Prudential's
Long Term Growth Account
[PHOTO]
Annual Report
to Participants
December 31, 1997
[LOGO] Prudential
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
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Committed to providing superior investment, administrative and recordkeeping
services to institutional clients.
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[LOGO]
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Our New Look.
You'll notice that we've made a few changes in your Annual Report this year.
We've redesigned and expanded the Report so we could more fully discuss the
performance, strategy and outlook of the Long Term Growth Account. Our goal is
to provide you with a clear, concise and candid analysis of activity. We trust
that you will find this Report useful.
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This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus for VCA-2. It is for the
information of persons participating in The Prudential Variable Contract
Account-2 (VCA-2, Long Term Growth Account, or the Account). VCA-2 is
distributed by Prudential Investment Management Services LLC, 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.
<PAGE>
Year Ended December 31, 1997
=================================
"We're quite pleased with the
return on stocks in the last five
years, but we don't think this
divergence from historical norms
can continue indefinitely"
Letter
To Participants
Dear Participant:
We are pleased to provide our Annual Report to you on the investment performance
of the Long Term Growth Account.
It has been another exceptional year. For the third year in a row (and the first
time in history), stock prices have risen by more than 20%, driven by
unexpectedly high corporate profits and surprisingly low inflation. Bonds also
performed quite well, with total returns averaging just below 10%.
We live in remarkable times. The U.S. economy grew by almost 4% in 1997, yet
inflation fell to 1.7%, the lowest since oil prices collapsed 11 years ago.
Unemployment dipped below 5% for the first time since the 1970s. And consumer
confidence was the highest in 28 years. Yet, we live in a global economy. The
economic turmoil, stock market and currency declines in Asia impacted global
markets in the fourth quarter and the economic effects on the world's growth are
not yet clear.
How Did The Account Perform?
You'll be pleased to know that the Long Term Growth Account delivered returns
similar to those of the broader markets and consistent with the strategies
around which it is designed. In fact, the Long Term Growth Account beat its
competitors and the S&P 500 Index over the 5 and 10 year periods.
It's Long-Term Performance That Counts.
Although in this Report we're focusing primarily on one year performance,
remember that it's long-term performance that counts. Review your Account's 1997
performance, but also be sure to examine its longer-term record as well. You'll
note that over the past three, five and 10 years, this Account has delivered
excellent performance, both on an absolute basis and in comparison with funds
having similar objectives.
Our goal is to achieve this kind of above-average investment performance over
time. Such consistency is important, because most people buy variable annuity
products, such as the Long Term Growth Account, to achieve long-term goals. We
encourage you to think about your horizon and risk tolerance and to consider
future potential returns rather than focusing on past performance. Past
performance does not guarantee future results.
<PAGE>
[PHOTO]
Mendel A. Melzer, CFA
Chairman
What Goes Up Can Also Go Down.
While discussing the long-term, we think it's crucial to remind participants
that stocks have offered a 10.7% average annual return over the last 70 years
- -- about half of what they have given us over the last five years. And since
1980, corporate revenues have risen 4% a year, while earnings have risen almost
twice as fast, and stock prices four times as much.
Can this continue? We're quite pleased with the return on stocks in the last
five years, but we don't think this divergence from historical norms can
continue indefinately. It's simply the law of averages. We must remember that
with return comes risk -- that stocks can and do go down, as well as up. If you
have benefited more than you expected in recent years, then at some point, you
will surely benefit less. The only question is: When? Given the very serious
economic crisis in Asia, it could be sooner, rather than later.
With this in mind, stocks ought to remain a primary focus for most investors
looking for long-term wealth accumulation. If you wish, contact your financial
advisor/representative for assistance in structuring a program to help meet
your needs.
All of us at Prudential thank you for your business and look forward to helping
you plan for your future financial security.
/s/ Mendel Melzer
Mendel A. Melzer, CFA
Chairman
2
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VCA-2 Long Term Growth Account
Performance Summary.
Your Account returned 31.89% in 1997, almost three times the 10.70% historical
average for stocks.+ It was the third successive year of unusually high gains
for U.S. stocks. The return on your Account was more than six percentage points
above the average of the Variable Insurance Products (VIP) Growth category as
reported by Lipper Analytical Services, but general equities -- including your
Account -- trailed the overall stock market. However, over the five- and
ten-year periods your Account beat both its competitors and the S&P 500.
