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, 1998
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) 445-4571
----------------------------------------------------
(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
--- ---
THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
ITEM ----- PAGE
NO. NO.
- ---- ----
COVER PAGE
INDEX 2
PART I
1. BUSINESS 3
2. PROPERTIES 4
3. LEGAL PROCEEDINGS 4
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 4
PART II
5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER MATTERS 5
6. SELECTED FINANCIAL DATA 5
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 6
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 16
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 17
11. EXECUTIVE COMPENSATION 22
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 23
EXHIBIT INDEX 23
SIGNATURES 26
2
PART I
ITEM 1. BUSINESS
The Prudential Variable Contract Real Property Account (the "Real Property
Account"), the Registrant, was established on November 20, 1986 by The
Prudential Insurance Company of America ("The Prudential"), as a separate
investment account, pursuant to New Jersey law. 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 The Prudential.
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,
agricultural land, 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 conventional, non
participating mortgage loans or real estate investment trusts.
Office Properties - The Partnership owns office properties in Lisle and
Oakbrook Terrace, IL; Morristown, NJ; Nashville and Brentwood, TN; and
Beaverton, OR. Total square footage owned is approximately 567,000 of
which 97% or 549,000 square feet are leased between 1 and 10 years.
Apartment Complexes - The Partnership owns apartment complexes in
Atlanta, GA and Raleigh, NC. There are a total of 490 apartment units
available of which 95% or 463 units are leased. Lease agreements range
from month to month to one year.
Retail Property - The Partnership owns a shopping center in Roswell,
GA. The property is located approximately 22 miles north of downtown
Atlanta on a 30 acre site. The square footage is approximately 297,000
of which 98% or 289,000 square feet is leased between 1 and 11 years.
Industrial Properties - The Partnership owns warehouses and
distribution centers in Bolingbrook, IL; Aurora, CO; and Salt Lake
City, UT. Total square footage owned is approximately 685,000 of which
60% or 413,719 square feet are leased between 2 and 6 years.
Investment in Real Estate Trust - The Partnership owns 506,894 shares
of Meridian Industrial Trust, Inc. Meridian is a self-administered and
self-managed equity real estate investment trust (REIT) engaged in
owning, operating, and leasing high quality, modern industrial
properties nationwide.
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 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.
3
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.
4
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 March 9, 1999, there were approximately 50,445 contract owners of
record investing in the Real Property Account.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
RESULTS OF OPERATIONS:
Net investment income $ 15,833,513 $ 13,789,747 $ 15,419,518 $ 14,720,271 $ 12,848,199
Net realized and unrealized
gain (loss) on investment
in Partnership 4,795,111 8,485,232 (4,784,583) 661,623 1,339,443
----------------- ---------------- ---------------- ---------------- ----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
$ 20,628,624 $ 22,274,979 $ 10,634,935 $ 15,381,894 $ 14,187,642
----------------- ---------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ---------------- ----------------
FINANCIAL POSITION:
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
Total Assets $244,249,272 $222,745,135 $204,156,040 $196,993,758 $183,119,986
----------------- ---------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ---------------- ----------------
Long-Term Lease Obligation $ 0 $ 0 $ 4,072,677 $ 3,882,421 $ 3,804,836
----------------- ---------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ---------------- ----------------
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All of the assets of 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 audited
financial statements and the accompanying footnotes and other financial
information included elsewhere herein.
(a) LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Partnership's liquid assets consisting of cash,
cash equivalents and marketable securities were $73.5 million, an increase of
$46.7 million from December 31, 1997. This increase was due to net proceeds from
the sales of the Partnership's industrial property located in Pomona, CA and an
apartment complex located in Farmington Hills, MI. In addition, continuing
operations from the Partnership's investment properties contributed $20.6
million to cash during 1998. Sources of liquidity include net cash flow from
property operations, interest from short-term investments, and dividends from
REIT shares.
The Partnership generally holds approximately 10% of its assets in cash or
invested in liquid instruments and securities, however, its investment policy
allows up to 30% investment in cash and short-term obligations. At December 31,
1998, 30% of the Partnership's assets consisted of cash, cash equivalents and
marketable securities.
Prudential has 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. As of December 31, 1998,
Prudential's equity interest in the Partnership under this commitment was $51
million. At the present time, Prudential does not intend to make further
contributions during the 1999 fiscal year.
The Partners made no withdrawals during 1998; however, on February 1, 1999, the
Partners made a $30 million withdrawal from excess cash. Additional withdrawals
may be made by the Partners during 1999 based upon the percentage of assets
invested in short-term obligations, and taking into consideration anticipated
cash needs of the Partnership including potential property acquisitions,
property dispositions and capital expenditures. Management anticipates that its
current liquid assets and ongoing cash flow from operations will satisfy the
Partnership's needs over the next twelve months and the foreseeable future.
During 1998, the Partnership spent $5.7 million in capital expenditures for
tenant alterations, and improvements in land and buildings. The majority of the
capital expenditures were made to reconfigure the Lisle, IL office building for
multi-tenant capability as it was previously occupied by a single tenant.
6
(b) RESULTS OF OPERATIONS
The following is a brief discussion of the Partnership's results of
operations for the years ended December 31, 1998, 1997 and 1996.
1998 VS. 1997
The following table presents a comparison of the Partnership's property results
of operations, and realized and unrealized gains or losses by investment type,
for the twelve months ended December 31, 1998 and December 31, 1997.
YEAR ENDED DECEMBER 31,
1998 1997
------------------ -----------------
NET INVESTMENT INCOME:
Office properties $ 7,269,613 $ 5,499,107
Apartment complexes 4,493,384 3,891,465
Retail property 2,702,234 2,856,357
Industrial properties 1,325,320 2,138,111
Income from interest in properties 33,462 435,296
Dividend income from real
estate investment trust 669,100 158,184
Other (including interest income,
investment management fee, etc.) (659,600) (1,188,773)
------------------ -----------------
TOTAL NET INVESTMENT INCOME $ 15,833,513 $ 13,789,747
------------------ -----------------
YEAR ENDED DECEMBER 31,
1998 1997
------------------ -----------------
REALIZED AND UNREALIZED GAIN(LOSS)
ON INVESTMENTS:
Office properties $3,034,542 $1,897,749
Apartment 2,387,054 1,053,061
complexes
Retail property (1,312,296) 1,109,099
Industrial properties 1,563,429 1,616,942
Interest in properties 91,538 284,581
Real estate investment trust (969,156) 2,523,800
------------------ -----------------
TOTAL NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS $4,795,111 $8,485,232
------------------ -----------------
The Partnership's net investment income for 1998 was $15.8 million, an increase
of $2.0 million from the prior year. This increase was primarily the result of
increased revenues from real estate and improvements partially offset by
increased operating expenses.
7
Revenue from real estate and improvements was $24.6 million in 1998, an
increase of $3.0 million, or 13.9%, from 1997. This increase was primarily
due to higher occupancy at the Lisle, IL office building and the Aurora, CO
distribution center coupled with increased rental rates on other properties.
Interest on short-term investments decreased $0.4 million from 1997. This was
primarily due to lower average cash and cash equivalent balances during 1998
compared to the prior year. Cash and cash equivalents through the third
quarter of 1998 averaged approximately $30.0 million, but increased
significantly in the last quarter of 1998 due to the sale of two properties
in Pomona, CA and Farmington Hills, MI.
Property operating expenses increased $0.8 million, or 23.5%, from 1997. This
increase was due primarily to a full year's operating costs (i.e.
electricity, repair and maintenance, water, etc.) for one of the Brentwood,
TN properties which was acquired in late 1997, in addition to operating
expenses incurred by the Partnership on vacant properties.
Administrative expenses decreased $0.3 million or 16.1%. This decrease was
due primarily to a reduction in legal expenses.
There was no interest expense during 1998 due to the Partnership's exercise
of its purchase option under the capital lease obligation.
OFFICE PROPERTIES
In 1998, net investment income from property operations for the office
properties increased $1.8 million, or 32.2%, from prior year. This increase
was primarily due to a full year's net investment income for one of the
Brentwood, TN properties which was acquired in late 1997, as well as the
leasing of vacant space in the Lisle, IL office property.
Office properties experienced a net unrealized gain of $3.0 million in 1998
due to improving office market conditions in most of the geographical areas
where the Partnership has office properties, particularly, the Oakbrook
Terrace, IL office property in suburban Chicago.
Occupancy at the Beaverton, OR; Oakbrook Terrace, IL; and Brentwood, TN
properties remained at 100% as of December 31, 1997 while occupancy at the
Lisle, IL office property increased from 37% to 96% at December 31, 1998.
Occupancy at the Morristown, NJ property decreased from 99% to 86%.
APARTMENT COMPLEXES
Net investment income from property operations for the apartment complexes
increased $0.6 million, or 15.5%, from 1997. The majority of this increase
was due to increased rental rates at the Atlanta, GA apartment complex.
