<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 33-20083
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
IN RESPECT OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-1211670
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
751 BROAD 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
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THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
<Table>
<Caption>
ITEM PAGE
NO. NO.
COVER PAGE
INDEX 2
PART I
1. BUSINESS 3
2. PROPERTIES 5
3. LEGAL PROCEEDINGS 5
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER MATTERS 6
6. SELECTED FINANCIAL DATA 6
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 22
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23
11. EXECUTIVE COMPENSATION 26
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 27
EXHIBIT INDEX 27
SIGNATURES 29
</Table>
2
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PART I
ITEM 1. BUSINESS
Pruco Life Variable Contract Real Property Account (the "Real Property
Account"), the Registrant, was established on August 27, and commenced
business September 5, 1986. Pursuant to Arizona law, the Real Property Account
was established as a separate investment account of Pruco Life Insurance
Company ("Pruco Life"). The Real Property Account was established to provide a
real estate investment option offered in connection with the funding of
benefits under certain variable life insurance and variable annuity contracts
(the "Contracts") issued by Pruco Life.
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership, a
general partnership organized under New Jersey law on April 29, 1988, was formed
through agreement among The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey, to provide a
means for assets allocated to the real estate investment option under certain
variable life insurance and variable annuity contracts issued by the respective
companies to be invested in a commingled pool.
The Partnership has an investment policy of investing at least 65% of its assets
in direct ownership interests in income-producing real estate and participating
mortgage loans. The largest portion of these real estate investments are direct
ownership interests in income-producing real estate, such as office buildings,
shopping centers, hotels, apartments, or industrial properties. Approximately
10% of the Partnership's assets are generally held in cash or invested in liquid
instruments and securities although the Partners reserve discretion to increase
this amount to meet partnership liquidity requirements. The remainder of the
Partnership's assets are invested in other types of real estate-related
investments, including real estate investment trusts.
Office Properties - The Partnership owns office properties in Lisle
and Oakbrook Terrace, Illinois; Brentwood, Tennessee; and Beaverton,
Oregon. Total square footage owned is approximately 482,000 of which
89% or 431,000 square feet are leased between 1 and 10 years. The
Partnership's Morristown, New Jersey property, which had approximately
85,000 square feet, was sold on October 26, 2000.
Apartment Complexes - The Partnership owns apartment complexes in
Atlanta, Georgia and Raleigh, North Carolina. There are a total of 490
apartment units available of which 82% or 403 units are leased. Lease
terms range from monthly to one year. In addition, on September 17,
1999, the Partnership invested in an apartment complex located in
Jacksonville, FL. This joint venture investment has a total of 458
units available of which 402 units or 88% are occupied. Leases range
from month-to-month to one year. Also, on February 15, 2001, the
Partnership invested in four apartment complexes located in Gresham/
Salem, OR. This joint venture investment has a total of 492 units
available of which 458 units or 93% are occupied.
Retail Property - The Partnership owns a shopping center in Roswell,
Georgia. The property is located approximately 22 miles north of
downtown Atlanta on a 30 acre site. The square footage is
approximately 316,000 of which 92% or 293,000 square feet is leased
between 1 and 10 years. On September 30, 1999 the Partnership invested
in a retail portfolio located in the Kansas City, MO and KS areas.
This joint venture investment has approximately 488,000 of net
rentable square feet of which 90% or 440,000 square feet is leased
between 1 and 20 years. In addition, on May 17, 2001, the
Partnership invested in a retail center located in the Hampton, VA.
This joint venture investment has approximately 155,000 of net
rentable square feet of which 100% or 155,000 is leased between 1
and 20 years.
Industrial Properties - The Partnership owns warehouses and
distribution centers in Bolingbrook, Illinois; Aurora, Colorado; and
Salt Lake City, Utah. Total square footage owned is approximately
685,000 of which 83% or 569,000 square feet are leased between 1 and
10 years.
Investment in Real Estate Trust - The Partnership liquidated its
entire investment in REIT shares during December 2001.
3
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investments in various other REIT stocks. The Partnership made an
additional investment of $8,000,000 in various other REIT stocks in
November 2000.
The Partnership's investments are maintained so as to meet the diversification
requirements set forth in Treasury Regulations issued pursuant to Section 817(h)
of the Internal Revenue Code relating to the investments of variable life
insurance and variable annuity separate accounts. Section 817(h), requires among
other things that the partnership will have no more than 55% of the assets
invested in any one investment, no more than 70% of the assets will be invested
in any two investments, no more than 80% of the assets will be invested in any
three investments, and no more than 90% of the assets will be invested in any
four investments. To comply with requirements of the State of Arizona, the
Partnership will limit additional investments in any one parcel or related
parcels to an amount not exceeding 10% of the Partnership's gross assets as of
the prior fiscal year.
For information regarding the Partnership's investments, operations, and other
significant events, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8, Financial Statements
and Supplementary Data.
REAL ESTATE MARKET
The real estate sector certainly felt the effects of the slowing US economy
during the fourth quarter. The decline in demand for space pushed vacancy rates
up and adversely affected both rents and prices. The hotel sector was hit
hardest and continues to suffer due to demand uncertainty, while the office and
industrial sectors weakened as vacancy rates rose, sharply in some markets where
technology had been a main driver of growth. Unlike the market downturn a decade
ago, however, a large portion of the vacant office space is sublease space which
continues to pay rent and should be absorbed relatively quickly once the economy
begins to recover. Investors continued their interest in apartments to take
advantage of their stabilizing attributes. Overall, private institutional real
estate investment, as measured by the NCREIF Index, produced total returns of
around 7.41% for the year with a total return of 0.74% in the fourth quarter.
The REIT market, as measured by the Morgan Stanley REIT Index (RMS), finished
the year strong registering a total return of 12.8%. In all, both private and
public equity real estate performed much better than most other investment
sectors, helping to fulfill their role as a hedge against market uncertainty.
OFFICE MARKET
Deterioration in office market conditions continued in the fourth quarter of
2001. According to Torto Wheaton Research (TWR), the average vacancy rate rose
to 13.60% in the fourth quarter, up from 12.50% in the third quarter. The
average vacancy rate in downtown areas rose to 10.4%, up from 9.8% as of third
quarter. The suburban markets were hit even harder, with the average vacancy
rate rising to 15.3% in the fourth quarter, up 1.5% from the third quarter.
Based on data from the NCREIF office index, private investment in US office real
estate returned 0.04% during the fourth quarter of 2001, down from 1.49% in the
third quarter. The current quarter's return was composed of 2.11% income and
- -2.06% value loss. The one-year total return for the sector was 6.36%. The total
returns for CBD and suburban properties continued to diverge during the fourth
quarter with suburban properties witnessing a decline of 0.09% while CBD
properties returned 0.28%.
INDUSTRIAL MARKET
The trends in the industrial market were similar to those in the office market.
TWR estimates that the overall availability rate for industrial space as of
fourth quarter 2001 was 9.6%, up from 9.0% in the previous quarter, and 6.7%
one-year prior.
The total return for the industrial sector dropped to 1.18% in the fourth
quarter, down from 2.01% in the third quarter. The one-year return for the
sector was 9.40%, finishing second to apartment sector. The best performing
industrial subtype in the fourth quarter was flex, with a total return of 1.84%,
followed by the warehouse subtype with a return of 1.44%. The R&D subtype lagged
in the fourth quarter, with a total return of -1.78%.
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APARTMENT MARKET
M/PF Research reports that the third quarter 2001 average occupancy rate among
US apartments was 95.5%, down 0.6% from the second quarter estimate. They report
that national same-unit rent growth was 1.8% during the one-year period ending
in the third quarter 2001.
According to the NCREIF apartment subindex, private investment in apartments
returned 1.64% during the fourth quarter of 2001, down from a 2.25% return in
the third quarter. Of the fourth quarter's total return, 1.90% was from income
and -0.26% was appreciation. The one-year return for the sector in 2001 was
9.47%, the best of all property type sectors. High-rise apartment properties
returned 0.25% in the fourth quarter, underperforming garden properties (1.77%)
and low-rise properties (2.89%).
RETAIL MARKET
While the retail sector continues to struggle with the faltering US economy, the
sector held up reasonably well in the fourth quarter. Most investor interest
continues to be concentrated in the grocery-anchored neighborhood/community
centers and dominant well-anchored regional malls, while power centers and
factory outlets continue to be shunned.
The retail sector posted a total return of 1.23% in the fourth quarter of 2001.
Of the total return, 2.16% was attributable to income and -0.93% was value loss.
The one-year return for the sector for the year was 6.82%. The best performing
retail subtype for the fourth quarter was the neighborhood centers (2.71%),
followed by community centers (2.05%), power centers (1.1%), regional centers
(0.57%) and super regional centers (0.36%).
ITEM 2. PROPERTIES
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Contract owners participating in the Real Property Account have no voting rights
with respect to the Real Property Account.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER
MATTERS
Owners of the Contracts may participate by allocating all or part of the net
premiums or purchase payments to the Real Property Account. Contract values will
vary with the performance of the Real Property Account's investments through the
Partnership. Participating interests in the Real Property Account are not traded
in any public market, thus a discussion of market information is not relevant.
As of December 31, 2001, there were approximately 38,947 contract owners of
record investing in the Real Property Account.
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS:
TOTAL INVESTMENT INCOME $ 27,480,593 $ 26,387,938 $ 24,835,049 $ 27,163,552 $ 24,481,812
============ ============ ============ ============ ============
NET INVESTMENT INCOME $ 12,350,306 $ 13,638,117 $ 13,279,589 $ 15,833,513 $ 13,789,747
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENT IN PARTNERSHIP (2,547,749) 4,487,022 (7,217,046) 4,795,111 8,485,232
------------ ------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,802,557 $ 18,125,139 $ 6,062,543 $ 20,628,624 $ 22,274,979
============ ============ ============ ============ ============
</Table>
FINANCIAL POSITION:
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $234,594,652 $221,512,296 $225,142,653 $244,249,272 $222,745,135
============ ============ ============ ============ ============
LONG TERM LEASE OBLIGATION $ 0 $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============ ============
MORTGAGE LOAN PAYABLE $ 28,994,521 $ 10,092,355 $ 10,184,662 $ 0 $ 0
============ ============ ============ ============ ============
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All of the assets of The Prudential Variable Contract 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 December 31, 2001, the Partnership's liquid assets consisting of cash,
cash equivalents, and marketable securities were $26.6 million, an increase of
$11.2 million from December 31, 2000. This increase was due primarily to the
liquidation of the VAL REIT Fund during the fourth quarter, offset by
distributions to partners and the acquisition of real estate investments as
described below. Sources of liquidity include net cash flow from property
operations, interest from short-term investments, and dividends from REIT
shares.
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 December 31, 2001,
11.3% of the Partnership's assets consisted of cash and cash equivalents.
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment have been utilized for property acquisitions, and returned
to Prudential on an ongoing basis from contract owners' net contributions and
other available cash. The amount of the commitment is reduced by $10 million for
every $100 million in current value net assets of the Partnership. Thus with
$198 million in net assets, the commitment has been automatically reduced to $90
million. As of December 31, 2001, Prudential's equity interest in the
Partnership, on a cost basis, under this commitment (held through the Real
Property Accounts) was $44 million. Prudential did not make any contributions
during the 2001 fiscal year, and will terminate this commitment at the end of
the 2002 fiscal year..
The Partnership made $22 million in distributions to the Partners during 2000,
and on October 22, 2001, the Partnership made an $18 million distribution to the
partners. Distributions made to the Partners during 2001 were 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.
The Partnership has completed two real estate acquisitions during the year. A
controlling interest in a portfolio of four apartment complexes based in Gresham
and Salem, OR, was acquired in February 2001. This portfolio consists of 492
units containing a total of 419,487 rentable square feet. The acquisition was
financed by contributions of $8.6 million from the Partnership, $0.5 million
from the joint venture partner, and the assumption of a $9.0 million mortgage
loan by the joint venture partnership. Also, in May, the Partnership acquired a
controlling interest in a 154,540 square foot retail center based in Hampton,
VA. The acquisition was financed by contributions of $4.0 million from the
Partnership, $0.4 million from the joint venture partner, and the assumption of
a $10.3 million mortgage loan. During the twelve months of 2001, the Partnership
also spent approximately $4.4 million in capital expenditures. Approximately
$0.6 million was associated with renovation costs pertaining to the apartment
complex located in Jacksonville, FL. The balance was
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associated with leasing activity at the office properties located in Oakbrook
Terrace, IL; Beaverton, OR; Brentwood, TN; Lisle, IL; and the industrial
property located in Salt Lake City, UT. In addition, improvements were done to
the retail center located in Roswell, GA.
(b) RESULTS OF OPERATIONS
The following is a brief year-to-date comparison of the Partnership's results of
operations for the periods ended December 31, 2001, 2000, and 1999.
2001 VS. 2000
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.
