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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 JUNE 30, 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--June 30, 2003 and December 31, 2002................ 3
Statements of Operations--Six and Three Months Ended
June 30, 2003 and 2002.................................................. 3
Statements of Changes in Net Assets--Six and Three Months Ended
June 30, 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--June 30, 2003
and December 31, 2002................................................... 7
Consolidated Statements of Operations--
Six and Three Months Ended June 30, 2003 and 2002................... 8
Consolidated Statements of Changes in Net Assets--
Six and Three Months Ended June 30, 2003 and 2002................... 9
Consolidated Statements of Cash Flows--
Six and Three Months Ended June 30, 2003 and 2002................... 10
Consolidated Schedules of Investments--June 30, 2003
and December 31, 2002................................................... 11
Notes to the Financial Statements of the Partnership.................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks......... 22
Item 4. Controls and Procedures............................................. 23
PART II--OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders................. 24
Item 6. Exhibits and Reports on Form 8-K.................................... 24
Signature Page.......................................................... 26
2
FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
June 30, 2003 and December 31, 2002
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
----------- -----------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership ......................................... $ 8,875,493 $ 8,854,905
----------- -----------
Net Assets ........................................................ $ 8,875,493 $ 8,854,905
=========== ===========
NET ASSETS, representing:
Equity of contract owners ......................................... $ 5,790,482 $ 5,818,363
Equity of Pruco Life Insurance Company of New Jersey .............. 3,085,011 3,036,542
----------- -----------
$ 8,875,493 $ 8,854,905
=========== ===========
Units outstanding ................................................. 4,053,209 4,041,054
=========== ===========
STATEMENTS OF OPERATIONS
For the six and three months ended June 30, 2003 and 2002
1/1/2003- 1/1/2002- 4/1/2003- 4/1/2002-
6/30/2003 6/30/2002 6/30/2003 6/30/2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
INVESTMENT INCOME
Net investment income from Partnership operations ................. $ 231,326 $ 249,681 $ 117,190 $ 120,508
----------- ----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration ............................... 16,471 16,564 8,248 8,456
----------- ----------- ----------- -----------
NET INVESTMENT INCOME ............................................. 214,855 233,117 108,942 112,052
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized loss on investments in Partnership ....... (233,124) (319,451) (29,348) (152,650)
Net realized gain (loss) on sale of investments in Partnership .... 22,386 (70) 0
0
----------- ----------- ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS .................................... (210,738) (319,521) (29,348) (152,650)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ......................................... $ 4,117 $ (86,404) $ 79,594 $ (40,598)
=========== =========== =========== ===========
STATEMENTS OF CHANGES IN NET ASSETS
For the six and three months ended June 30, 2003 and 2002
1/1/2003- 1/1/2002- 4/1/2003- 4/1/2002-
6/30/2003 6/30/2002 6/30/2003 6/30/2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
OPERATIONS
Net investment income ............................................. $ 214,855 $ 233,117 $ 108,942 $ 112,052
Net change in unrealized loss on investments in Partnership ....... (233,124) (319,451) (29,348) (152,650)
Net realized gain (loss) on sale of investments in Partnership .... 22,386 (70) 0 0
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ......................................... 4,117 (86,404) 79,594 (40,598)
----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners ................................ (24,477) (45,376) (34,322) (1,456)
Net contributions by Pruco Life Insurance Company of New Jersey ... 40,948 61,940 42,570 9,912
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS ............................... 16,471 16,564 8,248 8,456
----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... 20,588 (69,840) 87,842 (32,142)
NET ASSETS
Beginning of period ............................................... 8,854,905 8,747,935 8,787,651 8,710,237
----------- ----------- ----------- -----------
End of period ..................................................... $ 8,875,493 $ 8,678,095 $ 8,875,493 $ 8,678,095
=========== =========== =========== ===========
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
JUNE 30, 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 June 30, 2003 and for the six and three months
ended June 30, 2003 and June 30, 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 June 30, 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
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.
4
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 June 30,
2003 and December 31, 2002 were as follows:
JUNE 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------- -----------------
NUMBER OF SHARES (ROUNDED): 367,199 367,199
NET ASSET VALUE PER SHARE (ROUNDED): $24.17 $24.11
COST: $4,271,993 $4,271,993
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.