Holdings in the Partnership's two apartment complexes experienced a net
unrealized gain of $0.6 million during 1998. The Atlanta, GA property was the
largest contributor to the gain as it appreciated $0.4 million. The gain was
attributable to increased rental rates at the property. The Raleigh, NC
property experienced a net unrealized gain of $0.2 million due to increased
occupancy rates. The Farmington Hills, MI property was sold on October 7,
1998 for a price of $16.9 million, which resulted in a realized gain of $1.7
million.
At the end of December 31, 1998, occupancy at the Atlanta, GA and Raleigh, NC
apartment complex was 96% and 93%, respectively.
RETAIL PROPERTIES
In 1998, the retail center experienced a net unrealized loss of $1.3 million,
which is a reflection of lower rents. Occupancy at the shopping center was
98% at December 31, 1998, which was an increase of 2% from the prior year.
INDUSTRIAL PROPERTIES
Net investment income from property operations for the industrial properties
decreased $0.8 million, or 38.0%, from 1997. The decrease was attributable to
the sale of Pomona Industrial Park, which accounted for 82% of the decrease.
8
The three industrial properties experienced a net unrealized gain of $0.3
million during 1998. The Pomona, CA property was sold on December 17, 1998
for $21.4 million, which resulted in a realized gain of $1.2 million.
Occupancy at the Bolingbrook, IL property remained unchanged at 100%.
Occupancy at the Salt Lake City, UT and Aurora, CO property increased to
33.6% and 46%, respectively from prior year.
REAL ESTATE INVESTMENT TRUST
On September 24, 1997 the Partnership acquired 506,894 shares of Meridian
Industrial REIT. Dividend income from the REIT increased $0.5 million from
1997.
The Partnership held 506,894 shares of Meridian Industrial REIT throughout 1998.
As of December 31, 1998, the REIT shares experienced an unrealized loss of $1.0
million. The Valuation Unit of Prudential applies a 3% discount to the market
value of the REIT shares. This discount is applied 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.
OTHER
Other net investment loss, which includes interest income from short-term
investments, investment management fees, and expenses not related to property
activities, narrowed by $0.5 million. The improved result was due to increased
investment management fee in addition to a reduction in administrative expenses.
1997 VS. 1996
The following table presents a comparison of the Partnership's property results
of operations, and realized and unrealized gains or losses by investment type,
for the twelve months ended December 31, 1997 and December 31, 1996.
YEAR ENDED DECEMBER 31,
1997 1996
------------------ ------------------
NET INVESTMENT INCOME:
Office properties $ 5,499,107 $ 5,817,497
Apartment complexes 3,891,465 3,925,750
Retail property 2,856,357 3,129,390
Industrial properties 2,138,111 3,188,769
Income from interest in properties 435,296 606,558
Dividend income from real
estate investment trust 158,184 -
Other (including interest income,
investment management fee, etc.) (1,188,773) (1,248,446)
------------------ ------------------
TOTAL NET INVESTMENT INCOME $ 13,789,747 $ 15,419,518
------------------ ------------------
9
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Office properties $1,897,749 ($1,654,344)
Apartment complexes 1,053,061 1,209,970
Retail property 1,109,099 (3,786,554)
Industrial properties 1,616,942 (553,655)
Interest in properties 284,581 -
Real estate investment trust 2,523,800 -
------------------ ------------------
TOTAL NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS $ 8,485,232 ($4,784,583)
------------------ ------------------
The Partnership's net investment income for 1997 was $13.8 million, a
decrease of $1.6 million from 1996. This decrease was primarily the result
of market conditions in the industrial properties.
Income from interest in properties relates to the Partnership's 50%
co-investment in several warehouse properties (the unit warehouses). Income from
this source was $0.4 million in 1997, a decrease of 28.2% from 1996. This
decrease was attributable to the sale of the Partnership's interest in these
properties on September 30, 1997.
Administrative expenses on the Statement of Operations include both those
related to property operations and the administration of the Partnership.
Property administrative expenses in 1997 were $2.0 million, an increase of $0.4
million, or 21.5%, from 1996. This increase was primarily due to the acquisition
of three new properties as well as a full year of administrative expenses for a
property acquired at the end of 1996. Administrative expenses related to the
Partnership were $0.3 million in 1997, an increase of $0.1 million, or 49.7%,
from 1996. Increased legal reserves relating to potential litigation contributed
to the majority of the variance.
Property operating expenses for 1997 were $3.3 million, an increase of $0.4
million, or 13.5%, from 1996. This increase was primarily due to a full year of
ownership in 1997 of the office property in Beaverton, OR, and expenses incurred
in 1997 for new acquisitions, such as, the industrial buildings in Salt Lake
City, UT and Aurora, CO. Together these three properties contributed $0.3
million to the increased operating expenses. The acquisition of the office
building in Brentwood, TN contributed $0.1 million to the increase.
OFFICE PROPERTIES
Net investment income from property operations for the office properties in
1997 was $5.5 million. This was a decrease of $0.3 million or 5.5% from 1996.
The office properties experienced a net unrealized gain of $1.9 million in 1997.
The office property in Oakbrook Terrace, IL experienced the largest unrealized
gain that was attributable to the improving office market conditions in suburban
Chicago. In addition, the Morristown, NJ and Brentwood, TN office properties
also experienced net unrealized gains of $0.5 million and $0.6 million,
respectively.
The Partnership acquired a second office property in Brentwood, TN. The 97,378
square foot suburban office building was acquired on September 15, 1997 for $9.5
million. Occupancy at the time of acquisition, was at maximum capacity.
Occupancy at the Beaverton, OR; Oakbrook Terrace, IL; and Brentwood, TN
properties remained unchanged from December 31, 1996 at 100%. Occupancy at the
Morristown, NJ property increased from 93% to 100% while occupancy at the Lisle,
IL office property dropped from 100% to 37% in 1997.
APARTMENT COMPLEXES
In 1997, net investment income from apartment property operations was $3.9
million which was unchanged from the prior year.
10
The three apartment communities experienced a net unrealized gain of $1.0
million during 1997. The Atlanta, GA property was the largest contributor to
the gain as it appreciated $1.3 million. This gain was attributable to
increased rental rates and occupancy at the property. The Raleigh, NC
community had a net unrealized loss of $0.4 million due to the appraisal
assumptions concerning above market rentals expiring and subsequently
renewing at lower market rates.
Weighted average occupancy at the Partnership's residential communities
increased from 93.1% to 94.3% from December 31, 1996. Occupancy at the
Atlanta, GA and Farmington Hills, MI communities improved from 93% and 89%,
respectively, as of December 31, 1996 to 99% and 93%, respectively, at year
end 1997. Occupancy at the Raleigh, NC community decreased from 97% to 91% in
1997.
RETAIL PROPERTIES
Net investment income for the Partnership's retail property decreased by $0.3
million, or 8.7%, to $2.9 million in 1997. This decrease was primarily the
result of decreased occupancy at the shopping center earlier in the year. The
shopping center was 96% occupied as of December 31, 1997, unchanged from the
prior year.
The retail center experienced an unrealized gain of $1.1 million. This was a
result of changes in the assumed capital needs of the property and the
leasing of vacant spaces in the third and fourth quarters which stabilized
future cash flows and brought occupancy back up to 96%.
INDUSTRIAL PROPERTIES
In 1997, net investment income from industrial property operations was $2.1
million, a decrease of $1.0 million, or 32.9%, in 1996. The decline was
attributable to the sale of the industrial complex in Azusa, CA, in April
1996, which accounted for $0.6 million of the decrease. The sale of the
Partnership's investment in the Jacksonville, FL industrial properties, in
September 1997, also contributed to the decline in net investment income. For
properties held for comparable periods in 1997 and 1996, net investment
income was $2.0 million and $1.9 million, respectively.
The Partnership acquired three industrial properties in 1997. The first
acquisition was a 182,500 square foot building in Salt Lake City, UT for $5.4
million. The second acquisition was a two building 277,500 square foot
facility in Aurora, CO for $8.5 million. As of December 31, 1997, both
properties were vacant. The third acquisition was the land under the
Partnership's existing Pomona CA, industrial complex. The Partnership
acquired the land under a purchase option for $3.5 million.
The industrial properties (including the recently purchased land) had $1.9
million of net unrealized appreciation in 1997. The largest single gain of
$1.7 million was attributable to the purchase of the land under the Pomona,
CA property. The Salt Lake City, UT and Aurora, CO properties experienced
negative net appreciation as a result of softer market conditions.
As of December 31, 1997 occupancy at the Partnership's Pomona, CA and
Bolingbrook, IL industrial properties remained unchanged from December
31,1996 at 100%. As of December 31, 1997, both the Salt Lake City, UT and
Aurora, CO properties were 100% vacant.
The partnership sold its interest in the Jacksonville, FL warehouses for net
sales proceeds of $6.3 million, resulting in a gain of $0.3 million.
