T H E P R U D E N T I A L I N S U R A N C E C O M P A N Y O F A M E R I C A
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L O N G T E R M
G R O W T H
A C C O U N T
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COMMITTED TO PROVIDING
SUPERIOR INVESTMENT,
ADMINISTRATIVE AND
RECORDKEEPING SERVICES
TO INSTITUTIONAL CLIENTS
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[LOGO] Prudential
J U N E 3 0, 1 9 9 6 R E P O R T T O P A R T I C I P A N T S
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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VCA-2
INVESTMENT ENVIRONMENT
In the first half of 1996, the S&P 500 built upon last year's upward surge
returning 10.1%. Much like last year, the market was helped by good corporate
earnings, subdued inflation and favorably viewed corporate restructurings.
Unlike last year, however, interest rates rose as a result of several
stronger-than-expected economic reports. Most noteworthy was the surprisingly
strong employment report for February, which instantly changed investor
psychology from fear of a slowdown, to fear of accelerating growth. Large growth
stocks outperformed large value stocks for the period with the Russell 1000
Growth Index returning 12.1% vs. 7.5% for the Russell 1000 Value Index.
The Consumer Cyclical sector was the best performing sector, up 16.3%. Within
the sector, the retail and textile/apparel industries produced superior
performance, as consumers continued to spend in these areas, while the auto and
housing related industries produced slightly below market returns. Technology
was the second best performing sector, up 14.5%. Within the sector, returns were
disparate with the superior returns of a handful of large "elite" companies such
as Microsoft and Intel skewing the performance of a largely lackluster sector.
The Utility sector, up 0.4% for the period, was by far the worst performer. It
was hurt by rising interest rates and the passage of the Telecommunication
Deregulation Act of 1996, which created a lot of uncertainty as investors tried
to sort out the winners and losers.
INVESTMENT PERFORMANCE
STOCK MARKET RETURNS
with dividends reinvested
PERIODS ENDED JUNE 30, 1996
SIX MONTHS ONE YEAR
S&P 500 10.10% 26.00%
Returns by Economic Sector:
Energy 10.50 26.12
Utility 0.36 22.99
Technology 14.48 17.51
Finance 10.29 33.51
Industrial 11.72 22.85
Consumer Cyclical 16.26 17.79
Consumer Growth & Stable 10.71 32.42
Year-to-date, the VCA-2 account rose 11.1%, outperforming the S&P 500 which was
up 10.1%.
VCA-2 was helped by an overweighting in Industrial, as well as an underweighting
in Utilities, the poorest performing sector. These positives were offset to some
degree by poor relative performance in Technology and Finance holdings, the
latter due to a lack of money center banks and poor performing insurance
positions.
Significant purchases during the first six months of 1996 included several from
the Industrial sector, notably the chemical companies Uniroyal Chemical Corp.
and E.I. DuPont. Occidental Petroleum, an oil and gas company, was also a major
purchase during the period. Significant sales during the half included the
railroad holding company Chicago & Northwest, which was purchased by Union
Pacific, and Mead, whose price increase dictated some profit-taking. Consumer
Growth stocks such as ATM Manufacturer, Diebold Inc. and Caesars World, which
was acquired by ITT Corp., were also sold. In the Technology sector, National
Data was sold, as was Ply Gem Industries from the Consumer Cyclical sector and a
regional bank, Keycorp. In addition, Healthtrust, Inc. was acquired by the
healthcare service provider, Columbia HCA, increasing VCA-2's holdings in the
latter.
1
<PAGE>
INVESTMENT ACTIVITY
During the second quarter and year-to-date, VCA-2 reduced its weighting slightly
in the Consumer Growth & Stable sector and commensurably increased the
Technology weighting taking advantage of weakness there. In Consumer Growth &
Stable, sales were made in drug stocks as their values became less compelling
and in Community Health Systems, a hospital management company that received a
buyout bid. Offsetting these sales slightly were purchases of drug retailers
Eckerd and Thrifty Payless. Within Technology, purchases included IBM, Seagate
and several electronic equipment distributors.