5
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 six and three months ended June 30, 2003 and 2002, were
as follows:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------- ------- ------- -------
2003 2002 2003 2002
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
VAL $23,034 $38,841 $25,972 $ 7,902
VLI (6,784) 1,222 542 (918)
SPVA 7,828 0 7,828 0
SPVL 399 5,313 (20) (5,528)
------- ------- ------- -------
TOTAL $24,477 $45,376 $34,322 $ 1,456
======= ======= ======= =======
NOTE 7: UNIT INFORMATION
Outstanding units and unit values at June 30, 2003 and December 31, 2002 were as
follows:
JUNE 30, 2003 DECEMBER 31, 2002
------------------ ------------------
(UNAUDITED)
UNITS OUTSTANDING: 4,053,209 4,041,054
UNIT VALUE: 1.96497 to 2.28104 1.97263 to 2.27966
6
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
REAL ESTATE INVESTMENTS--At estimated market value:
Real estate and improvements
(cost: 06/30/2003--$213,240,126;
12/31/2002--$215,592,277) ................... $190,361,705 $196,631,183
Real estate partnership
(cost: 06/30/2003--$10,159,009;
12/31/2002--$9,931,394) ..................... 8,636,250 8,978,324
------------ ------------
Total real estate investments ............. 198,997,955 205,609,507
CASH AND CASH EQUIVALENTS ...................... 32,348,054 18,591,149
OTHER ASSETS (net of allowance
for uncollectible accounts:
06/30/2003--$59,100; 12/31/2002--$69,000) ... 5,370,080 5,519,457
------------ ------------
Total assets .............................. $236,716,089 $229,720,113
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE ............................ 44,013,633 35,699,108
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ............. 2,849,288 3,092,098
DUE TO AFFILIATES ................................. 940,014 907,503
OTHER LIABILITIES ................................. 936,378 911,245
MINORITY INTEREST ................................. 3,194,627 4,756,653
------------ ------------
Total liabilities ......................... 51,933,940 45,366,607
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY .................................. 184,782,149 184,353,506
------------ ------------
Total liabilities and partners' equity .... $236,716,089 $229,720,113
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD ..... 7,644,848 7,644,848
============ ============
SHARE VALUE AT END OF PERIOD ...................... $ 24.17 $ 24.11
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INVESTMENT INCOME:
Revenue from real estate and improvements ...... $ 12,132,657 $ 13,246,936 $ 5,908,155 $ 6,704,321
Equity in income of real estate partnership .... 304,963 65,770 144,227 (10,272)
Interest on short-term investments ............. 127,222 226,556 61,808 120,452
------------ ------------ ------------ ------------
Total investment income ..................... 12,564,842 13,539,262 6,114,190 6,814,501
------------ ------------ ------------ ------------
EXPENSES:
Investment managment fee ....................... 1,186,192 1,244,087 608,606 625,850
Real estate taxes .............................. 1,332,764 1,394,145 664,973 689,497
Administrative ................................. 1,618,904 1,606,971 813,759 937,380
Operating ...................................... 2,318,871 2,521,919 1,004,299 1,266,011
Interest expense ............................... 1,159,839 1,018,066 578,571 527,982
Minority interest .............................. 132,200 98,513 4,151 38,138
------------ ------------ ------------ ------------
Total investment expenses ................... 7,748,770 7,883,701 3,674,359 4,084,858
------------ ------------ ------------ ------------
NET INVESTMENT INCOME ............................. 4,816,072 5,655,561 2,439,831 2,729,643
------------ ------------ ------------ ------------
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 periods' unrealized
loss on real estate investments sold ..... (1,396,836) -- -- --
------------ ------------ ------------ ------------
Net realized gain (loss) on real estate
investments sold ............................... 466,061 (1,578) -- --
------------ ------------ ------------ ------------
Change in unrealized loss on real estate
investments .................................... (5,883,852) (7,451,488) (1,617,269) (3,635,059)
Less: Minority interest in unrealized loss
on investments ................................. (1,030,362) (215,550) (1,006,255) (177,366)
------------ ------------ ------------ ------------
Net unrealized loss on real estate
investments .................................... (4,853,490) (7,235,938) (611,014) (3,457,693)
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED LOSS
ON REAL ESTATE INVESTMENTS ..................... (4,387,429) (7,237,516) (611,014) (3,457,693)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ...................... $ 428,643 $ (1,581,955) $ 1,828,817 $ (728,050)
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
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.
9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) increase in net assets resulting from operations ........ $ 428,643 $(1,581,955)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash flows from operating activities:
Net realized and unrealized loss on investments ........................... 4,387,429 7,237,516
Equity in income of real estate partnership in excess/
(less than) distributions ............................................... 644,015 (65,771)
Minority interest from operating activities ............................... 132,200 98,513
Bad debt expense .......................................................... 60,216 49,499
Increase in:
Dividend receivable ..................................................... -- 20,802
Other assets ............................................................ 89,160 53,599
(Decrease) Increase in:
Accounts payable and accrued expenses ................................... (242,810) (489,052)
Due to affiliates ....................................................... 32,511 (1,876)
Other liabilities ....................................................... 25,133 (37,137)
----------- -----------
Net cash flows from operating activities ........................................ 5,556,497 5,284,138
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold .................................. 5,689,488 6,075
Additions to real estate ........................................................ (2,705,215) (1,140,767)
Additions to real estate partnership ............................................ (871,630) (1,188,535)
----------- -----------
Net cash flows from (used in) investing activities .............................. 2,112,643 (2,323,227)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loan payable ..................................... (435,475) (334,097)
