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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-20018
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
----------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2426091
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102-2992
----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(800) 778-2255
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
AMENDMENT ______________________________________________________________________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
END OF AMENDMENT________________________________________________________________
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PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
-----
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
A. PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Statements of Net Assets--March 31, 2003 and December 31, 2002 .. 3
Statements of Operations--Three Months Ended March 31, 2003
and 2002 ..................................................... 3
Statements of Changes in Net Assets--Three Months Ended
March 31, 2003 and 2002 ...................................... 3
Notes to the Financial Statements of the Account ................ 4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Consolidated Statements of Assets and Liabilities--
March 31, 2003 and December 31, 2002 ......................... 6
Consolidated Statements of Operations--Three Months Ended
March 31, 2003 and 2002 ...................................... 7
Consolidated Statements of Changes in Net Assets--
Three Months Ended March 31, 2003 and 2002 ................... 8
Consolidated Statements of Cash Flows--Three Months Ended
March 31, 2003 and 2002 ...................................... 9
Consolidated Schedules of Investments--March 31, 2003
and December 31, 2002 ........................................ 10
Notes to the Financial Statements of the Partnership ............ 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks ..... 18
Item 4. Controls and Procedures ......................................... 19
PART II--OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders ............. 20
Item 6. Exhibits and Reports on Form 8-K ................................ 20
Signature Page .................................................. 22
Certifications .................................................. 23
2
FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
March 31, 2003 and December 31, 2002
MARCH 31, 2003
(UNAUDITED) DECEMBER 31, 2002
-------------- -----------------
ASSETS
Investment in The Prudential Variable Contract Real Property Partnership ..... $ 8,787,651 $ 8,854,905
------------ ------------
Net Assets ................................................................... $ 8,787,651 $ 8,854,905
============ ============
NET ASSETS, REPRESENTING:
Equity of contract owners .................................................... $ 5,775,684 $ 5,818,363
Equity of Pruco Life Insurance Company of New Jersey ......................... 3,011,967 3,036,542
------------ ------------
$ 8,787,651 $ 8,854,905
============ ============
Units outstanding ............................................................ 4,047,133 4,041,054
============ ============
STATEMENTS OF OPERATIONS
For the three months ended March 31, 2003 and 2002
1/1/2003-3/31/2003 1/1/2002-3/31/2002
(UNAUDITED) (UNAUDITED)
------------------ ------------------
INVESTMENT INCOME
Net investment income from Partnership operations ............................ $ 114,136 $ 129,173
------------ ------------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration ....................................... 8,223 8,108
------------ ------------
NET INVESTMENT INCOME ........................................................ 105,913 121,065
------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized loss on investments in Partnership .................. (203,776) (166,801)
Net realized gain (loss) on sale of investments in Partnership ............... 22,386 (70)
------------ ------------
NET LOSS ON INVESTMENTS ...................................................... (181,390) (166,871)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ (75,477) $ (45,806)
============ ============
STATEMENTS OF CHANGES IN NET ASSETS
For the three months ended March 31, 2003 and 2002
1/1/2003-3/31/2003 1/1/2002-3/31/2002
(UNAUDITED) (UNAUDITED)
------------------ ------------------
OPERATIONS
Net investment income ........................................................ $ 105,913 $ 121,065
Net change in unrealized loss on investments in Partnership .................. (203,776) (166,801)
Net realized gain (loss) on sale of investments in Partnership ............... 22,386 (70)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... (75,477) (45,806)
------------ ------------
CAPITAL TRANSACTIONS
Net contributions (withdrawals) by contract owners ........................... 9,845 (43,920)
Net contributions (withdrawals) by Pruco Life Insurance Company
of New Jersey ............................................................. (1,622) 52,028
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS ................................................. 8,223 8,108
------------ ------------
TOTAL DECREASE IN NET ASSETS ................................................. (67,254) (37,698)
NET ASSETS
Beginning of period .......................................................... 8,854,905 8,747,935
------------ ------------
End of period ................................................................ $ 8,787,651 $ 8,710,237
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
MARCH 31, 2003
(UNAUDITED)
NOTE 1: GENERAL
Pruco Life of New Jersey Variable Contract Real Property Account ("Real Property
Account") was established on October 30, 1987 by resolution of the Board of
Directors of Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey"), an indirect wholly-owned subsidiary of The Prudential Insurance
Company of America ("Prudential"), as a separate investment account pursuant to
New Jersey law. The assets of the Real Property Account are segregated from
Pruco Life of New Jersey's other assets. The Real Property account is used to
fund benefits under certain variable life insurance and variable annuity
contracts issued by Pruco Life of New Jersey. These products are Appreciable
Life ("VAL"), Variable Life ("VLI"), Discovery Plus ("SPVA"), and Discovery Life
Plus ("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is
organized under New Jersey law and is registered under the Securities Act of
1933. The Partnership is the investment vehicle for assets allocated to the real
estate investment option under certain variable life insurance and annuity
contracts. The Real Property Account, along with the Pruco Life Variable
Contract Real Property Account and The Prudential Variable Contract Real
Property Account, are the sole investors in the Partnership. These financial
statements should be read in conjunction with the financial statements of the
Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
The interim financial data as of March 31, 2003 and for the three months ended
March 31, 2003 and March 31, 2002 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At March 31, 2003 and
December 31, 2002 the Real Property Account's interest in the Partnership was
4.8% or 367,199 shares.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
D. EQUITY OF PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Pruco Life of New Jersey maintains a position in the Real Property Account for
property acquisitions and capital expenditure funding needs. The position is
also utilized for liquidity purposes including unit purchases and redemptions,
Partnership share transactions, and expense processing. The position does not
have an effect on the contract owner's account or the related unit value.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP
The number of shares (rounded) held by the Real Property Account in the
Partnership and the Partnership net asset value per share (rounded) at March 31,
2003 and December 31, 2002 were as follows:
MARCH 31, 2003
(UNAUDITED) DECEMBER 31, 2002
-------------- -----------------
NUMBER OF SHARES (ROUNDED): 367,199 367,199
NET ASSET VALUE PER SHARE (ROUNDED): $23.93 $24.11
4
NOTE 4: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
respectively. Mortality risk is that life insurance contract owners may not live
as long as estimated or annuitants may live longer than estimated and expense
risk is that the cost of issuing and administering the policies may exceed
related charges by Pruco Life of New Jersey.
B. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.35% applied daily against the net assets representing equity of contract
owners held in each subaccount for SPVA and SPVL. Administrative charges include
costs associated with issuing the contract, establishing and maintaining
records, and providing reports to contract owners.
C. COST OF INSURANCE AND OTHER RELATED CHARGES
Contract owner contributions are subject to certain deductions prior to being
invested in the Real Property Account. The deductions for VAL and VLI are (1)
state premium taxes; (2) sales charges which are deducted in order to compensate
Pruco Life of New Jersey for the cost of selling the contract and (3)
transaction costs, applicable to VAL, are deducted from each premium payment to
cover premium collection and processing costs. Contracts are also subject to
monthly charges for the costs of administering the contract to compensate Pruco
Life of New Jersey for the guaranteed minimum death benefit risk.
D. DEFERRED SALES CHARGE
Subsequent to a contract owner redemption, a deferred sales charge is imposed
upon surrenders of certain variable life insurance contracts to compensate Pruco
Life of New Jersey for sales and other marketing expenses. The amount of any
sales charge will depend on the number of years that have elapsed since the
contract was issued. No sales charge will be imposed after the sixth and tenth
year of the contract for SPVL and VAL, respectively. No sales charge will be
imposed on death benefits.
E. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Pruco Life of New Jersey on partial withdrawals of the
cash surrender value for VAL. A charge equal to the lesser of $15 or 2% will be
made in connection with each partial withdrawal of the cash surrender value of a
contract.
NOTE 5: TAXES
Pruco Life of New Jersey is taxed as a "life insurance company" as defined by
the Internal Revenue Code. The results of operations of the Real Property
Account form a part of Prudential's consolidated federal tax return. Under
current federal law, no federal income taxes are payable by the Real Property
Account. As such, no provision for the tax liability has been recorded in these
financial statements.
NOTE 6: NET WITHDRAWALS (CONTRIBUTIONS) BY CONTRACT OWNERS
Net withdrawals by contract owners for the real estate investment option in
Pruco Life Insurance Company of New Jersey's variable insurance and variable
annuity products for the three months ended March 31, 2003 and 2002, were as
follows:
MARCH 31,
2003 2002
----------- -----------
(UNAUDITED)
VAL $(2,938) $30,939
VLI (7,326) 2,140
SPVA 0 0
SPVL 419 10,841
--------- ----------
TOTAL $(9,845) $43,920
========= ==========
5
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
REAL ESTATE INVESTMENTS--At estimated market value:
Real estate and improvements
(cost: 03/31/2003--$209,609,246; 12/31/2002--$215,592,277) ............. $188,085,753 $196,631,183
Real estate partnership
(cost: 03/31/2003--$10,623,116; 12/31/2002--$9,931,394) ................ 9,362,698 8,978,324
------------ ------------
Total real estate investments .......................................... 197,448,451 205,609,507
CASH AND CASH EQUIVALENTS .................................................... 25,048,896 18,591,149
OTHER ASSETS (net of allowance for uncollectible accounts:
03/31/2003--$74,000; 12/31/2002--$69,000) ................................. 5,748,731 5,519,457
------------ ------------
Total assets ........................................................... $228,246,078 $229,720,113
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE ....................................................... 35,480,637 35,699,108
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ........................................ 3,158,795 3,092,098
DUE TO AFFILIATES ............................................................ 893,244 907,503
OTHER LIABILITIES ............................................................ 916,324 911,245
MINORITY INTEREST ............................................................ 4,843,745 4,756,653
------------ ------------
Total liabilities ......................................................... 45,292,745 45,366,607
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY ............................................................. 182,953,333 184,353,506
------------ ------------
Total liabilities and partners' equity .................................... $228,246,078 $229,720,113
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD ................................ 7,644,848 7,644,848
============ ============
SHARE VALUE AT END OF PERIOD ................................................. $23.93 $24.11
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
6
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
------------ ------------
INVESTMENT INCOME:
Revenue from real estate and improvements ................................. $ 6,224,502 $ 6,542,615
Equity in income of real estate partnership ............................... 160,736 76,042
Interest on short-term investments ........................................ 65,414 106,104
------------ ------------
Total investment income ................................................ 6,450,652 6,724,761
------------ ------------
INVESTMENT EXPENSES:
Operating ................................................................. 1,314,572 1,255,908
Investment management fee ................................................. 577,586 618,236
Real estate taxes ......................................................... 667,791 704,648
Administrative ............................................................ 805,145 669,592
Interest expense .......................................................... 581,267 490,084
Minority interest ......................................................... 128,049 60,375
------------ ------------
Total investment expenses .............................................. 4,074,410 3,798,843
------------ ------------
NET INVESTMENT INCOME ........................................................ 2,376,242 2,925,918
------------ ------------
REALIZED AND UNREALIZED LOSS ON REAL ESTATE INVESTMENTS:
Net proceeds from real estate investments sold ............................ 5,689,488 6,075
Less: Cost of real estate investments sold ................................ 6,620,263 7,653
