PRUDENTIAL'S
LONG TERM GROWTH ACCOUNT
[PHOTO]
SEMI-ANNUAL REPORT
TO PARTICIPANTS
JUNE 30, 1999
[LOGO] PRUDENTIAL
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
- --------------------------------------------------------------------------------
COMMITTED TO PROVIDING SUPERIOR
INVESTMENT, ADMINISTRATIVE AND
RECORDKEEPING SERVICES TO
INSTITUTIONAL CLIENTS.
<PAGE>
[LOGO]
<PAGE>
================================================================================
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>
PERIOD ENDED JUNE 30, 1999
Letter
To Participants
DEAR PARTICIPANT:
This Semiannual Report presents the investment performance of the Long Term
Growth Account.
In the last couple of years, the recurring possibility of a global economic
crisis caused investors to focus on securities they thought to be safe. In the
equity market, they focused on the stocks of a handful of very large companies
that were perceived to be well-buffeted from an economic slowdown. These stocks
became very expensive-out of proportion to their earnings expectations. As a
result, there was a substantial disparity in value between large and small
companies and between growth and value stocks.
Since earlier this year, however, that gap has narrowed significantly amid news
of strong U.S. economic growth and faster-than-expected global stability. While
the long-term prospects of U.S. growth stocks are still very good, many of the
stocks of smaller and economically sensitive companies favored by our value
managers are now posting very attractive returns.
In the bond market, U.S. Treasuries and select European government bonds were
the major beneficiaries of the flight to quality that occurred last year. When
this trend reversed itself toward the end of 1998, other sectors of the bond
market rebounded. However, with a strong U.S. economy comes the threat of higher
inflation, which erodes the value of bonds' fixed interest payments. The recent
inflation concerns jolted the bond market toward the end of the reporting period
and helped send long-term interest rates to a 19-month high. Fortunately, the
Federal Reserve appears committed to keeping inflation from threatening the
economy's growth.
HOW DID OUR PORTFOLIO PERFORM?
Reflecting investors' renewed interest in value stocks-which include cyclical
stocks that do well when the economy thrives-our value-oriented portfolio did
well the first half of the year. Although a very strong six-month return by
historical standards, it trailed the Lipper (VIP) Growth Fund Average primarily
because our mid-size and smaller companies didn't begin to shoot ahead until the
second quarter.
DIVERSIFICATION: PROTECTION AGAINST MARKET TURBULENCE.
The winds of change in the equity market and the recent turbulence in the bond
market not only highlight the value of professional portfolio management, they
illustrate why investors should have a well-diversified asset allocation
strategy. It is also a good practice to revisit your strategy regularly
<PAGE>
[PHOTO]
JOHN R. STRANGFELD
CHAIRMAN
and, when necessary, rebalance your holdings to keep your asset allocation
consistent with your long-term objectives and risk tolerance.
Since most people buy variable annuity products for long-term goals, ours is to
achieve above-average investment performance over time. Therefore, when you
consider how to allocate either new or existing assets, we encourage you to
think about your time horizon and risk tolerance. As always, remember that past
performance is not indicative of future results. Please consult your prospectus
for complete details with regard to these products.
Your Prudential professional will be happy to help you review and structure a
program to meet your long-term financial needs. All of us at Prudential thank
you for your business and look forward to helping you plan for your future
financial security.
Sincerely,
John R. Strangfeld
Chairman,
June 30, 1999
2
<PAGE>
VCA-2 LONG TERM GROWTH ACCOUNT
PERFORMANCE SUMMARY.
A dramatic turn in market favor split this half year, with stocks that hurt our
performance in the first quarter contributing markedly superior gains in the
second. Over the full period, your Portfolio returned 10.82%, net of fees.
Although a very strong six-month return by historical standards, it trailed the
Lipper (VIP) Growth Fund Average primarily because our mid-size and smaller
companies didn't begin to shoot ahead until the second quarter.