Proceeds from mortgage loan payable ............................................. 8,750,000 --
Distributions to minority interest partners ..................................... (2,227,226) (25,697)
Contributions from minority interest partners ................................... 466 12,304
----------- -----------
Net cash flows from (used in) financing activities .............................. 6,087,765 (347,490)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................ 13,756,905 2,613,421
CASH AND CASH EQUIVALENTS--Beginning of period ..................................... 18,591,149 26,615,645
----------- -----------
CASH AND CASH EQUIVALENTS--End of period ........................................... $32,348,054 $29,229,066
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest .......................................... $ 1,077,240 $ 980,363
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
JUNE 30, 2003 (UNAUDITED) DECEMBER 31, 2002
--------------------------- -----------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS--
PERCENTAGE OF NET ASSETS................................ 103.0% 106.7%
Location Description
- -----------------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building.................... $ 22,950,819 $ 12,593,571 $ 22,857,236 $ 13,854,988
Atlanta, GA Garden Apartments.................. 15,770,893 17,516,158 15,715,772 17,523,063
Roswell, GA Retail Shopping Center............. 33,041,817 25,499,955 32,895,282 24,903,969
Raleigh, NC Garden Apartments.................. 15,945,326 17,501,490 15,943,836 17,502,998
Brentwood, TN Office Building.................... 10,320,577 8,899,999 10,320,613 9,651,831
Oakbrook Terrace, IL Office Building.................... 14,386,830 10,015,935 14,205,396 11,213,142
Beaverton, OR Office Building.................... 11,890,209 10,400,005 11,890,209 10,800,005
Salt Lake City, UT Industrial Building................ -- -- 6,599,482 5,202,646
Aurora, CO Industrial Building................ 10,659,059 10,213,369 10,294,784 10,557,058
Brentwood, TN Office Building.................... 9,837,483 7,000,043 9,826,195 7,709,345
*Jacksonville, FL Garden Apartments.................. 19,809,351 19,800,000 19,745,855 19,800,000
*Gresham/Salem, OR Garden Apartments.................. 18,886,676 18,125,000 18,838,570 18,600,000
Hampton, VA Retail Shopping Center............. 18,012,768 19,996,180 16,446,909 19,300,000
*Ocean City, MD Retail Shopping Center............. 11,728,318 12,800,000 10,012,138 10,012,138
------------ ------------ ------------ ------------
$213,240,126 $190,361,705 $215,592,277 $196,631,183
============ ============ ============ ============
REAL ESTATE PARTNERSHIP--
PERCENTAGE OF NET ASSETS................................ 4.7% 4.9%
Location Description
- -----------------------------------------------------------------------------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Centers............ $ 10,159,009 $ 8,636,250 $ 9,931,394 $ 8,978,324
====================================================================
* Real estate partnerships accounted for by the consolidation method.
JUNE 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------------- ------------------------
FACE ESTIMATED ESTIMATED
AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS............ 17.5% 10.1%
Federal Home Loan Banks, 0.95%, July 1, 2003 .................. $14,786,000 $14,785,610 $14,785,610 $ -- $ --
Federal National Mortgage Assoc., 1.14%, July 7, 2003 ......... 12,000,000 11,988,220 11,988,220 -- --
General Elec. Cap Corp., 1.14%, July 10, 2003 ................. 1,000,000 999,113 999,113
Federal National Mortgage Assoc., 0.88%, August 6, 2003 ....... 3,900,000 3,895,996 3,895,996
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 ........................................ 31,668,939 31,668,939 17,821,742 17,821,742
CASH .......................................................... 679,115 679,115 769,407 769,407
----------- ----------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS ............................... $32,348,054 $32,348,054 $18,591,149 $18,591,149
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
JUNE 30, 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
only of normal recurring adjustments) considered necessary for a fair statement
have been included. Operating results for the six months ended June 30, 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 adoption of FIN 46 will
not have a material impact on the Partnership's carrying value of this
investment.
NOTE 2: DISCLOSURE OF NON-CASH INVESTING ACTIVITY
On April 15, 2003, a buyout of a minority partner's interest in a consolidated
retail asset resulted in an increase in the Partnership's basis in the real
estate investment of approximately $1.6 million.
NOTE 3: 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 4: 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 six months ended
June 30, 2003 and 2002 investment management fees incurred by the Partnership
were $1,186,192 and $1,244,087 respectively. Management fees incurred by the
Partnership for the three months ended June 30, 2003 and 2002 were $608,606 and
$625,850 respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the six months ended June 30,
2003 and 2002 were $58,315 for each period, and are classified as administrative
expense in the Consolidated Statements of Operations. Administrative expenses
for the three months ended June 30, 2003 and 2002 were $29,157 for each period.
NOTE 5: DEBT
On June 27, 2003, a wholly owned property obtained loan financing in the amount
of $8.75 million, with a fixed interest rate of 3.09%. The loan matures in five
years with monthly payments of interest only and a balloon payment upon
maturity.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
JUNE 30, 2003 AND 2002
(UNAUDITED)
NOTE 6: FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS
ENDED
------------------
JUNE 30, JUNE 30,
2003 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 ............. $ 0.79 $ 0.83
Management fee ........................................... (0.16) (0.15)
Net realized and unrealized (loss) gain on investments ... (0.57) (0.87)
------ ------
Net Decrease in Net Assets Resulting from Operations ..... 0.06 (0.19)
------ ------
NET ASSET VALUE, END OF PERIOD ........................... $24.17 $23.63
====== ======
(a) TOTAL RETURN BEFORE MANAGEMENT FEE: ................. 0.88% (0.17)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions) .................. $185 $197
Ratios to average net assets (b):
Management Fee ..................................... 0.65% 0.63%
Net Investment Income, before Management Fee ....... 3.27% 3.55%
(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.
13
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 herein.