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
2001 2000
------------- -------------
NET INVESTMENT INCOME:
Office properties $ 4,766,035 $ 5,356,934
Apartment complexes 3,735,912 3,446,245
Retail property 2,950,333 2,772,438
Industrial properties 545,003 1,257,146
Equity in income of real estate partnership 686,801 791,596
Dividend income from real
estate investment trust 2,157,647 1,744,611
Other (including interest income,
investment mgt fee, etc.) (2,491,425) (1,730,853)
------------- -------------
TOTAL NET INVESTMENT INCOME $ 12,350,306 $ 13,638,117
============= =============
NET UNREALIZED (LOSS) GAIN ON REAL ESTATE INVESTMENTS:
Office properties ($ 777,380) (2,434,245)
Apartment complexes 415,417 2,717,915
Retail property (94,504) (264,300)
Industrial properties (2,105,641) (935,721)
Interest in real estate partnership 226,024 140,614
Real estate investment trusts -- 2,618,815
------------- -------------
(2,336,084) 1,843,078
------------- -------------
</Table>
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
2001 2000
------------- -------------
NET REALIZED (LOSS) GAIN ON REAL ESTATE INVESTMENTS
Office properties -- 186,920
Apartment complexes -- --
Industrial properties -- --
Interest in real estate partnership -- --
Real estate investment trust (211,665) 2,457,024
------------- -------------
(211,665) 2,643,944
------------- -------------
NET REALIZED AND UNREALIZED (LOSS)
------------- -------------
GAIN ON REAL ESTATE INVESTMENTS ($2,547,749) $ 4,487,022
============= =============
</Table>
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Partnership's net investment income for the twelve months ended December 31,
2001 was $12.4 million, a decrease of $1.2 million from the corresponding period
in the prior year. This decrease was primarily due to the sale of an office
property located in Morristown, NJ in the fourth quarter of 2000.
Equity in income of real estate partnership was $0.7 million for the twelve
months of 2001, a decrease of $0.1 million, or 13.2%, from $0.8 million in the
corresponding period in 2000. The decrease is primarily due to a temporary
decrease in rental rates at the retail portfolio located in Kansas City, KS and
MO when compared to the prior year.
Dividend income from real estate investment trusts amounted to approximately
$2.2 million for the twelve months ended December 31, 2001, an increase of
approximately $0.5 million, or 23.7%, from approximately $1.7 million in the
corresponding period in 2000. This increase was primarily due to an increase in
the amount invested in REIT stocks subsequent to the 3rd quarter 2000.
Interest on short-term investments decreased approximately $1.0 million or 76.9%
for the twelve months ended December 31, 2001 due primarily to a significantly
lower average cash balance compared to the corresponding period in 2000. Cash,
cash equivalents, and marketable securities maintained during the twelve months
ended December 31, 2001 averaged approximately $13.0 million when compared to
the twelve months ended December 31, 2000 when the average was approximately
$19.1 million.
Operating expenses increased $0.9 million, or 21.4%, in the twelve months of
2001 compared to the corresponding period in 2000. These increases were
primarily due to the Partnership's acquisition of a controlling interest in the
two investments discussed previously.
Interest expense increased $1.0 million, or 142.4%, in the twelve months of 2001
compared to the corresponding period in 2000. These increases were primarily due
to the Partnership's assumption of a $9.0 million and a $10.3 million mortgage
loan in conjunction with the acquisition of a controlling interest in the two
investments discussed previously.
Minority interest in consolidated partnerships increased $0.1 million, or
1,256.4%, for the twelve months ended December 31, 2001. These increases were
due to the Partnership's acquisition of a controlling interest in the two
investments discussed previously.
OFFICE PROPERTIES
Net investment income from property operations for the office sector decreased
approximately $0.6 million, or 11.0%, for the twelve months ended December 31,
2001 when compared to the corresponding period in 2000. This was primarily due
to the sale of the Morristown, NJ office center in October 2000.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.8 million during the twelve months of 2001. One of the
Brentwood, TN properties experienced a net unrealized loss of approximately $0.7
million primarily due to the near-term expiration and expected move-out of the
single tenant at the property in July 2002. The Beaverton, OR and the Lisle, IL
office properties experienced a net unrealized loss of approximately $0.4
million and $0.2 million, respectively, primarily due to softening market
conditions. Offsetting these unrealized losses was an unrealized gain of
approximately $0.6 million at the office property located in Oakbrook Terrace,
IL. This unrealized gain was attributable to the signing of two new leases,
which brought the leased area from 55% to 79%.
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The office properties owned by the Partnership experienced a net unrealized loss
of approximately $2.4 million during 2000. During 2000, the Oakbrook Terrace, IL
property decreased $1.6 million in value due to a lease termination associated
with 45% of the space and weaker market conditions. One of the Brentwood, TN
office properties also experienced a net unrealized loss of approximately $0.8
million primarily due to capital expenditures on the property that were not
reflected as an increase in market value.
Occupancy at one of the Brentwood, TN office properties decreased from 95% at
December 31, 2000 to 74% at December 31, 2001, while occupancy at the other
Brentwood, TN location remained unchanged at 100%. Occupancy at the Lisle, IL
office property increased from 88% at December 31, 2000 to 100% at December 31,
2001. Occupancy at the Beaverton, OR property remained unchanged at 100%.
Occupancy at the Oakbrook Terrace, IL property decreased from 100% at December
31, 2000 to 79% at December 31, 2001. As of December 31, 2001 all vacant spaces
were being marketed.
APARTMENT COMPLEXES
Net investment income from property operations for the apartment sector was $3.7
million for the twelve months ended December 31, 2001, an increase of $0.3
million, or 8.4%, when compared to the corresponding period in 2000. This
increase was primarily due to the acquisition of the controlling interest in the
apartment complex portfolio located in Gresham and Salem, OR.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.4 million for the twelve months ended December 31, 2001 compared to a
net unrealized gain of $2.7 million for the twelve months ended December 31,
2000. The majority of the unrealized gain experienced in 2001 was primarily due
to the Atlanta, GA apartment complex that experienced an increase in value of
$0.9 million due to sub-metering of the apartments for water usage and lower
real estate taxes than previously estimated. The apartment complex portfolio
located in Gresham and Salem, OR also experienced an increase in value of $0.4
million due to the completion of capital improvements and the reduction of
administrative expense estimates. Offsetting these unrealized gains was the
apartment complex located in Raleigh, NC, which experienced a net unrealized
loss of $0.5 million due to a decrease in occupancy. The apartment complex in
Jacksonville, FL also experienced a decrease in value of $0.4 million due to
higher replacement reserve expenses, higher operating expense projections, and
slightly lower market rent estimates.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $2.7 million in 2000. The largest share of the unrealized gain for 2000
or $1.7 million was experienced by the apartment complex located in Atlanta, GA
primarily due to increases in rental rates, stabilized occupancy, and lower
operating expense estimates. The apartment complex located in Raleigh, NC also
experienced a net unrealized gain of $0.2 million due to increases in rental
rates.
The occupancy at the Raleigh, NC complex decreased from 92% at December 31, 2000
to 82% at December 31, 2001. Occupancy at the Atlanta, GA complex decreased from
98% at December 31, 2000 to 83% at December 31, 2001. Occupancy at the apartment
complex in Jacksonville, FL decreased from 91% at December 31, 2000 to 88% at
December 31, 2001. Occupancy at the Gresham and Salem, OR apartment complexes
averaged approximately 93% at December 31, 2001. As of December 31, 2001, all
available vacant spaces were being marketed.
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RETAIL PROPERTY
Net investment income for the Partnership's retail properties located in
Roswell, GA and Hampton, VA was approximately $3.0 million for the twelve months
ended December 31, 2001 and approximately $2.8 million for the twelve months
ended December 31, 2000. The increase is primarily due to the acquisition of the
controlling interest in the 154,540 square foot retail center based in Hampton,
VA.
The retail properties experienced a net unrealized loss of $0.1 million and a
net unrealized loss of $0.3 million for the twelve months ended December 31,
2001 and 2000, respectively. The retail center located in Roswell, GA
experienced a loss of $0.6 million for 2001 due to increased capital
expenditures and a slight drop in occupancy. Offsetting this unrealized loss was
an unrealized gain of $0.5 million resulting from the market value appraisal
received on the newly acquired retail center located in Hampton, VA.
The unrealized loss experienced in 2000 was due to the Roswell, GA property due
to lower income projections, coupled with capital expenditures that did not
increase the market value of the property.
Occupancy at the shopping center located in Roswell, GA decreased from 97% at
December 31, 2000 to 92% at December 31, 2001. The newly acquired retail center
in Hampton, VA had an occupancy of 99% at December 31, 2001. As of December 31,
2001, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
Net investment income from property operations for the industrial properties
decreased from $1.3 million for the twelve months ended December 31, 2000 to
$0.5 million for the corresponding period ended December 31, 2001. The majority
of these decreases were due to decreased occupancy at the properties located in
Bolingbrook, IL and Salt Lake City, UT. Even though the Salt Lake City, UT
location increased occupancy for the year, the new tenants did not move in until
the end of the third quarter and there was significant vacancy at the
Bolingbrook, IL facility for a portion of 2001.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $2.1 million for the twelve months ended
December 31, 2001 compared to a net unrealized loss of approximately $0.9
million in 2000. The majority of the unrealized loss in 2001 was attributable to
the Salt Lake City, UT industrial property. This loss of approximately $1.3
million was due to a decrease in market rents. The Bolingbrook, IL facility
experienced a loss of $0.9 million due to a decrease in rental rates and
softening market conditions.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $0.9 million in 2000. The majority of the
decrease for 2000 was attributable to the
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Aurora, CO industrial property, which had a loss of approximately $0.7 million
due to more conservative assumptions regarding rental rates, lease-up time and
terminal capitalization rates used by the appraiser. In addition, capital
expenditures were incurred at the property that were not reflected as an
increase in market value. The industrial property located in Bolingbrook, IL
experienced an unrealized loss of $0.4 million in 2000. This loss was due to the
expiration of the single tenant lease with no replacement tenant being signed as
of yet. The space was leased during the fourth quarter of 2000 on a temporary
basis, and partially leased at the end of 2001 to a different temporary tenant.
The occupancy at the Bolingbrook, IL property decreased from 100% at December
31, 2000 to 98% at December 31, 2001. The occupancy at the Salt Lake City, Utah
property increased from 34% at December 31, 2000 to 77% at December 30, 2001.
The Aurora, CO property's occupancy rate remained unchanged at 75% at December
31, 2000 and 2001. As of December 31, 2001, all vacant spaces were being
marketed.
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
During the twelve months ended December 31, 2001, income from the investment
located in Kansas City, KS and MO amounted to $0.7 million, a decrease of 13.2%
from $0.8 million at December 31, 2000. The decrease is primarily due to a
temporary decrease in rental rates.
The equity investment experienced a net unrealized gain of $0.2 million and $0.1
million for the twelve months ended December 31, 2001 and 2000, respectively.
The unrealized gain of $0.2 million for the twelve months ended December 31,
2001 was primarily due to the addition of a tenant that will provide a
substantial amount of income to the center in rent and the addition of new space
to house this tenant.
The retail portfolio located in Kansas City, KS and MO had an average occupancy
of 90% at December 31, 2001, which remained unchanged from December 31, 2000. As
of December 31, 2001, all vacant spaces were being marketed.
REAL ESTATE INVESTMENT TRUSTS
During the twelve months ended December 31, 2001, the Partnership's remaining
investment in REITS recognized a realized loss of $0.2 million due to the sale
of the Partnership's remaining investment in REITs. The Partnership recognized a
net realized gain of $2.5 million in 2000 primarily due to the sale of the
Partnership's remaining investment in Prologis REIT shares and sales of other
REIT investments.
The Partnership recognized an unrealized gain of $2.6 million on investments in
REITs for the twelve months ended December 31, 2000, which reflects changes in
the market value of REIT shares held by the Partnership.
OTHER
Other net investment income decreased approximately $0.8 million during the
twelve months ended December 31, 2001 when compared to the corresponding period
in 2000. Other net investment income includes interest income from short-term
investments, investment management fees, and expenses not related to property
activities. The decreases discussed above were primarily due to
12
<Page>
interest income on short-term investments, which decreased primarily as a result
of the Partnership maintaining a significantly lower cash balance when compared
to the corresponding periods last year coupled with a decrease in interest
rates.
13
<Page>
2000 VS. 1999
The following table presents a comparison of the Partnership's sources of net
investment income, and realized and unrealized gains or losses by investment
type, for the twelve months ended December 31, 2000 and December 31, 1999.
<Table>
<Caption>
TWELVE MONTHS ENDED DECEMBER 31,
2000 1999
------------- ------------
NET INVESTMENT INCOME:
Office properties $ 5,356,934 $ 7,133,356
Apartment complexes 3,446,245 2,556,743
Retail property 2,772,438 2,676,387
Industrial properties 1,257,146 894,258
Equity in income of real estate partnership 791,596 98,375
Dividend income from real
estate investment trust 1,744,611 1,221,843
Other (including interest income,
investment mgt fee, etc.) (1,730,853) (1,301,373)
------------ ------------
TOTAL NET INVESTMENT INCOME $ 13,638,117 $ 13,279,589
============ ============
UNREALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS:
Office properties ($ 2,434,245) ($ 3,267,264)
Apartment complexes 2,717,915 607,234
Retail property (264,300) (1,770,462)
Industrial properties (935,721) 209,503
Interest in real estate partnerships 140,614 (680,870)
Real estate investment trusts 2,618,815 (2,282,044)
------------ ------------
1,843,078 (7,183,903)
------------ ------------
REALIZED GAIN (LOSS) ON REAL ESTATE INVESTMENTS
Office properties 186,920 --
Apartment complexes -- --
Industrial properties -- (1,485)
Interest in real estate partnerships -- 45,126
Real estate investment trust 2,457,024 (76,784)
------------ ------------
2,643,944 (33,143)
------------ ------------
TOTAL REALIZED AND UNREALIZED GAIN
------------ ------------
(LOSS) ON REAL ESTATE INVESTMENTS $ 4,487,022 ($ 7,217,046)
------------ ------------
</Table>
The Partnership's net investment income in 2000 was $13.6 million, an increase
of $0.3 million from net investment income of $13.3 million in 1999.