Stocks of small and mid-size companies have been inexpensive relative to those
of the largest firms for some time. Because of their greater value, we
================================================================================
AVERAGE ANNUAL RETURNS THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
SIX ONE THREE FIVE TEN
MONTHS YEAR YEAR YEAR YEAR
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Long Term Growth Account(1) 10.82% -1.23% 17.31% 18.57% 16.16%
- -------------------------------------------------------------------------------------------
Long Term Growth Account(2) 6.92% -4.83% 15.20% 16.84% 14.73%
- -------------------------------------------------------------------------------------------
Lipper (VIP) Growth Avg.(3) 12.62% 20.49% 24.12% 24.20% 17.56%
- -------------------------------------------------------------------------------------------
S&P 500(4) 12.38% 22.76% 29.11% 27.86% 18.76%
- -------------------------------------------------------------------------------------------
LONG TERM GROWTH ACCOUNT INCEPTION DATE: 7/1/68.
</TABLE>
================================================================================
$10,000 INVESTED OVER TEN YEARS.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<<PLOT POINTS TO COME>>
- --------------------------------------------------------------------------------
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. SOURCE: PRUDENTIAL
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.
(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 2 1/2% 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. INVESTORS CANNOT INVEST
DIRECTLY IN AN INDEX.
================================================================================
INVESTMENT GOAl
TYPES OF INVESTMENTS
Primarily stocks of a diversified group of major established 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.
Our strong return was particularly supported by our retailers, including the
Limited, Dillards, and Haverty Furniture, and our paper companies, notably
Georgia-Pacific. We have a focus on industrials, such as the paper companies.
Prospects of an economic recovery in Asia helped industrial stocks: in addition
to our papers, we benefited from specialty chemicals such as Cytec Industries
and from Alcoa. Our regional banks, such as Banc One, also benefited from the
improved economic prospects.
WE DIDN'T KEEP UP with Lipper in part because of poor performance by our
insurance companies and healthcare companies, such as Tenet and Columbia HCA.
The latter were hurt by uncertainty regarding government regulation of the
industry. They are currently very inexpensive and we believe they represent an
exceptional growth opportunity.
Among our technology stocks, Compaq and Seagate had negative returns for the
period. On the other hand, we also owned Hewlett-Packard (up 48%) and National
Semiconductor (up 88%), both of which we had been able to buy at low prices and
which rose sharply in 1999.
3
<PAGE>
PERFORMANCE SUMMARY CONTINUED
have a larger representation of them in our portfolio than their share of the
S&P 500 Index. Although the price disparity began to close in 1999, our focus on
these stocks still hurt our return for the first half of the year. We were
correspondingly underrepresented in the popular (and high-priced) technology
sector. This also held back our return. Whereas our financials trailed, our
retailers, paper companies, and regional banks had strong returns.
STRATEGY SESSION.
We continue to believe that large growth stocks are markedly more expensive
than the rest of the market, notably in the technology sector. We expect a
continuation of the rebound of value stocks (those selling for significantly
less than their earnings, cash flow, and book value would make a fair value) and
stocks of smaller companies.
WE STILL PREFER INDUSTRIAL STOCKS. Their superior performance in the second
quarter did little to reduce the huge difference in value between this group and
the overall market, especially given the potential impact of an Asian economic
recovery on their profits.
WE ALSO CONTINUE TO LIKE FINANCIAL COMPANIES, particularly insurance companies.
We think that their prices are lower than is warranted by competitive conditions
in the property and casualty business. Moreover, we think the insurance industry
is ripe for consolidation.
WE ARE UNDERWEIGHTED IN TECHNOLOGY STOCKS because prices in this sector can only
be justified by ideal conditions. Many of these stocks are set up for major
disappointments if perfect conditions and performance are not forthcoming.
- --------------------------------------------------------------------------------
OUTLOOK
PORTFOLIO MANAGER
THOMAS R. JACKSON
UNCERTAINTY ABOUT GLOBAL ECONOMY.
"We believe that uncertainty about the global economy in 1998 prolonged the
underperformance of stocks of companies whose earnings are more sensitive to
economic performance, such as smaller companies, industrials, and certain
retailers. These stocks became increasingly undervalued compared to those of
companies with steadier growth. The value investing style had a long and deep
period of underperformance that was broken sharply in April and May of 1999,
when investors began to appreciate the robustness of the U.S. economy and to see
signs of recovery in Asia. On several measures of value, including price to
earnings and price to book value ratios, our portfolio is bargain-priced. We
expect that these bargains will be recognized when investors no longer are
willing to pay as much of a premium for what they believe to be the security of
the large growth companies in a time of turmoil."