(A) LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Partnership's liquid assets consisting of cash and cash
equivalents were $32.3 million, an increase of $13.7 million from $18.6 million
at December 31, 2002. This increase was primarily due to an increase in net cash
flows from operations, the sale of the industrial property located in Salt Lake
City, Utah on January 28, 2003, the sale of one of the retail centers located in
Kansas City, Missouri on April 23, 2003, and mortgage proceeds of $8.75 million
received in connection with financing placed on the apartment complex located in
Raleigh, North Carolina on June 27, 2003. Sources of liquidity include net cash
flow from property operations, interest from short-term investments, sales,
financing and operational positions maintained by the Partners. These
operational positions may be periodically withdrawn by the Partners from
available cash.
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 June 30, 2003, 13.7% 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 Partners did not withdraw any operational positions during the first six
months of either 2003 or 2002. Withdrawals of operational positions may be made
by 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 six months of 2003, the Partnership spent approximately $2.7
million in capital expenditures on wholly owned and consolidated properties.
Approximately $1.7 million was associated with the development of the retail
center located in Ocean City, Maryland. The remaining $0.9 million balance was
primarily associated with leasing at the industrial building located in Aurora,
Colorado, the office located in Oakbrook Terrace, Illinois, the retail center
located in Roswell, Georgia, and the office located in Lisle, Illinois. The
Partnership also increased its investment in real estate partnerships by
approximately $0.2 million in connection with the redevelopment and expansion of
the retail centers located in Kansas City, Missouri.
14
(B) RESULTS OF OPERATIONS
The following is a brief year-to-date and quarterly comparison of the
Partnership's results of operations for the periods ended June 30, 2003 and
2002.
JUNE 30, 2003 VS. JUNE 30, 2002
The following table presents a year-to-date and quarterly comparison of the
Partnership's sources of net investment income, and realized and unrealized
gains or losses by investment type.
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET INVESTMENT INCOME:
Office properties ................................. $ 1,085,786 $ 2,629,727 $ 439,086 $ 1,278,123
Apartment complexes ............................... 2,061,907 1,559,422 1,187,222 731,556
Retail property ................................... 2,065,901 1,798,448 1,083,914 824,321
Industrial properties ............................. 424,218 717,129 198,367 283,825
Equity in income of real estate partnership ....... 304,963 65,770 144,227 (10,272)
Other (including interest income,
investment mgt fee, etc.) ...................... (1,126,703) (1,114,935) (612,985) (377,910)
----------- ----------- ----------- -----------
TOTAL NET INVESTMENT INCOME ....................... $ 4,816,072 $ 5,655,561 $ 2,439,831 $ 2,729,643
----------- ----------- ----------- -----------
NET UNREALIZED LOSS ON
REAL ESTATE INVESTMENTS:
Office properties ................................. $(4,606,028) $(3,644,336) $ (660,192) $(2,172,863)
Apartment complexes ............................... (595,127) (1,891,874) (661,411) (1,072,254)
Retail property ................................... 1,625,319 (1,225,001) 972,930 267,453
Industrial properties ............................. (707,964) 153,140 -- (233,295)
Interest in real estate partnership ............... (569,690) (627,867) (262,341) (246,734)
----------- ----------- ----------- -----------
TOTAL NET UNREALIZED LOSS ON
REAL ESTATE INVESTMENTS ........................ $(4,853,490) $(7,235,938) $ (611,014) $(3,457,693)
----------- ----------- ----------- -----------
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2003 2002 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 ........................ $(4,387,429) $(7,237,516) $ (611,014) $(3,457,693)
----------- ----------- ----------- -----------
The Partnership's net investment income for the six months ended June 30, 2003
was $4.8 million, a decrease of $0.8 million from $5.6 million when compared to
the corresponding period in 2002. The Partnership's net investment income for
the quarter ended June 30, 2003 was $2.4 million, a decrease of $0.3 million
from $2.7 million when compared to the corresponding period in 2002. The
decrease is primarily due to increased vacancy within the office portfolio and
the sales of the industrial properties in Bolingbrook, Illinois and Salt Lake
City, Utah.
Equity in income of real estate partnership was $0.3 million for the first six
months of 2003, an increase of $0.2 million from $0.1 million in the
corresponding period in 2002. Equity in income of real estate partnership was
$0.1 million for the second quarter of 2003, an increase of $0.2 million from
($0.01) 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 was completed this quarter.
Interest on short-term investments decreased approximately $0.1 million or 43.8%
for the six months ended June 30, 2003 due primarily to a lower average cash
balance when compared to the corresponding period in 2002. Interest on
short-term investments decreased approximately $0.1 million or 48.7% for the
quarter ended June 30, 2003 compared to the corresponding quarter last year due
primarily to lower interest rates.
15
Administrative expense decreased $0.1 million, or 13.2%, in the second quarter
of 2003 compared to the corresponding period in 2002. The decrease was primarily
due to the Partnership's sale of the two industrial properties in Bolingbrook,
Illinois and Salt Lake City, Utah and a slight overall reduction in
administrative expense throughout the portfolio.
Operating expense decreased $0.3 million, or 20.7%, in the second quarter of
2003 compared to the corresponding period in 2002. The decrease was primarily
due to the Partnership's sale of the two industrial properties in Bolingbrook,
Illinois and Salt Lake City, Utah, and a reclassification of 2002 repairs and
maintenance expenses to building improvements for the apartment complex located
in Gresham/Salem, Oregon during the second quarter of 2003.