Realization of prior years' unrealized loss on
real estate investments sold ....................................... (1,396,836) --
------------ ------------
Net gain (loss) realized on real estate investments sold .................. 466,061 (1,578)
------------ ------------
Change in unrealized loss on real estate investments ...................... (4,266,583) (3,816,428)
Less: Minority interest in unrealized loss on real estate investments ..... (24,107) (38,183)
------------ ------------
Net unrealized loss on real estate investments ............................ (4,242,476) (3,778,245)
------------ ------------
NET REALIZED AND UNREALIZED LOSS
ON REAL ESTATE INVESTMENTS ................................................ (3,776,415) (3,779,823)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ (1,400,173) $ (853,905)
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
------------ ------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income ..................................................... $ 2,376,242 $ 2,925,918
Net gain (loss) realized on real estate investments sold .................. 466,061 (1,578)
Net unrealized loss from real estate investments .......................... (4,242,476) (3,778,245)
------------ ------------
Net decrease in net assets resulting from operations ................... (1,400,173) (853,905)
------------ ------------
NET DECREASE IN NET ASSETS ................................................... (1,400,173) (853,905)
NET ASSETS--Beginning of period .............................................. 184,353,506 198,150,636
------------ ------------
NET ASSETS--End of period .................................................... $182,953,333 $197,296,731
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (decrease) increase in net assets resulting from operations .............. $ (1,400,173) $ (853,905)
Adjustments to reconcile net (decrease) increase in net assets
resulting from operations to net cash flows from operating activities:
Net realized and unrealized loss on investments ........................ 3,776,415 3,779,823
Equity in income of real estate partnership in excess
of distributions ..................................................... (86,486) (76,043)
Minority interest from operating activities ............................ 128,049 60,375
Bad debt expense ....................................................... 33,661 3,985
(Increase) Decrease in:
Dividend receivable .................................................. -- 20,802
Other assets ......................................................... (262,935) 15,756
Increase (Decrease) in:
Accounts payable and accrued expenses ................................ 66,697 (379,066)
Due to affiliates .................................................... (14,259) (25,240)
Other liabilities .................................................... 5,079 42,843
------------ ------------
Net cash flows from operating activities .................................. 2,246,048 2,589,330
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold ............................ 5,689,488 6,075
Additions to real estate ............................................... (637,232) (141,107)
Additions to real estate partnership ................................... (605,236) (485,725)
------------ ------------
Net cash flows from (used in) investing activities ........................ 4,447,020 (620,757)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loan payable ............................... (218,471) (140,287)
Distributions to minority interest partners ............................... (17,316) (6,280)
Contributions from minority interest partners ............................. 466 7,624
------------ ------------
Net cash flows used in financing activities ............................... (235,321) (138,943)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................................... 6,457,747 1,829,630
CASH AND CASH EQUIVALENTS--Beginning of period ............................... 18,591,149 26,615,645
------------ ------------
CASH AND CASH EQUIVALENTS--End of period ..................................... $ 25,048,896 $ 28,445,275
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest .................................... $ 619,641 $ 490,084
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
MARCH 31, 2003 (UNAUDITED) DECEMBER 31, 2002
----------------------------- ------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS--
PERCENTAGE OF NET ASSETS......................... 102.8% 106.7%
Location Description
- --------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building ........... $22,857,236 $12,499,988 $22,857,236 $13,854,988
Atlanta, GA Garden Apartments .......... 15,732,001 17,510,490 15,715,772 17,523,063
Roswell, GA Retail Shopping Center ..... 33,041,816 25,517,455 32,895,282 24,903,969
Raleigh, NC Garden Apartments .......... 15,943,836 17,500,000 15,943,836 17,502,998
Brentwood, TN Office Building ........... 10,320,577 9,299,963 10,320,613 9,651,831
Oakbrook Terrace, IL Office Building ........... 14,268,474 9,946,511 14,205,396 11,213,142
Beaverton, OR Office Building ........... 11,890,209 10,600,005 11,890,209 10,800,005
Salt Lake City, UT Industrial Building ........ -- -- 6,599,482 5,202,646
Aurora, CO Industrial Building ........ 10,345,693 9,900,003 10,294,784 10,557,058
Brentwood, TN Office Building ........... 9,837,483 7,011,338 9,826,195 7,709,345
*Jacksonville, FL Garden Apartments........... 19,755,460 19,800,000 19,745,855 19,800,000
*Gresham/Salem, OR Garden Apartments........... 18,871,196 18,600,000 18,838,570 18,600,000
*Hampton, VA Retail Shopping Center ..... 16,447,831 19,300,000 16,446,909 19,300,000
*Ocean City, MD Retail Shopping Center ..... 10,297,434 10,600,000 10,012,138 10,012,138
------------ ------------ ------------ ------------
$209,609,246 $188,085,753 $215,592,277 $196,631,183
============ ============ ============ ============
REAL ESTATE PARTNERSHIP --
PERCENTAGE OF NET ASSETS......................... 5.1% 4.9%
Location Description
- --------------------------------------------------------------------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Centers .... $10,623,116 $9,362,698 $9,931,394 $8,978,324
=================================================================
*Real estate partnerships accounted for by the consolidation method.