- --------------------------------------------------------------------------------
[PHOTO]
PORTFOLIO MANAGER
THOMAS R. JACKSON
===================================================
PORTFOLIO COMPOSITION
6/30/99
-------
Consumer Growth 27.0%
Industrials 26.8%
Finance 22.9%
Consumer Cyclicals 7.7%
Technology 7.6%
Energy 4.9%
Utilities 3.1%
- ---------------------------------------------------
SOURCE: PRUDENTIAL. HOLDINGS ARE SUBJECT TO CHANGE.
===================================================
TOP TEN HOLDINGS
6/30/99
-------
Banc One Corp. 2.7%
XL Capital Limited 2.2%
MediaOne Group, Inc. 2.1%
Eastman Kodak Co. 2.1%
Alltel Corp. 2.1%
CYTEC Industries Inc. 2.1%
Reynolds & Reynolds Cl. A 1.9%
Darden Restaurants Inc. 1.9%
Well Point Health Networks 1.8%
Georgia Pacific Corp. 1.8%
- ---------------------------------------------------
SOURCE: PRUDENTIAL. HOLDINGS ARE SUBJECT TO CHANGE.
4
<PAGE>
FINANCIAL HIGHLIGHTS FOR VCA-2
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME ................................ $.2131 $.3414 $.2633 $.2056 $.2000 $.1896
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
For investment management fee ................. (.0157) (.0325) (.0284) (.0215) (.0170) (.0151)
For assuming mortality and expense risks ...... (.0471) (.0974) (.0850) (.0646) (.0511) (.0453)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME ............................ .1503 .2115 .1499 .1195 .1319 .1292
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL CHANGES
Net realized gain on investments .............. 1.9137 3.1604 4.7245 2.3368 1.5228 1.0028
Net unrealized appreciation (depreciation)
of investments ................................ .6338 (4.3161) 1.3843 1.7641 1.7558 (1.2955)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN ACCUMULATION UNIT VALUE 2.6978 (0.9442) 6.2587 4.2204 3.4105 (.1635)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
Beginning of period ........................... 24.9386 25.8828 19.6241 15.4037 11.9932 12.1567
End of period ................................. $27.6364 $24.9386 $25.8828 $19.6241 $15.4037 $11.9932
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** .......................... .50%+ .50% .50% .50% .50% .50%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** .......................... 1.20%+ .81% .70% .69% .96% 1.07%
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE .......................... 39% 43% 47% 53% 42% 37%
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF ACCUMULATION UNITS OUTSTANDING
for Participants at end of period
(000 omitted) ................................. 22,552 26,278 28,643 30,548 31,600 32,624
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated by accumulating the actual per unit amounts daily.
**These calculations exclude Prudential's equity in VCA-2.
+Annualized.
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 HIGHLIGHTS FOR VCA-2
STATEMENT OF NET ASSETS AS OF JUNE 30, 1999
(UNAUDITED)
VALUE
LONG-TERM INVESTMENTS - 93.0% SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
COMMON STOCKS - 93.0%
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE - 0.8%
Doncasters PLC - ADR+
(United Kingdom) 111,400 $ 1,949,500
Gen Corp. 74,800 1,888,700
Litton Industries, Inc.+ 17,700 1,269,975
------------
5,108,175
- --------------------------------------------------------------------------------
APPAREL - 0.9%
Kellwood Co. 25,600 1,694,400
Liz Claiborne 31,300 1,142,450
Nautica Enterprises+ 50,900 1,858,938
Phillips-Van Heusen 105,600 1,042,800
Reebok International Ltd.+ 113,900 2,121,388
------------
5,859,975
- --------------------------------------------------------------------------------
AUTOS & TRUCKS - 1.5%
Borg-Warner Automotive, Inc. 41,900 2,304,500
Borg-Warner Security Corp. 5,600 1,113,750