REAL ESTATE INVESTMENT TRUST
Dividend income from REITs totaled $0.1 million in 1997. The Partnership
acquired 506,894 shares Meridian for $10.0 million on September 24, 1997.
Meridian is a self-administered and self-managed equity real estate
investment trust engaged in owning, operating, and leasing high quality,
modern industrial properties nationwide. As of December 31, 1997, these
shares experienced a $2.5 million net unrealized gain.
11
(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:
01/01/98 01/01/97 01/01/96
TO TO TO
12/31/98 12/31/97 12/31/96
-------- -------- --------
Revenue from real estate and improvements $ 2.0739 $ 1.8216 $ 1.9173
Income from interest in properties $ 0.0028 $ 0.0367 $ 0.0510
Dividend income from real estate investment
trusts $ 0.0565 $ 0.0134 $ 0.0000
Interest on short-term investments $ 0.1594 $ 0.1946 $ 0.1795
-------- -------- --------
TOTAL INVESTMENT INCOME $ 2.2926 $ 2.0663 $ 2.1478
-------- -------- --------
Investment management fee $ 0.2448 $ 0.2229 $ 0.2097
Real estate taxes $ 0.2031 $ 0.1864 $ 0.1991
Administrative expense $ 0.1647 $ 0.1963 $ 0.1569
Operating expense $ 0.3437 $ 0.2782 $ 0.2442
Interest expense $ 0.0000 $ 0.0186 $ 0.0412
-------- -------- --------
TOTAL INVESTMENT EXPENSES $ 0.9563 $ 0.9024 $ 0.8511
-------- -------- --------
NET INVESTMENT INCOME $ 1.3363 $ 1.1639 $ 1.2967
-------- -------- --------
Net gain (loss) realized on real estate
investments sold $ 0.2575 $ 0.0258 $ (0.1323)
Change in unrealized gain (loss) on real $ 0.1472 $ 0.6903 $ (0.2695)
estate investments sold -------- -------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS $ 0.4047 $ 0.7162 $ (0.4018)
-------- -------- ----------
-------- -------- ----------
Net change in share value $ 1.7410 $ 1.8800 $ 0.8949
Share value at beginning of period $ 18.5286 $ 16.6486 $ 15.7537
--------- --------- ---------
Share value at end of period $ 20.2696 $ 18.5286 $ 16.6486
-------- -------- ----------
-------- -------- ----------
Ratio of expenses to average net assets 4.99% 5.16% 5.26%
Ratio of net investment income to
average net assets 6.97% 6.66% 8.01%
Number of shares outstanding at
end of period (000's) 11,848 11,848 11,848
ALL CALCULATIONS ARE BASED ON AVERAGE MONTH-END SHARES OUTSTANDING WHERE
APPLICABLE.
12
(d) THE YEAR 2000 ISSUE
The Partnership utilizes many of the same business applications,
infrastructure and business partners as Prudential. Prudential has addressed
the Year 2000 issue on an enterprise-wide basis. Therefore, it is not
possible to differentiate the Partnership's Year 2000 issue from that of
Prudential. The accompanying discussion of the Year 2000 issue reflects steps
taken by Prudential to mitigate the Year 2000 risks.
Many computer systems are programmed to recognize only the last two digits in
a date. As a result, any computer system that has date-sensitive programming
may recognize a date using "00" as the year 1900 rather than the year 2000.
This problem can affect non-information technology systems that include
embedded technology, such as microprocessors included in "infrastructure"
equipment used for telecommunications and other services as well as computer
systems. If this anomaly is not corrected, the year "00" could cause systems
to perform date comparisons and calculations incorrectly, which could in turn
affect the accuracy and compromise the integrity of business records.
Business operations could be interrupted when companies are unable to process
transactions, send invoices, or engage in similar normal business activities.
Prudential established a Company-wide Program Office (CPO) to develop and
coordinate an operating framework for the Year 2000 compliance activities.
Prudential's CPO structured the Year 2000 program into three major
components: Business Applications, Infrastructure and Business Partners. The
CPO also established quality assurance procedures including a certification
process to monitor and evaluate enterprise-wide progress of each component of
Prudential's program for conversion and upgrading of systems for Year 2000
compliance.
BUSINESS APPLICATIONS
The scope of the Business Applications component includes a wide range of
computer systems that directly support Prudential's business operations and
accounting systems. The entire application portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace
or retire). Rigorous testing standards have been employed for all
applications that will not be retired, including those that are newly
developed or purchased. Application replacement and renovation projects
follow a similar path toward Year 2000 compliance. The key project phases
include Year 2000 analysis and design, programming activities, testing, and
implementation. Replacement projects are also tracked until the existing
applications are removed from production.
Of Prudential's total application portfolio, approximately 70% of the
applications are being renovated, 13% are being replaced by Year 2000
compliant systems, and the remaining 17% are being retired from production.
At December 31, 1998, the percentage of business applications (based on
application count) in the implementation phase for Year 2000 compliance for
renovation, replacement and retirement are 99%, 96% and 99%, respectively.
The overall completion date for Business Applications is June 1999.
INFRASTRUCTURE
The scope of Prudential's Year 2000 Infrastructure initiatives include
mainframe computer system hardware and operating system software, mid-range
systems and servers, telecommunications equipment, buildings and facilities
systems, personal computers, and vendor hardware and software.
Although there are minor differences among these various components, the
approach to Year 2000 readiness for Infrastructure generally involves phases
identified as inventory, assessment, remediation activities (e.g., upgrading
hardware or software), testing and implementation. The overall completion
date for Infrastructure is June 1999.
BUSINESS PARTNERS
Prudential's approach to business partner readiness includes classification
of each partner's status as "highly critical" or "less critical" and the
development of contingency plans to address the potential that a business
partner could experience a Year 2000 failure. Approximately 30% of our
business partners have been identified as highly critical and the remaining
70% as less critical. Project phases include inventory, risk assessment, and
contingency planning
13
activities. All project phases for highly critical business partner readiness
were achieved in December 1998; we have an overall completion date for less
critical business partner readiness is June 1999.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from operating cash flows. Some of
the expenses of Prudential's Year 2000 readiness are allocated across its
various businesses and subsidiaries, including the Partnership. Expenses related
to the Year 2000 initiatives allocated to the Partnership are part of systems
overhead costs and are included in the Partnership's general and administrative
expenses. The Year 2000 costs allocated to the Partnership to date are not
material to its operations and financial conditions. Moreover, the forecasted
allocated Year 2000 costs are not expected to have a material impact on the
Partnership's ability to meet its contractual commitments.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
The major portion of Prudential's transactions are of such volume that they can
only be effectively processed through the use of automated systems. Therefore,
substantially all of Prudential's contingency plans include the ultimate
resolution of any causative technology failures that may be encountered.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule.
While management expects a small number of the projects may not meet their
targeted completion date, it is anticipated that these projects will be
completed by September 1999 so that any delays, if experienced, would not have a
significant impact on the timing of the project as a whole. During the course of
the Year 2000 program, some discretionary technology projects have been delayed
in favor of the completion of Year 2000 projects. However, this impact has been
minimized by Prudential's strategic decision to outsource most of the Year 2000
renovation work.
While Prudential and its subsidiaries believe that they are well positioned to
mitigate its Year 2000 issue, this issue, by its nature contains inherent
uncertainties, including the uncertainty of Year 2000 readiness of third
parties. Consequently, the Partnership is unable to determine at this time
whether the consequences of Year 2000 failures will have a material adverse
effect on the Partnership's results of operations, liquidity or financial
condition. In the worst case, it is possible that any technology failure,
including an internal or external Year 2000 failure, could have a material
impact on the Partnership results of operations, liquidity, or financial
position.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure of
specific business applications or infrastructure components. These responses are
being reviewed and expected to be finalized by June 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. The plans are also
being updated to reduce the level of uncertainty about the Year 2000 problem
including readiness of Prudential's Business Partners.
The discussion of the Year 2000 Issue herein, and in particular Prudential's
plans to remediate this issue and the estimated costs thereof, are
forward-looking in nature. See cautionary statement below relating to
forward-looking statements.
(e) INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the 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 Company. There can be no
assurance that future developments affecting the Company 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;
14
competitive, regulatory or tax changes that affect the cost or demand for the
Company's products; and adverse litigation results. While the Company
reassesses material trends and uncertainties affecting its financial
condition 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. The information referred
to above should be considered by readers when reviewing any forward-looking
statements contained in this Management's Discussion and Analysis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Account and the Partnership are not subject to significant exposure to
market rate risk for changes in interest rates because the Partnership's
financial instruments consist primarily of short-term fixed rate commercial
paper and neither the Account nor the Partnership use derivative financial
instruments. Further, 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.
15
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
and F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member Corporate Governance
Committee. Business consultant since 1986. Senior Vice President, H.J.
Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc.
and Erie Plastics Corporation. Age 64.
