<PAGE>
Financial Highlights for VCA-2
Income and Capital Changes Per Accumulation Unit*
(For an Accumulation Unit outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
1995 1994 1993
<S> <C> <C>
<C> <C> <C>
Investment Income $ .2633 $ .2056
$ .2000 $ .1896 $ .2823
Expenses
For investment management fee .0284 .0215
.0170 .0151 .0138
For assuming mortality and
expense risks .0850 .0646
.0511 .0453 .0412
Net Investment Income .1499 .1195
.1319 .1292 .2273
Capital Changes
Net realized gain on investments 4.7245 2.3368
1.5228 1.0028 1.1147
Net unrealized appreciation
(depreciation) of investments 1.3843 1.7641
1.7558 (1.2955) .9803
Net Increase (Decrease) in
Accumulation Unit Value 6.2587 4.2204
3.4105 (.1635) 2.3223
Accumulation Unit Value
Beginning of year 19.6241 15.4037
11.9932 12.1567 9.8344
End of year $25.8828 $19.6241
$15.4037 $11.9932 $12.1567
Ratio Of Expenses To
Average Net Assets** .50% .50%
.50% .50% .50%
Ratio Of Net Investment Income To
Average Net Assets** .70% .69%
.96% 1.07% 2.06%
Portfolio Turnover Rate 47% 53%
42% 37% 47%
Average Commission Rate Per Share $ .0548 $ .0543
N/A N/A N/A
Number of Accumulation Units
Outstanding
for Participants at end of year
(000 omitted) 28,643 30,548
31,600 32,624 32,968
</TABLE>
*Calculated by accumulating the actual per unit amounts
daily.
**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.
See Notes to Financial Statements
1
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31,
1997
<TABLE>
<CAPTION>
Common Stock Value
Investments Shares [Note 2A]
<S> <C> <C>
Aerospace/Defense - 2.8%
Doncasters PLC - (ADR)
(United Kingdom) D 185,700
$03,922,912
Gen Corp. 375,000
9,375,000
Litton Industries, Inc.D 116,600
6,704,500
Primex Technologies 61,100
2,062,125
----------
- -
22,064,537
Autos & Trucks - 2.3%
Borg-Warner Automotive, Inc. 192,700
10,020,400
Lear Corp.D 90,300
4,289,250
Tower Automotive, Inc.D 94,400
3,970,700
---------
- -
18,280,350
Chemicals - 7.5%
Agrium, Inc. 618,300
7,535,531
Boc Group PLC (ADR)
(United Kingdom) 127,600
4,202,825
Chemfirst, Inc.D 214,400
6,056,800
Cytec Industries, Inc.D 118,700
5,571,481
Dow Chemical Co. 56,900
5,775,350
Imperial Chemical Industries
(ADR) (United Kingdom) 62,900
4,084,569
Mississippi Chemical Corp. 420,714
7,678,030
Olin Corp. 132,200
6,196,875
Solutia, Inc. 182,700
4,875,806
Spartech Corp. 189,800
2,870,725
Union Carbide 97,600
4,190,700
---------
- -
59,038,692
Computer Related - 0.3%
Digital Equipment Corp. D 62,600
2,316,200
Consumer Services - 3.0%
Archer-Daniels-Midland Co. 112,135
2,431,928
Hilton Hotels Corp.D 125,400
3,730,650
Ogden Corp. 163,900
4,619,931
RFS Hotel Investors, Inc.D 204,200
4,071,237
360 Communications Co. D 192,800
3,892,150
Whitman Corp. 169,000
4,404,562
---------
- -
23,150,458
Containers and Packaging - 2.8%
ACX Technologies, Inc.D 135,100
3,301,506
Alltrista Corp.D 247,600
7,025,650
AptarGroup, Inc. 91,000
$5,050,500
U.S. Can Corp.D 380,600 6,422,625
---------
- -
21,800,281
Electrical Equipment - 0.7%
Belden, Inc. 148,900
5,248,725
Electronics - 3.6%
Anixter International, Inc.D 193,000
3,184,500
Dallas Semiconductor Corp. 182,400
7,432,800
Marshall IndustriesD 224,300
6,729,000
Methode Electronics, Inc.