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Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
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Long Term Growth Account(1) 31.89% 29.20% 21.34% 19.52%
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Long Term Growth Account(2) 27.85% 27.36% 19.98% 18.47%
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Lipper (VIP) Growth Avg.(3) 25.36% 26.15% 17.27% 16.59%
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S&P 500(4) 33.35% 31.13% 20.25% 18.02%
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Long Term Growth Account inception date: 7/1/68.
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================================================================================
$10,000 Invested Over Ten Years.
[Graphical Representation of Mountain Chart]
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These results represent past performance and are no guarantee of future
performance. Investment return and principal value of the Long Term Growth
Account will fluctuate resulting in a value which may at any time, including the
time of withdrawal of the cash value, be more or less than the total principal
investment made.
Investment in the Long Term Growth Account involves various risks which are more
fully described in the prospectus. For more complete information about the
Account, including charges and expenses, contact Prudential for a free
prospectus. Please read it carefully before investing. The Long Term Growth
Account is a group annuity insurance product issued by The Prudential Insurance
Company of America, Newark, NJ and is distributed by Prudential Investment
Management Services LLC, an affiliate of Prudential Investments.
(1) The results are shown after the deduction of all expenses including
investment management and mortality and expense charges but do not include the
effect of any sales charge.
(2) The results are shown after the deduction of all expenses including
investment management, mortality and expense charges and in addition reflect the
deduction of a front-end 21/2% sales charge and the impact of an annual account
charge.
(3) The Lipper Variable Insurance Products (VIP) Growth Average is calculated by
Lipper Analytical Services, Inc., and reflects the investment return of certain
portfolios underlying variable life and annuity products. These returns are net
of investment fees and fund expenses but not product charges.
(4) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Account. The securities that comprise
the S&P 500 may differ substantially from the securities in the Account. The S&P
500 is not the only index that may be used to characterize performance of this
Account, and other indices may portray different comparative performance.
+ Source: Ibbotson Associates.
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Investment Goal
Long term growth of capital.
Types of Investments
Primarily stocks of a diversified group of companies in a variety of industries.
Investment Style
This Account uses a "value" investment approach to companies that are
attractively priced relative to book value, earnings, discretionary cash flow,
sales and other measures of value.
Performance Review.
Media companies did well. We had a focus on media companies, and they performed
extraordi- narily well. We had substantial investments in Comcast, Century
Communications, U.S. West Media Group, and others. Overall, our media stocks
gained 65% in 1997.
Finance led the market. The financial sector was the best-performing sector in
1997. We had a larger proportion of financial stocks than the S&P 500 and our
holdings performed better, on average, lifting our return.
Bigger was better. The stock market was led by a select number of the largest,
most familiar companies, whose high valuations made them unattractive to our
value style of investing. The small and mid-size companies we held instead
trailed.
Industrials stayed modestly priced. The earnings of industrials are sensitive to
the rate of economic growth. Fear of an economic slowdown grew acute at the end
of 1997. Since 45% of our holdings were in inexpensively purchased industrials,
our return was held back.
3
<PAGE>
Strategy Session.
Industrials offer the best value. After their decline at the end of 1997,
industrials represent even better value than before. We continue to have a focus
on them. Although we share the concerns of other investors that the Asian
situation may slow U.S. economic growth, we think the impact will be modest.
Current prices of industrial stocks appear to be based on a more dire
assumption. Hence, we expect the industrials to provide a satisfactory return
even in an economic slowdown. Their potential for price appreciation should
their earnings reaccelerate, however, is considerable.
Hidden value even among financials. We still like the financial sector,
particularly insurance companies, which have not yet participated in the rising
market to the degree banks and financial service companies have. We've focused
on some smaller insurance companies, such as Berkley W. R., the Trenwick Group,
and Financial Security Association Holdings. The industry is consolidating to
take advantage of productivity benefits from combinations. Both acquirers and
acquisition targets can be good buys.
Smaller industrials as well. We continue to hold some small and midsize
companies. S&P 500 stock prices have outpaced the prices of smaller companies;
we believe the latter should have faster earnings growth in the future. This
makes them a better value.
PORTFOLIO MANAGER
Roger Ford
Industrial Firms Attractively Priced.
"Value investors often benefit when most investors overreact to swings in the
economy or to their expectations of economic change. When investors focus on the
short-term prospect of an economic slowdown, cyclical stocks, for example --
whose earnings vary with the business cycle -- often are undervalued. Right now,
the best source of investment value is the cyclical industrial sector."
[PHOTO]
PORTFOLIO MANAGER
Roger Ford
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Portfolio Composition.