Overall VCA-2 continues to be overweighted in Industrial and Financial stocks,
the former because of a projected continuation of moderate economic growth and
the latter because of valuations that are considered attractive, especially in
insurance stocks where the majority of the overweighting is located.
INVESTMENT OUTLOOK
The original forecast for 1996 was that the economy would grow, albeit
moderately, and inflation would remain under control. Within this environment it
was believed corporate profits would be solid, but not great, as the slow
economy weighted on earnings. In such an environment stock market gains were
anticipated to be modest.
The market started out the year strongly but recently has given up a lot of
those gains as interest rates have trended up and European weakness has been
added to U.S. sluggishness. This has led to extreme volatility in the market
overall and particular weakness in financial, technology and cyclically
sensitive stocks as some investors fear a recession. The opinion regarding a
slow growth environment with inflation and interest rates remaining relatively
stable has not changed, hence financial and industrial stocks, where the fund is
overweighted, should do better as concerns abate.
VCA-2
AVERAGE ANNUAL RETURNS
for Periods ended June 30, 1996
YTD ONE YEAR FIVE YEARS TEN YEARS
Unit Value(1) 11.13% 25.33% 17.85% 14.56%
With Max. Sales Charge(2) 7.64% 21.48% 16.55% 13.56%
Standard & Poor's 500(3) 10.10% 26.00% 15.71% 13.74%
Lipper Growth Average(4) 10.08% 22.20% 14.85% 12.21%
These returns represent past performance. Past performance cannot guarantee
comparable future results. Investment return and principal value will fluctuate
so that units, upon redemption, may be worth more or less than their original
cost.
(1) Unit Value performance is calculated based on the change in the
accumulation unit value and does not take into account the payment of a
sales charge at the time of purchase.
(2) With Maximum Sales Charge performance is based on the change in
accumulation unit values and reflects the maximum sales charge of 2.5% at
time of purchase and the impact of any account fees.
(3) Standard & Poor's 500 Index (S&P 500) is a capital weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily on the New York Stock Exchange. The S&P 500 is an unmanaged index
and includes reinvestment of dividends, but does not reflect payment of
transaction costs and expenses associated with an investment in VCA-2.
(4) Lipper Growth Average is an average of the total return performance
(calculated based on net asset value) of mutual funds with similar
objectives as calculated by Lipper Analytical Services, an independent
mutual fund ranking service.
2
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INVESTMENT OBJECTIVE
VCA-2 will invest primarily in common stocks selected with the objective of
long-term growth, taking into account both income and capital appreciation.
Investments will be made according to the standards of a prudent investor
concerned primarily with the preservation of capital and the long-term prospects
for its growth in relation to both the growth of the economy and the changing
value of the dollar. There is no assurance that this investment objective will
be attained. There is no guarantee that the amount available to a person for
whom purchase payments have been made will equal or exceed the total purchase
payments made on that person's behalf. The value of the investments held in
VCA-2 fluctuates daily and is subject to the risks of changing economic
conditions and risks inherent in the selection of investments necessary to meet
the Account's objective.