(Class "A" Stock) 164,100
2,666,625
Pioneer Standard
Electronics, Inc. 528,800
8,064,200
---------
- -
28,077,125
Enginering & Construction - 4.2%
American Standard
Companies, Inc. D 113,500
4,348,469
Apogee Enterprises, Inc.D 51,500
611,562
Cameron Ashley Building
Products D 172,600
2,891,050
Giant Cement Holding, Inc.D 400,000
9,250,000
Gradall Industries, Inc.D 373,500
6,162,750
Texas Industries, Inc. 215,500
9,697,500
---------
- -
32,961,331
Exploration & Production - 4.6%
Cabot Oil & Gas Corp. 216,600
4,210,162
Comstock Resources, Inc. D 233,000
2,781,437
Occidental Petroleum Corp. 231,400
6,782,912
Oryx Energy Co.D 335,600
8,557,800
Pioneer Natural Resources Co. 271,800
7,865,212
Seagull Energy Corp.D 61,200
1,262,250
Vintage Petroleum, Inc. 249,400
4,738,600
---------
- -
36,198,373
Financial Services - 2.5%
Financial Security Assurance
Holdings Corp. 195,500
9,432,875
Morgan Stanley Dean Witter
Discover & Co. 12,100
715,412
Travelers Group, Inc. 176,599
9,514,271
---------
- -
19,662,558
</TABLE>
See Notes to Financial Statements
2
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31,
1997
<TABLE>
<CAPTION>
Common Stock Value
Investments Shares [Note 2A]
<S> <C> <C>
Healthcare - 2.1%
Columbia HCA Healthcare 146,500 $
4,340,062
Mallinckrodt, Inc. 106,300
4,039,400
Tenet Healthcare Corp.D 255,700
8,470,063
----------
- -
16,849,525
Housing Related - 2.1%
Furniture Brands
International, Inc.D 331,000
6,785,500
Owens Corning Fiberglass Corp. 124,300
4,241,738
Triangle Pacific Corp.D 152,800
5,176,100
---------
- -
16,203,338
Insurance - 9.2%
Allied Group, Inc. 233,925
6,696,103
Lincoln National Corp. 136,200
10,640,625
Loews Corp. 35,400
3,756,825
MMI Companies, Inc. 270,112
6,786,554
NAC Re Corp. 258,900
12,637,556
Reinsurance Group of America 172,950
7,361,184
Safeco Corp.D 86,500
4,216,875
Trenwick Group, Inc. 250,000
9,406,250
W.R. Berkley Corp. 247,500
10,859,063
---------
- -
72,361,035
Leisure - 2.4%
Darden Restaurants, Inc. 638,200
7,977,500
Servico, Inc.D 320,600
5,410,125
Sonic Corp.D 185,000
5,203,125
---------
- -
18,590,750
Machinery - 5.8%
Allied Products Corp. 341,250
8,190,000
Applied Power Inc.
(Class "A" Stock) 110,400
7,617,600
Columbus McKinnon Corp. 224,900
5,453,825
Denison International, PLC -
(ADR) (United Kingdom)D 136,200
2,349,450
Hardinge, Inc. 198,800
7,405,300
Harnischfeger Industries, Inc. 270,200
9,541,438
Ingersoll-Rand Co.D 113,500
4,596,750
---------
- -
45,154,363
Media - 9.2%
Century Communications Corp.
(Class "A" Stock)D 950,000
9,262,500
Comcast Corp.
(Class "A" Stock) 182,600
5,820,375
Comcast Corp.
(Class "A" Stock) Special 318,626
$10,056,633
Cox Communication, Inc.
(Class "A" Stock)D 145,587
5,832,579
Harcourt General, Inc. 116,000
6,351,000
Tele-Communications, Inc.
Liberty Media Group
(Series A)D 190,300
6,898,375
Time Warner, Inc. 117,400
7,278,800
U.S. West Media GroupD 497,300
14,359,538
Viacom, Inc.
(Class B Stock) D 150,000
6,215,625
---------
- -
72,075,425
Metals - 3.9%
The Carbide/Graphite
Group, Inc.D 407,400
13,749,750
Cleveland Cliffs, Inc.D 102,000
4,672,875
Reliance Steel and Aluminum 210,000
6,247,500
UCAR International, Inc.D 153,600
6,134,400
---------
- -
30,804,525
Miscellaneous-Industrial - 11.5%
Clarcor, Inc. 185,300
5,489,513
Coltec Industries, Inc.D 294,200
6,821,763
Crane Co. 149,800
6,497,575
Flowserve Corp. 232,971
6,508,627
Global Industrial
Technologies, Inc.D 477,000
8,079,188
Harsco Corp. 101,300
4,368,563
Idex Corp. 102,600
3,578,175
Mark IV Industries, Inc. 305,087
6,673,778
Pentair, Inc. 125,400
4,506,563
PPG Industries, Inc. 117,800
6,729,325
Regal Beloit Corp. 181,100
5,353,769
United Dominion Industries, Ltd. 398,100
10,076,906
Varian Associates, Inc. 83,800
4,237,138
Wolverine Tube, Inc.D 373,800
11,587,800
---------
- -
90,508,683
Paper Products - 1.3%
Boise Cascade Corp. 106,400
3,218,600
Georgia Pacific Corp.