FREDERICK K. BECKER--Director since 1994 (current term expires April,
1999). Member, Auditing Committee; Member, Corporate Governance
Committee. President, Wilentz Goldman and Spitzer, P.A. (law firm) since
1989, with firm since 1960. Age 63.
GILBERT F. CASELLAS--Director since 1998 (current term expires April,
1999). President, The Swarthmore Group, Inc. since 1999. Partner,
McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment Opportunity
Commission from 1994 to 1998. General Counsel, Department of Air Force from
1993 to 1994. Age 46.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics.
President & Chief Operating Officer, Bell Atlantic Corporation, since
1998. 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 Bell Atlantic Corporation and Johnson &
Johnson. Age 56.
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. National and International
Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also
a director of Beckman Coulter Instruments, Inc., Merck & Co. Inc., Minimed
Incorporated, and Beverley Enterprises. Age 67.
ROGER A. ENRICO--Director since 1994 (current term expires April,
2002). Member, Committee on Nominations & Corporate Governance;
Member, Compensation Committee. Chairman and Chief Executive Officer,
PepsiCo, Inc. since 1996. Mr. Enrico originally joined PepsiCo, Inc. in
1971. Mr. Enrico is also a director of A.H. Belo Corporation and Dayton
Hudson Corporation. Age 54.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 1999).
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, MeidiaOne Group, Inc., AP Automotive Systems, Inc.,
The Dow Chemical Company and DTE Energy Company. Age 64.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April,
2000). Member, Executive Committee; Member, Committee on Business
Ethics; Chairman, Committee on Nominations & Corporate Governance.
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 Corporation; Municipal Bond Investors Assurance
Corporation; Rockwell International Corporation; Union-Pacific Corporation;
Warner-Lambert Company; CBS Corporation; and Electronic Data Systems. Age 57.
JON F. HANSON--Director since 1991 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Business Ethics.
Chairman, Hampshire Management Company since 1976. Mr. Hanson is also a
director of James E. Hanson Management Company; Neumann Distributors,
Inc.; Fleet Trust and Investment Services Company, N.A.; United Water
Resources; Orange & Rockland Utilities, Inc.; and Consolidated Delivery
and Logistics. Age 62.
GLEN H. HINER, JR.--Director since 1997 (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer,
Owens Corning since 1991. Senior Vice President and Group Executive,
Plastics Group, General Electric Company from 1983 to 1991. Mr. Hiner is
also a director of Dana Corporation and Owens Corning. Age 64.
17
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committee 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 56.
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 67.
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. Dr. Malkiel is also a director of Banco Bilbao
Vizcaya; Baker Fentress & Company; The Jeffrey Company; The Southern New
England Telecommunications Company; and Vanguard Group, Inc. Age 66.
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase
Manhattan Bank from 1990 to 1994, with Chase since 1972. Age 56.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International
since 1994. Age 64.
CHARLES R. SITTER--Director since 1995 (current term expires April, 1999).
Member, Committee on Finance & Dividend; Member, Investment Committee.
Retired since 1996. President, Exxon Corporation from 1993 to 1996. Mr.
Sitter began his career with Exxon in 1957. Age 68.
DONALD L. STAHELI--Director since 1995 (current term expires April, 1999).
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. Mr. Staheli is also director of Bankers Trust
Company; Conti-Financial Corporation; and Continental Grain Company.
Age 67.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2000).
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 CGC, Inc.; INCO; Limited; S.C. Johnson & Son, Inc.;
The Thomson Corporation; Canadian Occidental Petroleum, Ltd.; The
Toronto-Dominion Bank; and Ontario Hydro. Age 64.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2000).
Member, Committee on Nominations & Corporate Governance; Member,
Investment Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a
director of Ameritech Corporation and Moss Micro. Age 57.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member,
Committee 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 is also a director of The Estee Lauder Companies,
Inc. and PepsiCo., Inc. Age 69.
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 64.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee;
Member, Committee on Nominations & Corporate Governance. Consultant since
1997. Chairman, Wolfensohn & Co., Inc. from 1988 to 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a director of
Nestle, S.A., and Bankers Trust New York Corporation as well as a Director
of the Board of Overseers of TIAA-CREF. Age 71.
18
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive
Officer, The Williams Companies from 1979 to 1993. Mr. Williams is also a
director of The Orvis Company; MTC Investors, LLC.; and AEA Investors, Inc.
Age 65.
19
PRINCIPAL OFFICERS OF THE PRUDENTIAL
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation, New York, NY. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since
1998; Chief Executive Officer, Prudential Investments from 1995 to 1998;
Chief Executive Officer, Money Management Group in 1995; prior to 1995,
President, Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President Human Resources since 1997;
prior to 1997, Executive Vice President, Canadian Imperial Bank of Commerce,
Toronto, Canada. Age 45.
ROBERT C. GOLDEN--Executive Vice President Operations and Systems since
1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
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, New York, NY. Age 46.
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional
since 1998; President, Diversified Group since 1995 to 1998; prior to 1995,
President, Prudential Capital Group. Age 52.
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,
New York, NY, from 1994 to 1996; prior to 1994, President and CEO, Global
Private Banking, Bankers Trust Company, New York, NY. Age 52.
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to
1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997;
prior to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; 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 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual
Insurance Group since 1997; President Prudential Select from 1996 to 1997;
prior to 1995, Executive Vice President and Chief Operating Officer,
Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since
1998; Senior Vice President and Comptroller from 1995 to 1998; prior to 1995,
Senior Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President,
Group Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to
1997; prior to 1995, President, Northeastern Group Operations. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997;
prior to 1995, Controller, Bankers Trust, New York, NY. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1998.
Managing Director, Bankers Trust Company from 1996 to 1998; prior to 1996,
Global Chief Auditor and Managing Director, Credit Suisse First Boston. Age
57.
20
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
MARK R. FETTING--Senior Vice President, Retirement Services, Institutional
since 1996; President, Prudential Retirement Services from 1992 to 1996;
prior to 1992, Partner, Greenwich Associates. Age 44.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company.
Age 60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Guaranteed Products, Global Asset
Management since 1997; Senior Vice President, Guaranteed Products, Guaranteed
Investments from 1996 to 1997; Vice President, Guaranteed Investments,
Guaranteed Products from 1996 to 1996; prior to 1996, Managing Director,
Retirement Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance Group,
since 1997; prior to 1997, Chief Marketing & Product Development Officer.
Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since
1999; Vice President, Individual Financial Services from 1996 to 1999; Vice
President, Operations and Systems from 1995 to 1996; prior to 1995 Vice
President, Chase Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls
since 1999; Vice President, Management Internal Controls from 1995 to 1999;
prior to 1995 Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997 Senior Vice President and
General Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Marketing, Prudential
Investments, since 1996; Director, Putnam Investments, in 1996; prior to
1996, President, Fidelity Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998;
Senior Vice President and Auditor from 1995 to 1998; prior to 1995, Vice
President and Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President since 1996; Senior Vice President
and Actuary from 1995 to 1996; prior to 1995, Chief Executive Officer,
Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Mutual Funds Sales, Individual
Financial Services since 1997; prior to 1997, Managing Director, Fidelity
Investments, Boston. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
21
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 Party Transactions in note 5 of Notes to Financial Statements on
page F - 18.
22
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, 1998. 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.
23
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.
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
24. Power of Attorney: F. Agnew, F. Becker, J. Cullen, C. Davis, R.
Enrico, 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, J. Williams, 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.
27. Not applicable.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
IN RESPECT OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(REGISTRANT)
Date: MARCH 29, 1999 By:/s/
------------------ ----------------------
Esther H. Milnes
Vice President
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 and March 29, 1999
----------------------- Chief Executive Officer
Arthur F. Ryan
* Chief Financial Officer March 29, 1999
-----------------------
Richard Carbone
BY: */s/
--------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
26
SIGNATURE TITLE DATE
- --------- ----- ----
* Director March 29, 1999
---------------------------
Franklin E. Agnew
* Director March 29, 1999
---------------------------
Frederic K. Becker
* Director March 29, 1999
---------------------------
Gilbert F. Casellas
* Director March 29, 1999
---------------------------
James G. Cullen
* Director March 29, 1999
---------------------------
Carolyne K. Davis
* Director March 29, 1999
---------------------------
Roger A. Enrico
* Director March 29, 1999
---------------------------
Allan D. Gilmour
* Director March 29, 1999
---------------------------
William H. Gray, III
* Director March 29, 1999
---------------------------
Jon F. Hanson
* Director March 29, 1999
---------------------------
Glen H. Hiner, Jr.