Dura Automotive Systems, Inc.+ 18,400 1,611,800
Midas, Inc. 12,800 1,363,200
Simpson Industries 21,800 1,223,450
Strattec Security Corp.+ 22,200 1,749,250
Tower Automotive, Inc.+ 218,900 5,568,269
------------
9,934,219
- --------------------------------------------------------------------------------
CASINO HOTELS - 1.1%
Aztar Corp.+ 91,400 1,839,738
Harrah's Entertainment, Inc.+ 55,400 1,218,800
Park Place Entertainment+ 379,300 3,674,469
Station Casinos, Inc.+ 80,300 1,636,113
------------
7,369,119
- --------------------------------------------------------------------------------
CHEMICALS - 5.1%
Agrium, Inc. 271,800 2,395,238
Arch Chemicals, Inc. 34,800 1,846,075
Cambrex Corp. 37,500 1,984,375
Crompton & Knowles Corp. 400,100 7,826,956
Cytec Industries, Inc.+ 429,900 13,703,063
Ferro Corp. 47,600 1,309,000
French Fragrances, Inc.+ 289,000 2,113,313
Hanna (M.A.) Co. 86,000 1,413,625
IMC Global, Inc. 34,500 1,608,063
Mississippi Chemical Corp. 241,714 2,371,819
------------
33,571,525
- --------------------------------------------------------------------------------
COMPUTER - 1.7%
Compaq Computer 141,000 3,339,938
Hewlett Packard Inc. 78,300 7,869,150
------------
11,209,088
- --------------------------------------------------------------------------------
COMPUTER RELATED - 1.7%
BancTec, Inc.+ 41,100 1,737,231
Electronic Data Systems Corp. 81,300 4,598,531
Seagate Technology+ 217,600 5,576,000
------------
10,911,763
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 2.4%
Coinmach Laundry Corp.+ 76,400 1,969,325
Reynolds & Reynolds
(Class "A" Stock) 543,200 12,663,350
Service Corp International 125,500 2,415,875
------------
16,048,550
- --------------------------------------------------------------------------------
CONTAINERS AND PACKAGING - 0.9%
Alltrista Corp.+ 38,900 1,283,700
Crown Cork & Seal Co., Inc. 80,000 2,280,000
Shorewood Packaging Corp.+ 24,700 1,455,406
U.S. Can Corp.+ 88,700 1,973,575
------------
5,992,681
- --------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING OPERATIONS - 1.0%
ACX Technologies, Inc.+ 32,400 1,526,500
Clarcor, Inc. 23,900 1,458,581
Crane Co. 33,350 1,048,441
FMC Corp.+ 12,500 1,853,906
Griffon Corporation+ 40,000 1,312,500
Harsco Corp. 45,100 1,443,200
Lancaster Colony 20,400 1,703,800
U.S. Industries, Inc. 60,700 1,031,900
------------
6,378,828
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.1%
Belden, Inc. 95,600 2,288,425
Emcor Group, Inc.+ 50,400 1,269,450
Hussmann International, Inc. 233,850 3,873,141
------------
7,431,016
- --------------------------------------------------------------------------------
ELECTRONIC PARTS DISTRIBUTION - 0.4%
Arrow Electronics, Inc.+ 73,100 1,388,900
Avnet, Inc. 30,100 1,399,650
------------
2,788,550
- --------------------------------------------------------------------------------
ELECTRONICS - 1.0%
Marshall Industries+ 2,000 11,V71,875
National Semiconductor Corp.+ 142,170 3,598,678
Pioneer Standard Electronics 152,300 1,827,600
Varian Semiconductor
Equipment+ 56,500 960,500
------------
6,458,653
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
FINANCIAL HIGHLIGHTS FOR VCA-2
STATEMENT OF NET ASSETS AS OF JUNE 30, 1999
(UNAUDITED)
VALUE
DESCRIPTION SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
ENGINEERING & CONSTRUCTION - 1.6%
Apogee Enterprises, Inc. 285,800 $ 3,840,438
Cameron Ashley
Building Products+ 136,100 1,420,544
Crossman Communities+ 25,200 1,732,375
D.R. Horton, Inc. 53,700 1,892,763
Giant Cement Holding, Inc.+ 72,900 1,667,588
NVR, Inc.+ 23,300 1,215,969
Nortek, Inc.+ 18,500 ,579,281
------------
10,348,956
- --------------------------------------------------------------------------------
EXPLORATION & PRODUCTION - 4.5%
Atlantic Richfield Co. 105,400 8,807,488
Cabot Oil & Gas Corp.