Equity in income of real estate partnership increased $0.7 million, or 704.7%,
in 2000 due to the acquisition of an equity investment interest in the retail
portfolio located in the Kansas City, MO area. This interest was not acquired
until September 30, 1999. Therefore, equity in income of real
14
<Page>
estate partnerships for the period ended December 31, 1999 represents only three
months of activity, while activity for the period ended December 31, 2000
represents a full year of activity.
Dividend income from real estate investment trusts was $1.7 million for the year
ended December 31, 2000, an increase of $0.5 million or 42.8% from the
corresponding period in 1999. This increase was primarily due to higher amounts
invested in real estate investment trusts. Amounts invested in REIT shares
averaged approximately $28.6 million during 2000 compared to approximately $22.4
million during 1999.
Interest on short-term investments decreased approximately $0.4 million or 25.0%
for the twelve months ended December 31, 2000 due primarily to a significantly
lower average cash balance. Cash and cash equivalents during 2000 averaged
approximately $16.6 million compared to approximately $32.0 million during 1999.
Operating expenses increased $0.6 million or 15.7% to $4.4 million during the
period ended December 31, 2000 when compared to the corresponding period in
1999. This increase was primarily a result of the Partnership's acquisition of a
controlling interest in the apartment complex located in Jacksonville, FL.
Interest expense increased $0.6 million, or 404.1%, in 2000 when compared to the
corresponding periods in 1999. This increase was due to the Partnership's
acquisition on September 30, 1999 of a controlling interest in the apartment
complex located in Jacksonville, FL, which was acquired subject to $10.2 million
in debt.
OFFICE PROPERTIES
Net investment income from property operations for the office sector decreased
approximately $1.8 million, or 24.9%, in 2000 when compared to 1999. This
decrease was primarily due to lower revenue levels experienced by the Oakbrook
Terrace, IL office complex during 2000 as a result of the lease termination fee
received during 1999 coupled with a corresponding decrease in occupancy. A 36%
decrease in occupancy at one of the Brentwood, TN office properties also
contributed to the decrease.
The office properties owned by the Partnership experienced a net unrealized loss
of approximately $2.4 million during 2000 compared to a net unrealized loss of
$3.3 million in 1999.
During 2000, the Oakbrook Terrace, IL property decreased $1.6 million in value
due to a lease termination associated with 45% of the space and weaker market
conditions. One of the Brentwood, TN office properties also experienced a net
unrealized loss of approximately $0.8 million primarily due to capital
expenditures on the property that were not reflected as an increase in market
value.
Approximately half of the $3.3 million net unrealized loss in 1999 was
attributable to the office building located in Oakbrook Terrace, IL, which
experienced costs associated with re-leasing and expected vacancy resulting from
the lease termination exercised by a tenant. The Beaverton, OR office property
also experienced a net unrealized loss of approximately $0.8 million. This
decline in value was partially attributable to an anticipated reduction in
investor demand for suburban office properties. The Lisle, IL office property
also experienced a net unrealized loss of approximately $0.7 million primarily
due to capital expenditures on the property that were not reflected as an
increase in market value.
The Morristown, NJ office property was sold on October 26, 2000 and resulted in
a realized gain of approximately $0.2 million.
15
<Page>
Occupancy at the Lisle, IL office property increased from 88% at December 31,
1999 to 94% at December 31, 2000. Occupancy at one of the Brentwood, TN office
complexes decreased from 95% to 59% from December 31, 1999 to December 31, 2000,
while occupancy at the other Brentwood, TN office property remained unchanged at
100%. Occupancy at the Oakbrook Terrace, IL office complex decreased from 100%
at December 31, 1999 to 52% at December 31, 2000, while occupancy at the
Beaverton, OR office complex decreased from 100% at December 31, 1999 to 95% at
December 31, 2000. As of December 31, 2000 all vacant spaces were being
marketed.
APARTMENT COMPLEXES
Net investment income from property operations for the apartment sector was $3.4
million in 2000, an increase of $0.9 million or 34.8% compared with 1999. This
increase was primarily due to the acquisition of the controlling interest in the
apartment complex located in Jacksonville, FL.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $2.7 million and $0.6 million in 2000 and 1999, respectively. The
largest share of the unrealized gain for 2000 or $1.7 million was experienced by
the apartment complex located in Atlanta, GA primarily due to increases in
rental rates, stabilized occupancy, and lower operating expense estimates. The
apartment complex located in Raleigh, NC also experienced a net unrealized gain
of $0.2 million due to increases in rental rates.
The net unrealized gain of $0.6 million during 1999 was primarily experienced by
the Atlanta, GA apartment complex that increased in value due to improved market
conditions that resulted in higher rent levels.
The occupancy at the Atlanta, GA complex remained unchanged at 98% as of
December 31, 1999 and December 31, 2000. Occupancy at the apartment complex in
Raleigh, NC also remained unchanged at 92% as of December 31, 1999 and December
31, 2000. Occupancy at the Jacksonville, FL apartment complex increased from 89%
as of December 31, 1999 to 91% as of December 31, 2000. This increase is largely
a result of renovations completed at the project. As of December 31, 2000, all
available vacant units were being marketed.
16
<Page>
RETAIL PROPERTY
Net investment income for the twelve months ended December 31, 2000 and 1999 for
the Partnership's retail property located in Roswell, GA was approximately $2.7
million for both periods.
The retail property experienced a net unrealized loss of $0.3 million and $1.8
million in 2000 and 1999, respectively. The unrealized loss experienced by the
property in 2000 was due to lower projected income growth, coupled with capital
expenditures that did not increase the market value of the property. The
decrease in value in 1999 was attributable to a declining position of the
property in the market.
Occupancy at the shopping center located in Roswell, GA decreased from 97% as of
December 31, 1999 to 96% as of December 31, 2000. As of December 31, 2000, all
vacant space was being marketed.
INDUSTRIAL PROPERTIES
Net investment income from property operations for the industrial properties
increased from $0.9 million in 1999 to $1.3 million in 2000. The majority of the
increase was a result of increased occupancy throughout 2000 at the property
located in Aurora, CO.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $0.9 million and a net unrealized gain of $0.2
million in 2000 and 1999, respectively. The majority of the decrease for 2000
was attributable to the Aurora, CO industrial property, which had a loss of
approximately $0.7 million due to more conservative assumptions regarding rental
rates, lease-up time and terminal capitalization rates used by the appraiser. In
addition, capital expenditures were incurred at the property that was not
reflected as an increase in market value. The industrial property located in
Bolingbrook, IL experienced an unrealized loss of $0.4 million in 2000. This
loss was due to the expiration of the single tenant lease with no replacement
tenant being signed as of yet. A portion of the space was temporarily leased
during the fourth quarter of 2000.
The occupancy at the Bolingbrook, IL property decreased from 100% at December
31, 1999 to 45% at December 31, 2000. As of December 31, 2000 the Salt Lake
City, Utah property was 50% leased with two tenants. However, one tenant for
approximately 33% of the space was bankrupt and had moved out of the space by
year-end. The Salt Lake City, UT property had an occupancy rate of 34% at
December 31, 1999. The Aurora, Co property's occupancy rate remained unchanged
at 75% from December 31, 1999 to December 31, 2000. As of December 31, 2000, all
vacant spaces were being marketed.
17
<Page>
EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP
On September 30, 1999, the Partnership invested in an equity joint venture of
retail centers located in the Kansas City, MO area. During the twelve months
ended December 31, 2000, income from this investment amounted to $0.8 million
compared to $0.1 million for the corresponding period in 1999. The increase in
income was attributable to the Partnership holding the investment for a full
year during 2000 as opposed to only three months during 1999. This investment
experienced a net unrealized gain in 2000 of $0.1 million. During 1999, the
investment experienced a net unrealized loss of $0.7 million, primarily due to
capital expenditures on the properties that were not reflected as an increase in
market value.
The retail portfolio located in the Kansas City, MO area had an average
occupancy of 91% as of December 31, 2000 compared to an average occupancy of 90%
as of December 31, 1999. As of December 31, 2000, all vacant spaces were being
marketed.
REAL ESTATE INVESTMENT TRUSTS
The Partnership recognized a net realized gain from real estate investment
trusts of $2.5 million in 2000 primarily due to the sale of the Partnership's
remaining investment in ProLogis REIT shares and sales of other REIT
investments.
The Partnership's investment in REIT shares experienced an unrealized gain of
$2.6 million and an unrealized loss of $2.3 million for the twelve months ended
December 31, 2000 and 1999, respectively. These changes in unrealized gain and
loss reflect changes in the market value of REIT shares held by the Partnership.
OTHER
Other net investment income decreased $0.5 million during 2000 compared to the
corresponding period last year. Other net investment income includes interest
income from short-term investments, investment management fees, and expenses not
related to property activities. The decrease in 2000 was primarily due to lower
interest income on short-term investments primarily as a result of the
Partnership maintaining a significantly lower cash balance as noted previously.
18
<Page>
(c) PER SHARE INFORMATION
Following is an analysis of the Partnership's net investment income and net
realized and unrealized gain (loss) on investments, presented on a per share
basis:
<Table>
<Caption>
01/01/2001 01/01/2000 01/01/1999
TO TO TO
12/31/2001 12/31/2000 12/31/1999
---------- ---------- ----------
Revenue from real estate and improvements $ 2.71 $ 2.32 $ 2.08
Equity in income of real estate partnership $ 0.08 $ 0.08 $ 0.01
Dividend income from real estate investment trusts $ 0.24 $ 0.18 $ 0.12
Interest on short-term investments $ 0.03 $ 0.13 $ 0.16
--------- --------- ---------
TOTAL INVESTMENT INCOME $ 3.06 $ 2.71 $ 2.37
--------- --------- ---------
Investment management fee $ 0.30 $ 0.28 $ 0.26
Real estate taxes $ 0.30 $ 0.25 $ 0.25
Administrative expense $ 0.28 $ 0.25 $ 0.21
Operating expense $ 0.60 $ 0.44 $ 0.37
Interest expense $ 0.20 $ 0.07 $ 0.01
Minority interest in consolidated partnership $ 0.02 $ 0.00 * $ 0.00 *
--------- --------- ---------
TOTAL INVESTMENT EXPENSES $ 1.70 $ 1.29 $ 1.10
--------- --------- ---------
NET INVESTMENT INCOME $ 1.36 $ 1.42 $ 1.27
--------- --------- ---------
Net realized gain (loss) on real estate investments sold
or converted ($ 0.02) $ 0.27 ($ 0.00) *
--------- --------- ---------
Change in unrealized gain (loss) on real estate investments ($ 0.26) $ 0.23 ($ 0.68)
Minority interest in unrealized gain (loss) on investments $ 0.00 * ($ 0.04) ($ 0.00) *
--------- --------- ---------
Net unrealized gain (loss) on real estate investments ($ 0.26) $ 0.19 ($ 0.68)
--------- --------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ($ 0.28) $ 0.46 ($ 0.68)
========= ========= =========
Net change in share value $ 1.08 $ 1.88 $ 0.59
Share value at beginning of period $ 22.74 $ 20.86 $ 20.27
--------- --------- ---------
Share value at end of period $ 23.82 $ 22.74 $ 20.86
========= ========= =========
Ratio of expenses to average net assets(1) 7.26% 6.07% 5.33%
Ratio of net investment income to average net assets(1) 5.93% 6.49% 6.12%
Number of weighted average shares outstanding during
the period (000's) 8,922 9,831 10,472
</Table>
ALL PER SHARE CALCULATIONS ARE BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING.
(1) Average net assets are calculated based on an average of ending monthly
net assets.
* Per Share amount less than $0.01 (rounded)
19
<Page>
(d) 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.
(e) 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 Generally Accepted
Accounting Principles ("GAAP") 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
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 PIM's Risk Management Unit 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.
20
<Page>
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
December 31, 2001 and 2000. Further discussion surrounding our policies and
procedures for valuing Real Estate Investments can be found in Footnote 2 to the
Consolidated Financial Statements.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS - Shares of real estate investment
trusts (REITs) are generally valued at their quoted market price. These values
may be adjusted for discounts relating to restrictions, if any, on the future
sale of these shares, such as lockout periods or limitations on the number of
shares which may be sold in a given time period. Any such discounts are
determined by the Chief Real Estate Appraiser.