(Georgia - PAC Group) 6,700
407,025
Georgia Pacific Corp.
(Timber - Group) D 6,700
152,006
International Paper Co. 90,400
3,898,500
Louisiana Pacific Corp. 151,900
2,886,100
---------
- -
10,562,231
</TABLE>
See Notes to Financial Statements
3
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31,
1997
<TABLE>
<CAPTION>
Common Stock Value
Investments Shares [Note 2A]
<S> <C> <C>
Railroads - 4.2%
Burlington Northern Santa Fe 79,700 $
7,407,119
CSX Corp. 92,400
4,989,600
Greenbrier Companies, Inc. 254,100
4,399,106
Illinois Central Corp. 193,500
6,591,094
Union Pacific Corp. 67,200
4,195,800
Varlen Corp. 213,683
5,238,555
--------
- ---
32,821,274
Regional Banks - 3.7%
Banc One Corp. 72,800
3,953,950
First Chicago NBD Corp. 99,480
8,306,580
First Commerce Corporation 6,300
423,675
Norwest Corp. 311,800
12,043,275
PNC Bank Corp. 69,000
3,937,313
-------
- ---
28,664,793
Retail - 3.9%
BJ's Wholesale Club, Inc. D 139,000
4,361,125
Food Lion, Inc.
(Class "A" Stock) 410,900
3,466,969
Food Lion, Inc.
(Class "B" Stock) 137,500
1,134,375
Haverty Furniture, Inc. 600,000
8,100,000
The Limited, Inc. 209,200
5,334,600
Officemax, Inc.D 212,400
3,026,700
Toys R UsD 156,700
4,926,256
-------
- ---
30,350,025
Specialty Chemicals - 3.6%
Cambrex Corp. 148,500
6,831,000
Ferro Corp. 271,500
6,600,844
French Fragances, Inc. D 400,000
3,650,000
Great Lakes Chemical, Corp. 82,100
3,684,238
Lilly Industries, Inc. 102,300
2,109,938
OM Group, Inc. 150,000
5,493,750
-------
- ---
28,369,770
Trucking/Shipping - 0.8%
Interpool, Inc. 199,400
2,953,613
Pittston Burlington Group 123,400
3,239,250
-------
- ---
6,192,863
Total Common Stocks Investment - 98.0%
(Cost: $554,595,006)
$768,307,230
Short-Term Investment -1.9% Principal
Amount
Repurchase Agreement - 1.9%
J.P. Morgan Securities, Inc., 5.74%
Due 1/02/98, Amount
Due-$15,075,805 (collaterized
by $15,414,957, U.S.Treasury
Bonds, 13.75%, Due 8/15/04)
(Cost $15,071,000) $15,071,000
15,071,000
Total Investments - 99.9%
(Cost $569,666,006)
783,378,230
Other Assets, Less Liabilities
Cash
832
Dividends and Interest Receivable
717,099
Receivable for Investments Sold
4,230,876
Payable for Pending
Capital Transactions
(1,963,601)
Payable for Investments Purchased
(2,509,980)
Total Other Assets
Less Liabilities - 0.1%
475,226
Net Assets - 100%
$783,853,456
Net Assets, representing:
Equity of Participants
(other than Annuitants)
28,643,154 Accumulation Units at an
Accumulation Unit Value of $25.8828
$741,364,935
Equity of Annuitants
36,178,643
Equity of Prudential Insurance
Company of America
6,309,878
$783,853,456
</TABLE>
The following abbreviations are used in portfolio
descriptions:
ADR - American Depository Receipts
PLC - Public Limited Company
DNon-income producing Security
See Notes to Financial Statements
4
<PAGE>
Financial Statements of VCA-2
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
<S> <C>
Investment Income [Note 2B]
Dividends $
6,840,490
Interest
1,395,390
Total Income
8,235,880
Expenses [Note 3]
Fees Charged to Participants and Annuitants
for Investment Management Services
868,606
Fees Charged to Participants (other than
Annuitants) for Assuming Mortality and
Expense Risks
2,482,789
Total Expenses
3,351,395
Investment Income - Net
4,884,485
Realized and Unrealized Gain on Investments -
Net [Note 2B]
Realized Gain on Investments - Net
147,369,906
Increase in Unrealized Appreciation on
Investments - Net
43,649,467
Net Gain on Investments
191,019,373
Net Increase In Net Assets Resulting
from Operations
$195,903,858
Statements of Changes in Net Assets
Year Ended December 31, 1997
December 31, 1996
Operations
Investment Income - Net $ 4,884,485
$ 4,143,434
Realized Gain on Investments -
Net [Note 2B] 147,369,906
77,378,955
Increase In Unrealized
Appreciation on Investments -
Net [Note 2B] 43,649,467
61,960,118
Net Increase in Net Assets
Resulting from Operations 195,903,858
143,482,507
Capital Transactions [Notes 3 & 5]
Purchase Payments and Transfers In 37,581,652
34,187,009
Withdrawals and Transfers Out (80,261,096)
(54,140,871)
Annual Administration Charges
Deducted from
Participants' Accumulation Accounts (28,266)
(30,477)
Mortality and Expense Risk
Charges Deducted
from Annuitants' Accounts (123,028)
(99,600)
Variable Annuity Payments (4,174,661)
(3,459,550)
Net Decrease In Net Assets
Resulting from Capital
Transactions (47,005,399)
(23,543,489)
Net Increase/Decrease In Net
Assets Resulting from Surplus
Transfers [Note 6] 78,656
(235,290)
Total Increase in Net Assets 148,977,115
119,703,728
Net Assets
Beginning of Year 634,876,341
515,173,613
End of Year $783,853,456
$634,876,341
</TABLE>
See Notes to Financial Statements
5
<PAGE>
Notes to Financial Statements of VCA-2
NOTE 1: General
The Prudential Variable Contract Account-2 (VCA-2
or the Account) was