Interest expense increased $0.1 million, or 13.9%, in the first six months of
2003 compared to the corresponding period in 2002. This increase was primarily
due to the Partnership's assumption of 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 $0.03 million, or 34.2%, in the first six
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. Minority interest
expense decreased $0.03 million, or 89.1%, in the second quarter of 2003
compared to the corresponding period in 2002. This decrease was primarily due to
the Partnership's buyout of its minority partner's interest in the retail center
located in Hampton, Virginia on April 15, 2003.
The Partnership experienced a net unrealized loss of $4.9 million for the six
months ended June 30, 2003 compared to a net unrealized loss of $7.2 million
during the corresponding period in 2002. The unrealized losses during the first
six months of 2003 were experienced in the office, industrial, apartment, and
equity partnership sectors. The office properties recorded an unrealized loss of
$4.6 million primarily due to the buildings located in Oakbrook Terrace,
Illinois, Lisle, Illinois, and Brentwood, Tennessee; decreases in occupancy
coupled with soft 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 six months of 2003
due to decreases in market rental rates. The apartment sector also experienced
an unrealized loss of $0.6 million primarily associated with the apartment
portfolio located in Gresham/Salem, Oregon. The decrease is a result of
projected increases in operating expenses. The equity partnership sector also
experienced a net unrealized loss of $0.6 million primarily due to capital
expenditures that were not reflected as an increase in market value. Offsetting
some of these losses were unrealized gains of $1.6 million in the retail sector.
Increases in value were primarily due to renovation and re-leasing efforts at
the Ocean City, Maryland retail center, a strengthening of market fundamentals
at the Hampton, Virginia retail center, and a major tenant at the Roswell,
Georgia retail center renewing their lease.
The Partnership experienced a net unrealized loss of $0.6 million for the three
months ended June 30, 2003 compared to a net unrealized loss of $3.5 million
during the corresponding period in 2002. The unrealized losses for the second
quarter were primarily experienced in the office sector ($0.7 million), the
apartment sector ($0.7 million), and the equity partnership sector ($0.3
million) for the same reasons discussed previously. Offsetting these unrealized
losses were net unrealized gains experienced by the retail sector of $1.0
million for the same reasons discussed previously.
Minority interest in unrealized loss on investments changed approximately $0.8
million from $0.2 million for the six months ended June 30, 2002 to $1.0 million
for the corresponding period in 2003. This change was primarily due to the
Partnership's buyout of its minority partner's interest in the retail center
located in Hampton, Virginia as discussed previously.
16
OFFICE PROPERTIES
NET NET
INVESTMENT INVESTMENT
INCOME INCOME APPRECIATION APPRECIATION OCCUPANCY OCCUPANCY
PROPERTY 06/30/03 06/30/02 06/30/03 06/30/02 06/30/03 06/30/02
---------- ---------- ----------- ---------- ---------- -----------
YEAR TO DATE
Lisle, IL .............. $ 509,643 $ 757,535 $(1,355,000) $ (204,359) 44% 100%
Brentwood, TN .......... 306,981 281,640 (751,796) (1,429,012) 78% 68%
Oakbrook Terrace, IL ... (22,763) 541,585 (1,378,642) (1,121,052) 31% 79%
Beaverton, OR .......... 494,610 549,935 (400,000) 210,877 81% 100%
Brentwood, TN .......... (202,685) 442,815 (720,590) (1,100,790) 0% 100%
Morristown, NJ ......... -- 56,217 -- --
---------- ---------- ----------- -----------
$1,085,786 $2,629,727 $(4,606,028) $(3,644,336)
---------- ---------- ----------- -----------
QUARTER TO DATE
Lisle, IL .............. $ 122,560 $ 380,231 $ -- $ (210,820)
Brentwood, TN .......... 185,984 130,992 (399,964) (1,200,000)
Oakbrook Terrace, IL ... (14,516) 277,571 (48,933) (762,043)
Beaverton, OR .......... 246,541 271,310 (200,000) --
Brentwood, TN .......... (101,483) 218,019 (11,295) --
---------- ---------- ----------- -----------
$ 439,086 $1,278,123 $ (660,192) $(2,172,863)
---------- ---------- ----------- -----------
NET INVESTMENT INCOME
Net investment income from property operations for the office sector decreased
approximately $1.5 million, or 58.7%, for the six months ended June 30, 2003
when compared to the corresponding period in 2002. Net investment income from
property operations for the office sector also decreased approximately $0.8
million, or 65.6%, for the quarter ended June 30, 2003 when compared to the
corresponding period in 2002. Decreases in occupancy at 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.
