N-30D 1 dn30d.txt PRUDENTIAL LONG-TERM GROWTH ACCOUNT PRUDENTIAL LONG-TERM GROWTH ACCOUNT [PHOTO] ANNUAL REPORT TO PARTICIPANTS December 31, 2002 The Prudential Insurance Company of America 751 Broad Street Newark, NJ 07102-3777 [LOGO OF PRUDENTIAL FINANCIAL] A Prudential Financial Company 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 a group annuity insurance product issued by The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777, and distributed by Prudential Investment Management Services LLC (PIMS), Three Gateway Center, 14th Floor, Newark, NJ 07102-4077. PIMS is a Prudential Financial company. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ, and its affiliates. Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your plan sponsor or licensed financial professional can provide you with costs and complete details. THE PRUDENTIAL LONG-TERM GROWTH ACCOUNT ANNUAL REPORT DECEMBER 31, 2002 LETTER TO PARTICIPANTS [PHOTO OF DAVID R. ODENATH, JR.] CHAIRMAN We recommend that any changes to your investment strategy be based on sound financial principles rather than in reaction to market events. It can help to speak with a financial professional. . DEAR PARTICIPANT, This annual report reviews the investments strategies and performance of the portfolio available in the Prudential Long-Term Growth Account. . AN EXCEPTIONALLY LARGE GAP BETWEEN STOCK AND BOND RETURNS In 2002, concerns about accounting practices, geopolitical uncertainty, and corporate profitability led many investors to abondon equities. As share prices continued to move down, investors increasingly lost confidence in stocks, resulting in the worst return for the Standard & Poor's (S&P) 500 Index since 1974. Some of the investors' cash was reinvested in bonds. Together with a slower-than-expected economic recovery, which kept interest rates low, this produced an excellent year for the bond markets. Despite some corporate credit concerns, almost all fixed income sectors performed well. . PLAN WITH REALISTIC EXPECTATIONS The performance of the different asset classes in 2002 suggests that some investors changed their asset allocation in response to the falling equity market (accelerating the fall in the process). Although both bond and stock prices fluctuate, stocks historically have been more volatile. They are nonetheless part of most asset allocation plans because their returns have been higher than those on bonds over the long term. The principles of finance state that there ought to be a trade-off between volatility and long-term return. One advantage of consulting a financial professional is that professionally designed plans take this trade-off into account. Your asset allocation should be appropriately diversified to help you reach your investment goals, taking into account the amount of time you have to reach them and your personal tolerance for risk. . GOOD COUNSEL HELPS IN DIFFICULT TIMES Distracting market turbulence and world-changing international events can make it difficult to keep focused on your personal goals. We recommend that any changes to your investment strategy be based on sound financial principles rather than in reaction to market events. It can help to speak with a financial professional. We appreciate your continued confidence in The Prudential Long-Term Growth Account. Sincerely, /s/ David R. Odenath, Jr. David R. Odenath, Jr. Chairman, The Prudential Variable Contract Account-2 January 31, 2003 THE PRUDENTIAL LONG-TERM GROWTH ACCOUNT ANNUAL REPORT DECEMBER 31, 2002 VCA-2 PORTFOLIO MANAGED BY: JENNISON ASSOCIATES LLC From the peak in March 2000 to the lowest point reached in October 2002, a period of 31 months, the S&P 500 Index lost nearly 50% of its value. The magnitude and duration of this decline eclipses the bear market of 1973-1974 when the Index fell 48% in 21 months. Moreover, this past year is the first time since the early 1980s, when the S&P 500 sectors were first tracked, that every sector posted a negative return. PERFORMANCE SUMMARY
AVERAGE ANNUAL RETURNS SIX MONTH/5/ 1-YEAR 3-YEAR 5-YEAR 10-YEAR Long-Term Growth Acct./1/ -10.95% -22.35% -8.77% -5.84% 6.89% Long-Term Growth Acct. (with sales charge)/2/ -10.85% -25.17% -10.42% -7.19% 5.74% S&P 500 Index/3/ -10.30% -22.09% -14.54% -0.58% 9.34% Lipper (VIP) Multi-Cap Value Funds Avg./4/ -11.49% -17.91% -3.36% 1.32% 9.69%