12/31/97
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Industrial 45%
Consumer Growth 17%
Finance 16%
Consumer Cyclical 9%
Technology 7%
Energy 5%
Utility 1%
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Source: Prudential. Holdings are subject to change.
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Top Ten Holdings.
12/31/97
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US West Media Group 1.8%
Carbide/Graphite Group 1.8%
NACRE Corp. 1.6%
Norwest Corp. 1.5%
Wolverine Tube Inc. 1.5%
Berkley WR Corp. 1.4%
Lincoln National Corp. 1.4%
United Dominion Inds. 1.3%
Comcast Corp. Special Cl A 1.3%
Borg Warner Auto Inc. 1.3%
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Source: Prudential. Holdings are subject to change.
4
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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,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Investment Income ...................... $.2633 $ .2056 $ .2000 $.1896 $.2823
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Expenses
For investment management fee ........ .0284 .0215 .0170 .0151 .0138
For assuming mortality and
expense risks ........................ .0850 .0646 .0511 .0453 .0412
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Net Investment Income .................. .1499 .1195 .1319 .1292 .2273
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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
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Net Increase (Decrease) in
Accumulation Unit Value ................ 6.2587 4.2204 3.4105 (.1635) 2.3223
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Accumulation Unit Value
Beginning of year .................... 19.6241 15.4037 11.9932 12.1567 9.8344
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End of year .......................... $25.8828 $19.6241 $15.4037 $11.9932 $12.1567
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Ratio Of Expenses To
Average Net Assets** ................. .50% .50% .50% .50% .50%
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Ratio Of Net Investment Income To
Average Net Assets** ................. .70% .69% .96% 1.07% 2.06%
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Portfolio Turnover Rate ................ 47% 53% 42% 37% 47%
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Average Commission Rate Per Share ...... $.0548 $.0543 N/A N/A N/A
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Number of Accumulation Units Outstanding
for Participants at end of year
(000 omitted) ........................ 28,643 30,548 31,600 32,624 32,968
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</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
5
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
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Aerospace/Defense - 2.8%
Doncasters PLC - (ADR)
(United Kingdom) + 185,700 $ 3,922,912
Gen Corp. 375,000 9,375,000
Litton Industries, Inc.+ 116,600 6,704,500
Primex Technologies 61,100 2,062,125
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22,064,537
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Autos & Trucks - 2.3%
Borg-Warner Automotive, Inc. 192,700 10,020,400
Lear Corp.+ 90,300 4,289,250
Tower Automotive, Inc.+ 94,400 3,970,700
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18,280,350
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Chemicals - 7.5%
Agrium, Inc. 618,300 7,535,531
Boc Group PLC (ADR)
(United Kingdom) 127,600 4,202,825
Chemfirst, Inc.+ 214,400 6,056,800
Cytec Industries, Inc.+ 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
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59,038,692
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Computer Related - 0.3%
Digital Equipment Corp.+ 62,600 2,316,200
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Consumer Services - 3.0%
Archer-Daniels-Midland Co. 112,135 2,431,928
Hilton Hotels Corp.+ 125,400 3,730,650
Ogden Corp. 163,900 4,619,931
RFS Hotel Investors, Inc.+ 204,200 4,071,237
360 Communications Co.+ 192,800 3,892,150
Whitman Corp. 169,000 4,404,562
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23,150,458
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Containers and Packaging - 2.8%
ACX Technologies, Inc.+ 135,100 3,301,506
Alltrista Corp.+ 247,600 7,025,650
AptarGroup, Inc. 91,000 $5,050,500
U.S. Can Corp.+ 380,600 6,422,625
----------
21,800,281
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Electrical Equipment - 0.7%
Belden, Inc. 148,900 5,248,725
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Electronics - 3.6%
Anixter International, Inc.+ 193,000 3,184,500
Dallas Semiconductor Corp. 182,400 7,432,800
Marshall Industries+ 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
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Enginering & Construction - 4.2%
American Standard
Companies, Inc. + 113,500 4,348,469
Apogee Enterprises, Inc.+ 51,500 611,562
Cameron Ashley Building
Products + 172,600 2,891,050
Giant Cement Holding, Inc.+ 400,000 9,250,000
Gradall Industries, Inc.+ 373,500 6,162,750
Texas Industries, Inc. 215,500 9,697,500
----------
32,961,331
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Exploration & Production - 4.6%
Cabot Oil & Gas Corp. 216,600 4,210,162
Comstock Resources, Inc. + 233,000 2,781,437
Occidental Petroleum Corp. 231,400 6,782,912
Oryx Energy Co.+ 335,600 8,557,800
Pioneer Natural Resources Co. 271,800 7,865,212
Seagull Energy Corp.+ 61,200 1,262,250
Vintage Petroleum, Inc. 249,400 4,738,600
----------
36,198,373
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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
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See Notes to Financial Statements
6