* Director March 29, 1999
---------------------------
Constance J. Horner
* Director March 29, 1999
---------------------------
Gaynor N. Kelley
* Director March 29, 1999
---------------------------
Burton G. Malkiel
BY: */s/
---------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
27
SIGNATURE TITLE DATE
- --------- ----- ----
* Director March 29, 1999
------------------------------
Ida F. S. Schmertz
* Director March 29, 1999
------------------------------
Charles R. Sitter
* Director March 29, 1999
------------------------------
Donald L. Staheli
* Director March 29, 1999
------------------------------
Richard M. Thomson
* Director March 29, 1999
------------------------------
James A. Unruh
* Director March 29, 1999
------------------------------
P. Roy Vagelos, M.D.
* Director March 29, 1999
------------------------------
Stanley C. Van Ness
* Director March 29, 1999
------------------------------
Paul A. Volcker
* Director March 29, 1999
------------------------------
Joseph H. Williams
BY: */s/
-----------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
28
THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(REGISTRANT)
INDEX
PAGE
----
A. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Financial Statements:
Report of Independent Accountants F-2
Statements of Net Assets - December 31, 1998 and 1997 F-3
Statements of Operations and Changes in Net Assets -
Years Ended December 31, 1998, 1997 and 1996 F-3
Notes to Financial Stateme
nts F-4
B. THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Financial Statements:
Report of Independent Accountants F-8
Statements of Assets and Liabilities - December 31, 1998 and 1997 F-9
Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 F-10
Statements of Changes in Net Assets - Years Ended December 31, 1998, 1997 and 1996 F-11
Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 F-12
Schedule of Investments - December 31, 1998 and 1997 F-13
Notes to Financial Statements F-16
Financial Statement Schedules:
For the period ended December 31, 1998
Schedule III - Real Estate Owned: Properties F-19
Schedule III - Real Estate Owned: Interest in Properties F-20
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
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 Prudential Variable Contract Real
Property Account at December 31, 1998 and 1997, and the results of its
operations and the changes in its net assets for the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of The Prudential
Insurance Company of America's management; 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 generally accepted
auditing standards 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 owned in The Prudential Variable
Contract Real Property Partnership at December 31, 1998 and 1997, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
F-2
FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
DECEMBER 31,
-----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Investment in The Prudential Variable Contract
Real Property Partnership (Note 3) $ 111,115,968 $ 101,268,264
--------------------------- ----------------------------
--------------------------- ----------------------------
NET ASSETS, representing:
Equity of Contract Owners (Note 4) $ 60,232,750 $ 59,242,776
Equity of Prudential Insurance Company of America (Note 2D) 50,883,218 42,025,488
--------------------------- ----------------------------
$ 111,115,968 $ 101,268,264
--------------------------- ----------------------------
--------------------------- ----------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
INVESTMENT INCOME:
Net Investment Income from Partnership Operations $ 7,324,915 $ 6,361,101 $ 7,088,695
EXPENSES:
Charges to Contract Owners for Assuming Mortality Risk and
Expense Risk and for Administration (Note 5) 492,841 480,620 473,388
-------------- -------------- ---------------
NET INVESTMENT INCOME 6,832,074 5,880,481 6,615,307
-------------- -------------- ---------------
Net Change in Unrealized Gain (Loss) on Investments in Partnership 806,156 3,772,996 (1,474,373)
Net Realized Gain (Loss) on Sale of Investments in Partnership 1,411,632 141,173 (723,211)
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 9,049,862 9,794,650 4,417,723
-------------- -------------- --------------
CAPITAL TRANSACTIONS:
Net Withdrawals by Contract Owners (Note 7) (3,853,980) (3,343,849) (2,022,824)
Net Contributions by Prudential Insurance Company of America 4,651,822 3,824,469 2,496,212
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS 797,842 480,620 473,388
-------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 9,847,704 10,275,270 4,891,111
NET ASSETS:
Beginning of period 101,268,264 90,992,994 86,101,883
-------------- -------------- --------------
End of period $ 111,115,968 $ 101,268,264 $ 90,992,994
-------------- -------------- --------------
-------------- -------------- --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES F-4 THROUGH F-7
F-3
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
DECEMBER 31, 1998
NOTE 1: GENERAL
The Prudential Variable Contract Real Property Account (the "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 Pruco Life of New Jersey Variable Contract
Real Property Account, are the sole investors in 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 generally
accepted accounting principles ("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, 1998
and 1997 the Real Property Account's interest in the Partnership was 46.2% or
5,481,889 shares and 46.1% or 5,465,515 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
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP
The number of shares held by the Real Property Account in the Partnership, the
Partnership share value and the aggregate cost of investments in the Real
Property Accounts' shares held at December 31, 1998 and 1997 were as follows:
1998 1997
------ -----
SHARES OUTSTANDING: 5,481,889 5,465,515
SHARE VALUE: $20.27 $18.53
COST: $64,095,895 $63,790,895
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of contract owner
equity at December 31, 1998 and 1997, by product, were as follows:
1998:
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE TOTAL
------------- ------------ -------------- ------------------ --------------
CONTRACT OWNER UNITS OUTSTANDING: 2,873,789 2,011,903 13,216,595 18,444,838
UNIT VALUE: $ 1.60383 $ 1.60383 $ 1.68343 $ 1.63448
-------------- ------------ -------------- ------------------
TOTAL CONTRACT OWNER EQUITY: $ 4,609,069 $ 3,226,750 $ 22,249,213 $ 30,147,718 $ 60,232,750
------------- ------------ -------------- ------------------ --------------
------------- ------------ -------------- ------------------ --------------
1997:
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE TOTAL
-------------- ------------ -------------- ----------------- --------------
CONTRACT OWNER UNITS OUTSTANDING: 3,063,257 2,642,918 13,838,774 19,469,599
UNIT VALUE: $ 1.48380 $ 1.48380 $ 1.54807 $ 1.50761
-------------- ------------ -------------- ------------------
TOTAL CONTRACT OWNER EQUITY: $ 4,545,261 $ 3,921,562 $ 21,423,391 $ 29,352,562 $ 59,242,776
------------- ------------ -------------- ------------------ --------------
------------- ------------ -------------- ------------------ --------------
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 1.0%, 0.6%, 0.9%, and 1.2% for PDISCO+, PVAL, PVAL $100,000 +
face value, and VIP respectively. Mortality risk is that life insurance and
annuity 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. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.2% applied daily against the net assets representing equity of PDISCO+
contract owners held in each subaccount. Administrative charges include costs
associated with issuing the contract, establishing and maintaining records, and
providing reports to contract owners.
C. COST OF INSURANCE 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 and to compensate Prudential for the
guaranteed minimum death benefit risk.
F-5
D. DEFERRED SALES CHARGE
A deferred sales charge, applicable to PVAL and PVAL $100,000 + face value, is
imposed upon the surrenders of certain variable life insurance to compensate
Prudential for sales and other marketing expenses. The amount of any sales
charge will depend on the number of contract 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.