Long-Term Growth Account inception date: 7/1/68. The VCA-2 Portfolio returned -22.35% in 2002, trailing the Lipper (VIP) Multi-Cap Value Funds Average, in line with the S&P 500 Index. It trailed the Index in the financials and healthcare sectors, but mitigated much of the underperformance in these sectors with better stock selection in the materials and industrial sectors. PERFORMANCE REVIEW We underweighted bank stocks as the year began because of concerns about consumer spending and credit quality. Consequently, we didn't fully benefit when further interest rate cuts improved their margins and credit quality appeared stronger than expected. We focused on insurance stocks instead because of strengthening property and casualty policy rates, but other factors drove down their share prices. Food and Drug Administration (FDA) rejection letters on a number of promising drugs and concern about competition from generics soured the market for research-oriented drug companies. We thought these well-known factors already had affected share prices as much as they would, but we were wrong. We think investors overreacted. The negative impact of these holdings was mitigated by gains on a few opportunely purchased positions, notably Amgen and WellPoint Health Networks. In the Materials sector, our focus on precious metals-related stocks produced strong performance as the price of gold soared. The largest gold stock contributors to return include Freeport-McMoRan Copper & Gold Inc., as Newmont Mining Corp., the largest unhedged gold producer in the world. Our concentration in defense-related companies performed relatively well this year. Rising military spending and geopolitical tensions produced a favourable environment for defense contractors. We expect this trend to continue for several years. $10,000 INVESTED OVER 10 YEARS [GRAPHIC APPEARS HERE]
VCA-2 Lipper (VIP) Multi-Cap Value Fund Avg. S&P 500 Index Dec|1993 12361.8 11581.1 11005.7 11908.1 11290.1 10589.1 11986.7 11300.5 10633.3 12654.4 11812.8 11152.1 Dec|1994 12196.3 11550.9 11150.2 13050 12504.5 12234.7 13889.1 13530.8 13401 15222.5 14574 14465.2 Dec|1995 15662.4 15171 15335.4 17164.5 16044.6 16158.3 17404.8 16495.6 16882.5 18102.7 16911.1 17404.6 Dec|1996 19952.8 18277.4 18854.1 19879 18591.8 19360.6 22906.5 21145.3 22737.5 26166.1 23395.5 24440.4 Dec|1997 26317.9 23510.5 25142.1 29489.2 26225.5 28646.6 28451.2 26063.9 29597.7 22422.4 22432 26660.3 Dec|1998 25359.7 26153.8 32332.4 26516.1 26377 33942.7 29385.1 29219.4 36330.8 25767.8 26479.1 34068 Dec|1999 27033 28451.8 39133 27295.2 28799.4 40029.2 26975.9 28343.8 38966 28432.6 30075.7 38588.3 Dec|2000 29356.7 31482.3 35571.2 27251.8 30501.9 31356.6 28385.5 32346 33190.4 23823.9 28575.6 28320.7 Dec|2001 26430.2 31707.6 31346.7 26543.9 32678.3 31433.1 23048.1 29174.9 27224.3 18934 23845.7 22523.8 Dec|2002 20524.5 25796.5 24421.5
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 that are more fully described in the prospectus. For more complete information about the Account, including charges and expenses, please see the prospectus. Please read it carefully before investing. /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 2.5% sales charge and the impact of an annual account charge. /3/ The S&P 500 Index 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 Index is unmanaged 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 Index may differ substantially from the securities in the Account. The S&P 500 Index is not the only index that may be used to characterize performance of this Account, and other indexes may portray different comparative performance. Investors cannot invest directly in an index. /4/ The Lipper Variable Insurance Products (VIP) Multi-Cap Value Funds Average is calculated by Lipper Analytical Services, Inc., and reflects the investment of certain portfolio's underlying variable life and annuity products. These returns are net of investment fees and fund expenses, but not product charges. Investors cannot invest directly in a market index or average. /5/ Six-month returns are not annualized. FINANCIAL STATEMENTS OF VCA-2 STATEMENT OF NET ASSETS December 31, 2002