3
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CONDENSED FINANCIAL INFORMATION FOR VCA-2
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT
(For an Accumulation Unit outstanding throughout the period)
<TABLE>
<CAPTION>
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SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
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<S> <C> <C>
INVESTMENT INCOME ........................................................ $ .0992 $ .2000
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EXPENSES
For investment management fee ......................................... .0103 .0170
For assuming mortality and expense risks .............................. .0309 .0511
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NET INVESTMENT INCOME .................................................... .0580 .1319
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CAPITAL CHANGES
Net realized gain on investments ...................................... 1.0228 1.5228
Net unrealized appreciation of investments ............................ .6333 1.7558
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN ACCUMULATION UNIT VALUE .................................. 1.7141 3.4105
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ACCUMULATION UNIT VALUE
Beginning of period ................................................... 15.4037 11.9932
End of period ......................................................... $17.1178 $15.4037
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SUM OF AVERAGE RATIOS for the period of (a) charge
for investment management fee to net assets*, and
(b) charge for assuming mortality and expense risks to net assets*..... .2478% .4959%
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AVERAGE RATIO for the period of net investment
income to net assets .................................................. .3488% .9602%
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PORTFOLIO TURNOVER RATE .................................................. 18.94% 42.21%
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NUMBER OF ACCUMULATION UNITS OUTSTANDING
for Participants at end of period (000 omitted) ....................... 31,389 31,600
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</TABLE>
*These calculations exclude Prudential's equity in VCA-2.
The above table does not reflect the annual administration charge, which does
not affect the Accumulation Unit Value. This charge is made by reducing
Participants' Accumulation Accounts by a number of Accumulation Units equal in
value to the charge.
While both income and capital changes are shown above, the distinction between
these sources of change in VCA-2 is not particularly significant to
Participants. There is no distinction between income and realized and unrealized
gains and losses on investments in determining the amount of the Participant's
benefits and the taxes payable by the Participant on them.
4
<PAGE>
FINANCIAL STATEMENTS OF VCA-2
STATEMENT OF NET ASSETS (UNAUDITED) JUNE 30, 1996
COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
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AEROSPACE/DEFENSE (2.0%)
Gen Corp. 218,500 $ 3,304,813
General Motors Corp.
(Class 'H' Stock) 42,500 2,555,312
Litton Industries, Inc.+ 126,800 5,515,800
-----------
11,375,925
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AUTOS & TRUCKS (2.4%)
A.O. Smith Corp. 269,800 6,745,000
Custom Chrome+ 124,000 3,332,500
Lear Corp.+ 95,000 3,348,750
-----------
13,426,250
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CHEMICALS (5.8%)
Cytec Industries, Inc.+ 112,900 9,652,950
E.I. Dupont De Nemours & Co. 86,200 6,820,575
Imperial Chemical Industries
(ADRs) 50,000 2,456,250
Mississippi Chemical Corp. 255,000 5,100,000
Olin Corp. 60,000 5,355,000
W.R. Grace & Co. 49,800 3,529,575
-----------
32,914,350
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COMMUNICATIONS EQUIPMENT (0.6%)
Oak Industries, Inc.+ 117,800 3,489,825
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COMPUTER HARDWARE (1.9%)
International Business Machines 40,000 3,960,000
Lexmark International Group
(Class 'A' Stock)+ 146,000 2,938,250
Seagate Technology, Inc.+ 89,300 4,018,500
-----------
10,916,750
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CONSUMER SERVICES (2.1%)