(Class "A" Stock) 52,300 1,974,088
Comstock Resources, Inc.+ 209,300 1,693,306
Devon Energy Corporation 51,000 1,823,250
Kerr McGee 114,599 5,751,437
Louis Dreyfus Natural Gas+ 39,000 1,840,938
Occidental Petroleum Corp. 225,600 4,765,800
St. Mary Land & Exploration 28,200 1,579,863
Santa Fe Snyder Corp.+ 339,865 2,591,471
Vintage Petroleum, Inc. 257,800 2,771,350
------------
29,598,989
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 4.8%
The CIT Group, Inc.
(Class "A" Stock) 249,600 7,207,200
Citigroup, Inc. 188,248 8,941,780
Federated Investors, Inc.
(Class "B" Stock) 60,300 1,081,631
Financial Security Assurance
Holdings Corp. 73,400 3,816,800
Heller Financial, Inc. 71,000 1,974,688
Morgan (JP) & Co., Inc. 41,300 5,802,650
The PMI Group, Inc. 19,400 1,218,563
Waddell & Reed Financial, Inc.
(Class "B" Stock) 69,692 1,881,684
------------
31,924,995
- --------------------------------------------------------------------------------
FOODS - 3.2%
Fleming Companies 50,600 1,588,225
Food Lion, Inc.
(Class "A" Stock) 364,600 4,329,625
Food Lion, Inc.
(Class "B" Stock) 133,200 1,540,125
International Home Foods+ 122,000 2,249,375
Interstate Bakeries 43,200 1,969,300
Richfood Holdings 206,800 3,644,850
Sara Lee Corp. 172,500 3,913,594
Suiza Foods Corp.+ 90,200 3,777,125
------------
21,012,219
- --------------------------------------------------------------------------------
GAS DISTRIBUTION - 0.1%
Eastern Enterprises 14,400 572,400
- --------------------------------------------------------------------------------
HEALTHCARE - 9.4%
Beverly Enterprises, Inc.+ 239,700 1,932,581
Columbia HCA Healthcare Corp. 379,500 8,657,344
Foundation Health Systems+
(Class "A" Stock) 127,000 1,905,000
Lifepoint Hospitals, Inc.+ 19,973 1,268,384
Mallinckrodt, Inc. 157,000 5,710,875
Pacificare Health Systems+ 72,800 5,241,600
Quorum Health Group+ 229,000 2,876,813
Sierra Health Services+ 99,400 1,435,088
Tenet Healthcare+ 413,400 7,673,738
Triad Hospitals, Inc.+ 39,773 1,536,933
Trigon Healthcare, Inc.+ 52,300 1,902,413
United HealthCare Corp. 131,900 8,260,238
Universal Health Services+
(Class "B" Stock) 80,000 3,820,000
Wellpoint Health Networks, Inc.+ 141,000 11,967,375
------------
62,188,379
- --------------------------------------------------------------------------------
HOTELS & MOTELS - 2.4%
Hilton Hotels Corp. 352,000 4,994,000
Innkeepers USA Trust 422,300 4,223,000
Lodgian, Inc.+ 189,600 1,244,250
Prime Hospitality Corp.+ 72,600 1,871,200
RFS Hotel Investors, Inc. 329,200 4,135,575
Red Roof Inns, Inc.+ 23,900 428,706
------------
15,896,731
- --------------------------------------------------------------------------------
HOUSING RELATED - 1.2%
Furniture Brands
International, Inc.+ 139,000 3,874,625
Kimball International
(Class "B" Stock) 400 116,750
Premark International, Inc. 85,900 3,221,250
Stanley Furniture Co.+ 23,200 522,000
------------
7,624,625
- --------------------------------------------------------------------------------
INSURANCE - 10.3%
ARM Financial Group, Inc.
(Class "A" Stock) 47,600 404,600
AmerUs Life Holdings, Inc.
(Class "A" Stock) 117,700 3,177,900
Berkley (W.R.) Corp. 344,200 8,605,000
CNA Surety Corp. 75,700 1,159,156
Capital Re Corp. 87,800 1,410,288
Enhance Financial Services
Group, Inc. 84,200 1,662,950
Everest Reinsurance
Holdings, Inc. 63,400 2,068,425
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
FINANCIAL HIGHLIGHTS FOR VCA-2
STATEMENT OF NET ASSETS AS OF JUNE 30, 1999
(UNAUDITED)
VALUE
DESCRIPTION SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
INSURANCE CONT'D
Harleysville Group, Inc. 46,600 $ 955,300
Horace Mann Educators 27,500 1,747,656
Liberty Financial Companies 2,200 1,164,075
Loews Corp. 49,100 3,885,038
MMI Companies, Inc. 109,311 1,844,623
Old Republic International Corp. 287,450 4,976,478
Reinsurance Group of America 25,575 1,901,519
Reliastar Financial 6,000 1,262,500
Torchmark Corp. 227,000 7,746,375
Travelers Property Casualty
(Class "A" Stock) 151,600 5,931,350
Trenwick Group, Inc. 314,400 7,751,925
XL Capital Ltd.