MARCH 31, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------------- ------------------------
FACE ESTIMATED ESTIMATED
AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS ............. 13.7% 10.1%
Federal Home Loan Banks, 1.28%, April 1, 2003 ................... $13,045,000 $13,044,536 $13,044,536 $ -- $ --
Federal Home Loan Banks, 1.20%, May 7, 2003 ..................... 11,099,000 11,076,062 11,076,062 -- --
Federal National Mortgage Assoc., 1.00%, January 02, 2003 ....... 6,928,000 -- -- 6,927,615 6,927,615
Federal National Mortgage Assoc., 1.27%, January 17, 2003 ....... 1,218,000 -- -- 1,217,055 1,217,055
Federal Home Loan Mortgage Corp., 1.27%, January 21, 2003 ....... 3,461,000 -- -- 3,457,581 3,457,581
Federal National Mortgage Assoc., 1.27%, January 21, 2003 ....... 1,288,000 -- -- 1,286,819 1,286,819
Federal National Mortgage Assoc., 1.22%, February 10, 2003 ...... 1,000,000 -- -- 998,611
998,611
Federal National Mortgage Assoc., 1.22%, February 13, 2003 ...... 2,070,000 -- -- 2,066,913
2,066,913
Federal Farm Credit Banks, 1.22%, February 14, 2003 ............. 1,870,000 -- -- 1,867,148 1,867,148
----------- ----------- ----------- ----------- -----------
TOTAL CASH EQUIVALENTS .......................................... 24,120,598 24,120,598 17,821,742 17,821,742
CASH ............................................................ 928,298 928,298 769,407 769,407
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS ................................. $25,048,896 $25,048,896 $18,591,149 $18,591,149
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements included herein have been
prepared in accordance with the requirements of Form 10-Q and accounting
principles generally accepted in the United States of America for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. For further information, refer to the financial
statements and notes thereto included in each Partner's December 31, 2002 Annual
Report on Form 10K.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", ("FIN
46") was issued in January 2003. FIN 46 applies immediately to variable interest
entities created or for which an interest is acquired after January 31, 2003.
For all interests in variable interest entities acquired before February 1,
2003, FIN 46 goes into effect for periods beginning after June 15, 2003. The
Partnership is evaluating the extent to which our equity investment may need to
be consolidated as a result of this Interpretation. The Partnership's exposure
to losses associated with this equity joint venture is limited to its carrying
value in this investment.
NOTE 2: COMMITMENT FROM PARTNER
In 1986, the Prudential Insurance Company of America ("Prudential") committed to
fund up to $100 million to enable the Prudential Variable Contract Real Property
Partnership ("Partnership") to acquire real estate investments. Contributions to
the Partnership under this commitment were utilized for property acquisitions,
and could be returned to Prudential on an ongoing basis from the contract
owners' net contributions and other available cash. This commitment terminated
on December 31, 2002. Prudential did not make any contributions during the 2002
fiscal year. During the period that this commitment was in effect, Prudential
funded $44 million.
NOTE 3: RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the three months
ended March 31, 2003 and 2002 investment management fees incurred by the
Partnership were $577,586 and $618,236 respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the three months ended March
31, 2003 and 2002 were $29,157 for each period, and are classified as
administrative expense in the Consolidated Statements of Operations.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 4: FINANCIAL HIGHLIGHTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
PER SHARE (UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period ......................................... $24.11 $23.82
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income, before management fee ................................. $ 0.39 $ 0.42
Management fee ............................................................... (0.08) (0.07)
Net realized and unrealized (loss) gain on investments ....................... (0.49) (0.45)
------ ------
Net Decrease in Net Assets Resulting from Operations ......................... (0.18) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD ............................................... $23.93 $23.72
====== ======
TOTAL RETURN BEFORE MANAGEMENT FEE (a): ...................................... (0.45)% (0.12)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions) ...................................... $ 183 $ 197
Ratios to average net assets (b):
Management Fee ......................................................... 0.31% 0.31%
Net Investment Income, before Management Fee ........................... 1.60% 1.80%
(a) Total Return before Management Fee is calculated by linking quarterly
returns which are calculated using the formula below:
Net Investment Income + Net Realized and Unrealized Gains/(Losses)
- --------------------------------------------------------------------------------
Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions
(b) Average net assets are based on beginning of period net assets.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All of the assets of the Real Property Account (the "Account") are invested in
the Prudential Variable Contract Real Property Partnership (the "Partnership").
Correspondingly, the liquidity, capital resources and results of operations for
the Real Property Account are contingent upon the Partnership. Therefore, all of
management's discussion of these items is at the Partnership level. The partners
in the Partnership are The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively,
the "Partners").
The following analysis of the liquidity and capital resources and results of
operations of the Partnership should be read in conjunction with the Financial
Statements and the related Notes to the Financial Statements included elsewhere
herein.
(A) LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Partnership's liquid assets consisting of cash and
cash equivalents were $25.0 million, an increase of $6.4 million from $18.6
million at December 31, 2002. This increase was primarily due to an increase in
net cash flows from operations and the sale of the industrial property located
in Salt Lake City, Utah on January 28, 2003. Sources of liquidity include net
cash flow from property operations, interest from short-term investments, sales,
and financing.
The Partnership's investment policy allows up to 30% investment in cash and
short-term obligations, although the Partnership generally holds approximately
10% of its assets in cash and short-term obligations. At March 31, 2003, 11.0%
of the Partnership's total assets consisted of cash and short-term obligations.
In 1986, the Prudential Insurance Company of America ("Prudential") committed to
fund up to $100 million to enable the Partnership to acquire real estate
investments. Contributions to the Prudential Variable Contract Real Property
Partnership ("Partnership") under this commitment were utilized for property
acquisitions, and could be returned to Prudential on an ongoing basis from the
contract owners' net contributions and other available cash. This commitment
terminated on December 31, 2002. Prudential did not make any contributions
during the 2002 fiscal year. During the period that this commitment was in
effect, Prudential funded $44 million.