Pittston Brinks Group 127,300 3,707,612
Whitman Corp. 340,000 8,202,500
-----------
11,910,112
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CONTAINERS & PACKAGING (2.4%)
ACX Technologies, Inc.+ 146,900 2,919,637
Alltrista Corp+ 256,200 6,084,750
U.S. Can Corp.+ 300,000 4,875,000
-----------
13,879,387
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DRUGS & MEDICAL SUPPLIES (2.6%)
Ciba-Geigy Ag-Spons (ADRs) 30,000 1,828,125
Gelman Sciences, Inc.+ 184,000 4,163,000
Rhone Poulenc Rorer 59,600 4,000,650
Zeneca Group PLC (ADRs) 75,000 5,043,750
-----------
15,035,525
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COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
- ----------------------------------------------------------------
ELECTRICAL EQUIPMENT (1.5%)
Belden, Inc. 180,900 $ 5,427,000
Littelfuse, Inc.+ 75,000 2,812,500
-----------
8,239,500
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ELECTRONICS (5.8%)
Anixter International+ 263,200 3,915,100
Marshall Industries+ 200,000 5,600,000
Methode Electronics, Inc. 545,000 9,265,000
Pioneer Standard Electronics 291,600 3,863,700
SGS-Thomson Microelec+ 120,400 4,319,350
Sterling Electronics+ 350,900 4,725,000
Wyle Electronics 39,500 1,308,437
-----------
32,996,587
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ENGINEERING & CONSTRUCTION (0.8%)
Giant Cement Holding, Inc.+ 367,400 4,638,425
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EXPLORATION & PRODUCTION (5.7%)
Cabot Oil & Gas Corp. 225,600 3,919,800
Enron Oil & Gas 149,100 4,156,162
Occidental Petroleum Corp. 188,200 4,657,950
Oryx Energy Co.+ 400,000 6,500,000
Parker & Parsley Petroleum Co. 150,000 4,162,500
Santa Fe Energy Resources+ 243,600 2,892,750
Seagull Energy Corp.+ 121,800 3,045,000
Vintage Petroleum, Inc. 118,600 3,024,300
-----------
32,358,462
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FINANCIAL SERVICES (4.1%)
American States Financial+ 70,500 1,515,750
Associates First Capital Co.+ 29,300 1,102,413
Dean Witter Discover & Co. 143,000 8,186,750
Financial Security Assurance
Holdings 156,400 4,281,450
Finova Group, Inc. 99,800 4,865,250
Travelers Group, Inc. 70,800 3,230,250
-----------
23,181,863
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FOOD/DRUG RETAIL (1.8%)
Eckerd Corp.+ 290,500 6,572,562
Thrifty Payless Holdings
(Class 'B' Stock)+ 202,100 3,486,225
-----------
10,058,787
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HOSPITAL MANAGEMENT (1.4%)
Tenet Healthcare+ 381,200 8,148,150
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5
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FINANCIAL STATEMENTS OF VCA-2
STATEMENT OF NET ASSETS (UNAUDITED) JUNE 30, 1996
COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
- ----------------------------------------------------------------
HOUSING RELATED (2.7%)
Furniture Brands International,
Inc.+ 450,000 $ 4,950,000
Mueller Industries, Inc.+ 110,000 4,565,000
Owens Corning Fiberglass
Corp. 135,300 5,817,900
-----------
15,332,900
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INSURANCE (8.6%)
Allmerica Financial Corp. 50,000 1,487,500
Equitable of Iowa Companies 240,000 8,520,000
ITT Hartford Group, Inc. 48,500 2,582,625
NAC Re Corp. 149,800 5,018,300
National Re Corp. 129,100 4,873,525
Reinsurance Group of
America 240,000 9,060,000
TIG Holdings, Inc. 150,000 4,350,000
Trenwick Group, Inc. 78,600 3,930,000
Unionamerica Holdings, PLC 300,000 4,537,500
W.R. Berkley Corp. 108,000 4,546,575
-----------
48,906,025
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MACHINERY (4.3%)
Allied Products 201,300 5,711,887
Applied Power Co.
(Class 'A' Stock) 307,600 8,612,800
Cincinnati Milacron, Inc. 77,200 1,852,800
Hardinge, Inc. 97,400 3,092,450
Harnischfeger Industries 157,800 5,246,850
-----------
24,516,787
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COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
- ----------------------------------------------------------------
MEDIA (9.4%)
Central Newspapers
(Class 'A' Stock) 60,000 $ 2,250,000
Century Communications
(Class 'A' Stock)+ 332,000 2,822,000
Comcast Corp.
(Class 'A' Stock) 180,000 3,307,500
Comcast Corp. Special
(Class 'A' Stock) 90,000 1,665,000
Cox Communication
(Class 'A' Stock)+ 173,687 3,755,981
E.W. Scripps Co.