established on January 9, 1968 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 (Contracts) are general
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. Securitis 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 NYSE (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 Pricing
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. Securities Transactions and Investment Income
Securities transactions are recorded on the trade
date. Realized gains
and losses on sales of securities are calculated on
the identified
cost basis. Dividend income is recorded on the ex-
dividend date and
interest income is recorded on the accrual basis.
Income and realized
and unrealized gains and losses are allocated to the
Participants and
Prudential on a daily basis in proportion to their
respective
ownership in VCA-2. Expenses are recorded on the
accrual basis which
may require the use of certain estimates by
management.
6
<PAGE>
Notes to Financial Statements of VCA-2
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, as
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. Prudential acts as investment manager for VCA-2
under an agreement
for Investment Management Services. 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 and Prudential).
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 and Prudential). An equivalent
charge is made
monthly in determining the amount of
Annuitants' payments.
B. An annual administration charge of not more than
$30 annually, is
deducted from the accumulation account of
certain Participants
either time of withdrawal of the value of the
entire Participant's
account or at the end of the accounting year by
canceling
Accumulation Units. This deduction may be made
from a fixed-dollar
annuity contract if the Participant is enrolled
under such a
contract.
C. A charge of 2.5% for sales a*nd other marketing
expenses is made
from certain Participant's purchase payments.
For the year ended
December 31, 1997, Prudential has advised the
account it has
received $9,628 for such charges.
NOTE 4: Purchases and Sales of Portfolio Securities
For the year ended December 31, 1997, the aggregate
cost of purchases
and the proceeds from sales of securities, excluding
short-term
investments, were $333,425,286 and $373,986,242
respectively.
7
<PAGE>
Notes to Financial Statements of VCA-2
NOTE 5: Unit Transactions
The number of Accumulation Units issued and redeemed
for the years
ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Units issued 4,486,054 4,133,210
Units redeemed 6,391,015 5,185,531
</TABLE>
NOTE 6: Net Increase/Decrease in Net Assets Resulting from
Surplus Transfers
The increase/decrease in net assets resulting from
surplus transfers
represents the net additions/ reductions from the
equity of Prudential
from VCA-2.
NOTE 7: Related Party Transactions
For the year ended December 31, 1997, Prudential
Securities
Incorporated, an indirect, wholly owned subsidiary
of Prudential,
earned $17,671 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 accounts
are permitted to
direct loan repayments into VCA-2.
For the years ended December 31, 1997 and 1996,
$18,529 and $36,354
of participant loan principal and interest 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
Investment
Management Services LLC, 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.
8
<PAGE>
Report of Independent Accountants
To the Committee and Participants
of The Prudential Variable Contract Account - 2
of The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets,
and the related
statements of operations and of changes in net assets and
the financial
highlights present fairly, in all material respects, the
financial position of
The Prudential Variable Contract Account - 2 of The
Prudential Insurance
Company of America (the "Account") at December 31, 1997, the
results of its
operations for the year then ended and the changes in its
net assets and the
financial highlights for each of the two years in the period
then ended, in
conformity with generally accepted accounting principles.
These financial
statements and financial highlights (hereafter referred to
as "financial
statements") are the responsibility of the Account'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 securities at December 31, 1997 by
correspondence with the
custodian and brokers and the application of alternative
auditing procedures
where confirmations from brokers were not received, provide
a reasonable basis
for the opinion expressed above. The financial highlights
for each of the three
years in the period ended December 31, 1995 were audited by
other independent
accountants whose report thereon dated February 15, 1996
expressed an
unqualified opinion on those financial highlights.
Price Waterhouse LLP
New York, New York
February 18, 1998