UNREALIZED LOSS
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.7 million during the second quarter of 2003. One of the
Brentwood, Tennessee properties experienced a net unrealized loss of
approximately $0.4 million primarily due to softening market conditions. The
office property located in Beaverton, Oregon experienced an unrealized loss of
approximately $0.2 million due to a slight decrease in average market rent.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $2.2 million during the second quarter of 2002. One of the
Brentwood, Tennessee properties experienced a net unrealized loss of
approximately $1.2 million primarily due to a reduction in market rental rates
and softening market conditions. The Oakbrook Terrace, Illinois property
experienced a net unrealized loss of approximately $0.8 million primarily due to
softening market conditions and the near-term lease expiration of a major tenant
at the property that has already vacated. The Lisle, Illinois property
experienced a net unrealized loss of approximately $0.2 million primarily due to
impending tenant rollover.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $4.6 million during the first six months of 2003. The
Oakbrook Terrace, Illinois and Lisle, Illinois properties both experienced a net
unrealized loss of approximately $1.4 million primarily due to decreased
occupancy, lower market rents, and increased lease up costs. Both Brentwood,
Tennessee properties experienced a net unrealized loss of approximately $0.7
million each primarily due to softening market conditions and increased
expenses. The office property located in Beaverton, Oregon experienced an
unrealized loss of approximately $0.4 million due to the lease expiration of one
of the tenants and a slight decrease in average market rent.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $3.6 million during the first six months of 2002. One of
the Brentwood, Tennessee properties experienced a net unrealized loss of
approximately $1.4 million primarily due to a reduction in market rental rates
and softening market conditions. The Oakbrook Terrace, Illinois property
experienced a net unrealized loss of approximately $1.1 million primarily due to
softening market conditions and the near-term lease expiration of a major tenant
17
at the property. The other Brentwood, Tennessee property experienced a net
unrealized loss of approximately $1.1 million primarily due to the move-out of
the single tenant at the property in July 2002. The Lisle, Illinois property
experienced a net unrealized loss of approximately $0.2 million primarily due to
anticipated lease expirations. 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.
As of June 30, 2003 all vacant spaces were being marketed.
APARTMENT COMPLEXES
NET NET
INVESTMENT INVESTMENT
INCOME INCOME APPRECIATION APPRECIATION OCCUPANCY OCCUPANCY
PROPERTY 06/30/03 06/30/02 06/30/03 06/30/02 06/30/03 06/30/02
- --------------------- ---------- --------- ----------- ----------- --------- -----------
YEAR TO DATE
Atlanta, GA ......... $ 442,515 $ 345,528 $ (62,026) $ (557,139) 92% 82%
Raleigh, NC ......... 444,574 589,936 (2,998) (608,160) 95% 85%
Jacksonville, FL .... 641,823 389,130 (6,996) (393,065) 91% 91%
Gresham/Salem, OR ... 532,995 234,828 (523,107) (333,510) 88% 94%
---------- ---------- --------- -----------
$2,061,907 $1,559,422 $(595,127) $(1,891,874)
---------- ---------- --------- -----------
QUARTER TO DATE
Atlanta, GA ......... $ 199,466 $ 153,760 $ (33,224) $ (205,000)
Raleigh, NC ......... 225,453 295,394 -- --
Jacksonville, FL .... 374,588 155,488 (137,706) (184,782)
Gresham/Salem, OR ... 387,715 126,914 (490,481) (682,472)
---------- ---------- --------- -----------
$1,187,222 $ 731,556 $(661,411) $(1,072,254)
---------- ---------- --------- -----------
NET INVESTMENT INCOME
Net investment income from property operations for the apartment sector was $2.1
million for the six months ended June 30, 2003, an increase of $0.5 million, or
32.2%, when compared to the corresponding period in 2002. Net investment income
from property operations for the apartment sector was $1.2 million for the
quarter ended June 30, 2003, an increase of $0.5 million, or 62.3%, when
compared to the corresponding period in 2002. The increases were mainly due to a
reclassification of 2002 repairs and maintenance expenses to building
improvements for the apartment complex located in Gresham/Salem, Oregon and
increased operational efficiencies at the apartment complex located in
Jacksonville, Florida during the second quarter of 2003.
UNREALIZED LOSS
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $1.1 million in the second quarter of 2002. The apartment portfolio
located in Gresham/Salem, Oregon, experienced a net unrealized loss of $0.7
million primarily due to softening market conditions, which resulted in lower
short-term occupancy and income projections, and increased rent concessions. The
apartment complex located in Atlanta, Georgia also experienced a net unrealized
loss of approximately $0.2 million for this same reason. The apartment complex
located in Jacksonville, Florida experienced an unrealized loss of $0.2 million
due to slightly higher expense estimates and higher rental concessions resulting
from soft market conditions.
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.6 million for the six months ended June 30, 2003 compared to a net
unrealized loss of $1.9 million for the six months ended June 30, 2002. The
apartment complexes owned by the Partnership experienced a net unrealized loss
of $0.7 million for the quarter ended June 30, 2003. The unrealized loss for
year-to-date and quarter-to-date 2003 was mainly attributable to the apartment
complex located in Gresham/Salem, Oregon due to an increase in projected
operating expenses.
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $1.9 million for the six months ended June 30, 2002. Of the unrealized
loss experienced in the first six months of 2002, $0.6 million was experienced
at each of the apartment complexes located in Raleigh, North Carolina and
Atlanta, Georgia. These unrealized losses were due to softening market
conditions, which resulted in lower short-term occupancy and income projections,
and increased rent concessions. The apartment complex located in
18
Jacksonville, Florida experienced an unrealized loss of $0.4 million due to
slightly higher expense estimates and softening market conditions, which
resulted in reduced occupancy levels and lower market rents. The apartment
portfolio located in Gresham/Salem, Oregon, also experienced a net unrealized
loss of $0.3 million primarily due to increases in operating expense levels and
softening market conditions, which resulted in lower short-term occupancy and
income projections, and increased rent concessions.