(Class 'A' Stock) 100,000 4,662,500
Harcourt General, Inc. 137,100 6,855,000
Hollinger International
(Class 'A' Stock) 240,700 2,737,962
Knight Ridder, Inc. 35,800 2,595,500
Lee Enterprises 110,000 2,598,750
Pulitzer Publishing Co. 40,000 2,370,000
Tele-Communications, Inc.
TCI Group (Series A)+ 240,000 4,350,000
Tele-Communications, Inc.
Liberty Media Group
(Series A)+ 60,000 1,590,000
Time Warner, Inc. 180,000 7,065,000
Times Mirror Co.
(Class 'A' Stock) 60,000 2,610,000
United International Holdings
(Class 'A' Stock)+ 161,200 2,216,500
-----------
53,451,693
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MISCELLANEOUS-INDUSTRIAL (14.3%)
Allied Signal, Inc. 47,300 2,702,013
Ametek, Inc. 160,000 3,480,000
Coltec Industries, Inc.+ 176,600 2,516,550
Crane Co. 103,800 4,255,800
Danaher Corp. 125,000 5,437,500
Donaldson, Inc. 220,000 5,665,000
Figgie International, Inc.
(Class 'A' Stock)+ 360,000 5,445,000
Global Industrial Technologies+ 375,700 6,011,200
Greenfields Industries, Inc. 200,000 6,600,000
Idex Corp. 130,000 4,940,000
Jason, Inc.+ 277,300 2,322,388
Lydall, Inc.+ 161,400 3,550,800
Mark IV Industries, Inc. 248,850 5,630,231
Pentair, Inc. 196,500 5,895,000
Regal Beloit Corp. 218,600 4,317,350
United Dominion Industries 232,400 5,345,200
Wolverine Tube, Inc.+ 210,000 7,350,000
-----------
81,464,032
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6
<PAGE>
FINANCIAL STATEMENTS OF VCA-2
STATEMENT OF NET ASSETS (UNAUDITED) JUNE 30, 1996
COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
- ----------------------------------------------------------------
NON-FERROUS METALS (1.9%)
The Carbide/Graphite Group+ 393,600 $ 7,380,000
Ucar International, Inc.+ 80,000 3,330,000
------------
10,710,000
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RAILROADS (3.8%)
Canadian Pacific Ltd. 131,400 2,890,800
Greenbrier Companies, Inc. 375,000 5,203,125
Illinois Central Corp. 170,000 4,823,750
Union Pacific Corp. 80,700 5,638,913
Varlen Corp. 158,675 3,332,175
------------
21,888,763
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REGIONAL BANKS (5.1%)
Bank of Boston Corp. 77,700 3,846,150
Cullen Frost Bankers, Inc. 220,000 6,105,000
First Bank System, Inc. 85,510 4,959,580
First Chicago NBD Corp. 108,180 4,232,543
Norwest Corp. 280,000 9,765,000
------------
28,908,273
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RETAIL (0.6%)
Haverty Furniture, Inc. 338,400 3,468,600
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SAVINGS & LOANS (0.2%)
Washington Mutual, Inc. 30,700 917,163
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SPECIALTY CHEMICALS (2.2%)
Cambrex Corp. 14,700 751,538
Ferro Corp. 227,400 6,026,100
Lilly Industries, Inc. 107,600 1,829,200
OM Group, Inc. 105,000 4,121,250
------------
12,728,088
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TELECOMMUNICATION SERVICES (3.2%)
AT&T Corp. 71,400 4,426,800
Century Telephone
Enterprises, Inc. 70,000 2,231,250
Frontier Corporation 200,000 6,125,000
MCI Communications Corp. 217,700 5,578,563
------------
18,361,613
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TEXTILES/APPAREL (1.3%)
Fieldcrest Cannon, Inc.+ 185,900 3,648,288
Paxar Corp.+ 200,875 3,515,312
------------
7,163,600
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COMMON STOCK MARKET
INVESTMENTS [NOTE 2] SHARES VALUE
- ----------------------------------------------------------------
TRUCKING/SHIPPING (0.5%)
Pittston Burlington Group 142,450 $ 3,080,481
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TOTAL COMMON STOCK INVESTMENTS (99.0%)
(Cost: $430,291,261) $563,467,916
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SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- ----------------------------------------------------------------
Canadian Imperial Bank of
Commerce 5.625%,
Euro Time Deposit,
Due 07/01/96 $ 3,188,000 $ 3,188,000
- ----------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (0.6%)
(Cost: $3,188,000) 3,188,000
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TOTAL INVESTMENTS (99.6%)
(Cost: $433,479,261) $566,655,916
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OTHER ASSETS, LESS LIABILITIES
Cash 698,740
Dividends and Interest Receivable 522,418
Receivable for Investments Sold 3,988,364
Payable for Investments Purchased (2,564,305)
Pending Transfers (217,224)