(Class "A" Stock) 250,985 14,180,624
------------
67,735,782
- --------------------------------------------------------------------------------
LEISURE - 0.2%
Brunswick Corp. 57,200 1,594,450
- --------------------------------------------------------------------------------
MACHINERY - 4.0%
Applied Power Co.
(Class "A" Stock) 68,500 1,870,906
Case Corporation 17,700 1,851,813
Columbus McKinnon Corp. 243,700 5,848,800
Denison International PLC - ADR+
(United Kingdom) 195,500 3,005,813
Global Industrial
Technologies, Inc.+ 80,700 1,973,444
Graco, Inc. 19,400 1,569,875
Hardinge, Inc. 286,350 5,029,022
Idex Corp. 41,000 1,347,875
Lincoln Electric Holdings 76,100 1,560,050
New Holland N.V. 57,500 1,984,688
Omniquip International, Inc. 37,600 1,296,100
Regal Beloit Corp. 47,200 1,115,100
Robbins & Myers, Inc. 21,400 1,477,488
United Dominion Industries
(Canada) 108,30 2,626,275
------------
26,557,247
- --------------------------------------------------------------------------------
MEDIA - 2.6%
Belo (A.H.) Corp.
(Class "A" Stock) 96,000 1,890,000
Granite Broadcasting Corp.+ 36,200 1,282,813
MediaOne Group, Inc.+ 187,600 13,952,750
Young Broadcasting Corp.+
(Class "A" Stock) 27,100 1,153,444
------------
17,279,006
- --------------------------------------------------------------------------------
METALS - 3.1%
Alcoa, Inc. 131,200 8,118,000
The Carbide/Graphite Group+ 465,100 6,656,744
Cleveland - Cliffs, Inc. 138,500 4,483,938
UCAR International, Inc.+ 51,700 1,305,425
------------
20,564,106
- --------------------------------------------------------------------------------
MISCELLANEOUS-INDUSTRIAL - 1.4%
Chase Industries, Inc.+ 25,900 1,218,531
Dexter Corp. 41,300 1,685,556
DT Industries 3,100 1,128,481
Hawk Corp.+
(Class "A" Stock) 46,600 1,410,663
Pentair, Inc. 53,200 2,433,900
Varian, Inc.+ 56,500 1,762,750
Varian Medical Systems, Inc. 93,600 2,363,400
Wolverine Tube, Inc.+ 49,000 1,231,125
X-Rite Inc. 7,300 46,994
------------
9,181,400
- --------------------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES - 1.4%
Harris Corporation 228,100 8,938,669
- --------------------------------------------------------------------------------
PAINT & RELATED PRODUCTS - 0.1%
Lilly Industries, Inc.
(Class "A" Stock) 27,000 501,188
- --------------------------------------------------------------------------------
PAPER PRODUCTS - 4.0%
Boise Cascade Corp. 109,500 4,708,500
Ennis Business Forms 299,100 2,561,044
Georgia Pacific Corp.
(GP Group) 244,600 11,587,925
Georgia Pacific Corp.