As of June 30, 2003, all available vacant units were being marketed.
RETAIL PROPERTIES
NET NET
INVESTMENT INVESTMENT
INCOME INCOME APPRECIATION APPRECIATION OCCUPANCY OCCUPANCY
PROPERTY 06/30/03 06/30/02 06/30/03 06/30/02 06/30/03 06/30/02
- ------------ ---------- ---------- ------------ ------------ --------- ---------
YEAR TO DATE
Roswell, GA ....... $1,342,491 $1,458,365 $ 449,452 $(1,428,341) 93% 92%
Hampton, VA ....... 488,680 340,083 566,617 203,340 100% 100%
Ocean City, MD .... 234,730 N/A 609,250 N/A 97% N/A
---------- ---------- ---------- -----------
$2,065,901 $1,798,448 $1,625,319 $(1,225,001)
---------- ---------- ---------- -----------
QUARTER TO DATE
Roswell, GA ....... $ 652,273 $ 659,495 $ (17,500) $ 1,053
Hampton, VA ....... 270,452 164,826 566,617 266,400
Ocean City, MD .... 161,189 N/A 423,813 N/A
---------- ---------- ---------- -----------
$1,083,914 $ 824,321 $ 972,930 $ 267,453
---------- ---------- ---------- -----------
NET INVESTMENT INCOME
Net investment income for the Partnership's retail properties was approximately
$2.1 million for the six months ended June 30, 2003, an increase of $0.3
million, or 14.9%, when compared to the corresponding period in 2002. Net
investment income for the Partnership's retail properties was approximately $1.1
million for the quarter ended June 30, 2003, an increase of $0.3 million, or
31.5%, when 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. Also on April 15,
2003 the Partnership acquired its joint venture partner's membership interest in
the retail center located in Hampton, Virginia, thus entitling the Partnership
to all of the net investment income generated by the investment commencing on
the buyout date and going forward.
UNREALIZED GAIN/LOSS
The retail properties experienced a net unrealized gain of $1.0 million for the
quarter ended June 30, 2003. These unrealized gains were primarily experienced
by the retail centers located in Hampton, Virginia and Ocean City, Maryland for
the same reasons as discussed previously.
The retail properties experienced a net unrealized gain of $0.3 million for the
quarter ended June 30, 2002. The retail center located in Hampton, Virginia
experienced an unrealized gain of $0.3 million due to the addition of 20,000
rentable square feet, as discussed previously. Capital expenditures related to
the construction of this new building coupled with the leasing of 75% of the new
space drove the increase in value.
The retail properties experienced a net unrealized gain of $1.6 million for the
six months ended June 30, 2003. The retail center in Ocean City, Maryland
experienced a net unrealized gain of $0.6 million for the first six months of
2003 due to renovation and re-leasing efforts. The retail center located in
Hampton, Virginia experienced a net unrealized gain of $0.6 million for the
first six months of 2003 due to strengthening market fundamentals. The retail
center located in Roswell, Georgia also experienced a net unrealized gain of
$0.4 million for the first six months of 2003 due to a major tenant signing a
lease renewal.
The retail properties experienced a net unrealized loss of $1.2 million for the
six months ended June 30, 2002. The retail center located in Roswell, Georgia
experienced a net unrealized loss of $1.4 million for the first six months 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. Offsetting
this loss, the retail center located in Hampton, Virginia experi-
19
enced an unrealized gain of $0.2 million due to the addition of 20,000 rentable
square feet. Capital expenditures related to the construction of this new
building coupled with the leasing of 75% of the new space have driven the
increase in value.
As of June 30, 2003, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
NET NET
INVESTMENT INVESTMENT
INCOME INCOME APPRECIATION APPRECIATION OCCUPANCY OCCUPANCY
PROPERTY 06/30/03 06/30/02 06/30/03 06/30/02 06/30/03 06/30/02
- ------------ -------- -------- --------- --------- --------- ---------
YEAR TO DATE
Aurora, CO ........... $408,573 $355,560 $(707,964) $ 494,264 84% 75%
Bolingbrook, IL ...... (146) 154,333 -- (50,230)
Salt Lake City, UT ... 15,791 207,236 466,061 (290,894)
-------- -------- --------- ---------
$424,218 $717,129 $(241,903) $ 153,140
-------- -------- --------- ---------
QUARTER TO DATE
Aurora, CO ........... $207,529 $172,547 $ -- $ (6,736)
Bolingbrook, IL ...... (146) 16,489 -- (23,156)
Salt Lake City, UT ... (9,016) 94,789 -- (203,403)
-------- -------- --------- ---------
$198,367 $283,825 $ -- $(233,295)
-------- -------- --------- ---------
NET INVESTMENT INCOME
Net investment income from property operations for the industrial properties
decreased from $0.7 million for the six months ended June 30, 2002 to $0.4
million for the corresponding period ended June 30, 2003. Net investment income
from property operations for the industrial properties decreased from $0.3
million for the quarter ended June 30, 2002 to $0.2 million for the
corresponding period ended June 30, 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 sale of the industrial property located in
Salt Lake City, Utah during the first quarter of 2003.