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TOTAL OTHER ASSETS, LESS
LIABILITIES (0.4%) 2,427,993
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NET ASSETS (100%) $569,083,909
- ----------------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
(other than Annuitants)
31,389,264 Accumulation Units at an
Accumulation Unit Value of
$17.1178 (rounded) $537,315,931
Equity of Annuitants 26,468,821
Equity of The Prudential Insurance
Company of America 5,299,157
- ----------------------------------------------------------------
$569,083,909
================================================================
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipts
PLC Public Limited Company
+Non-income producing securities
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
FINANCIAL STATEMENTS OF VCA-2
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Six Months Ended June 30 1996
- -------------------------------------------------------------------------------------------
<S> <C>
Investment Income [Note 2]
Dividends $ 3,124,610
Interest 161,310
- -------------------------------------------------------------------------------------------
3,285,920
Expenses [Note 3]
Fees Charged to Participants for Investment Management Services 339,240
Fees Charged to Participants (other than Annuitants) for Assuming
Mortality and Expense Risks 969,356
- -------------------------------------------------------------------------------------------
Investment Income--Net 1,977,324
- -------------------------------------------------------------------------------------------
Realized and Unrealized Gain on Investments--Net
Realized Gain on Investments--Net 30,361,836
Unrealized Increase in Value of Investments--Net 25,074,016
- -------------------------------------------------------------------------------------------
Net Gain on Investments 55,435,852
- -------------------------------------------------------------------------------------------
Net Increase In Net Assets Resulting from Operations $57,413,176
===========================================================================================
</TABLE>
Statements of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Investment Income--Net $ 1,977,324 $ 4,691,807
Realized Gain on Investments--Net 30,361,836 51,878,963
Unrealized Increase
In Value of Investments--Net 25,074,016 59,711,120
- ----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 57,413,176 116,281,890
- ----------------------------------------------------------------------------------------------------------
Capital Transactions
Purchase Payments and Transfers In [Note 3] 13,265,152 27,724,309
Withdrawals and Transfers Out (14,808,441) (41,532,255)
Annual Administration Charges Deducted from
Participants' Accumulation Accounts [Note 3] 3,705 (34,067)
Mortality and Expense Risk Charges Deducted
from Annuitants' Accounts [Note 3] (48,364) (88,043)
Variable Annuity Payments (1,686,079) (3,045,807)
- ----------------------------------------------------------------------------------------------------------
Net Decrease In Net Assets
Resulting from Capital Transactions (3,274,027) (16,975,863)
- ----------------------------------------------------------------------------------------------------------
Net Decrease In Net Assets
Resulting from Surplus Transfers [Note 6] (227,853) (12,650)
- ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 53,911,296 99,293,377
Net Assets
Beginning of Period 515,172,613 415,879,236
- ----------------------------------------------------------------------------------------------------------
End of Period $569,083,909 $515,172,613
==========================================================================================================
</TABLE>
See Notes to Financial Statements
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
Six Months Ended June 30, 1996 and Year Ended December 31, 1995
- --------------------------------------------------------------------------------
NOTE 1: General
The Prudential Variable Contract Account-2 (VCA-2 or the Account)
was established by The Prudential Insurance Company of America
(Prudential) under the laws of the State of New Jersey and is
registered as an open-end, diversified management investment
company under the Investment Company Act of 1940, as amended.