LONG-TERM INVESTMENTS--92.8% COMMON STOCKS SHARES VALUE (NOTE 2) ---------- --------------- ADVERTISING -- 0.8% Omnicom Group, Inc. ............................... 38,100 $ 2,461,260 --------------- AEROSPACE/DEFENSE -- 3.9% Lockheed Martin Corp. ............................. 12,400 716,100 Northrop Grumman Corp. ............................ 70,800 6,867,600 Raytheon Co. ...................................... 125,900 3,871,425 --------------- 11,455,125 --------------- AUTOMOTIVE -- 0.6% Harley-Davidson, Inc. ............................. 38,600 1,783,320 --------------- BANKING & FINANCIAL SERVICES -- 6.9% American Express Co. .............................. 143,700 5,079,795 Bank One Corp. .................................... 158,000 5,774,900 Charter One Financial, Inc. ....................... 20,700 594,711 CitiGroup, Inc.(a) ................................ 88,764 3,123,605 Goldman Sachs Group, Inc. (The) ................... 40,500 2,758,050 Merrill Lynch & Co., Inc. ......................... 78,000 2,960,100 --------------- 20,291,161 --------------- BIOTECHNOLOGY -- 2.8% Amgen, Inc. ....................................... 88,900 4,297,426 MedImmune, Inc. (a) ............................... 86,700 2,355,639 Teva Pharmaceutical Industries Ltd. ADR (Israel) ..................................... 42,600 1,644,786 --------------- 8,297,851 --------------- CHEMICALS -- 1.1% Agrium, Inc. ...................................... 296,900 3,357,939 --------------- COMPUTER HARDWARE -- 2.4% Hewlett-Packard Co. ............................... 411,507 7,143,762 --------------- COMPUTER SOFTWARE & SERVICES -- 2.8% Microsoft Corp. (a) ............................... 160,500 8,297,850 --------------- DIVERSIFIED INDUSTRIES -- 1.9% Minnesota Mining & Manufacturing Co. .............. 46,200 5,696,460 --------------- HOTELS & MOTELS -- 1.6% Marriott International, Inc.--Cl. A ............... 62,900 2,067,523 USA Interactive(a) ................................ 118,000 2,704,560 --------------- 4,772,083 --------------- INSURANCE -- 8.4% American International Group, Inc. ................ 90,300 5,223,855 Hartford Financial Services Group, Inc. (The) ............................................ 95,300 4,329,479 Lincoln National Corp ............................. 84,300 2,662,194 Loews Corp. ....................................... 143,100 6,362,226 XL Capital Ltd.--Cl. A (Bermuda) .................. 79,784 6,163,314 --------------- 24,741,068 --------------- MEDIA -- 5.1% AT&T Corp. ........................................ 354,300 3,167,442 Clear Channel Communications, Inc.(a).............. 45,200 1,685,508 New York Times Co.-- Cl.A (The) ................... 79,200 3,621,816 Viacom, Inc.--Cl. B(a) ............................ 132,200 5,388,472 Univision Communication, Inc--Cl. A(a) ............ 40,100 982,450 --------------- 14,845,688 --------------- METALS & MINING -- 8.4% Alcoa, Inc. ....................................... 187,100 $ 4,262,138 Carbide/Graphite Group, Inc. (The)(a) ............. 427,700 43 Companhia Vale do Rio Doce ADR (Brazil)(a) ................................... 191,100 5,524,701 Freeport-McMoRan Cooper & Gold, Inc.--Cl. B(a) .... 530,800 8,906,824 Newmont Mining Corp ............................... 211,800 6,148,554 --------------- 24,842,260 --------------- NETWORKING -- 0.5% Cisco Systems, Inc. (a) ........................... 105,200 1,378,120 --------------- OFFICE EQUIPMENT & SUPPLIES -- 1.0% Xerox Corp.(a) .................................... 375,400 3,021,971 --------------- OIL & GAS EXPLORATION & PRODUCTION -- 12.4% Anadarko Petroleum Corp. .......................... 83,600 4,004,440 Baker Hughes, Inc. ................................ 185,200 5,961,588 BJ Services Co.(a) ................................ 119,000 3,844,890 Kerr-McGee Corp. .................................. 72,799 3,224,996 Total Fina Elf S.A. ADR (France) .................. 93,600 6,692,400 Transocean, Inc. .................................. 211,700 4,911,440 Suncor Energy, Inc. (Canada) ...................... 234,900 3,680,883 Weatherford International Ltd. ADR (Bermuda)(a) ..................................... 109,000 4,352,370 --------------- 36,673,007 --------------- PAPER & FOREST PRODUCTS -- 3.1% International Paper Co. ........................... 62,100 2,171,637 Temple-Inland, Inc. ............................... 92,400 4,140,444 Weyerhaeuser Co. .................................. 57,000 2,804,970 --------------- 9,117,051 --------------- PHARMACEUTICALS -- 10.1% Abbott Laboratories ............................... 166,900 6,676,000 Eli Lilly & Co. ................................... 55,700 3,536,950 Johnson & Johnson ................................. 74,200 3,985,282 Pfizer, Inc. ...................................... 