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 7A. 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 28.06% 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 December 31, 2001:
<Table>
<Caption>
ESTIMATED MARKET VALUE AVERAGE
MATURITY (IN $ MILLIONS) INTEREST RATE
------------------ ------------------------- ---------------------
Cash equivalents 0-3 months $25.3 1.51%
Short-term investments 3-12 months $0 0%
</Table>
21
<Page>
The table below discloses the Partnership's fixed and variable rate debt as of
December 31, 2001. Approximately $19.0 million of the Partnership's long-term
debt bears interest at fixed rates and therefore the fair value of this
instrument 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 December 31, 2001 was 5.735%.
December 31, 2001
<Table>
<Caption>
DEBT (IN $ THOUSANDS), ESTIMATED
INCLUDING CURRENT PORTION 2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
- ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed Rate $ 536 $ 577 $ 619 $ 665 $ 8,361 $ 8,240 $ 18,998 $ 18,583
Average Fixed Interest Rate 7.437% 7.449% 7.471% 7.491% 7.491% 6.750% 6.950%
Variable Rate $ 142 $ 159 $ 168 $ 178 $ 9,350 $ 0 $ 9,997 $ 10,038
</Table>
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the accompanying
Index to the Financial Statements and Supplementary Data on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<Page>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2006).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1987. Chief Financial Officer, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. Age 66.
Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERIC K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman & Spitzer, P.A. (law firm) since 1989, with firm since 1960. Age
65. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President and Chief Executive Officer, Q-Linx
Inc. since 2001. President and Chief Operating Officer, The Swarthmore Group,
Inc. from 1999-2000. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S.
Equal Employment Opportunity Commission from 1994 to 1998. Age 48. Address: 1025
Connecticut Avenue, N.W., Suite 1012, Washington, D.C. 20036.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. Retired since
2000. President & Chief Operating Officer, Telecom Group, Bell Atlantic
Corporation, from 1998-2000. President & Chief Executive Officer, Telecom Group,
Bell Atlantic Corporation, from 1997 to 1998. Vice Chairman, Bell Atlantic
Corporation from 1995 to 1997. President, Bell Atlantic Corporation from 1993 to
1995. Mr. Cullen is also a director of Agilient Technologies, Inc., Quantum
Bridge Communications and Johnson & Johnson. Age 58. Address: 751 Broad Street,
21st Floor, Newark, NJ 07102-3777.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. Health Care Advisor, Ernst & Young,
LLP from 1985 to 1997. Dr. Davis is also a director of Beckman Coulter
Instruments, Inc., Minimed Incorporated, Science Applications International
Corporation, and Beverley Enterprises. Age 69. Address: 751 Broad Street, 21st
Floor, Newark, NJ 07102-3777.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, The Dow Chemical Company and DTE Energy Company. Age 66. Address:
751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
WILLIAM H. GRAY III--Director since 1991 (current term expires April, 2004).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Bank, JP Morgan Chase &
Co., Municipal Bond Investors Assurance Corporation, Rockwell International
Corporation, Dell Computer Corporation, Pfizer, Inc., Viacom, Inc., Visteon
Corporation, Electronic Data Systems, and Ezgov.com, Inc. Age 59. Address: 8260
Willow Oaks Corp. Drive, Fairfax,VA 22031-4511.
23
<Page>
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Finance & Dividend. Chairman,
Hampshire Management Company since 1976. Mr. Hanson is also a director of James
E. Hanson Management Company, Hampshire Management Company and CDL, Inc.. Age
64. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER--Director since 1997 (current term expires April, 2001). Member,
Compensation Committee. Chairman and Chief Executive Officer, Owens Corning
since 1992. Senior Vice President and Group Executive, Plastics Group, General
Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation, Owens Corning, and Kohler, Co. Age 66. Address: One Owens Corning
Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Compensation Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 59. Address: 751 Broad Street, 21st Floor, Newark, NJ
07102-3777.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 69. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Professor Malkiel is also a director of Baker Fentress & Company, The
Jeffrey Company, NeuVis, Inc. and Vanguard Group, Inc. Age 68. Address:
Princeton University, Department of Economics, 110 Fisher Hall, Prospect Avenue,
Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer and President of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 58. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Auditing Committee. Principal, Investment Strategies International since
1994. Age 66. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividends; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 70. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Age 69 Address: 47 East South Temple, #501, Salt Lake City, UT 84150.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2004).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of INCO, Limited, S.C. Johnson & Son, Inc., The Thomson Corporation,
The Toronto-Dominion Bank, Ontario Power Generation, Inc., Stuart Energy
Systems, Inc., Nexen Inc., Canada Pension Plan Investment Board, and TrizecHahn
Corporation. Age 67. Address: 11th Floor TD Tower, Toronto Dominion Centre,
Toronto, ON, M5K 1A2, Canada.
24
<Page>
JAMES A. UNRUH--Director since 1996 (current term expires April, 2004). Member,
Committees on Nominations & Corporate Governance; Member, Auditing Committee.
Founding Principal, Alerion Capital Group, LLC since 1998. Chairman and Chief
Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a
director of Moss Software, Inc. and Apex Microtechnology Corporation. Age 59.
Address: 7600 Double Tree Ranch Road, Suite 240, Scottsdale, AZ 95258.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of Advanced
Medicine, Inc. and Regeneron Pharmaceuticals, Inc. Age 71. Address: One
Crossroads Drive, Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 67.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2004).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997. Chairman
and Chief Executive Officer, Wolfensohn & Co., Inc. 1995 to 1996. Chairman,
James D. Wolfensohn, Inc. 1988 to 1995. Mr. Volcker is also a director of
Genosys Technology Management Inc. and as well as a Member of the Board of
Overseers of TIAA-CREF. Age 72. Address: 610 Fifth Avenue, Suite 420, New York,
NY 10020.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer, and President
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 58.
VIVIAN BANTA-- Executive Vice President, U.S. Consumer Group of The Prudential
Insurance Company of America and Executive Vice President of Prudential
Financial, Inc. since 2001; Executive Vice President, Individual Financial
Services 2000 to 2001; Consultant, Individual Financial Services from 1998 to
1999; Consultant, Morgan Stanley from 1997 to 1998; Executive Vice President,
Global Investor Service, The Chase Manhattan Bank from 1991 to 1997. Age 51.
MICHELE S. DARLING--Executive Vice President, Corporate Governance, Human
Resources and Community Resources since 2000; Executive Vice President, Human
Resources from 1997 to 2000; prior to 1997, Executive Vice President, Human
Resources, Canadian Imperial Bank of Commerce. Age 46.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 54.
MARK B. GRIER--Executive Vice President, Financial Management, Government
Affairs and Demutualization since 2000; Executive Vice President, Corporate
Governance from 1998 to 2000; Executive Vice President, Financial Management
from 1997 to 1998; Chief Financial Officer from 1995 to 1997; prior to 1995,
Executive Vice President, Chase Manhattan Corporation. Age 48.
25
<Page>
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional since 1998;
President, Diversified Group from 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 53.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing Communications since 1998; Executive Vice President, Marketing and
Planning from 1996 to 1998; President and CEO, Van Eck Global, from 1994 to
1996; prior to 1994, President and CEO, Global Private Banking, Bankers Trust
Company. Age 54.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management and
Prudential Securities since 2000; Executive Vice President, Global Asset
Management since1998 and Prudential Securities since 2000; Chief Executive
Officer, Private Asset Management Group (PAMG) from 1996 to 1998; President,
PAMG, from 1994 to 1996; prior to 1994, Senior Managing Director. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers, from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 53.
ANTHONY S. PISZEL--Senior Vice President and Comptroller since 2000; Vice
President and Comptroller from 1998 to 2000. Vice President, Enterprise
Financial Management from 1997 to 1998; prior to 1997, Chief Financial Officer,
Individual Insurance Group. Age 46.
C. EDWARD CHAPLIN--Senior Vice President and Treasurer since 2000; Vice
President and Treasurer 1995 to 2000; prior to 1995, Managing Director and
Assistant Treasurer. Age 44.
SUSAN J. BLOUNT--Vice President, Corporate Counsel and Secretary since 2000;
Vice President and Secretary 1995 to 2000; prior to 1995, Assistant General
Counsel. Age 43.
ITEM 11. EXECUTIVE COMPENSATION
The Real Property Account does not pay any fees, compensation or reimbursement
to any Director or Officer of the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Related Transactions in note 7 of Notes to Financial Statements of the
Partnership on page F-24.
26
<Page>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
See the Index to Financial Statements and Supplementary Data on page
F-1.
2. Financial Statement Schedules
The following financial statement schedules of The Prudential Variable
Contract Real Property Partnership should be read in conjunction with
the financial statements in Item 8 of this Annual Report on Form 10-K:
Schedule III. Real Estate Owned: Properties
Schedule III. Real Estate Owned: Interest in Properties
See the Index to Financial Statements and Supplementary Data on page
F-1.
3. Documents Incorporated by Reference
See the following list of exhibits.
4. Exhibits
See the following list of exhibits.
(b) None.
(c) The following is a list of Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. The Registrant will
furnish a copy of any Exhibit listed below to any security holder of the
Registrant who requests it upon payment of a fee of 15 cents per page. All
Exhibits are either contained in this Annual Report on Form 10-K or are
incorporated by reference as indicated below.
3.1 Amended Charter of The Prudential Insurance Company of America, filed
as Exhibit 1.A.(6)(a) to Post-Effective Amendment No. 2 to Form S-6,
Registration Statement No. 33-19999, filed March 2, 1989, and
incorporated herein by reference.
3.2 Amended By-Laws of The Prudential Insurance Company of America, filed
as Exhibit 1.A.(6)(b) to Post-Effective Amendment No. 4 to Form S-6,
Registration Statement No. 33-19999, filed March 2, 1990, and
incorporated herein by reference.
3.3 Resolution of the Board of Directors establishing The Prudential
Variable Contract Real Property Account, filed as Exhibit (3C) to Form
S-1, Registration Statement No. 33-20083, filed February 10, 1988, and
incorporated herein by reference.
4.1 Revised Individual Variable Annuity Contract filed as Exhibit A(4)(w)
to Post-Effective Amendment No. 8 to Form N-4, Registration Statement
No. 2-80897, filed October 23, 1986, and incorporated herein by
reference.
4.2 Discovery Plus Contract, filed as Exhibit (4)(a) to Form N-4,
Registration Statement No. 33-25434, filed November 8, 1988, and
incorporated herein by reference.
4.3 Custom VAL (previously named Adjustable Premium VAL) Life Insurance
Contracts with fixed death benefit, filed as Exhibit 1.A.(5) to Form
S-6, Registration Statement No. 33-25372, filed November 4, 1988, and
incorporated herein by reference.
4.4 Custom VAL (previously named Adjustable Premium VAL) Life Insurance
Contracts with variable death benefit, filed as Exhibit 1.A.(5) to
Form S-6, Registration Statement No. 33-25372, filed November 4, 1988,
and incorporated herein by reference.
27
<Page>
4.5 Variable Appreciable Life Insurance Contracts with fixed death
benefit, filed as Exhibit 1.A.(5) to Pre-Effective Amendment No. 1 to
Form S-6, Registration Statement No. 33-20000, filed June 15, 1988,
and incorporated herein by reference.
4.6 Variable Appreciable Life Insurance Contracts with variable death
benefit, filed as Exhibit 1.A.(5) to Pre-Effective Amendment No. 1 to
Form S-6, Registration Statement No. 33-20000, filed June 15, 1988,
and incorporated herein by reference.
9. None.
10.1 Investment Management Agreement between The Prudential Insurance
Company of America and The Prudential Variable Contract Real Property
Partnership, filed as Exhibit (10A) to Pre-Effective Amendment No. 1
to Form S-1, Registration Statement No. 33-20083, filed May 2, 1988,
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 Pre-Effective Amendment
No. 1 to Form S-1, Registration Statement No. 33-20083, filed May 2,
1988, and incorporated herein by reference.
11. Not applicable.
12. Not applicable.
13. None.
18. None.
21. Not applicable.
22. Not applicable.
23. None.
24. Power of Attorney: F. Agnew, F. Becker, J. Cullen, C. Davis, A.
Gilmour, W. Gray III, J. Hanson, G. Hiner, C. Horner, G. Kelley, B.
Malkiel, A. Ryan, I. Schmertz, C. Sitter, D. Staheli, R. Thomson, J.
Unruh, P. Vagelos, S. Van Ness, P. Volcker, incorporated by reference
to Post-Effective Amendment No. 10 to Form S-1, Registration No.
33-20083, filed April 9, 1998 on behalf of The Prudential Variable
Contract Real Property Account. G. Casellas incorporate by reference
to Form S-6, Registration No. 333-64957, filed September 30, 1998 on
behalf of The Prudential Variable Appreciable Account. R. Carbone
incorporated by reference to Post-Effective Amendment No. 3 to Form
N-4, Registration No. 333-23271, filed October 16, 1998 on behalf of
The Prudential Discovery Select Group Variable Contract Account. A.
Piszel incorporated by reference to Post-Effective Amendment No. 4 to
Form N-4, Registration No. 333-23271, filed February 23, 1999 on
behalf of The Prudential Discovery Select Group Variable Contract
Account.