E. 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.
F. 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 and 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, 1998 and 1997 were as follows:
1998:
PVAL & PVAL
PDISCO+ VIP $100,000+ FACE VALUE TOTAL
----------- --------- -------------------- -------
CONTRACT OWNER NET PAYMENTS: $ 34,192 $ 64,722 $ 7,093,241 $ 7,192,155
POLICY LOANS: 0 0 (1,904,723) (1,904,723)
POLICY LOAN REPAYMENTS AND INTEREST: 0 0 1,227,793 1,227,793
SURRENDERS, WITHDRAWALS, AND DEATH BENEFITS: (488,508) (1,009,902) (3,536,617) (5,035,027)
NET TRANSFERS FROM (TO) OTHER SUBACCOUNTS
OR FIXED RATE OPTIONS: 159,601 (12,601) (1,618,529) (1,471,529)
ADMINISTRATIVE AND OTHER CHARGES: (16) (3,869) (3,858,764) (3,862,649)
--------------- -------------- ---------------------- ---------------
NET WITHDRAWALS BY CONTRACT OWNER $ (294,731) $ (961,650) $ (2,597,599) $ (3,853,980)
--------------- -------------- ---------------------- ---------------
--------------- -------------- ---------------------- ---------------
F-6
1997:
PVAL & PVAL
PDISCO+ VIP $100,000+ FACE VALUE TOTAL
----------- ------------ --------------------- -------
CONTRACT OWNER NET PAYMENTS: $ 351,456 $ 347,300 $ 8,463,594 $ 9,162,350
POLICY LOANS: 0 0 (1,932,364) (1,932,364)
POLICY LOAN REPAYMENTS AND INTEREST: 0 0 975,817 975,817
SURRENDERS, WITHDRAWALS, AND DEATH BENEFITS: (726,927) (714,252) (3,808,846) (5,250,025)
NET TRANSFERS FROM (TO) OTHER SUBACCOUNTS
OR FIXED RATE OPTIONS: 87,144 (194,348) (1,816,066) (1,923,270)
ADMINISTRATIVE AND OTHER CHARGES: (20) (3,847) (4,372,490) (4,376,357)
--------------- -------------- ---------------------- ---------------
NET WITHDRAWALS BY CONTRACT OWNER $ (288,347) $ (565,147) $ (2,490,355) $ (3,343,849)
--------------- -------------- ---------------------- ---------------
--------------- -------------- ---------------------- ---------------
NOTE 8: UNIT ACTIVITY
Transactions in units for the years ended December 31, 1998, 1997 and 1996 were
as follows:
1998:
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE
----------- --------- ----------- ----------
CONTRACT OWNER CONTRIBUTIONS: 613,206 186,504 2,480,913 3,131,058
CONTRACT OWNER REDEMPTIONS: (802,674) (817,519) (3,103,092) (4,155,819)
1997:
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE
---------- --------- ----------- ----------
CONTRACT OWNER CONTRIBUTIONS: 644,374 373,838 3,039,579 3,893,900
CONTRACT OWNER REDEMPTIONS: (846,753) (773,203) (3,692,270) (4,965,990)
1996:
PVAL $100,000+
PDISCO+ VIP PVAL FACE VALUE
---------- --------- ----------- ----------
CONTRACT OWNER CONTRIBUTIONS: 708,743 381,682 4,061,972 4,872,293
CONTRACT OWNER REDEMPTIONS: (745,783) (654,114) (4,350,882) (5,786,430)
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, 1998 were as follows:
Purchases: $341,000
Sales: $(36,000)
F-7
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Partners of Prudential
Variable Contract Real Property Partnership
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the management of 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
generally accepted auditing standards 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 1999
F-8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- -------------------
ASSETS
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements
(cost: 12/31/98 -- $170,045,055; 12/31/97 -- $201,670,248) $ 155,374,462 $ 181,317,624
Real estate investment trust (cost: 12/31/98 -- $10,000,005;
12/31/97 -- $10,000,005) 11,554,649 12,523,805
--------------------- -------------------
Total real estate investments 166,929,111 193,841,429
MARKETABLE SECURITIES - At estimated market value
(cost: 12/31/98 -- $14,967,236; 12/31/97 -- $13,971,421) 14,950,525 13,929,296
CASH AND CASH EQUIVALENTS 58,578,848 12,880,560
DIVIDEND RECEIVABLE 167,275 146,999
OTHER ASSETS (net of allowance for uncollectible
accounts: 12/31/98 -- $66,000; 12/31/97 -- 3,623,513 1,946,851
$68,000)
--------------------- -------------------
Total assets $ 244,249,272 $ 222,745,135
--------------------- -------------------
--------------------- -------------------
LIABILITIES AND PARTNERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,985,400 $ 1,842,027
DUE TO AFFILIATES 1,598,535 832,922
OTHER LIABILITIES 504,940 538,413
--------------------- -------------------
Total liabilities 4,088,875 3,213,362
COMMITMENTS
PARTNERS' EQUITY
240,160,397 219,531,773
--------------------- -------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 244,249,272 $ 222,745,135
--------------------- -------------------
--------------------- -------------------
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD 11,848,275 11,848,275
--------------------- -------------------
--------------------- -------------------
SHARE VALUE AT END OF PERIOD $ 20.27 $ 18.53
--------------------- -------------------
--------------------- -------------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-9
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
INVESTMENT INCOME:
Revenue from real estate and improvements $ 24,572,642 $ 21,582,968 $ 22,799,694
Income from interest in properties 33,462 435,296 606,558
Dividend income from real estate investment trust 669,100 158,184 0
Interest on short-term investments 1,888,348 2,305,364 2,134,386
--------------------- --------------------- ---------------------
Total investment income 27,163,552 24,481,812 25,540,638
--------------------- --------------------- ---------------------
EXPENSES:
Investment management fee 2,900,445 2,640,470 2,494,229
Real estate taxes 2,406,624 2,208,972 2,367,404
Administrative expense 1,951,235 2,326,155 1,865,433
Operating expense 4,071,735 3,296,350 2,904,620
Interest expense 0 220,118 489,434
--------------------- --------------------- ---------------------
Total investment expenses 11,330,039 10,692,065 10,121,120
--------------------- --------------------- ---------------------
NET INVESTMENT INCOME 15,833,513 13,789,747 15,419,518
--------------------- --------------------- ---------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net proceeds from real estate investments
sold 37,443,762 6,297,422 20,497,789
Less: Cost of real estate investments sold 37,361,533 6,274,539 26,610,932
Realization of prior years' unrealized
gain on real estate investments sold (2,969,150) (283,157) (4,539,996)
--------------------- --------------------- ---------------------
Net gain (loss) realized on real estate
investments sold 3,051,379 306,040 (1,573,147)
--------------------- --------------------- ---------------------
Change in unrealized gain (loss) on real estate
investments 1,743,732 8,179,192 (3,211,436)
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 4,795,111 8,485,232 (4,784,583)
--------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 20,628,624 $ 22,274,979 $ 10,634,935
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income $ 15,833,513 $ 13,789,747 $ 15,419,518
Net gain (loss) realized on real estate
investments sold 3,051,379 306,040 (1,573,147)
Net unrealized gain (loss) from real estate
investments 1,743,732 8,179,192 (3,211,436)
--------------------- --------------------- ---------------------
Net increase in net assets resulting from
operations 20,628,624 22,274,979 10,634,935
--------------------- --------------------- ---------------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(Shares: 1998 -- 0; 1997 -- 0; 1996 -- 188,409
shares, respectively) 0 0 (3,000,000)
--------------------- --------------------- ---------------------
Net decrease in net assets resulting from
capital transactions 0 0 (3,000,000)
--------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS 20,628,624 22,274,979 7,634,935
NET ASSETS - Beginning of year 219,531,773 197,256,794 189,621,859
--------------------- --------------------- ---------------------
NET ASSETS - End of year $ 240,160,397 $ 219,531,773 $ 197,256,794
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-11
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 20,628,624 $ 22,274,979 $ 10,634,935
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Net realized and unrealized (gain) loss on
investments (4,795,111) (8,485,232) 4,784,583
Bad Debt Expense 28,264 99,929 14,201
(Increase) decrease in:
Dividend receivable (20,276) (146,999) 0
Other assets (1,704,926) 20,136 (337,812)
(Decrease) increase in:
Obligation under capital lease 0 (72,677) 190,256
Accounts payable and accrued expenses 143,373 201,667 (502,254)
Due to affiliates 765,613 113,722 36,405
Other liabilities (33,473) 71,404 (197,060)
------------------- ------------------- -------------------
Net cash flows from operating activities 15,012,088 14,076,929 14,623,254
------------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments
sold 37,443,762 6,297,422 20,497,789
Acquisition of real estate property 0 (23,417,474) (10,713,722)
Acquisition of real estate investment trust 0 (10,000,005) 0
Improvements and additional costs on prior purchases:
Additions to real estate owned (5,736,333) (1,311,864) (997,893)
Additions to real estate partnerships 0 0 0
Sale (purchase) of marketable securities, net (1,021,229) 10,497,348 (13,894,489)
------------------- ------------------- -------------------
Net cash flows from investing activities 30,686,200 (17,934,573) (5,108,315)
------------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners 0 0 (3,000,000)
Principal payments on capital lease obligation 0 (4,000,000) 0
------------------- ------------------- -------------------
Net cash flows from financing activities 0 (4,000,000) (3,000,000)
------------------- ------------------- -------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 45,698,288 (7,857,644) 6,514,939
CASH AND CASH EQUIVALENTS - Beginning of year 12,880,560 20,738,204 14,223,265
------------------- ------------------- -------------------
CASH AND CASH EQUIVALENTS - End of year $ 58,578,848 $ 12,880,560 $ 20,738,204
------------------- ------------------- -------------------
------------------- ------------------- -------------------
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 0 $ 220,118 $ 376,450
------------------- ------------------- -------------------
------------------- ------------------- -------------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-12
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