VCA-2 has been designed for use by public school systems and
certain tax-exempt organizations to provide for the purchase and
payment of tax-deferred variable annuities. Its investments are
composed primarily of common stocks. All contractual and other
obligations arising under contracts participating in VCA-2 are
general corporate obligations of Prudential, although
Participants' payments from the Account will depend upon the
investment experience of the Account.
NOTE 2: Summary of Significant Accounting Policies
A. Securities Valuation
Equity Securities
Any security for which the primary market is on an exchange is
generally valued at the last sale price on such exchange as of
the close of the New York Stock Exchange (which is currently 4:00
p.m. Eastern time) or, in the absence of recorded sales, at the
mean between the most recently quoted bid and asked prices.
NASDAQ National Market System equity securities are valued at the
last sale price or, if there was no sale on such day, at the mean
between the most recently quoted bid and asked prices. Other
over-the-counter equity securities are valued at the mean between
the most recently quoted bid and asked prices. Portfolio
securities for which market quotations are not readily available
will be valued at fair value as determined in good faith under
the direction of the Account's Committee.
Fixed Income Securities
Fixed income securities will be valued utilizing an independent
pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers
such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific
securities in arriving at securities valuations. Convertible debt
securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market
is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by
an independent pricing service.
Short-Term Investments
Short-term investments having maturities of sixty days or less
are valued at amortized cost, which approximates market value.
Amortized cost is computed using the cost on the date of
purchase, adjusted for constant accrual of discount or
amortization of premium to maturity.
B. Income Recognition
Income and realized and unrealized gains and losses on
investments are allocated to the Participants (including
Annuitants) and Prudential on a daily basis in proportion to
their respective equities in VCA-2. Realized gains and losses
from equity transactions and convertible bond transactions are
determined and accounted for on the basis of identified cost.
Dividend income is recorded on the ex-dividend date at the
declared value. Interest income is accrued daily. Equity and
long-term bond transactions are recorded on the first business
day following the trade date, except that transactions on the
last business day of the year are recorded on that date.
Short-term security transactions are recorded on trade date.
9
<PAGE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
Six Months Ended June 30, 1996 and Year Ended December 31, 1995
- -------------------------------------------------------------------------------
Effective January 1, 1996, VCA-2 changed its method of accounting
for realized gains and losses on investments from an average cost
basis to an identified cost basis. The net cumulative effect of
this accounting change for fiscal year 1995 is as follows:
--------------------------------------------------------------------------------------------------------------------
<C> <C>
Year ended December 31, 1995, as reported:
Realized Gain on Investments--
Net Before Cumulative Effect due to accounting change to identified cost: $ 51,878,963
Unrealized Increase in Value of Investments--
Net Before Cumulative Effect due to accounting change to identified cost: 59,711,120
--------------------------------------------------------------------------------------------------------------------
$111,590,083
====================================================================================================================
Year ended December 31, 1995, after cumulative effect of change:
Realized Gain on Investments--
Net After Cumulative Effect due to accounting change to identified cost: $ 48,033,963
Unrealized Increase in Value of Investments--
Net After Cumulative Effect due to accounting change to identified cost: 63,556,120
--------------------------------------------------------------------------------------------------------------------
$111,590,083
====================================================================================================================
</TABLE>
C. Taxes
The operations of VCA-2 are part of, and are taxed with, the
operations of Prudential. Under the current provisions of the
Internal Revenue Code, Prudential does not expect to incur
federal income taxes on earnings of VCA-2 to the extent the
earnings are credited under the Contracts. As a result, the Unit
Value of VCA-2 has not been reduced by federal income taxes.
