected a change in the date utilized for estimating liquidation costs from December 31, 2003 to March 31, 2004 and accrued $7,500 for the costs of the supplemental soil-gas sampling procedures requested by MDE (see discussion above). As June 30, 2003, the Partnership has cash and cash equivalents of $1,600,000. The future liquidation and dissolution of the Partnership will result in the sale of the Hampton Park property and any other Partnership assets and the distribution to the Limited Partners, after payment of all expenses and liabilities, of the net sales proceeds and remaining cash. Results of Operations As a result of the Partnership adopting the liquidation basis of accounting as of October 1, 1996, in accordance with accounting principles generally accepted in the United States, the Partnership no longer reports results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk is not required pursuant to Item 305(e) of Regulation S-K. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Managing General Partner carried out an evaluation, under the supervision and with the participation of the officers of the Managing General Partner, including the Managing General Partner's chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures. Based upon that evaluation, the Managing General Partner's chief executive officer and chief financial officer concluded that the Partnership's disclosure controls and procedures are effective. 6 PART II. OTHER INFORMATION Item 1. Legal Proceedings--None Item 2. Changes in Securities--None Item 3. Defaults Upon Senior Securities--None Item 4. Submission of Matters to a Vote of Security Holders--None Item 5. Other Information--Effective June 2003, William C. Yip was elected by the Board of Directors of Prudential-Bache Properties, Inc. as Chief Financial Officer and Vice President replacing Steven Weinreb. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Description: 4.01 Revised Certificate of Limited Partnership Interest (filed as an exhibit to Registrant's Form 10-K for the year ended December 31, 1988 and incorporated herein by reference) 31.1 Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) 31.2 Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the SARBANES-OXLEY Act of 2002 (furnished herewith) 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the SARBANES-OXLEY Act of 2002 (furnished herewith) (b) Reports on Form 8-K--None 7 SIGNATURES Pursuant to the requirements 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/ William C. Yip Date: August 14, 2003 ---------------------------------------- William C. Yip Chief Financial Officer and Vice President 8

PRUDENTIAL BACHE WATSON & TAYLOR LTD 2 10-Q