--------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS (PERCENT OF NET ASSETS) 64.7% 82.6%
Location Description
- ----------------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building $ 21,634,707 $ 14,123,742 $ 17,916,983 $ 10,278,959
Atlanta, GA Garden Apartments 15,601,495 15,651,216 15,446,293 15,100,000
Roswell, GA Retail Shopping Center 32,272,627 28,649,176 31,858,198 29,547,042
Pomona, CA Warehouse 0 0 23,637,049 19,504,612
Morristown, NJ Office Building 19,409,490 11,596,138 18,931,914 10,805,918
Bolingbrook, IL Warehouse 8,948,028 7,000,000 8,948,028 7,100,000
Farmington Hills, MI Garden Apartments 0 0 13,641,971 14,805,258
Raleigh, NC Garden Apartments 15,822,682 16,804,570 15,804,860 16,525,751
Nashville, TN Office Building 8,448,026 10,152,399 8,613,828 9,611,329
Oakbrook Terrace, IL Office Complex 12,945,366 15,750,000 12,725,366 14,100,000
Beaverton, OR Office Complex 10,728,618 11,200,000 10,728,285 10,700,000
Salt Lake City, UT Industrial Building 5,388,134 5,450,000 5,388,134 5,350,000
Aurora, CO Industrial Building 9,304,171 9,497,221 8,540,585 8,400,000
Brentwood, TN Office Complex 9,541,711 9,500,000 9,488,754 9,488,755
---------------------------------------------------------------------
$ 170,045,055 $ 155,374,462 $ 201,670,248 $181,317,624
---------------------------------------------------------------------
---------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST (PERCENT OF NET ASSETS) 4.8% 5.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Meridian REIT Shares (506,894 shares) $ 10,000,005 $ 11,554,649 $ 10,000,005 $ 12,523,805
---------------------------------------------------------------------
---------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
--------------------------------------------------------------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 6.2% 6.3%
(See pages F-14 to F-15 for details)
Description
- ----------------------------------------------------------------------------------------------------------------------------------
Marketable Securities $ 14,967,236 $ 14,950,525 $ 13,971,421 $ 13,929,296
---------------------------------------------------------------------
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 24.4% 5.9%
(See pages F-14 to F-15 for details)
Description
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper and Cash $ 58,578,848 $ 58,578,848 $ 12,880,560 $ 12,880,560
---------------------------------------------------------------------
---------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-13
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
-----------------------------------------------------------
NET ESTIMATED
FACE AMOUNT COST MARKET VALUE
------------------- ------------------ --------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 6.2%
General Motors Acceptance Corp., 5.26%, January 26, 1999 $ 830,000 $ 817,556 $ 817,556
American Express Credit Corp., 7.375%, February 1, 1999 325,000 329,342 325,418
Canadian Imperial Bank of Commerce, 5.55%, February 10, 1999 1,000,000 999,520 999,947
Federal National Mortgage Assoc., 5.33%, February 12, 1999 100,000 99,703 99,703
Salomon Smith Barney Holdings, Inc., 5.38%, February 16, 1999 1,720,000 1,695,137 1,695,397
General Motors Acceptance Corp., 5.29 %, February 17, 1999 650,000 641,501 641,501
Chrysler Financial Company LLC, 5.26%, February 22, 1999 2,400,000 2,365,700 2,365,700
International Lease Finance Corp., 7.50% March 1, 1999 500,000 508,250 501,367
Federal Home Loan Mortgage Corp., 5.505%, March 12, 1999 1,000,000 1,000,856 1,000,630
General Motors Acceptance Corp., 6.04%, March 19, 1999 1,000,000 1,003,480 1,000,707
Merrill Lynch & Co. Inc., 5.23%, March 19, 1999 1,790,000 1,758,820 1,758,820
Canadian Wheat Board, 5.14%, April 1, 1999 2,000,000 1,962,406 1,962,406
International Lease Finance Corp., 6.625%, April 1, 1999 375,000 377,419 375,721
CIT Group Holdings, Inc., 6.375%, May 21, 1999 400,000 402,120 400,873
Federal National Mortgage Assoc., 6.07%, July 1, 1999 1,000,000 1,005,426 1,004,779
------------------- ------------------ --------------
TOTAL MARKETABLE SECURITIES $15,090,000 $14,967,236 $14,950,525
------------------- ------------------ --------------
------------------- ------------------ --------------
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 24.4%
Countrywide Home Loans, 5.403%, January 4, 1999 $ 1,000,000 $ 999,400 $ 999,400
Fortune Brands Inc., 5.05%, January 4, 1999 3,463,000 3,461,057 3,461,057
Xerox Capital (Europe) PLC, 5.303%, January 4, 1999 3,483,000 3,480,949 3,480,949
Federal National Mortgage Assoc., 5.77%, January 5, 1999 10,401,000 10,000,000 10,000,000
Ford Motor Credit Co., 5.454%, January 5, 1999 500,000 499,622 499,622
Pioneer Hi-BRED International, 5.665%, January 7, 1999 1,000,000 997,332 997,332
Ford Motor Credit Co., 6.11%, January 8, 1999 167,000 166,717 166,717
Deere & Co., 5.372 %, January 13, 1999 2,520,000 2,509,514 2,509,514
E.I. Du Pont De Nemours & Co. Inc., 5.277%, January 13, 1999 648,000 644,598 644,598
Household Finance Corp., 5.356%, January 13, 1999 175,000 174,119 174,119
Household Finance Corp., 5.355% , January 15, 1999 2,343,000 2,331,899 2,331,899
Potomac Electric Power Co., 5.569%, January 15, 1999 3,122,000 3,110,930 3,110,930
Chrysler Financial Corp., 5.537%, January 25, 1999 1,164,000 1,158,121 1,158,121
Eastman Kodak Co., 5.232%, January 26, 1999 2,518,000 2,502,360 2,502,360
Cigna Corp., 5.559%, January 27, 1999 1,819,000 1,809,220 1,809,220
Cigna Group Holdings, Inc. 5.334%, January 27, 1999 1,851,000 1,835,496 1,835,496
Countrywide Home Loan, Inc. 5.506%, January 27, 1999 1,342,000 1,333,028 1,333,028
Countrywide Home Loan, Inc. 5.587%, January 27, 1999 1,177,000 1,169,197 1,169,197
General RE Corp., 5.187% , January 29, 1999 542,000 538,046 538,046
PNC Funding Corp., 5.728%, January 29, 1999 2,500,000 2,487,729 2,487,729
GTE Funding, Inc., 5.211%, February 1, 1999 2,526,000 2,506,048 2,506,048
Norwest Financial, Inc., 5.536%, February 3, 1999 3,563,000 3,539,593 3,539,593
CIGNA Corp., 5.233%, February 4, 1999 1,745,000 1,730,660 1,730,660
General Electric Capital Corp., 5.537%, February 4, 1999 3,563,000 3,539,049 3,539,049
Associates First Capital Corp., 5.241%, February 8, 1999 2,519,000 2,498,988 2,498,988
GTE Funding, Inc., 5.304%, February 11, 1999 1,000,000 993,413 993,413
------------------- ------------------ --------------
TOTAL CASH EQUIVALENTS 56,651,000 56,017,085 56,017,085
CASH
2,561,762 2,561,762 2,561,762
------------------- ------------------ --------------
TOTAL CASH AND CASH EQUIVALENTS $59,212,762 $58,578,847 $58,578,847
------------------- ------------------ --------------
------------------- ------------------ --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-14
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
-----------------------------------------------------------
NET ESTIMATED
FACE AMOUNT COST MARKET VALUE
------------------- ------------------ --------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 6.3%
International Lease Finance Corp., 5.92%, January 15, 1998 $ 500,000 $ 499,083 $ 499,956
Smith Barney Holding Inc., 5.70%, January 28, 1998 1,304,000 1,285,475 1,285,475
Suntrust Banks, 8.875%, February 1, 1998 1,500,000 1,517,880 1,503,553
Chase Manhattan Bank, 5.75%, February 10, 1998 2,000,000 2,000,000 2,000,000
Beneficial Corp., 9.125%, February 15, 1998 700,000 705,948 702,456
Citicorp, 10.15%, February 15, 1998 200,000 207,324 200,969
General Motors Acceptance Corp., 5.9%, February 19, 1998 985,000 994,545 986,218
General Motors Acceptance Corp., 5.9875%, February 23, 1998 1,300,000 1,299,363 1,299,894
American General Finance Corp., 7.25%, March 1, 1998 500,000 507,880 501,217
Commercial Credit Co., 5.7%, March 1, 1998 375,000 375,199 375,031
Associates Corp. of North America, 7.3%, March 15, 1998 400,000 406,635 401,242
International Lease Finance Corp., 5.75%, March 15, 1998 400,000 399,940 399,988
Morgan Guaranty Trust Co., 5.85%, March 16, 1998 500,000 499,855 499,971
Royal Bank of Canada, 5.91%, June 17, 1998 2,000,000 1,998,853 1,999,475
FCC National Bank, 5.75281%, July 2, 1998 1,025,000 1,024,202 1,024,602
General Mills Inc., 5.38%, July 8, 1998 250,000 249,238 249,249
------------------- ------------------ --------------
TOTAL MARKETABLE SECURITIES $ 13,939,000 $ 13,971,421 $ 13,929,296
------------------- ------------------ --------------
------------------- ------------------ --------------
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 5.9%
Barnett Bank, Inc., 6.70%, January 2, 1998 $ 1,235,000 $ 1,234,540 $ 1,234,540
American Greetings Corp., 6.26%, January 5, 1998 1,250,000 1,247,179 1,247,179
Xerox Capital, 5.85%, January 6, 1998 1,000,000 995,775 995,775
Nike Inc., 6.10%, January 8, 1998 1,215,000 1,213,353 1,213,353
Paccar Financial Corp., 5.85%, January 9, 1998 1,000,000 996,100 996,100
Pitney Bowes Credit Corp., 6.00%, January 13, 1998 750,000 747,375 747,375
Merrill Lynch & Co., Inc. 5.85%, January 15, 1998 1,000,000 994,313 994,313
Bank of Montreal, 5.90%, January 16, 1998 1,000,000 1,000,000 1,000,000
Countrywide Home Loan, Inc., 5.85%, January 22, 1998 1,000,000 993,175 993,175
General Electric Capital Corp., 5.74%, February 9, 1998 1,000,000 990,593 990,593
------------------- ------------------ --------------
TOTAL CASH EQUIVALENTS 10,450,000 10,412,402 10,412,402
CASH 2,468,158 2,468,158 2,468,158
------------------- ------------------ --------------
TOTAL CASH AND CASH EQUIVALENTS $ 12,918,158 $ 12,880,560 $ 12,880,560
------------------- ------------------ --------------
------------------- ------------------ --------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE F-16
F-15
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: ORGANIZATION
On April 29, 1988, 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. Although it is the Partnership's policy to adhere to the
aforementioned percentage, at December 31, 1998, the Partnership's direct
investment in real estate, as described above, temporarily fell to 64.7%. On
February 1, 1999, a distribution of cash brought the Partnership back into
compliance with the 65% policy by increasing the Partnership's direct
investment in real estate to 79.2%. (See Note 6: Subsequent Events). 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, as
described in Notes 2A and 2B, reduced by any liabilities of the Partnership.