D. Equity of Annuitants
Reserves are computed for purchased annuities using the
Prudential 1950 Group Annuity Valuation (GAV) Table, adjusted,
and a valuation interest rate related to the Assumed Investment
Result (AIR). The valuation interest rate is equal to the AIR
less .5% which is a charge defined in Note 3A. The AIRs are
selected by each Contract-holder and are described in the
prospectus.
NOTE 3: Charges
A. The expenses charged to VCA-2 consist of the following
contract charges which are paid to Prudential:
(i) An investment management fee is calculated daily at an
effective annual rate of 0.125% of the current value of
the accounts of Participants (other than Annuitants).
An equivalent charge is made monthly in determining the
amount of Annuitants' payments.
(ii) A daily charge for assuming mortality and expense risks
is calculated at an effective annual rate of 0.375% of
the current value of the accounts of Participants
(other than Annuitants). A one-time equivalent charge
is deducted when the initial Annuity Units for
Annuitants are determined. Thus, the first and
subsequent annuity payments reflect the reduced number
of Annuity Units.
B. An annual administration charge is deducted from the
accumulation account of each Participant at the time of
withdrawal of the value of all of the Participant's accounts
or at the end of the accounting year by cancelling
Accumulation Units. This deduction may be made from a
fixed-dollar annuity contract if the Participant is enrolled
under such a contract. The charge is not greater than $30
annually.
C. A deduction of 2.5% for sales and other marketing expenses
is made from each Participant's purchase payments.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
Six Months Ended June 30, 1996 and Year Ended December 31, 1995
- --------------------------------------------------------------------------------
NOTE 4: Purchases and Sales of Portfolio Securities
For the six months ended June 30, 1996, excluding short-term
investments and U.S. government securities, the aggregate cost of
purchases and the proceeds from sales of securities were
$104,183,238 and $107,480,446 respectively.
NOTE 5: Unit Transactions
The number of Accumulation Units issued and redeemed for the six
months ended June 30, 1996 and the year ended December 31, 1995
is as follows:
1996 1995
-----------------------------------------------------------
Units issued 1,045,993 2,022,197
-----------------------------------------------------------
Units redeemed 1,257,165 3,045,441
-----------------------------------------------------------
NOTE 6: Net Decrease in Net Assets Resulting from Surplus Transfers
The decrease in net assets resulting from surplus transfers
represents the net withdrawals from the Equity of Prudential from
VCA-2.
NOTE 7: Related Party Transactions
For the six months ended June 30, 1996, Prudential Securities
Incorporated, an indirect, wholly-owned subsidiary of Prudential,
earned $22,047 in brokerage commissions from portfolio
transactions executed on behalf of VCA-2.
NOTE 8: Participant Loans
Participant loan initiations are not permitted in VCA-2. However,
participants who initiated loans in other funds are permitted to
direct loan repayments into VCA-2.
For the six months ended June 30, 1996 and for the year ended
December 31, 1995, $3,012 and $1,311 of participant loan
principal has been paid to VCA-2, respectively.
- --------------------------------------------------------------------------------
This report is for the information of persons participating in
The Prudential Variable Contract Account-2 (VCA-2, Long Term
Growth Account, or the Account). It is not authorized for
distribution to prospective investors unless preceded or
accompanied by a current prospectus for VCA-2. Prudential
Retirement Services, Inc., Distributor, is an affiliate of The
Prudential Insurance Company of America. VCA-2 is a group annuity
insurance product issued by The Prudential Insurance Company of
America, Newark, NJ.
11
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The Prudential Insurance Company of America BULK RATE
30 Scranton Office Park U.S. POSTAGE
Moosic, Pennsylvania 18507-1789 PAID
(800) 458-6333 PERMIT No. 2145
Newark, N.J.
ADDRESS CORRECTION REQUESTED
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[Prudential Logo] [Union Label]
96091-8/96