27. Not applicable.
28
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
IN RESPECT OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(REGISTRANT)
Date: March 29, 2002 By: /s/ William J. Eckert, IV
-------------- ----------------------------------------
William J. Eckert, IV
Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* Chairman of the Board, President March 29, 2002
- ----------------------- and Chief Executive Officer
Arthur F. Ryan
* Senior Vice President and Chief March 29, 2002
- ----------------------- Financial Officer
Richard J. Carbone
* Senior Vice President and March 29, 2002
- ----------------------- Comptroller
Anthony S. Piszel
*BY: /s/ Thomas C. Castano
-----------------------------------------
Thomas C. Castano
(Attorney-in-Fact)
29
<Page>
SIGNATURE TITLE DATE
* Director March 29, 2002
- ------------------------------
Franklin E. Agnew
* Director March 29, 2002
- ------------------------------
Frederic K. Becker
* Director March 29, 2002
- ------------------------------
Gilbert F. Casellas
* Director March 29, 2002
- ------------------------------
James G. Cullen
* Director March 29, 2002
- ------------------------------
Carolyne K. Davis
* Director March 29, 2002
- ------------------------------
Allan D. Gilmour
* Director March 29, 2002
- ------------------------------
William H. Gray, III
* Director March 29, 2002
- ------------------------------
Jon F. Hanson
* Director March 29, 2002
- ------------------------------
Glen H. Hiner, Jr.
* Director March 29, 2002
- ------------------------------
Constance J. Horner
* Director March 29, 2002
- ------------------------------
Gaynor N. Kelley
* Director March 29, 2002
- ------------------------------
Burton G. Malkiel
*BY: /s/ Thomas C. Castano
-----------------------------------------
Thomas C. Castano
(Attorney-in-Fact)
30
<Page>
SIGNATURE TITLE DATE
- --------- ----- ----
* Director March 29, 2002
- ------------------------------
Ida F. S. Schmertz
* Director March 29, 2002
- ------------------------------
Charles R. Sitter
* Director March 29, 2002
- ------------------------------
Donald L. Staheli
* Director March 29, 2002
- ------------------------------
Richard M. Thomson
* Director March 29, 2002
- ------------------------------
James A. Unruh
* Director March 29, 2002
- ------------------------------
P. Roy Vagelos, M.D.
* Director March 29, 2002
- ------------------------------
Stanley C. Van Ness
* Director March 29, 2002
- ------------------------------
Paul A. Volcker
*BY: /s/ Thomas C. Castano
-----------------------------------------
Thomas C. Castano
(Attorney-in-Fact)
31
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
<Table>
<Caption>
PAGE
----
A. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Financial Statements:
Report of Independent Accountants F-2
Statements of Net Assets - December 31, 2001 and 2000 F-3
Statements of Operations - Years Ended December 31, 2001, 2000, 1999 F-3
Statements of Changes in Net Assets - Years Ended December 31, 2001,
2000, 1999 F-3
Notes to Financial Statements F-4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Financial Statements:
Report of Independent Accountants F-9
Report of Independent Accountants on Financial Statement Schedules F-10
Statements of Assets and Liabilities - December 31, 2001 and 2000 F-11
Statements of Operations - Years Ended December 31, 2001, 2000 and
1999 F-12
Statements of Changes in Net Assets - Years Ended December 31, 2001,
2000 and 1999 F-13
Statements of Cash Flows - Years Ended December 31, 2001, 2000 and
1999 F-14
Schedule of Investments - December 31, 2001 and 2000 F-15
Notes to Financial Statements F-19
Financial Statement Schedules:
For the period ended December 31, 2001
Schedule III - Real Estate Owned: Properties F-26
Schedule III - Real Estate Owned: Interest in Properties F-27
</Table>
All other schedules are omitted because they are not applicable, or because the
required information is included in the financial statements or notes thereto.
F-1
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
The Prudential Variable Contract Real Property Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of The Prudential Variable
Contract Real Property Account at December 31, 2001 and 2000, and the
results of its operations and of the changes in its net assets for the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the management of
The Prudential Insurance Company of America; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
shares at December 31, 2001 with The Prudential Variable Contract Real
Property Partnership, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 29, 2002
F-2
<Page>
FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2001 and 2000
<Table>
<Caption>
2001 2000
-------------- --------------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership (Note 3) $ 80,845,322 $ 84,632,071
-------------- --------------
Net Assets $ 80,845,322 $ 84,632,071
============== ==============
NET ASSETS, representing:
Equity of contract owners (Note 4) $ 55,383,118 $ 55,428,143
Equity of The Prudential Insurance
Company of America (Note 2D) 25,462,204 29,203,928
-------------- --------------
$ 80,845,322 $ 84,632,071
============== ==============
Units outstanding 42,938,170 46,743,530
============== ==============
</Table>
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
<Table>
<Caption>
2001 2000 1999
--------------- --------------- ---------------
INVESTMENT INCOME
Net investment income from Partnership operations $ 5,038,916 $ 5,516,671 $ 5,209,408
--------------- --------------- ---------------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration (Note 5) 451,312 441,647 470,772
--------------- --------------- ---------------
NET INVESTMENT INCOME 4,587,604 5,075,024 4,738,636
--------------- --------------- ---------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments in Partnership (933,731) 779,624 (2,888,812)
Realized gain (loss) on sale of investments in Partnership (86,359) 1,069,485 (13,002)
--------------- --------------- ---------------
NET GAIN (LOSS) ON INVESTMENTS (1,020,090) 1,849,109 (2,901,814)
--------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,567,514 $ 6,924,133 $ 1,836,822
=============== =============== ===============
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2001, 2000, 1999
</Table>
<Table>
<Caption>
2001 2000 1999
--------------- --------------- ---------------
OPERATIONS
Net investment income $ 4,587,604 $ 5,075,024 $ 4,738,636
Net change in unrealized gain (loss) on investments in Partnership (933,731) 779,624 (2,888,812)
Net realized gain (loss) on sale of investments in Partnership (86,359) 1,069,485 (13,002)
--------------- --------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 3,567,514 6,924,133 1,836,822
--------------- --------------- ---------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners (Note 7) (2,204,027) (4,226,534) (6,004,411)
Net withdrawals by The Prudential Insurance Company of America (5,150,236) (1,489,090) (23,524,817)
--------------- --------------- ---------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (7,354,263) (5,715,624) (29,529,228)
--------------- --------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (3,786,749) 1,208,509 (27,692,406)
NET ASSETS
Beginning of year 84,632,071 83,423,562 111,115,968
--------------- --------------- ---------------
End of year $ 80,845,322 $ 84,632,071 $ 83,423,562
--------------- --------------- ---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES F-4 THROUGH F-8
F-3
<Page>
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
DECEMBER 31, 2001
NOTE 1: GENERAL
The Prudential Variable Contract Real Property Account ("Real Property Account")
was established on November 20, 1986 by resolution of the Board of Directors 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 Prudential's other assets. The Real Property Account
is used to fund benefits under certain variable life insurance and variable
annuity contracts issued by Prudential. These products are Variable Appreciable
Life ("PVAL and PVAL $100,000+ Face Value"), Discovery Plus ("PDISCO+"), and
Variable Investment Plan ("VIP").
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 variable
annuity contracts. The Real Property Account, along with the Pruco Life Variable
Contract Real Property Account and The Pruco Life of New Jersey 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.
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 December 31, 2001
and 2000 the Real Property Account's interest in the Partnership was 40.8% or
3,393,522 shares and 41.0% or 3,722,415 shares respectively.
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 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential 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.
F-4
<Page>
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) December
31, 2001 and 2000 were as follows:
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
NUMBER OF SHARES (ROUNDED): 3,393,522 3,722,415
NET ASSET VALUE PER SHARE (ROUNDED): $23.82 $22.74
</Table>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of contract owner
equity at December 31, 2001 and December 31, 2000 by product, were as follows:
2001:
- -----
<Table>
<Caption>
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE TOTAL
------------ ------------ ------------ ------------ ------------
CONTRACT OWNER UNITS OUTSTANDING: 1,399,705 1,320,120 10,773,700 15,769,502
UNIT VALUE: $ 1.81915 $ 1.81915 $ 1.94357 $ 1.87044
------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER EQUITY: $ 2,546,274 $ 2,401,497 $ 20,939,440 $ 29,495,907 $ 55,383,118
============ ============ ============ ============ ============
</Table>
2000:
- -----
<Table>
<Caption>
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE TOTAL
------------- ------------- ------------- ------------- -------------
CONTRACT OWNER UNITS OUTSTANDING: 1,549,865 1,369,900 11,181,146 16,345,520
UNIT VALUE: $ 1.75676 $ 1.75676 $ 1.86582 $ 1.80091
------------- ------------- ------------- -------------
TOTAL CONTRACT OWNER EQUITY: $ 2,722,742 $ 2,406,586 $ 20,862,005 $ 29,436,810 $ 55,428,143
============= ============= ============= ============= =============
</Table>
NOTE 5: 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 1.2%, 0.6%, 0.9% and 1.2% for PDISCO+, PVAL, PVAL $100,000 + face
value, and VIP, 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 Prudential.
B. 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 PVAL and PVAL $100,000
+ face value are (1) state premium taxes; (2) sales charges which are deducted
in order to compensate Prudential for the cost of selling the contract and (3)
transaction costs which 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 Prudential for the
guaranteed minimum death benefit risk.
F-5
<Page>
C. DEFERRED SALES CHARGE
A deferred sales charge, applicable to PVAL and PVAL $100,000 + face value, is
imposed upon surrenders of certain variable life insurance contracts to
compensate Prudential 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 tenth year of the
contract. No sales charge will be imposed on death benefits.
Also a deferred sales charge is imposed upon the withdrawals of certain purchase
payments to compensate Prudential for sales and other marketing expenses for
PDISCO+ and VIP. The amount of any sales charge will depend on the amount
withdrawn and the number of contract years that have elapsed since the contract
owner or annuitant made the purchase payments deemed to be withdrawn. No sales
charge is made against the withdrawal of investment income. A reduced sales
charge is imposed in connection with the withdrawal of a purchase payment to
effect an annuity if three or more contract years have elapsed since the
contract date, unless the annuity effected is an annuity certain. No sales
charge is imposed upon death benefit payments or upon transfers made between
subaccounts.
D. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Prudential on partial withdrawals of the cash surrender
value for PVAL and PVAL $100,000 + face value. 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.
E. ANNUAL MAINTENANCE CHARGE
An annual maintenance charge, applicable to PDISCO+ and VIP, of $30 will be
deducted if and only if the contract fund is less than $10,000 on a contract
anniversary or at the time a full withdrawal is effected, including a withdrawal
to effect an annuity. The charge is made by reducing accumulation units credited
to a contract owner's account.
NOTE 6: TAXES
Prudential 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 7: NET WITHDRAWALS BY CONTRACT OWNERS
Contract owner activity for the real estate investment option in Prudential's
variable insurance and variable annuity products for the years ended December
31, 2001, 2000 and 1999 were as follows:
2001:
- -----
<Table>
<Caption>
PVAL & PVAL
PDISCO+ VIP $100,000+ FACE VALUE TOTAL
------------- ------------- -------------------- -------------
Contract Owner Net Payments: $ 24,129 $ 2,656 $ 4,995,144 $ 5,021,929
Policy Loans: 0 0 (1,557,761) (1,557,761)
Policy Loan Repayments and Interest: 0 0 1,327,962 1,327,962
Surrenders, Withdrawals, and Death Benefits: (579,346) (205,982) (3,392,906) (4,178,234)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (284,365) 116,677 48,342 449,384
Administrative and Other Charges: (17) (2,567) (3,264,723) (3,267,307)
------------- ------------- ------------- -------------
NET WITHDRAWALS BY CONTRACT OWNERS $ (270,869) $ (89,216) $ (1,843,942) $ (2,204,027)
============= ============= ============= =============
</Table>
F-6
<Page>
2000:
<Table>
<Caption>
PVAL & PVAL
PDISCO+ VIP $100,000+ FACE VALUE TOTAL
------------- ------------- -------------------- -------------
Contract Owner Net Payments: $ 5,159 $ 19,990 $ 5,269,026 $ 5,294,175
Policy Loans: 0 0 (1,571,876) (1,571,876)
Policy Loan Repayments and Interest: 0 0 1,091,619 1,091,619
Surrenders, Withdrawals, and Death Benefits: (552,602) (287,552) (2,902,456) (3,742,610)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (189,118) (138,910) (1,747,680) (2,075,708)
Administrative and Other Charges: (2,200) (3,126) (3,216,808) (3,222,134)
------------- ------------- ------------- -------------
NET WITHDRAWALS BY CONTRACT OWNERS $ (738,761) $ (409,598) $ (3,078,175) $ (4,226,534)
============= ============= ============= =============
</Table>
1999:
- -----
<Table>
<Caption>
PVAL & PVAL
PDISCO+ VIP $100,000+ FACE VALUE TOTAL
------------- ------------- -------------------- -------------
Contract Owner Net Payments: $ 9,535 $ 15,687 $ 4,396,224 $ 4,421,446
Policy Loans: 0 0 (1,809,781) (1,809,781)
Policy Loan Repayments and Interest: 0 0 1,465,114 1,465,114
Surrenders, Withdrawals, and Death Benefits: (1,121,210) (549,361) (2,894,300) (4,564,871)
Net Transfers From(To) Other Subaccounts
or Fixed Rate Option: (304,042) (103,565) (1,593,233) (2,000,840)
Administrative and Other Charges: (1,000) (3,837) (3,510,642) (3,515,479)
------------- ------------- ------------- -------------
NET WITHDRAWALS BY CONTRACT OWNERS $ (1,416,717) $ (641,076) $ (3,946,618) $ (6,004,411)
============= ============= ============= =============
</Table>
NOTE 8: CONTRACT OWNER UNIT ACTIVITY
Transactions in units for the years ended December 31, 2001, 2000 and 1999 were
as follows:
2001:
- -----
<Table>
<Caption>
PDISCO+ VIP PVAL PVAL $100,000+ FACE VALUE
------------- ------------- ------------- -------------------------
Contract Owner Contributions: 217,010 191,730 1,347,176 1,727,014
Contract Owner Redemptions: (367,170) (241,510) (1,754,622) (2,303,032)
</Table>
2000:
- -----
<Table>
<Caption>
PDISCO+ VIP PVAL PVAL $100,000+ FACE VALUE
------------- ------------- ------------- -------------------------
Contract Owner Contributions: 44,707 46,444 10,576,369 5,685,549
Contract Owner Redemptions: (489,889) (292,270) (11,527,290) (6,508,205)
</Table>
1999:
- -----
<Table>
<Caption>
PDISCO+ VIP PVAL PVAL $100,000+ FACE VALUE
------------- ------------- ------------- -------------------------
Contract Owner Contributions: 50,450 31,056 1,515,288 1,972,941
Contract Owner Redemptions: (929,192) (427,232) (2,599,816) (3,249,603)
</Table>
NOTE 9: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Partnership for the year ended December 31, 2001 were as follows:
<Table>
Purchases: $ 0
Sales: $ (7,786,532)
</Table>
F-7
<Page>
NOTE 10: FINANCIAL HIGHLIGHTS
Prudential Insurance Company of America (the "Company") sells a number of
variable annuity and variable life insurance products, both of which have
unique combinations of features and fees that are charged against the
contract owner's account balance. Differences in the fee structures result in
a variety of unit values, expense ratios and total returns.