UNREALIZED GAIN/LOSS AND REALIZED GAIN
The Aurora, Colorado industrial property owned by the Partnership experienced a
net unrealized loss of approximately $0.7 million for the six months ended June
30, 2003 compared to a net unrealized gain of approximately $0.5 million for the
six months ended June 30, 2002. The unrealized loss experienced in 2003 is due
to soft market conditions.
On January 28, 2003 the industrial property located in Salt Lake City, Utah was
sold for a realized gain of $0.5 million.
The three industrial properties owned by the Partnership experienced a net
unrealized gain of approximately $0.2 million for the six months ended June 30,
2002. The majority of this unrealized gain was attributable to the Aurora,
Colorado industrial property. This gain of approximately $0.5 million was due to
an increase in market rents. Offsetting this unrealized gain was the Salt Lake
City, Utah facility, which experienced a net unrealized loss of $0.3 million due
to capital expenditures at the property that were not reflected as an increase
in market value and softening market conditions.
As of June 30, 2003, all vacant spaces were being marketed.
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
NET NET
INVESTMENT INVESTMENT
INCOME INCOME APPRECIATION APPRECIATION OCCUPANCY OCCUPANCY
PROPERTY 06/30/03 06/30/02 06/30/03 06/30/02 06/30/03 06/30/02
- ------------ -------- ------- --------- --------- --------- ---------
YEAR TO DATE
Kansas City, KS; MO........ $304,963 $65,770 $(569,690) $(627,867) 87% 83%
QUARTER TO DATE
Kansas City, KS; MO........ $144,227 $(10,272) $(262,341) $(246,734)
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NET INVESTMENT INCOME/LOSS
During the six months ended June 30, 2003, income from the investment located in
Kansas City, Kansas and Missouri was $0.3 million compared to $0.1 million for
the six months ended June 30, 2002. During the quarter ended June 30, 2003,
income from the investment located in Kansas City, Kansas and Missouri amounted
to $0.1 million compared to ($0.01) million for the six months ended June 30,
2002. This increase is due to an increase in revenue associated with expansion
of the existing grocery store anchor that was completed this quarter. On April
23, 2003, one of the retail centers located in Kansas City, Missouri was sold. A
gain or loss was not realized on the sale of this investment because all the
sale proceeds were used to pay down outstanding preferred return due on the
entire portfolio of retail centers located in Kansas City, Kansas and Missouri.
UNREALIZED LOSS
The equity investment experienced a net unrealized loss of $0.6 million for both
the six-month periods ended June 30, 2003 and 2002. The equity investment
experienced a net unrealized loss of $0.3 million and a net unrealized loss of
$0.2 million for the quarter ended June 30, 2003 and 2002, respectively. These
unrealized losses were primarily due to renovations from the expansion of the
existing grocery store anchor, which were not reflected as an increase in market
value.
As of June 30, 2003, all vacant spaces were being marketed.
OTHER
Other net investment income decreased $0.2 million during the quarter ended June
30, 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
21
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.
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 June
30, 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 41.33% 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 June 30, 2003:
ESTIMATED MARKET
VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
------------ ---------------- -------------
Cash equivalents............ 0-3 months $32.3 1.02%
The table below discloses the Partnership's fixed and variable rate debt as of
June 30, 2003. Approximately $34.3 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
22
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 June 30, 2003 was 3.235%.
JUNE 30, 2003
DEBT (IN $ THOUSANDS), 7/1/2003- ESTIMATED
INCLUDING CURRENT PORTION 12/31/2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---- ------ ------- ---- ---------- ------- ----------
Average Fixed Interest Rate .... 5.91% 6.31% 6.29% 5.67% 5.65% 6.75% 7.39%
Fixed Rate ..................... $342 $719 $ 774 $ 8,479 $588 $23,373 $34,275 $35,421
Variable Rate .................. 126 242 250 9,121 -- -- 9,739 9,601
-------------------------------------------------------------------------------------------------
Total Mortgage Loans Payable ... $468 $961 $1,024 $17,600 $588 $23,373 $44,014 $45,022
-------------------------------------------------------------------------------------------------
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
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company's management, including our President
and Chief Accounting Officer, have reviewed and evaluated the effectiveness of
our disclosure controls and procedures, as defined in Exchange Act Rules
13a-15(e) and 15d-15(e), as of June 30, 2003. Based on such evaluation, the
President and Chief Accounting Officer have concluded that, as of June 30, 2003,
our disclosure controls and procedures were effective in timely alerting them to
material information relating to us (and our consolidated subsidiaries) required
to be included in our periodic SEC filings. There has been no change in our
internal control over financial reporting during the quarter ended June 30,
2003, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
23
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.
24
21. Not applicable.
22. Not applicable.
23. None.
24. Not applicable.
27. Not applicable.
31.1 Certification of President required pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Chief Accounting Officer required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
25
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: August 14, 2003 By: /s/ Andrew J. Mako
--------------- ----------------------------
Andrew J. Mako
President
Date: August 14, 2003 By: /s/ William J. Eckert, IV
--------------- ----------------------------
William J. Eckert, IV
Chief Accounting Officer
26