The Partnership did not make any distributions to the Partners during the first
quarter of 2003 or 2002. Distributions may be made to the Partners during 2003
based upon the percentage of assets invested in short-term obligations, taking
into consideration anticipated cash needs of the Partnership including potential
property acquisitions, property dispositions and capital expenditures.
Management anticipates that its current liquid assets and ongoing cash flow from
operations will satisfy the Partnership's needs over the next twelve months and
the foreseeable future.
During the first three months of 2003, the Partnership spent approximately $0.6
million in capital expenditures on wholly owned and consolidated properties.
Approximately $0.3 million was associated with the development of the retail
center located in Ocean City, Maryland. The remaining $0.3 million balance was
primarily associated with leasing at the retail center located in Roswell,
Georgia, the industrial building located in Aurora, Colorado, and the office
located in Oakbrook Terrace, Illinois. The Partnership also increased its
investment in real estate partnerships by approximately $0.6 million in
connection with the redevelopment and expansion of the retail centers located in
Kansas City, Missouri.
(B) RESULTS OF OPERATIONS
The following is a brief comparison of the Partnership's results of operations
for the quarters ended March 31, 2003 and 2002.
13
MARCH 31, 2003 VS. MARCH 31, 2002
The following table presents a year-to-date comparison of the Partnership's
sources of net investment income, and realized and unrealized gains or losses by
investment type.
QUARTER ENDED MARCH 31,
2003 2002
----------- -----------
NET INVESTMENT INCOME:
Office properties ............................................................ $ 646,699 $ 1,351,604
Apartment complexes .......................................................... 874,685 827,866
Retail property .............................................................. 981,987 974,127
Industrial properties ........................................................ 225,850 433,304
Equity in income of real estate partnership .................................. 160,736 76,042
Other (including interest income,
investment mgt fee, etc.) .................................................... (513,715) (737,025)
----------- -----------
TOTAL NET INVESTMENT INCOME .................................................. $ 2,376,242 $ 2,925,918
=========== ===========
NET UNREALIZED LOSS ON REAL ESTATE INVESTMENTS:
Office properties ............................................................ $(3,945,836) $(1,471,473)
Apartment complexes .......................................................... 66,284 (819,619)
Retail property .............................................................. 652,388 (1,492,454)
Industrial properties ........................................................ (707,964) 386,434
Interest in real estate partnership .......................................... (307,348) (381,133)
----------- -----------
TOTAL NET UNREALIZED LOSS ON REAL ESTATE INVESTMENTS ......................... (4,242,476) (3,778,245)
----------- -----------
QUARTER ENDED MARCH 31,
2003 2002
----------- -----------
NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Industrial properties ........................................................ 466,061 --
Real estate investment trust ................................................. -- (1,578)
----------- -----------
TOTAL NET REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS .................... 466,061 (1,578)
----------- -----------
NET REALIZED AND UNREALIZED LOSS ON REAL ESTATE INVESTMENTS .................. (3,776,415) $(3,779,823)
=========== ===========
The Partnership's net investment income for the period ended March 31, 2003 was
$2.4 million, a decrease of $0.5 million from $2.9 million when compared to the
corresponding period in 2002. The decrease is primarily due to the occupancy at
one of the Brentwood, Tennessee properties decreasing to 0% from 100% due to the
move-out of the single tenant, decreased occupancy at the Oakbrook Terrace,
Illinois property, and the sales of the industrial properties in Bolingbrook,
Illinois and Salt Lake City, Utah.
Equity in income of real estate partnership was $0.2 million for the first three
months of 2003, an increase of $0.1 million, or 111.4%, from $0.1 million in the
corresponding period in 2002. This increase is due to an increase in revenue
associated with expansion of the existing grocery store anchor that commenced
during the fourth quarter of 2001. It is anticipated that upon completion, both
occupancy and rental rates would increase.
Interest on short-term investments decreased approximately $0.04 million or
38.3% for the quarter ended March 31, 2003 due primarily to a lower average cash
balance when compared to the corresponding period in 2002.
Administrative expense increased $0.1 million, or 20.2%, in the first three
months of 2003 compared to the corresponding period in 2002. These increases
were primarily due to the Partnership's acquisition of a retail center located
in Ocean City, Maryland in late 2002. Also there were increases at the
Jacksonville, Florida and Raleigh, North Carolina apartment complexes due to
increased occupancy.
Interest expense increased $0.1 million, or 18.6%, in the first three months of
2003 compared to the corresponding period in 2002. This increase was primarily
due to the Partnership's assumption a $7.4 million mortgage loan in conjunction
with the acquisition of a controlling interest in a retail center located in
Ocean City, Maryland in late 2002.
Minority interest expense increased $0.07 million, or 112.1%, in the first three
months of 2003 compared to the corresponding period in 2002. This increase was
primarily due to the Partnership's acquisition of a controlling interest in a
retail center located in Ocean City, Maryland in late 2002.
14
The Partnership experienced a net unrealized loss of $4.2 million for the
quarter ended March 31, 2003 compared to a net unrealized loss of $3.8 million
during the corresponding period in 2002. The unrealized losses during the first
quarter of 2003 were experienced in the office, industrial and equity
partnership sectors. The office properties recorded an unrealized loss of $3.9
million primarily due to the buildings located in Lisle, Illinois, Oakbrook
Terrace, Illinois, and Brentwood, Tennessee; decreases in occupancy coupled with
softening market conditions have resulted in reductions in market rental rates
and increased leasing costs. The industrial site in Aurora, Colorado experienced
an unrealized loss of $0.7 million for the first three months of 2003 due to
decreases in market rental rates. The equity partnership sector also experienced
a net unrealized loss of $0.3 million primarily due to capital expenditures that
were not reflected as an increase in market value. Offsetting these losses were
unrealized gains of $0.7 million in the retail sector due to a major tenant at
the Roswell, Georgia retail center renewing their lease.