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
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Healthcare - 2.1%
Columbia HCA Healthcare 146,500 $ 4,340,062
Mallinckrodt, Inc. 106,300 4,039,400
Tenet Healthcare Corp.+ 255,700 8,470,063
-----------
16,849,525
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Housing Related - 2.1%
Furniture Brands
International, Inc.+ 331,000 6,785,500
Owens Corning Fiberglass Corp. 124,300 4,241,738
Triangle Pacific Corp.+ 152,800 5,176,100
----------
16,203,338
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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.+ 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
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Leisure - 2.4%
Darden Restaurants, Inc. 638,200 7,977,500
Servico, Inc.+ 320,600 5,410,125
Sonic Corp.+ 185,000 5,203,125
----------
18,590,750
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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)+ 136,200 2,349,450
Hardinge, Inc. 198,800 7,405,300
Harnischfeger Industries, Inc. 270,200 9,541,438
Ingersoll-Rand Co.+ 113,500 4,596,750
----------
45,154,363
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Media - 9.2%
Century Communications Corp.
(Class "A" Stock)+ 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)+ 145,587 5,832,579
Harcourt General, Inc. 116,000 6,351,000
Tele-Communications, Inc.
Liberty Media Group
(Series A)+ 190,300 6,898,375
Time Warner, Inc. 117,400 7,278,800
U.S. West Media Group+ 497,300 14,359,538
Viacom, Inc.
(Class B Stock)+ 150,000 6,215,625
----------
72,075,425
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Metals - 3.9%
The Carbide/Graphite
Group, Inc.+ 407,400 13,749,750
Cleveland Cliffs, Inc.+ 102,000 4,672,875
Reliance Steel and Aluminum 210,000 6,247,500
UCAR International, Inc.+ 153,600 6,134,400
----------
30,804,525
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Miscellaneous-Industrial - 11.5%
Clarcor, Inc. 185,300 5,489,513
Coltec Industries, Inc.+ 294,200 6,821,763
Crane Co. 149,800 6,497,575
Flowserve Corp. 232,971 6,508,627
Global Industrial
Technologies, Inc.+ 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.+ 373,800 11,587,800
----------
90,508,683
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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) + 6,700 152,006
International Paper Co. 90,400 3,898,500
Louisiana Pacific Corp. 151,900 2,886,100
----------
10,562,231
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See Notes to Financial Statements
7
<PAGE>
Financial Statements of VCA-2
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
- --------------------------------------------------------------------------------
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. + 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.+ 212,400 3,026,700
Toys R Us+ 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. + 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
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Total Common Stocks Investment - 98.0%
(Cost: $554,595,006) $768,307,230
- --------------------------------------------------------------------------------
Short-Term Investment - 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)
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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
================================================================================
The following abbreviations are used in portfolio descriptions:
ADR - American Depository Receipts
PLC - Public Limited Company
+ Non-income producing Security
See Notes to Financial Statements
8
<PAGE>
Financial Statements of VCA-2
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
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 634,876,341 515,172,613
- --------------------------------------------------------------------------------
End of Year $ 783,853,456 $ 634,876,341
================================================================================
See Notes to Financial Statements
9
<PAGE>
Notes to Financial Statements of VCA-2
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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.
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Notes to Financial Statements of VCA-2
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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.
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Notes to Financial Statements of VCA-2
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NOTE 5: Unit Transactions
The number of Accumulation Units issued and redeemed for the years ended
December 31, 1997 and 1996 is as follows:
1997 1996
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Units issued 4,486,054 4,133,210
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Units redeemed 6,391,015 5,185,531
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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.
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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
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Whether providing insurance protection for home, family and business, or
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have always been able to deliver something more: personal service, quality,
attention to detail and the financial strength of The Rock(R). Since 1875,
Prudential has been helping individuals and families meet their financial needs.
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The Prudential Insurance Company of America Bulk Rate
30 Scranton Office Park U.S. Postage
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[PRINTER'S UNION LOGO] Printed in the U.S.A. PI-RS-0298-M528
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MD.RA.002.0298