144,400 4,414,308 Pharmacia Corp. ................................... 107,000 4,472,600 Sepracor, Inc.(a) ................................. 160,100 1,548,167 Wyeth ............................................. 119,000 5,198,600 --------------- 29,831,907 --------------- RETAIL -- 4.9% CarMax, Inc.(a) ................................... 89,245 1,595,701 Circuit City Stores, Inc. ......................... 232,400 1,724,408 Costco Wholesale Corp.(a) ......................... 110,900 3,111,854 Walgreen Co. ...................................... 45,200 1,319,388 Wal-Mart Stores, Inc. ............................. 131,600 6,647,116 --------------- 14,398,467 --------------- SEMICONDUCTORS -- 4.9% Altera Corp.(a) ................................... 192,800 2,377,224 Applied Materials, Inc.(a) ........................ 132,300 1,723,869 Intel Corp. ....................................... 252,800 3,936,096 Micron Technology, Inc.(a) ........................ 87,000 847,380 Novellus Systems, Inc.(a) ......................... 27,200 763,776 STMicroelectronics N.V. ADR (Switzerland) .................................... 66,300 1,293,513 Texas Instruments, Inc. ........................... 227,300 3,411,772 --------------- 14,353,630 ---------------
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS OF VCA-2 STATEMENT OF NET ASSETS December 31, 2002
COMMON STOCKS (Continued) SHARES VALUE (NOTE 2) ---------- --------------- TELECOMMUNICATIONS -- 3.3% BellSouth Corp. ................................... 250,500 $ 6,480,435 SBC Communications, Inc. .......................... 120,700 3,272,177 --------------- 9,752,612 --------------- TELECOMMUNICATIONS EQUIPMENT -- 1.1% Nokia Oyi ADR (Finland) ........................... 207,300 3,213,150 --------------- TOBACCO -- 1.1% Philip Morris Co., Inc. ........................... 78,200 3,169,446 --------------- UTILITIES -- 3.7% Dominion Resources, Inc. .......................... 65,100 3,573,990 FirstEnergy Corp. ................................. 119,000 3,923,430 Public Service Enterprise Group, Inc. ............. 105,700 3,392,970 --------------- 10,890,390 --------------- TOTAL LONG-TERM INVESTMENTS (cost: $300,811,734) .............................. $ 273,785,577 --------------- SHORT-TERM INVESTMENT -- 6.7% MUTUAL FUND Prudential Core Investment Fund- Taxable Money Market Series (cost: $19,853,339; Note 4) ...................... 19,853,339 $ 19,853,339 --------------- TOTAL INVESTMENTS -- 99.5% (cost: $320,665,073) .............................. 293,638,916 --------------- OTHER ASSETS, LESS LIABILITIES Dividends Receivable .............................. 1,821,541 Payable for Pending Capital Transactions .......... (196,338) Payable for Investments Purchased ................. (151,452) --------------- Other assets -- 0.5% .................................. 1,473,751 --------------- Net assets -- 100% .................................... $ 295,112,667 =============== NET ASSETS, REPRESENTING: Equity of Participants (other than Annuitants) -- 14,636,229 Accumulation Units at an Accumulation Unit Value of $19.1583 .............. $ 280,404,811 Equity of Annuitants .............................. 14,051,175 Equity of The Prudential Insurance Company of America ............................... 656,681 --------------- $ 295,112,667 ===============
The following abbreviations are used in portfolio descriptions: ADR American Depository Receipt. (a) Non-income producing security. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL STATEMENTS OF VCA-2 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 INVESTMENT INCOME Dividends (net of $11,878 foreign withholding tax) ............................................ $ 4,311,699 Interest ...................................................................................... 348,450 ----------------------------------------------------------------------------------------------------------------- Total Income ................................................................................ 4,660,149 ----------------------------------------------------------------------------------------------------------------- EXPENSES Fees Charged to Participants and Annuitants for Investment Management Services ................ 429,911 Fees Charged to Participants (other than Annuitants) for Assuming Mortality and Expense Risks.. 1,289,733 ----------------------------------------------------------------------------------------------------------------- Total Expenses .............................................................................. 