The following table was developed by determining which products offered by
the Company have the lowest and highest total return. Only product designs
within the Real Property Account that had units outstanding during December
31, 2001, were considered when determining the lowest and highest total
return. The summary may not reflect the minimum and maximum contract charges
offered by the Company as contract owners may not have selected all available
and applicable contract options as discussed in note 1.
<Table>
<Caption>
AT DECEMBER 31, 2001 FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------ ---------------------------------------------
CONTRACT HOLDER CONTRACT HOLDER EXPENSE TOTAL
UNITS UNIT FAIR VALUE NET ASSETS INVESTMENT RATIO** RETURN***
(000'S) LOWEST-HIGHEST (000'S) INCOME RATIO* LOWEST-HIGHEST LOWEST-HIGHEST
--------------- --------------------- --------------- ------------- -------------- --------------
29,263 $1.81915 to $1.94357 $55,383 5.91% 0.60% to 1.20% 3.55% to 4.17%
</Table>
* This amount represents the proportionate share of the net investment income
from the underlying Partnership dividend by the total average assets of the
Real Property Account. This ratio excludes those expenses, such as mortality
and expense charges, that result in direct reductions in the unit values.
** These ratios represent the annualized contract expenses of the separate
account, consisting primarily of mortality and expense charges, for each period
indicated. The ratios include only those expenses that result in a direct
reduction to unit values. Charges made directly to contract owner accounts
through the redemption of units and expenses of the underlying Partnership are
excluded.
*** These amounts represent the total return for the periods indicated,
including changes in the value of the underlying Partnership, and reflect
deductions for all items included in the expense ratio. The total return does
not include any expenses assessed through the redemption of units; inclusion of
these expenses in the calculation would result in a reduction in the total
return presented.
NOTE 11: RELATED PARTY FOOTNOTE
Prudential and its affiliates perform various services on behalf of the
Partnership in which the Real Property Account invests and may receive fees
for the services performed. These services include, among other things,
shareholder communications, preparation, postage, fund transfer agency and
various other record keeping and customer service functions.
F-8
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of The Prudential
Variable Contract Real Property Partnership:
In our opinion, the accompanying consolidated statements of assets and
liabilities, including the schedule of investments, and the related consolidated
statements of operations, of changes in net assets and of cash flows present
fairly, in all material respects, the financial position of The Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the management of The Prudential
Insurance Company of America; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 15, 2002
F-9
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Partners of The Prudential
Variable Contract Real Property Partnership:
Our audits of the consolidated financial statements referred to in our report
dated February 15, 2002 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 15, 2002
F-10
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
ASSETS
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements
(cost: 12/31/2001 -- $212,044,159; 12/31/2000 -- $173,748,950) $ 197,970,877 $ 162,213,095
Real estate partnership (cost: 12/31/2001 -- $7,026,540;
12/31/2000 -- $5,985,783) 6,712,308 5,445,528
Real estate investment trusts (cost: 12/31/2001 -- $0;
12/31/2000 -- $31,896,908) -- 35,224,737
------------- -------------
Total real estate investments 204,683,185 202,883,360
MARKETABLE SECURITIES - At estimated market value
(cost: 12/31/2001 -- $0; 12/31/2000 -- $4,916,327) --
4,916,494
CASH AND CASH EQUIVALENTS 26,615,645 10,543,821
DIVIDEND RECEIVABLE 28,455 242,341
OTHER ASSETS (net of allowance for uncollectible
accounts: 12/31/2001 -- $107,000; 12/31/2000 -- $91,000) 3,267,367 2,926,280
------------- -------------
Total assets $ 234,594,652 $ 221,512,296
============= =============
LIABILITIES
MORTGAGE LOANS PAYABLE 28,994,521 10,092,355
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,469,242 2,517,818
DUE TO AFFILIATES 896,134 887,434
OTHER LIABILITIES 972,410 669,209
MINORITY INTEREST 2,111,709 997,401
------------- -------------
Total liabilities 36,444,016 15,164,217
------------- -------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY 198,150,636 206,348,079
------------- -------------
Total liabilities and partners' equity $ 234,594,652 $ 221,512,296
============= =============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD 8,317,470 9,075,913
============= =============
SHARE VALUE AT END OF PERIOD $ 23.82 $ 22.74
============= =============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
INVESTMENT INCOME:
Revenue from real estate and improvements $ 24,339,631 $ 22,570,851 $ 21,807,346
Equity in income of real estate partnership 686,801 791,596 98,375
Dividend income 2,157,647 1,744,611 1,221,843
Interest on short-term investments 296,514 1,280,880 1,707,485
-------------- -------------- --------------
Total investment income 27,480,593 26,387,938 24,835,049
-------------- -------------- --------------
INVESTMENT EXPENSES:
Operating 5,328,004 4,390,001 3,794,081
Investment management fee 2,694,130 2,705,589 2,730,713
Real estate taxes 2,652,956 2,498,065 2,616,553
Administrative 2,518,644 2,411,390 2,234,949
Interest expense 1,776,701 732,991 145,418
Minority interest 159,852 11,785 33,746
-------------- -------------- --------------
Total investment expenses 15,130,287 12,749,821 11,555,460
-------------- -------------- --------------
NET INVESTMENT INCOME 12,350,306 13,638,117 13,279,589
-------------- -------------- --------------
REALIZED AND UNREALIZED (LOSS) GAIN ON REAL ESTATE
INVESTMENTS:
Net proceeds from real estate investments
sold or converted 53,417,000 46,617,017 21,649,562
Less: Cost of real estate investments sold or converted 50,300,836 55,269,357 19,602,032
Realization of prior years' unrealized
gain (loss) on real estate investments sold or converted 3,327,829 (11,296,284) 2,080,673
-------------- -------------- --------------
Net (loss) gain realized on real estate
investments sold or converted (211,665) 2,643,944 (33,143)
-------------- -------------- --------------
Change in unrealized (loss) gain on real estate investments (2,311,404) 2,297,429 (7,145,372)
Less: Minority interest in unrealized gain on real estate investments 24,680 454,351 38,531
-------------- -------------- --------------
Net unrealized (loss) gain on real estate investments (2,336,084) 1,843,078 (7,183,903)
-------------- -------------- --------------
NET REALIZED AND UNREALIZED (LOSS) GAIN
ON REAL ESTATE INVESTMENTS (2,547,749) 4,487,022 (7,217,046)
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 9,802,557 $ 18,125,139 $ 6,062,543
============== ============== ==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income $ 12,350,306 $ 13,638,117 $ 13,279,589
Net (loss) gain realized on real estate
investments sold (211,665) 2,643,944 (33,143)
Net unrealized (loss) gain from real estate
investments (2,336,084) 1,843,078 (7,183,903)
--------------- --------------- ---------------
Net increase in net assets resulting from
operations 9,802,557 18,125,139 6,062,543
--------------- --------------- ---------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2001 -- 758,443; 2000 -- 1,003,008; and
1999 -- 1,769,354 shares, respectively) (18,000,000) (22,000,000) (36,000,000)
--------------- --------------- ---------------
Net decrease in net assets resulting from
capital transactions (18,000,000) (22,000,000) (36,000,000)
--------------- --------------- ---------------
NET DECREASE IN NET ASSETS (8,197,443) (3,874,861) (29,937,457)
NET ASSETS - Beginning of year 206,348,079 210,222,940 240,160,397
--------------- --------------- ---------------
NET ASSETS - End of year $ 198,150,636 $ 206,348,079 $ 210,222,940
=============== =============== ===============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 9,802,557 $ 18,125,139 $ 6,062,543
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Net realized and unrealized loss (gain) on
real estate investments 2,547,749 (4,487,022) 7,217,046
Equity in income of real estate partnership's
operations in excess of distributions (686,801) (791,596) (98,376)
Minority interest in operating activities 159,852 11,785 33,746
Bad debt expense 108,358 96,785 124,059
Decrease (increase) in:
Dividend receivable 213,886 (110,799) 35,733
Other assets (449,444) (169,489) 645,878
Increase (decrease) in:
Accounts payable and accrued expenses 951,424 (449,796) 982,214
Due to affiliates 8,700 17,957 (729,058)
Other liabilities 303,201 143,316 20,952
-------------- -------------- --------------
Net cash flows from operating activities 12,959,482 12,386,280 14,294,737
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold 53,417,000 46,617,017 10,706,996
Acquisition of real estate (14,582,383) -- (7,200,743)
Acquisition of real estate partnership -- -- (5,088,750)
Acquisition of real estate investment trust (18,403,928) (34,157,332) (31,239,744)
Improvements and additional costs on prior purchases:
Additions to real estate (4,373,073) (4,215,157) (2,516,645)
Additions to real estate partnership (353,956) (7,060) --
Sale (purchase) of marketable securities, net 4,916,494 (2,119,486) 12,153,517
-------------- -------------- --------------
Net cash flows from investing activities 20,620,154 6,117,982 (23,185,369)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners (18,000,000) (22,000,000) (36,000,000)
Principal payments on mortgage loans payable (437,588) (92,307) (15,338)
Distributions to minority interest partners -- -- (93,425)
Contributions from minority interest partners 929,776 159,197 393,216
-------------- -------------- --------------
Net cash flows from financing activities (17,507,812) (21,933,110) (35,715,547)
-------------- -------------- --------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 16,071,824 (3,428,848) (44,606,179)
CASH AND CASH EQUIVALENTS - Beginning of year 10,543,821 13,972,669 58,578,848
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS - End of year $ 26,615,645 $ 10,543,821 $ 13,972,669
============== ============== ==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------- -------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
-----------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS - PERCENT OF NET ASSETS 99.9% 78.6%
LOCATION DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building $ 22,561,428 $ 14,193,539 $ 22,267,422 $ 14,134,722
Atlanta, GA Garden Apartments 15,696,606 18,752,139 15,667,354 17,800,002
Roswell, GA Retail Shopping Center 32,878,304 26,625,833 32,533,052 26,874,838
Bolingbrook, IL Warehouse 9,039,620 5,826,782 9,012,838 6,664,810
Raleigh, NC Garden Apartments 15,940,839 16,808,160 15,847,460 17,200,000
Nashville, TN Office Building 9,977,669 10,629,012 9,657,787 10,396,565
Oakbrook Terrace, IL Office Complex 14,015,481 14,359,009 13,021,251 12,716,910
Beaverton, OR Office Complex 11,989,204 10,988,123 11,225,040 10,623,809
Salt Lake City, UT Industrial Building 6,568,107 5,487,490 5,640,709 5,900,050
Aurora, CO Industrial Building 10,131,517 9,900,000 10,131,358 9,800,714
Brentwood, TN Office Complex 9,612,024 8,900,790 9,609,133 9,600,675
* Jacksonville, FL Garden Apartments 19,711,225 20,400,000 19,135,546 20,500,000
* Gresham/Salem, OR Garden Apartments 18,815,082 19,100,000 -- --
* Hampton, VA Retail Shopping Center 15,107,053 16,000,000 -- --
-----------------------------------------------------------------
$ 212,044,159 $ 197,970,877 $ 173,748,950 $ 162,213,095
=================================================================
</Table>
<Table>
<Caption>
REAL ESTATE PARTNERSHIP - PERCENT OF NET ASSETS 3.4% 2.6%
LOCATION DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Center $ 7,026,540 $ 6,712,308 $ 5,985,783 $ 5,445,528
=================================================================
</Table>
* Real estate partnerships accounted for by the consolidation method.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-15
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<Table>
<Caption>
DECEMBER 31, 2000
------------------------------
ESTIMATED
MARKET
COST VALUE
------------------------------
REAL ESTATE INVESTMENT TRUSTS (PERCENT OF NET ASSETS) 17.1%
- --------------------------------------------------------------------------------------
Alexandria Real Est Equities (5,000 shares) $ 181,188 $ 185,938
AMB Property Corporation (30,000 shares) 706,770 774,375
AMLI Residential Properties (30,000 shares) 706,800 740,625
Apartment Inv & Mgmt Co, Class A (28,900 shares) 1,218,828 1,443,194
Archstone Communities Trust (25,000 shares) 592,188 643,750