OFFICE PROPERTIES
Net investment income from property operations for the office sector decreased
approximately $0.7 million, or 52.2%, for the quarter ended March 31, 2003 when
compared to the corresponding period in 2002. Decreases in occupancy at the one
of the Brentwood, Tennessee properties and the Oakbrook Terrace, Illinois office
property were the primary reason that net investment income decreased for the
office sector.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $3.9 million during the first three months of 2003. The
Lisle, Illinois property experienced a net unrealized loss of approximately $1.4
million primarily due to decreased occupancy, increased lease-up costs, and
lower market rents. The Oakbrook Terrace, Illinois property experienced a net
unrealized loss of approximately $1.3 million primarily due to softening market
conditions and the lease expiration of a major tenant. One of the Brentwood,
Tennessee properties experienced a net unrealized loss of approximately $0.7
million primarily due to softening market conditions. The other Brentwood,
Tennessee property experienced a net unrealized loss of approximately $0.3
million primarily due to softening market conditions and increased expenses. The
office property located in Beaverton, Oregon experienced an unrealized loss of
approximately $0.2 million due to the lease expiration of one of the tenants.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $1.5 million during the first three months of 2002. One of
the Brentwood, Tennessee properties experienced a net unrealized loss of
approximately $1.1 million primarily due to the near-term expiration and
expected move-out of the single tenant at the property in July 2002. The
Oakbrook Terrace, Illinois and the other Brentwood, Tennessee office properties
experienced net unrealized losses of approximately $0.4 million and $0.2
million, respectively, primarily due to a reduction in market rental rates at
the Oakbrook Terrace, Illinois property and an increase in operating expenses at
the Brentwood, Tennessee property. Offsetting these unrealized losses was an
unrealized gain of approximately $0.2 million at the office property located in
Beaverton, Oregon. This unrealized gain was attributable to a slight increase in
average market rent.
Occupancy at one of the Brentwood, Tennessee office properties increased from
69% at March 31, 2002 to 78% at March 31, 2003. The other Brentwood, Tennessee
office property occupancy decreased from 100% at March 31, 2002 to 0% at March
31, 2003. Occupancy at the Beaverton, Oregon office property decreased from 100%
at March 31, 2002 to 81% at March 31, 2003. Occupancy at the Lisle, Illinois
decreased from 100% at March 31, 2002 to 47% at March 31, 2003. Occupancy at the
Oakbrook Terrace, Illinois decreased from 79% at March 31, 2002 to 31% at March
31, 2003. As of March 31, 2003 all vacant spaces were being marketed.
APARTMENT COMPLEXES
Net investment income from property operations for the apartment sector was $0.9
million for the quarter ended March 31, 2003, a decrease of $0.05 million, or
5.7%, when compared to the corresponding period in 2002.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.1 million for the quarter ended March 31, 2003 compared to a net
unrealized loss of $0.8 million for the quarter ended March 31, 2002. The
unrealized gain for 2003 was attributable to the apartment complex located in
Jacksonville, Florida due to an increase in occupancy.
15
Of the unrealized loss experienced in the first quarter of 2002, $0.6 million
was due to an increase in expenses at the Raleigh, North Carolina apartment
complex. The apartment complex located in Atlanta, Georgia also experienced a
net unrealized loss of approximately $0.4 million due to softening market
conditions, which have resulted in lower short-term occupancy and income
projections, and increased rent concessions. The apartment complex located in
Jacksonville, Florida experienced an unrealized loss of $0.2 million due to
softening market conditions, which have resulted in reduced occupancy levels and
lower market rents. Offsetting these unrealized losses was the apartment
portfolio located in Gresham/Salem, Oregon, which experienced a net unrealized
gain of $0.4 million primarily due to an increase in market rents.
Occupancy at the Atlanta, Georgia complex increased from 73% at March 31, 2002
to 88% at March 31, 2003. Occupancy at the Raleigh, North Carolina complex
increased from 83% at March 31, 2002 to 95% at March 31, 2003. Occupancy at the
apartment complex in Jacksonville, Florida increased from 86% at March 31, 2002
to 94% at March 31, 2003. Occupancy at the Gresham and Salem, Oregon apartment
complexes decreased from 93% at March 31, 2002 to 91% at March 31, 2003. As of
March 31, 2003, all available vacant units were being marketed.
RETAIL PROPERTIES
Net investment income for the Partnership's retail properties was approximately
$1.0 million for the quarter ended March 31, 2003 and for the quarter ended
March 31, 2002.
The retail properties experienced a net unrealized gain of $0.7 million for the
quarter ended March 31, 2003 and a net unrealized loss of $1.5 million for the
quarter ended March 31, 2002. The retail center located in Roswell, Georgia
experienced a net unrealized gain of $0.5 million for the first three months of
2003 due to a major tenant signing a lease renewal. The retail center in Ocean
City, Maryland also experienced a net unrealized gain of $0.2 million for the
first three months of 2003 due to an increase in value resulting from capital
expenditures.
The net unrealized loss of $1.5 million experienced by the retail properties for
the three months ended March 31, 2002 was primarily due to the retail center
located in Roswell, Georgia. This center experienced a net unrealized loss of
$1.4 million for the first quarter of 2002 due to increased risk that a major
tenant would not renew its lease, coupled with a deterioration in the market
position of the property. The retail center located in Hampton, Virginia also
experienced an unrealized loss of $0.1 million due to capital expenditures at
the property that were not reflected as an increase in market value.