The periodic adjustments to property values described in Notes 2A and 2B 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 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.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A: REAL ESTATE OWNED AND INTEREST IN PROPERTIES - The Partnership's
investments in real estate owned and interests in properties are
initially valued at their purchase price. 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
Appraiser of Prudential Comptroller's Department Valuation Unit
(Valuation Unit) is responsible to assure that the valuation
process provides independent and accurate market value estimates.
In the interest of maintaining and monitoring the independence and
accuracy of the appraisal process, the Comptroller of Prudential
has appointed a third party firm to act as the Appraisal Management
Firm. The Appraisal Management Firm, among other responsibilities,
approves the selection and scheduling of external appraisals;
engages all external appraisers; reviews and provides comments on
all external appraisals; prepares all quarterly update appraisals;
assists in developing policies and procedures and assists in the
evaluation of the performance and competency of external appraisers.
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 to 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
F-16
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 place. 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.
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, 1998 and 1997.
B: INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS (REITs) - Shares of REITs
are generally valued at their quoted market price. These values may
be adjusted for discounts resulting from 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 Valuation
Unit. The Valuation Unit of Prudential applied a 3% discount to the
market value of the REIT shares at December 31, 1998. This discount
is being applied 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.
C: REVENUE RECOGNITION - Rent from real estate is recognized when
billed. Revenue from certain real estate investments is net of all
or a portion of related real estate expenses and taxes. Since real
estate is stated at estimated market value, net income is not
reduced by depreciation and amortization expense. Dividend income
is accrued at the ex-dividend date.
D: CASH AND CASH EQUIVALENTS - For purposes of the Statement of Cash
Flows, all short-term investments with an original maturity of
three months or less are considered to be cash equivalents.
Cash of $114,745 and $128,089 at December 31, 1998 and 1997,
respectively, was maintained by the properties for tenant
security deposits and is included in other assets on the
Statements of Assets and Liabilities.
E: MARKETABLE SECURITIES - Marketable securities are highly liquid
investments with maturities of more than three months when
purchased and are carried at estimated market value.
F: 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.
G: MANAGEMENT'S USE OF ESTIMATES IN THE FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles 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.
H: RECLASSIFICATIONS - Certain 1997 amounts in the financial
statements have been reclassified to conform with the 1998
presentation.
F-17
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 3: 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 1999 to 2009. At December 31, 1998, the
aggregate future minimum base rental payments under non-cancelable operating
leases by year are:
Year Ending
December 31, (000's)
----------- --------
1999 $ 11,037
2000 9,907
2001 9,104
2002 7,576
2003 4,573
Thereafter 10,753
--------
Total $ 52,950
--------
--------
NOTE 4: COMMITMENT FROM PARTNER
Prudential has 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. As of
December 31, 1998, Prudential's equity interest in the Partnership under this
commitment was $51 million. At the present time, Prudential does not intend
to make further contributions during the 1999 fiscal year.
NOTE 5: 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, 1998, 1997 and 1996 management fees incurred by the
Partnership were $2.9 million; $2.6 million; and $2.5 million, respectively.
The Partnership also reimburses Prudential for certain administrative
services rendered by Prudential. The amounts incurred for the years ended
December 31, 1998, 1997 and 1996 were $116,128; $115,346; and $116,818,
respectively, and are classified as administrative expenses in the Statements
of Operations.
The Partnership owned a 50% interest in four warehouse/distribution buildings
in Jacksonville, FL (the unit warehouses). The remaining 50% interest was
owned by Prudential and one of its subsidiaries. In September 1997, the unit
warehouses were sold as part of an industrial package for cash of $12.5
million. The Partnership's share of the proceeds was $6.3 million.
NOTE 6: SUBSEQUENT EVENTS
On February 1, 1999, $30 million was distributed to the Real Property
Accounts.
F-18
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 1998
------------------------------------------------------------------------
INTIAL 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 4,110,826
Garden Apartments
Atlanta, GA None 3,631,212 11,168,904 801,379 (b)
Warehouse
Pomona, CA None 3,412,636 19,091,210 1,133,203
Retail Shopping Center
Roswell, GA None 9,454,622 21,513,677 1,304,328
Office Building
Morristown, NJ None 2,868,660 12,958,451 3,582,379
Office/Warehouse
Bolingbrook, IL None 1,373,199 7,302,518 272,311
Garden Apartments
Farmington Hills, MI None 1,550,000 11,744,571 347,400
Garden Apartments
Raleigh, NC None 1,623,146 14,135,553 63,983
Office Building
Nashville, TN None 1,797,000 6,588,451 62,575
Office Park
Oakbrook Terrace, IL None 1,313,310 11,316,883 315,173
Office Building
Beaverton, OR None 816,415 9,897,307 14,896
Industrial Building
Salt Lake City, UT None 582,457 4,805,676 0
Industrial Building
Aurora, CO None 1,338,175 7,202,411 0
Office Complex
Brentwood, TN None 2,425,000 7,063,755 0
----------- ----------- -----------
----------- ----------- -----------
33,965,832 160,533,248 12,008,454
----------- ----------- -----------
----------- ----------- -----------
1998 1997 1996
----------- ----------- -----------
(a) Balance at beginning of year 201,670,248 177,082,291 191,981,608
Additions:
Acquistions 0 23,417,474 10,713,722
Improvements, 5,827,888 1,170,483 550,050
etc.
Deletions:
Sale (37,453,081) 0 (26,163,089)
----------- ----------- -----------
----------- ----------- -----------
Balance at end of year 170,045,055 201,670,248 177,082,291
----------- ----------- -----------
----------- ----------- -----------
(b) Net of $1,000,000 settlement received from
lawsuit.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 1998
-----------------------------------------------------------
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF YEAR
------------------------------------------------------------------------------------
BUILDING & 1998 YEAR OF DATE
DESCRIPTION LAND IMPROVEMENTS SALES TOTAL CONSTRUCTION ACQUIRED
----------- ---- ------------ ----- --------------- ------------ --------
Properties:
Office Building
Lisle, IL 1,780,000 19,854,707 21,634,707 1985 Apr., 1988
Garden Apartments
Atlanta, GA 3,631,212 11,970,283 15,601,495 1987 Apr., 1988
Warehouse
Pomona, CA 4,545,839 19,248,659 (23,794,498) 0 1987 Apr., 1988
Retail Shopping Center
Roswell, GA 9,479,089 22,793,538 32,272,627 1988 Jan., 1989
Office Building
Morristown, NJ 2,868,660 16,540,830 19,409,490 1981 Aug., 1988
Office/Warehouse
Bolingbrook, IL 1,373,199 7,574,829 8,948,028 1989 Feb., 1990
Garden Apartments
Farmington Hills, MI 1,897,400 11,761,183 (13,658,583) 0 1989 Feb., 1990
Garden Apartments
Raleigh, NC 1,623,146 14,199,536 15,822,682 1995 Jun., 1995
Office Building
Nashville, TN 1,797,327 6,650,699 8,448,026 1982 Oct., 1995
Office Park
Oakbrook Terrace, IL 1,313,821 11,631,545 12,945,366 1988 Dec., 1995
Office Building
Beaverton, OR 816,415 9,912,203 10,728,618 1995 Dec., 1996
Industrial Building
Salt Lake City, UT 582,457 4,805,676 5,388,133 1997 Jul., 1997
Industrial Building
Aurora, CO 1,338,175 7,965,996 9,304,171 1997 Sep., 1997
Office Complex
Brentwood, TN 2,425,000 7,116,711 9,541,711 1987 Oct., 1997
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
35,471,740 172,026,396 (37,453,081) 170,045,055
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
F-19
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 1998
-------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
Balance at beginning of year $0 $6,133,157 $6,133,157
Additions:
Acquistions 0 0 0
Improvements, etc. 0 0 0
Deletions:
Sale 0 (6,133,157) 0
=============== =============== ==============
Balance at end of year $0 $0 $6,133,157
=============== =============== ==============
F-20