(Timber Group) 117,800 2,974,450
Mead Corp. 89,900 3,753,325
Schweitzer-Maudit, Inc. 34,300 514,500
------------
26,099,744
- --------------------------------------------------------------------------------
PHOTOGRAPHY - 2.1%
Eastman Kodak Co. 204,300 13,841,325
- --------------------------------------------------------------------------------
PRINTING - 0.6%
World Color Press, Inc.+ 147,300 4,050,750
- --------------------------------------------------------------------------------
PUBLISHING - 0.6%
Big Flower Holdings, Inc.+ 69,400 2,212,125
Central Newspaper
(Class "A" Stock) 26,300 1,989,538
Pulitzer, Inc. 13,700 665,306
------------
3,866,969
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
FINANCIAL HIGHLIGHTS FOR VCA-2
STATEMENT OF NET ASSETS AS OF JUNE 30, 1999
(UNAUDITED)
VALUE
DESCRIPTION SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
RAILROADS - 1.1%
Burlington Northern Santa Fe 217,100 $6,730,100
Wisconsin Central Transport+ 18,000 339,750
-----------
7,069,850
- --------------------------------------------------------------------------------
REGIONAL BANKS - 4.0%
Bank One Corp. 296,977 17,688,693
Community First Bankshares, Inc. 26,100 1,623,138
PNC Bank Corp. 104,700 6,033,338
Peoples Heritage
Financial Group, Inc. 88,500 1,664,906
------------
26,010,074
- --------------------------------------------------------------------------------
RESTAURANTS - 2.7%
Buffets, Inc.+ 27,600 1,317,400
CKE Restaurants, Inc. 240,700 3,911,375
Darden Restaurants Inc. 558,100 12,173,556
Ryan's Family Steak House+ 84,400 1,981,150
Vicorp Restaurants, Inc.+ 31,900 554,263
------------
17,937,744
- --------------------------------------------------------------------------------
RETAIL - 3.4%
Bon-Ton Stores, Inc.+ 17,500 1,112,656
Burlington Coat Factory 66,000 1,274,625
Cole National Corporation+
(Class "A" Stock) 35,600 1,282,575
Dillards, Inc.
(Class "A" Stock) 259,300 9,107,913
Dress Barn Inc.+ 43,800 1,700,800
Haverty Furniture, Inc. 39,400 1,388,850
Limited, Inc. 117,299 5,322,442
Payless Shoesource+ 23,800 1,273,300
Pier 1 Imports, Inc. 54,200 1,609,750
Stage Stores, Inc.+ 111,400 1,724,100
Stein Mart+ 69,200 1,648,750
World Fuel Services Corp. 44,300 653,425
------------
22,099,186
- --------------------------------------------------------------------------------
SAVINGS & LOAN - 0.9%
Astoria Financial Corp. 71,600 3,145,925
Charter One Financial, Inc. 33,400 1,928,938
Commercial Federal Corp. 75,500 1,750,656
------------
5,825,519
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS - 2.1%
ALLTEL Corp. 190,272 $13,604,448
- --------------------------------------------------------------------------------
TEXTILE - 0.1%
Dan River, Inc.+
(Class "A" Stock) 50,700 1,373,913
Guilford Mills, Inc. 30,100 1,312,288
------------
686,200
- --------------------------------------------------------------------------------
TOBACCO 0.8%
Philip Morris 129,400 5,200,263
- --------------------------------------------------------------------------------
UTILITY - ELECTRIC 0.7%
BEC Energy 19,800 1,816,750
El Paso Electric Company+ 56,900 1,508,544
Niagara Mohawk Holdings, Inc.+ 56,200 1,902,713
Pinnacle West Capital Corp. 19,800 1,796,950
Sierra Pacific Resources 30,700 1,116,710
TNP Enterprises, Inc. 14,000 507,500
------------
4,649,166
- --------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS - 93.0%
(Cost: $515,569,321) 611,522,522
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT - 6.1% PRINCIPAL
AMOUNT
(000)
- --------------------------------------------------------------------------------
Discount Note
Federal Home Loan Bank
4.60%, 7/1/99
(cost $40,320,137) $40,320 40,320,137
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 99.1%
(Cost $555,889,458) 651,842,659
- --------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash 1,212
Dividends and Interest Receivable 847,903
Receivable for Investments Sold 6,269,711
Payable for Investments Purchased (1,608,402)
Payable for Pending Capital Transactions (602,486)
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS
LESS LIABILITIES-0.9% 4,907,938
- --------------------------------------------------------------------------------
NET ASSETS - 100% $656,750,597
- --------------------------------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
(other than Annuitants)
22,551,550 Accumulation Units at an
Accumulation Unit Value of
$27.6364 $623,243,081
Equity of Annuitants 31,497,372
Equity of Prudential Insurance
Company of America 2,010,144
------------
$656,750,597
- -------------------------------------------------------------------------------
The following abbreviations are used in portfolio descriptions:
ADR - American Depository Reciepts
N.V. - Naamloze Vennootschap (Dutch Corporation)
PLC - Public Limited Company
+Non-Income Producing Security
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF VCA-2
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2B]
Dividends $ 4,460,557
Interest 929,174
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 5,389,731
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants and Annuitants for Investment Management Services 399,449
Fees Charged to Participants (other than Annuitants) for Assuming
Mortality and Expense Risks 1,145,869
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,545,318