Occupancy at the shopping center located in Hampton, Virginia increased from 97%
at March 31, 2002 to 100% at March 31, 2003. Occupancy at the shopping center
located in Roswell, Georgia increased from 92% at March 31, 2002 to 93% at March
31, 2003. Occupancy at the retail center in Ocean City, Maryland was 100% at
March 31, 2003. As of March 31, 2003, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
Net investment income from property operations for the industrial properties
decreased from $0.4 million for quarter ended March 31, 2002 to $0.2 million for
the corresponding quarter ended March 31, 2003. The majority of this decrease
was due to the sale of the industrial property located in Bolingbrook, Illinois
during the third quarter of 2002 and the January 28, 2003 sale of the industrial
property located in Salt Lake City, Utah.
The Aurora, Colorado industrial property owned by the Partnership experienced a
net unrealized loss of approximately $0.7 million for the quarter ended March
31, 2003 compared to a net unrealized gain of approximately $0.4 million for the
quarter ended March 31, 2002. The value loss is due to softening market
conditions.
The three industrial properties owned by the Partnership experienced a net
unrealized gain of approximately $0.4 million for the three months ended March
31, 2002. The majority of the unrealized gain in 2002 was attributable to the
Aurora, Colorado industrial property. This gain of approximately $0.5 million
was due to an increase in market rents. The Salt Lake City, Utah facility
experienced a net unrealized loss of $0.1 million due to capital expenditures at
the property that were not reflected as an increase in market value.
On January 28, 2003 the industrial property located in Salt Lake City, Utah was
sold for a realized gain of $0.5 million.
16
The Aurora, Colorado property's occupancy rate increased from 75% at March 31,
2002 to 84% at March 31, 2003. As of March 31, 2003, all vacant spaces were
being marketed.
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
During the quarter ended March 31, 2003, income from the investment located in
Kansas City, Kansas and Missouri amounted to $0.2 million, an increase of 111.4%
from $0.1 million at March 31, 2002. The increase in the quarter-to-date equity
in income of real estate partnership is due to an increase in revenue associated
with expansion of the existing grocery store anchor that commenced during the
fourth quarter of 2001. It is anticipated that upon completion, both occupancy
and rental rates will increase.
The equity investment experienced a net unrealized loss of $0.3 million and a
net unrealized loss of $0.4 million for the quarters ended March 31, 2003 and
2002, respectively. The unrealized loss of $0.3 million for the quarter ended
March 31, 2003 and the unrealized loss of $0.4 million for the quarter ended
March 31, 2002 was primarily due to renovations from the expansion of the
existing grocery store anchor that were not reflected as an increase in market
value.
The retail portfolio located in Kansas City, Kansas and Missouri had an average
occupancy of 88% at March 31, 2002, which increased to 90% at March 31, 2003. As
of March 31, 2003, all vacant spaces were being marketed.
OTHER
Other net investment income increased $0.2 million during the quarter ended
March 31, 2003 compared to the corresponding period in 2002. Other net
investment income includes interest income from short-term investments,
investment management fees, and expenses not related to property activities.
(C) INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis may be
considered forward-looking statements. Words such as "expects", "believes",
"anticipates", "intends", "plans", or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Partnership. There can be no
assurance that future developments affecting the Partnership will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Partnership's
products; and adverse litigation results. While the Partnership reassesses
material trends and uncertainties affecting its financial position and results
of operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. Readers should consider the information
referred to above when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
(D) INFLATION
The Partnership's leases with a majority of its commercial tenants provide for
recoveries of expenses based upon the tenant's proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which may reduce
the Partnership's exposure to increases in operating costs resulting from
inflation.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the application of
accounting policies that often involve a significant degree of judgment.
Management, on an ongoing basis, reviews critical estimates and assumptions. If
management determines, as a result of its consideration of facts and
circumstances that modifications in assumptions and estimates are appropriate,
results of operations and financial position as reported in the Consolidated
Financial Statements may change significantly.
The following sections discuss critical accounting policies applied in preparing
our financial statements that are most dependent on the application of estimates
and assumptions.
17
VALUATION OF INVESTMENTS
REAL ESTATE INVESTMENTS--The Partnership's investments in real estate are
initially valued at their purchase price. Thereafter, real estate investments
are reported at their estimated market values based upon appraisal reports
prepared by independent real estate appraisers (members of the Appraisal
Institute or an equivalent organization) within a reasonable amount of time
following acquisition of the real estate and no less frequently than annually
thereafter. The Chief Real Estate Appraiser of Prudential Investment Management
is responsible to assure that the valuation process provides objective and
accurate market value estimates.
The purpose of an appraisal is to estimate the market value of real estate as of
a specific date. Market value has been defined as the most probable price for
which the appraised real estate will sell in a competitive market under all
conditions requisite for a fair sale, with the buyer and seller each acting
prudently, knowledgeably, and for self interest, and assuming that neither is
under undue duress.
Real estate partnerships are valued at the Partnership's equity in net assets as
reflected in the partnership's financial statements with properties valued as
described above.
As described above, the estimated market value of real estate and real estate
related assets is determined through an appraisal process. These estimated
market values may vary significantly from the prices at which the real estate
investments would sell since market prices of real estate investments can only
be determined by negotiation between a willing buyer and seller. Although the
estimated market values represent subjective estimates, management believes
these estimated market values are reasonable approximations of market prices and
the aggregate value of investments in real estate is fairly presented as of
March 31, 2003 and December 31, 2002.