Avalonbay Communities Inc (15,000 shares) 683,900 751,875
Boston Properties Inc (25,000 shares) 995,339 1,087,500
Brandywine Realty Trust (15,000 shares) 321,338 310,313
CBL & Associates Prop (30,800 shares) 741,988 779,625
Cabot Industrial Trust (40,000 shares) 820,726 767,500
Centerpoint Properties Corp. (18,600 shares) 632,302 878,850
Cousins Properties (20,000 shares) 551,200 558,750
Crescent Real Estate Eqt Co (25,000 Shares) 565,563 556,250
Duke - Weeks Realty Corporation (47,000 shares) 1,070,320 1,157,375
Equity Office Properties Trust (77,400 shares) 2,215,533 2,525,175
Equity Residential Property Trust (30,000 shares) 1,450,732 1,659,375
Essex Property Trust, Inc (15,000 shares) 593,700 821,250
First Industrial Realty Trust (25,000 shares) 781,100 850,000
Franchise Finance Cp Amer (51,300 shares) 1,228,281 1,195,931
Gables Residential Trust (25,000 shares) 632,750 700,000
General Growth Properties (22,000 shares) 714,894 796,125
Highwoods Properties Inc (30,000 shares) 758,832 746,250
Host Marriot Corp (105,000 shares) 1,114,575 1,358,438
Innkeepers USA Trust (50,000 shares) 512,375 553,125
IRT Property (45,000 shares) 406,395 365,625
Kilroy Realty Corp. (30,000 shares) 746,886 856,875
Kimco Realty (15,000 shares) 612,612 662,813
Liberty Property LP (35,000 shares) 899,563 999,688
Macerich Co (30,000 shares) 670,490 575,625
MeriStar Hospitality Corp (37,500 shares) 636,151 738,281
Mission West Properties (88,200 shares) 697,122 1,223,775
Parkway Properties Inc (25,000 shares) 782,750 742,188
Public Storage Inc (5,000 shares) 113,763 121,563
Reckson Assoc Realty Corp. (32,500 shares) 805,150 814,531
Regency Realty Corp (25,000 shares) 576,600 592,188
Saul Centers Inc (1,700 shares) 29,085 31,663
Shurgard Storage Centers (20,000 shares) 478,500 488,750
Simon Property Group Inc (45,000 shares) 1,032,357 1,080,000
Spieker Properties (27,000 shares) 1,197,078 1,353,375
Summit Properties Inc (12,000 shares) 292,832 312,000
Vornado Realty Trust (29,800 shares) 1,028,569 1,141,713
Washington Reit (40,000 shares) 759,220 945,000
Public Storage Inc, Preferred Stock (15,000 shares) 340,569 337,500
------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS $ 31,896,908 $ 35,224,737
==============================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
F-16
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------------------------
ESTIMATED
FACE AMOUNT COST MARKET VALUE
------------- ------------- -------------
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 13.4%
Federal Home Loan Mortgage 1.51%, January 2, 2002 $ 25,334,000 $ 25,331,875 $ 25,331,875
------------- ------------- -------------
TOTAL CASH EQUIVALENTS 25,334,000 25,331,875 25,331,875
CASH 1,283,770 1,283,770 1,283,770
------------- ------------- -------------
TOTAL CASH AND CASH EQUIVALENTS $ 26,617,770 $ 26,615,645 $ 26,615,645
============= ============= =============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-17
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------------
ESTIMATED
FACE AMOUNT COST MARKET VALUE
------------- -------------- -------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 2.4%
Associates First Capital B.V., 6.55%, January 29, 2001 699,000 687,681 687,681
New Center Asset Trust, 6.52%, January 30, 2001 1,614,000 1,587,692 1,587,692
Lasalle National Bank, 6.71%, February 1, 2001 969,000 968,792 968,959
B-One Australia Ltd., 6.55%, February 13, 2001 1,700,000 1,672,162 1,672,162
------------- ------------- -------------
TOTAL MARKETABLE SECURITIES $ 4,982,000 $ 4,916,327 $ 4,916,494
============= ============= =============
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 5.1%
J.P. Morgan & Co, 6.55%, January 2, 2001 $ 546,000 $ 545,603 $ 545,603
Alcoa Inc., 6.55%, January 4, 2001 634,000 633,193 633,193
Merrill Lynch & Co., 6.53%, Inc., January 10, 2001 300,000 299,347 299,347
Bankamerica Corp., 6.55%, January 11, 2001 680,000 678,020 678,020
General Motors Acceptance Corp., Inc., 6.60%, January 17, 2001 600,000 597,910 597,910
Paccar Financial Corp., 6.67%, January 18, 2001 661,000 657,693 657,693
General Electric Capital Corp., 6.55%, January 22, 2001 700,000 691,085 691,085
Countrywide Home Loans, 6.60%, January 25, 2001 560,000 556,201 556,201
Duke Energy Corp., 6.50%, January 25, 2001 682,000 678,552 678,552
Caterpillar Financial Svcs Corp., 6.50%, January 26, 2001 625,000 621,727 621,727
Verizon Global Funding Corp., 6.55%, January 26, 2001 500,000 496,179 496,179
Ciesco L.P., 6.54%, January 30, 2001 1,675,000 1,652,178 1,652,178
Eastman Kodak Co., 6.53%, February 9, 2001 800,000 787,230 787,230
------------- ------------- -------------
TOTAL CASH EQUIVALENTS 8,963,000 8,894,919 8,894,919
CASH 1,648,902 1,648,902 1,648,902
------------- ------------- -------------
TOTAL CASH AND CASH EQUIVALENTS $ 10,611,902 $ 10,543,821 $ 10,543,821
------------- ------------- -------------
</Table>
F-18
<Page>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 1: ORGANIZATION
On April 29, 1988, The Prudential Variable Contract Real Property Partnership
(the "Partnership"), a general partnership organized under New Jersey law, was
formed through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The Partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership's policy is to invest at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The estimated market value of the Partnership's shares is determined daily,
consistent with the Partnership Agreement. On each day during which the New York
Stock Exchange is open for business, the net asset value of the Partnership is
estimated using the estimated market value of its assets, principally as
described in Notes 2A and 2B below, reduced by any liabilities of the
Partnership. The periodic adjustments to property values described in Notes 2A
and 2B below and other adjustments to previous estimates are made on a
prospective basis. There can be no assurance that all such adjustments to
estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real
Property Account, Pruco Life Variable Contract Real Property Account and Pruco
Life of New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") and may be purchased and sold at the then current share value of the
Partnership's net assets. Share value is calculated by dividing the estimated
market value of net assets of the Partnership as determined above by the number
of shares outstanding. A contract owner participates in the Partnership through
interests in the Real Property Accounts.
Prudential Real Estate Investors ("PREI") is part of the Prudential Investment
Management unit ("PIM") and is a division of Prudential Investment Management,
Inc., a subsidiary of Prudential PREI provides investment advisory services to
the Partnership's Partners pursuant to the terms of the Advisory Agreement as
described in Note 9.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A: BASIS OF PRESENTATION - The accompanying consolidated financial
statements are presented on the accrual basis of accounting. It is the
Partnership's policy to consolidate those real estate partnerships in
which it has a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in the
consolidation.
B: 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 PIM's Risk Management Unit is responsible to
assure that the valuation process provides objective and accurate
market value estimates. American Appraisal Associates (the "Appraisal
Management Firm"), an entity not affiliated with Prudential, has been
appointed by PIM to assist the Chief Real Estate Appraiser in
maintaining and monitoring the objectivity and accuracy of the
appraisal process. The Appraisal Management Firm, under the
supervision of the Chief Real Estate Appraiser, approves the selection
and scheduling of external appraisals; engages all external
appraisers; reviews and provides comments on all external appraisals;
prepares all
F-19
<Page>
quarterly update appraisals; assists in developing policies and
procedures; and assists in the evaluation of the performance and
competency of external appraisers, among other responsibilities.
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.
The estimate of market value generally is a correlation of three
approaches, all of which require the exercise of subjective judgment.
The three approaches are: (1) current cost of reproducing the real
estate less deterioration and functional and economic obsolescence;
(2) discounting of a series of income streams and reversion at a
specified yield or by directly capitalizing a single year income
estimate by an appropriate factor; and (3) value indicated by recent
sales of comparable properties in the market. In the reconciliation of
these three approaches, the one most heavily relied upon is the one
then recognized as the most appropriate by the independent appraiser
for the type of real estate in the market.
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 December 31, 2001 and 2000.
C: INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS - Shares of real estate
investment trusts (REITs) are generally valued at their quoted market
price. These values may be adjusted for discounts relating to
restrictions, if any, on the future sale of these shares, such as
lockout periods or limitations on the number of shares which may be
sold in a given time period. Any such discounts are determined by the
Chief Real Estate Appraiser. On March 30, 1999, the Partnership
converted 506,894 shares of Meridian REIT to 557,583 shares of
ProLogis REIT, with a fair value of $10.9 million, and cash of $1.0
million (or total fair value of $11.9 million) as a result of
ProLogis' acquisition of Meridian Industrial Trust. Management
continued applying a 3% discount to the market value of the ProLogis
REIT shares through June 29, 1999 because of the restriction which
limits the number of shares that can be publicly traded during any six
month period to 30% of the total shares originally acquired. The
application of the 3% discount was discontinued on June 30, 1999
because this restriction no longer applied.
F-20
<Page>
D: REVENUE RECOGNITION - Revenue from real estate is earned in
accordance with the terms of Respective Leases. Revenue from certain
real estate investments is net of all or a portion of related real
estate expenses and taxes, as lease arrangements vary as to
responsibility for payment of these expenses between tenants and the
Partnership. Since real estate is stated at estimated market value,
net income is not reduced by depreciation or amortization expense.
Dividend income is accrued at the ex-dividend date.
E: EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP - Equity in income from
real estate partnership operations represents the Partnership's share
of the current year's partnership income as provided for under the
terms of the partnership agreements. As is the case with wholly-owned
real estate, partnership net income is not reduced by depreciation or
amortization expense. Frequency of distribution of income is
determined by formal agreements or by the executive committees of the
partnerships.
F: MORTGAGE LOANS PAYABLE - Mortgage loans payable are stated at the
principal amount of the obligation outstanding.
G: CASH AND CASH EQUIVALENTS - For purposes of the Consolidated
Statements of Cash Flows, all short-term investments with an original
maturity of three months or less are considered to be cash
equivalents. Cash equivalents consist of investments in the
Prudential Investment Liquidity Pool offered and managed by an
affiliate of Prudential and are accounted for at market value.
Cash of $160,635 and $79,300 at December 31, 2001 and 2000,
respectively, was maintained by the properties for tenant security
deposits and is included in Other Assets on the Consolidated
Statements of Assets and Liabilities.
H: MARKETABLE SECURITIES - Marketable securities are highly liquid
investments with maturities of more than three months when purchased
and are carried at estimated market value.
I: FEDERAL INCOME TAXES - The Partnership is not a taxable entity under
the provisions of the Internal Revenue Code. The income and capital
gains and losses of the Partnership are attributed, for federal income
tax purposes, to the Partners in the Partnership. The Partnership may
be subject to state and local taxes in jurisdictions in which it
operates.
J: MANAGEMENT'S USE OF ESTIMATES IN THE FINANCIAL STATEMENTS - 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.
NOTE 3: DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING
AND FINANCING ACTIVITY
Cash paid for interest during the years ended December 31, 2001, 2000, and 1999
was $1,776,701, $732,991, and $145,418, respectively.
During the first and second quarters of 2001, in conjunction with the
acquisition of two real estate investments, the consolidated partnerships
assumed mortgage loan financing of $9.0 million and $10.3 million, respectively.
During 1999, in conjunction with the acquisition of a real estate investment of
one property, a consolidated partnership assumed mortgage loan financing of
approximately $10.2 million.