1,719,644 ----------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME ........................................................................... 2,940,505 ----------------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS Realized Loss on Investments .................................................................. (40,390,526) Increase in Unrealized Depreciation on Investments ............................................ (54,309,308) ----------------------------------------------------------------------------------------------------------------- NET LOSS ON INVESTMENTS ......................................................................... (94,699,834) ----------------------------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................................ $ (91,759,329) =================================================================================================================
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, --------------------------------- 2002 2001 --------------- --------------- OPERATIONS Net Investment Income .......................................................... $ 2,940,505 $ 3,968,377 Net Realized Loss on Investments ............................................... (40,390,526) (35,820,916) Increase In Unrealized Depreciation on Investments ............................. (54,309,308) (14,980,082) --------------------------------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................. (91,759,329) (46,832,621) --------------------------------------------------------------------------------------------------------------------- CAPITAL TRANSACTIONS Purchase Payments and Transfers In ............................................. 34,155,856 18,167,773 Withdrawals and Transfers Out .................................................. (43,243,220) (45,820,185) Annual Administration Charges Deducted from Participants' Accumulation Accounts. (12,438) (19,189) Mortality and Expense Risk Charges Deducted from Annuitants' Accounts .......... (48,984) (71,256) Variable Annuity Payments ...................................................... (2,661,656) (3,257,733) --------------------------------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS ................... (11,810,442) (31,000,590) --------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS ...................... 181,124 286,258 --------------------------------------------------------------------------------------------------------------------- TOTAL DECREASE IN NET ASSETS ..................................................... (103,388,647) (77,546,953) ===================================================================================================================== NET ASSETS Beginning of year .............................................................. 398,501,314 476,048,267 --------------------------------------------------------------------------------------------------------------------- End of year .................................................................... $ 295,112,667 $ 398,501,314 =====================================================================================================================
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS FOR VCA-2 INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT* (For an Accumulation Unit outstanding throughout the period)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Investment Income ............................. $ .2859 $ .3621 $ .4152 $ .4596 $ .3414 ---------------------------------------------------------------------------------------------------------- EXPENSES Investment management fee ................... (.0268) (.0320) (.0321) (.0316) (.0325) Assuming mortality and expense risks ........ (.0803) (.0960) (.0961) (.0948) (.0974) ---------------------------------------------------------------------------------------------------------- Net Investment Income ......................... .1788 .2341 .2870 .3332 .2115 ---------------------------------------------------------------------------------------------------------- CAPITAL CHANGES Net realized gain (loss) on investments ..... (2.4591) (2.1868) 1.8450 1.3723 3.1604 Net change in unrealized appreciation (depreciation) of investments .............. (3.2340) (.7809) .0344 (1.4043) (4.3161) ---------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Accumulation Unit Value ........................................ (5.5143) (2.7336) 2.1664 .3012 (.9442) ---------------------------------------------------------------------------------------------------------- ACCUMULATION UNIT VALUE Beginning of period ......................... 24.6726 27.4062 25.2398 24.9386 25.8828 End of period ............................... $ 19.1583 $ 24.6726 $ 27.4062 $ 25.2398 $ 24.9386 ---------------------------------------------------------------------------------------------------------- Total Return** ................................ (22.35)% (9.97)% 8.58% 1.21% (3.65)% ---------------------------------------------------------------------------------------------------------- Ratio Of Expenses To Average Net Assets*** .... .50% .50% .50% .50% .50% ---------------------------------------------------------------------------------------------------------- Ratio Of Net Investment Income To Average Net Assets*** .................................... .83% .92% 1.12% 1.33% .81% ---------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate ....................... 71% 80% 84% 81% 43% ---------------------------------------------------------------------------------------------------------- NUMBER OF ACCUMULATION UNITS OUTSTANDING For Participants at end of year (000 omitted) 14,636 15,271 16,372 20,424 26,278 ==========================================================================================================
* Calculated by accumulating the actual per unit amounts daily. ** Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported. *** 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. NOTES TO THE 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. The investment objective of the Account is long-term growth of capital. Its investments are composed primarily of common stocks. Although variable annuity payments differ according to the investment performance of the Account, they are not affected by mortality or expense experience because Prudential assumes the expense risk and the mortality risk under the contracts. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Securities Valuation: Equity Securities Any security for which the primary market is on an exchange is generally valued at the last sale price on such exchange as of the close of the New York Stock Exchange 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 pursuant to the Account's valuation procedures. Short-Term Investments Short-term investments which mature in more than 60 days are valued based on current market quotations. 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 accretion of discount or amortization of premium to maturity. Securities Transactions and Investment Income: Securities transactions are recorded on the trade date. Realized gains (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. Federal Income 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. Annuity Reserves: 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% in contract charges defined in Note 3A. The AIRs are selected by each Contract-holder and are described in the prospectus. NOTE 3: INVESTMENT MANAGEMENT AGREEMENT AND CHARGES The Account has a management agreement with Prudential Investments LLC ("PI") Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PI has entered into a subadvisory agreement with Jennison Associates LLC ("Jennison"). The subadvisory agreement provides that Jennison will furnish investment advisory services in connection with management of the Account. PI pays for the services of Jennison. A daily charge, at an effective annual rate of 0.125% of the current value of the Participant's (other than Annuitants' and Prudential's) equity in VCA-2, is charged to the Account and paid to PI for investment management services. An equivalent charge is deducted monthly in determining the amount of Annuitants' payments. A daily charge, paid to PI for assuming mortality and expense risks, is calculated at an effective annual rate of 0.375% of the current value of the Participant's (other than Annuitants' and Prudential's) equity in VCA-2. A one-time equivalent charge is deducted when the Annuity Units for Annuitants are determined. Prudential, PI and Jennison are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. 