OTHER ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to about 33.08% of its investment portfolio consisting
primarily of short-term fixed rate commercial paper and fixed and variable
interest rate debt. The Partnership does not use derivative financial
instruments. By policy, the Partnership places its investments with high quality
debt security issuers, limits the amount of credit exposure to any one issuer,
limits duration by restricting the term, and holds investments to maturity
except under rare circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at March 31, 2003:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
---------- ---------------- -------------
Cash equivalents.......... 0-3 months $25.0 1.24%
18
The table below discloses the Partnership's fixed and variable rate debt as of
March 31, 2003. Approximately $25.7 million of the Partnership's long-term debt
bears interest at fixed rates and therefore the fair value of these instruments
is affected by changes in market interest rates. The following table presents
principal cash flows (in thousands) based upon maturity dates of the debt
obligations and the related weighted-average interest rates by expected maturity
dates for the fixed rate debt. The interest rate on the variable rate debt is
equal to the 6-month Treasury rate plus 1.565%. It is subject to a maximum of
11.345% and a minimum of 2.345%. The interest rate on the variable rate debt as
of March 31, 2003 was 3.235%.
MARCH 31, 2003
DEBT (IN $ THOUSANDS), 4/1/2003- ESTIMATED
INCLUDING CURRENT PORTION 12/31/2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate...... 7.43% 7.46% 7.47% 7.16% 7.18% 6.75% 7.79%
Fixed Rate....................... $506 $719 $ 774 $ 8,479 $588 $14,624 $25,690 $26,580
Variable Rate.................... 178 242 250 9,121 -- -- 9,791 9,548
------------------------------------------------------------------------------------
Total Mortgage Loans Payable..... $684 $961 $1,024 $17,600 $588 $14,624 $35,481 $36,128
------------------------------------------------------------------------------------
The Partnership is exposed to market risk from tenants. While the Partnership
has not experienced any significant credit losses, in the event of a significant
rising interest rate environment and/or economic downturn, defaults could
increase and result in losses to the Partnership, which would adversely affect
its operating results and liquidity.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 15d under the Securities and Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
19
PART II
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Contract owners participating in the Real Property Account have no voting
rights with respect to the Real Property Account.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2. Not applicable.
3.1 Amended Articles of Incorporation of Pruco Life Insurance Company of
New Jersey filed as Exhibit 1.A.(6)(a) to Post Effective Amendment
No. 17 to Form S-6, Registration Statement No. 2-89780, filed March
1, 1991, and incorporated herein by reference.
3.2 Amended By-Laws of Pruco Life Insurance Company of New Jersey, filed
as Exhibit 1.A.(6)(b) to Post-Effective Amendment No. 17 to Form
S-6, Registration Statement No. 2-89780, filed March 1, 1991, and
incorporated herein by reference.
3.3 Resolution of the Board of Directors establishing the Pruco Life of
New Jersey Variable Contract Real Property Account, filed as Exhibit
(3C) to Form S-1, Registration Statement No. 33-20018, filed
February 5, 1988, and incorporated herein by reference.
4.1 Variable Life Insurance Contract filed as Exhibit A(5) to Form
N-8B-2, Registration Statement No. 2-81243, filed January 10, 1983,
and incorporated herein by reference.
4.2 Revised Variable Appreciable Life Insurance Contract with fixed
death benefit, filed as Exhibit 1.A.(5)(c) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89780,
filed July 11, 1986, and incorporated herein by reference.
4.3 Revised Variable Appreciable Life Insurance Contract with variable
death benefit, filed as Exhibit 1.A.(5)(d) to Post-Effective
Amendment No. 5 to Form S-6, Registration Statement No. 2-89780,
filed July 11, 1986, and incorporated herein by reference.
4.4 Single Premium Variable Annuity Contract, filed as Exhibit 4(i) to
Form N-4, Registration Statement No. 2-99916, filed August 13, 1985,
and incorporated herein by reference.
4.5 Flexible Premium Variable Life Insurance Contract, filed as Exhibit
1.A.(5) to Form S-6, Registration Statement No. 2-99537, filed
August 8, 1985, and incorporated herein by reference.
9. None.
10.1 Investment Management Agreement between Prudential Investment
Management, Inc. and The Prudential Variable Contract Real Property
Partnership, filed as Post-Effective Amendment No. 16 to Form S-1,
Registration Statement No. 33-20083-01, filed April 10, 2003, and
incorporated herein by reference.
10.2 Service Agreement between The Prudential Insurance Company of
America and The Prudential Investment Corporation, filed as Exhibit
(10B) to Form S-1, Registration Statement No. 33-8698, filed
September 12, 1986, and incorporated herein by reference.
10.3 Partnership Agreement of The Prudential Variable Contract Real
Property Partnership filed as Exhibit (10C) to Post-Effective
Amendment No. 2 to Form S-1, Registration Statement No. 33-20018,
filed April 6, 1990, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
13. None.
18. None.
20
21. Not applicable.
22. Not applicable.
23. None.
24. Not applicable.
27. Not applicable.
99.1 Certification of President required pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Accounting Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B) REPORT ON FORM 8-K
None.
21
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.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
IN RESPECT OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
----------------------------------------------------------------
(REGISTRANT)
Date: May 15, 2003 By: /s/ Andrew J. Mako
-------------- ---------------------------
Andrew J. Mako
President
Date: May 15, 2003 By: /s/ William J. Eckert, IV
-------------- ---------------------------
William J. Eckert, IV
Chief Accounting Officer
22
CERTIFICATIONS
I, Andrew J. Mako, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life of New
Jersey Variable Contract Real Property Account;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Andrew J. Mako
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Andrew J. Mako
President
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I, William J. Eckert, IV, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life of New
Jersey Variable Contract Real Property Account;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ William J. Eckert, IV
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William J. Eckert, IV
Chief Accounting Officer
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