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME - NET 3,844,413
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS - NET [NOTE 2B]
Realized Gain on Investments - Net 50,374,293
Increase in Unrealized Appreciation on Investments - Net 10,307,879
- ------------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 60,682,172
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $64,526,585
====================================================================================================================================
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, 1999 DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Investment Income - Net $ 3,844,413 $ 6,334,477
Realized Gain on Investments - Net [NOTE 2B] 50,374,293 93,450,128
Increase/Decrease In Unrealized
Appreciation on Investments - Net [NOTE 2B] 10,307,879 (128,066,902)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM OPERATIONS 64,526,585 (28,282,297)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS [NOTES 3 & 5]
Purchase Payments and Transfers In 8,595,425 25,857,801
Withdrawals and Transfers Out (101,782,422) (85,141,729)
Annual Administration Charges Deducted from
Participants' Accumulation Accounts (310) (26,134)
Mortality and Expense Risk Charges Deducted
from Annuitants' Accounts (52,476) (91,240)
Variable Annuity Payments (1,785,096) (4,762,987)
- -----------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (95,024,879) (64,164,292)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFERS [NOTE 6] 18,863 (4,176,839)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (30,479,431) (96,623,428)
NET ASSETS
Beginning of Period 687,230,028 783,853,456
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period $ 656,750,597 $ 687,230,028
===================================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
- --------------------------------------------------------------------------------
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. 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 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 60 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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
- --------------------------------------------------------------------------------
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. 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). A one-time equivalent charge is
deducted when the initial Annuity Units for Annuitants are
determined.
B. An annual administration charge of not more than $30 annually, is
deducted from the accumulation account of certain Participants
either at the 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 and other marketing expenses is made
from certain Participant's purchase payments. For the period
ended June 30, 1999, Prudential has advised the Account it has
received $3,640 for such charges.
NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES
For the period ended June 30, 1999, the aggregate cost of purchases
and the proceeds from sales of securities, excluding short-term
investments, were $236,269,611 and $350,948,082 respectively.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-2 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5: UNIT TRANSACTIONS
The number of Accumulation Units issued and redeemed for the six
months ended June 30, 1999 and the year ended December 31, 1998 is as
follows:
SIX MONTHS
ENDED
JUNE 30, 1999 1998
-----------------------------------------------------------
Units issued 833,277 1,824,158
-----------------------------------------------------------
Units redeemed 4,560,077 4,188,962
-----------------------------------------------------------
NOTE 6: NET DECREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The decrease in net assets resulting from surplus transfers represents
the net reductions from the equity of Prudential from VCA-2.
NOTE 7: RELATED PARTY TRANSACTIONS
For the six months ended June 30, 1999 Prudential Securities
Incorporated, an indirect, wholly owned subsidiary of Prudential,
earned $9,711 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 six months ended June 30, 1999 and the year ended December
31,1998, $13,191 and $36,727 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.
13
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT - 2
Committee Members
John R. Strangfeld W. SCOTT McDONALD, JR., Ph.D.
Chairman, Vice President,
The Prudential Variable Kaludis Consulting Group
Contract Accounts - 2, 10 and 11
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, PH.D.
President, New Jersey Vice President,
Institute of Technology Interclass (international corporate
learning)
14
<PAGE>
THIS PAGE
INTENTIONALLY
LEFT BLANK
<PAGE>
THIS PAGE
INTENTIONALLY
LEFT BLANK
<PAGE>
================================================================================
Whether providing insurance protection for home, family and business, or
arranging to cover future education and retirement expenses, Prudential people
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.
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
(800) 458-6333
--------------
PRSRT.STD.
U.S. POSTAGE
PAID
SUMMIT, NJ
Address Service Requested Permit No. 657
--------------
[LOGO]
Printed in the U.S.A.
on recycled paper. INST-19990824-A001521
MD.RS.006.0899