F-21
<Page>
NOTE 4: REAL ESTATE PARTNERSHIP
Real estate partnership is valued at the Partnership's equity in net assets as
reflected by the partnership's financial statements with properties valued as
indicated in Note 2B above. The partnership's combined financial position at
December 31, 2001 and 2000, and results of operations for the years ended
December 31, 2001, 2000, and 1999 are summarized as follows:
<Table>
<Caption>
DECEMBER 31,
2001 2000
-----------------------------
Partnership Assets and Liabilities
Real Estate at estimated market value $ 28,300,000 $ 27,080,000
Other Assets 1,877,122 1,470,801
------------- -------------
Total Assets 30,177,122 28,550,801
------------- -------------
Mortgage loans payable 20,648,892 20,669,422
Other Liabilities 918,664 665,365
------------- -------------
Total Liabilities 21,567,556 21,334,787
------------- -------------
Net Assets $ 8,609,566 $ 7,216,014
============= =============
Partnership's Share of Net Assets $ 6,712,308 $ 5,445,528
============= =============
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------------------------------------
Partnership Operations
Rental Revenue $ 4,497,459 $ 4,223,801 $ 926,283
Real Estate Expenses and Taxes 3,536,948 3,292,500 795,115
------------ ------------ ------------
Net Investment Income $ 960,511 $ 931,301 $ 131,168
============ ============ ============
Partnership's Share of Net Investment Income $ 686,801 $ 791,596 $ 98,375
============ ============ ============
</Table>
F-22
<Page>
NOTE 5: MORTGAGE LOANS PAYABLE:
Debt includes mortgage loans payable as summarized below:
<Table>
<Caption>
PARTNERSHIP DEBT AS OF 12/31/01 PARTNERSHIP DEBT AS OF 12/31/00 AS OF 12/31/01
PARTNERSHIP'S PARTNERSHIP'S
100% LOAN SHARE OF 100% LOAN SHARE OF INTEREST MATURITY
BALANCE LOAN BALANCE * BALANCE LOAN BALANCE * RATE** DATE
------- -------------- ------- -------------- ------ ----
MORTGAGES OF WHOLLY OWNED PROPERTIES
& CONSOLIDATED PARTNERSHIPS
Riverbend Apartments 9,996,863 9,293,084 10,092,355 9,208,265 5.74%*** 2006
SIMA Apartment Portfolio 8,863,334 8,493,733 -- -- 7.97% 2006
Hampton Towne Center 10,134,324 8,709,438 -- -- 6.75% 2018
- ------------------------------------------------------------------------------------------------------------------------
Total 28,994,521 26,496,255 10,092,355 9,208,265
MORTGAGE LOANS ON EQUITY PARTNERSHIP
KCP - Ten Quiviria 6,946,631 5,121,057 6,953,113 5,246,819 8.16% 2007
KCP - Ten Quiviria Parcel 999,306 736,688 1,000,238 754,780 8.16% 2007
KCP - Cherokee Hill 3,212,174 2,368,015 3,215,341 2,426,296 7.79% 2007
KCP - Devonshire 2,226,609 1,641,456 2,228,686 1,681,767 8.16% 2007
KCP - Willow Creek 1,336,251 985,084 1,338,590 1,010,100 8.63% 2005
KCP - Brywood Center 5,927,921 4,370,064 5,933,453 4,477,383 8.16% 2007
- ------------------------------------------------------------------------------------------------------------------------
Total 20,648,892 15,222,363 20,669,422 15,597,146
TOTAL MORTGAGE LOANS PAYABLE $41,718,618 $24,805,410 7.28%
</Table>
* Represents the Partnership's interest in the loan based upon the estimated
percentage of net assets which would be distributed to the Partnership if
the partnership were liquidated at December 31, 2001 or 2000. It does not
represent the Partnership's legal obligation.
** The Partnership's weighted average interest rate at December 31, 2001 and
2000 were 7.28% and 8.05%, respectively.
The weighted average interest rates were calculated using the Partnership's
annualized interest expense for each loan (derived using the same
percentage as that in (*) above) divided by the Partnership's share of
total debt.
*** Variable Rate Debt.
The interest rate on the variable rate debt is adjusted annually. The rate 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 change from year to year may not be more
than 2%. At December 31, 2001 and 2000, the rate was 5.735% and 7.735%,
respectively.
As of December 31, 2001, the mortgage loans payable were payable as follows:
F-23
<Page>
<Table>
<Caption>
YEAR ENDING DECEMBER 31, (000'S)
----------------------- --------------
2002 $ 678
2003 736
2004 787
2005 843
2006 17,711
Thereafter 8,240
--------------
Total $ 28,995
==============
</Table>
The mortgages payable are secured by real estate investments with an estimated
market value of $55,500,000.
Based on borrowing rates available to the Partnership at December 31, 2001 for
loans with similar terms and average maturities, the carrying value of the
Partnership's mortgages on the consolidated partnerships approximates its
estimated fair value. Different assumptions or changes in future market
conditions could significantly affect estimated market value.
NOTE 6: CONCENTRATION RISK OF REAL ESTATE INVESTMENTS
At December 31, 2001, the Partnership had real estate investments located
throughout the United States. The diversification of the account's holdings
based on the estimated market values and established NCREIF regions is as
follows:
<Table>
<Caption>
ESTIMATED
MARKET VALUE
REGION REGION % (000'S)
- --------------------------------------------------------
Southeast 42% $ 85,308
East North Central 17% 34,379
Mideast 16% 32,808
Pacific 15% 30,088
Mountain 7% 15,388
West North Central 3% $ 6,712
----------
Total $ 204,683
==========
</Table>
F-24
<Page>
NOTE 7: LEASING ACTIVITY
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 2002 to 2018. At December 31, 2001, the aggregate
future minimum base rental payments under non-cancelable operating leases by
year and in the aggregate are as follows:
<Table>
<Caption>
YEAR ENDING DECEMBER 31, (000'S)
------------------------------ ------------
2002 $ 11,725
2003 9,149
2004 7,208
2005 6,716
2006 5,990
Thereafter 21,295
------------
Total $ 62,083
============
</Table>
The above future minimum base rental payments exclude residential lease
agreements, which accounted for 24% of the Partnership's 2001 annual rental
income.
NOTE 8: COMMITMENTS AND CONTINGENCIES
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment are utilized for property acquisitions, and returned to
Prudential on an ongoing basis from contract owners' net contributions and other
available cash. The amount of the commitment is reduced by $10 million for every
$100 million in current value net assets of the Partnership. Thus, with $198
million in net assets, the commitment has been automatically reduced to $90
million. As of December 31, 2001, the cost basis of Prudential's equity interest
in the Partnership under this commitment (held through the Real Property
Accounts) was $44 million. Prudential intends to terminate this commitment at
the end of the 2002 fiscal year.
The Partnership is subject to various legal proceedings and claims arising in
the ordinary course of business. These matters are generally covered by
insurance. In the opinion of Prudential's management, the outcome of such
matters will not have a significant effect on the Partnership.
NOTE 9: 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 years ended
December 31, 2001, 2000 and 1999 management fees incurred by the Partnership
were $2.7 million for each of the three years.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the years ended December 31,
2001, 2000 and 1999 were $118,972; $116,630 and $116,463, respectively, and are
classified as administrative expenses in the Consolidated Statements of
Operations.
During the years ended December 31, 2001, 2000 and 1999, the Partnership made
the following distributions to the Partners:
<Table>
<Caption>
YEAR ENDING DECEMBER 31, (000's)
- ------------------------ -------
2001 $18,000
2000 22,000
1999 36,000
</Table>
F-25
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 2001
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
INITIAL COSTS TO THE PARTNERSHIP
-------------------------------------------------- COSTS
CAPITALIZED
BUILDING & SUBSEQUENT TO
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION
- ----------------------- ------------ ------------- ------------- -------------
Properties:
Office Building
Lisle, IL None 1,780,000 15,743,881 5,037,547
Garden Apartments
Atlanta, GA None 3,631,212 11,168,904 896,490 (b)
Retail Shopping Center
Roswell, GA None 9,454,622 21,513,677 1,910,005
Office/Warehouse
Bolingbrook, IL None 1,373,199 7,302,518 363,903
Garden Apartments
Raleigh, NC None 1,623,146 14,135,553 182,140
Office Building
Brentwood, TN None 1,797,000 6,588,451 1,592,218
Office Park
Oakbrook Terrace, IL None 1,313,310 11,316,883 1,385,288
Office Building
Beaverton, OR None 816,415 9,897,307 1,275,482
Industrial Building
Salt Lake City, UT None 582,457 4,805,676 1,179,974
Industrial Building
Aurora, CO None 1,338,175 7,202,411 1,590,931
Office Complex
Brentwood, TN None 2,425,000 7,063,755 123,268
------------- ------------- -------------
26,134,536 116,739,016 15,537,246
============= ============= =============
<Caption>
- ----------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
---------------------------------------------------------------------------
BUILDING & YEAR OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL (a)(b)(c) CONSTRUCTION ACQUIRED
- ----------------------- ------------- ------------- -------------- ----------- -----------
Properties:
Office Building
Lisle, IL 1,780,000 20,781,428 22,561,428 1985 Apr., 1988
Garden Apartments
Atlanta, GA 3,631,212 12,065,394 15,696,606 1987 Apr., 1988
Retail Shopping Center
Roswell, GA 9,462,951 23,415,353 32,878,304 1988 Jan., 1989
Office/Warehouse
Bolingbrook, IL 1,373,199 7,666,421 9,039,620 1989 Feb., 1990
Garden Apartments
Raleigh, NC 1,623,146 14,317,693 15,940,839 1995 Jun., 1995
Office Building
Brentwood, TN 1,797,377 8,180,292 9,977,669 1982 Oct., 1995
Office Park
Oakbrook Terrace, IL 1,313,821 12,701,660 14,015,481 1988 Dec., 1995
Office Building
Beaverton, OR 844,751 11,144,453 11,989,204 1995 Dec., 1996
Industrial Building
Salt Lake City, UT 702,323 5,865,784 6,568,107 1997 Jul., 1997
Industrial Building
Aurora, CO 1,415,159 8,716,358 10,131,517 1997 Sep., 1997
Office Complex
Brentwood, TN 2,453,117 7,158,906 9,612,023 1987 Oct., 1997
-------------- ------------- -------------
26,397,056 132,013,742 158,410,798
============== ============= =============
</Table>
<Table>
<Caption>
2001 2000 1999
------------- ------------- --------------
(a) Balance at beginning of year 154,613,404 172,606,825 170,045,055
Additions:
Acquisitions 0 0 0
Improvements, etc. 3,797,394 2,480,354 2,561,770
Deletions:
Sale 0 (20,473,775) 0
-------------- ------------- --------------
Balance at end of year 158,410,798 154,613,404 172,606,825
============== ============= ==============
(b) Net of $1,000,000 settlement received from lawsuit.
</Table>
F-26
<Page>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 2001
<Table>
<Caption>
INITIAL COSTS TO THE
PARTNERSHIP COSTS
----------------------------- CAPITALIZED
ENCUMBRANCES BUILDING & SUBSEQUENT TO
DESCRIPTION AT 12/31/01 LAND IMPROVEMENTS ACQUISITION
- ----------------------- --------------- ----------- ---------------- ----------------
Interest in Properties:
Garden Apartments
Jacksonville, FL 9,996,863 2,750,000 14,650,743 2,310,482
Retail Shopping Center
Kansas City MO and KS * 15,222,363 5,710,916 15,211,504 223,293
Garden Apartments
Gresham/Salem, OR 8,863,334 3,063,000 15,318,870 433,212
Retail Shopping Center
Hampton, VA 10,134,324 2,339,100 12,767,956 0
--------------- ----------- ---------------- ----------------
44,216,884 13,863,016 57,949,073 2,966,987
=============== =========== ================ ================
<Caption>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
----------------------------------------------------------------------------------------
BUILDING & YEAR OF DATE
LAND IMPROVEMENTS TOTAL(a)(b)(c) CONSTRUCTION ACQUIRED
- ----------------------- ------------ ----------------- ---------------- ---------------- ----------------
DESCRIPTION
Interest in Properties:
Garden Apartments
Jacksonville, FL 2,750,000 16,961,225 19,711,225 1973 Sept., 1999
Retail Shopping Center
Kansas City MO and KS * 5,710,916 15,434,797 21,145,713 Various Ranging Sept., 1999
From 1972-1992
Garden Apartments
Gresham/Salem, OR 3,063,000 15,752,082 18,815,082 Various Ranging Feb., 2001
From 1971-1983
Retail Shopping Center 2,339,100 12,767,956 15,107,056 1998 May, 2001
------------ ----------------- ----------------
Hampton, VA 13,863,016 60,916,060 74,779,076
============ ================= ================
</Table>
<Table>
<Caption>
2001 2000 1999
---------- ---------- -----------
(a) Balance at beginning of year 25,121,329 22,587,869 0
Additions:
Acquisitions 33,488,926 0 38,556,018
Improvements, etc. 1,674,862 2,162,457 0
Deletions:
Sale 0 0 0
Encumbrances on Joint Ventures
accounted for by the equity method 374,783 371,003 (15,968,149)
Balance at end of year 60,659,900 25,121,329 22,587,869
---------- ---------- -----------
</Table>
* Partnership interest accounted for by the equity method.
F-27