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 fiscal 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. A charge of 2.5% for sales and other marketing expenses is deducted from certain Participant's purchase payments. For the year ended December 31, 2002, Prudential has advised the Account it has received $12,438 for such charges. NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES For the year ended December 31, 2002, the aggregate cost of purchases and the proceeds from sales of securities, excluding short-term investments, were $238,796,057 and $289,702,479, respectively. Investment in the Core Funds: The Account invests in the Taxable Money Market Series (the "Series"), a portfolio of Prudential Core Investment Fund, pursuant to an exemptive order received from the Securities and Exchange Commission. The Series is a money market mutual fund registered under the Investment Company Act of 1940, as amended, and managed by PI. During the fiscal year ended December 31, 2002, the Account earned $103,458, from the Series by investing its excess cash in the Series. NOTE 5: UNIT TRANSACTIONS The number of Accumulation Units issued and redeemed for the years ended December 31, 2002 and December 31, 2001, respectively are as follows: YEAR ENDED DECEMBER 31, --------------------------------- 2002 2001 ------------------------------------------------------- Units issued 1,462,923 713,442 ------------------------------------------------------- Units redeemed (2,097,407) (1,814,330) ------------------------------------------------------- Net decrease (634,484) (1,100,888) ------------------------------------------------------- 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 increases to/(reductions from) Prudential's investment Account. The increase (decrease) includes reserve adjustments for mortality and expense risks assumed by Prudential. NOTE 7: 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, 2002 and December 31, 2001, $11,777 and $ 25,918 of participant loan principal and interest has been paid to VCA-2, respectively. The participant loan principal and interest repayments are included in purchase payments and transfers in within the Statement of Changes in Net Assets. 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, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 27, 2003 MANAGEMENT OF VCA-2 (UNAUDITED) Information pertaining to the Committee Members of VCA-2 is set forth below. Committee Members who are not deemed to be "interested persons" of VCA-2 as defined in the Investment Company Act of 1940, as amended (the Investment Company Act or the 1940 Act) are referred to as "Independent Committee Members." Committee Members who are deemed to be "interested persons" of VCA-2 are referred to as "Interested Committee Members." "Fund Complex" consists of VCA-2 and any other investment companies managed by Prudential Investments LLC (PI). INDEPENDENT COMMITTEE MEMBERS
NUMBER OF PORTFOLIOS IN TERM OF FUND COMPLEX OTHER OFFICE*** OVERSEEN BY DIRECTORSHIPS HELD POSITION WITH AND LENGTH OF PRINCIPAL OCCUPATIONS COMMITTEE BY THE COMMITTEE NAME, ADDRESS** AND AGE VCA-2 TIME SERVED DURING PAST 5 YEARS MEMBER MEMBER**** --------------------------- ------------- ------------- --------------------------------- ------------- ------------------ Saul K. Fenster, Ph.D. (68) Committee Since 1985 Currently President Emeritus 79 Member (since Member of New Jersey Institute of 2000), Board of Technology; formerly President Directors of IDT (1978-2002) of New Jersey Corporation. Institute of Technology; Commissioner (1998-2002) of the Middle States Association Commissioner on Higher Education; Commissioner (1985-2002) on the New Jersey Commission of Science and Technology; Director (since 1998) Society of Manufacturing Engineering Education Foundation, Director (since 1995) of Prosperity New Jersey; formerly a director or trustee of Liberty Science Center, Research and Development Council of New Jersey, New Jersey State Chamber of Commerce, and National Action Council for Minorities in Engineering. W. Scott McDonald, Jr. (64) Committee Since 1985 Vice President (since 1997) of 79 Member Kaludis Consulting Group, Inc. (a company serving higher education); formerly principal (1993-1997), Scott McDonald & Associates; Chief Operating Officer (1991-1995), Fairleigh Dickinson University; Executive Vice President and Chief Operating Officer (1975-1991), Drew University; interim President (1988-1990), Drew University and former director of School, College and University Underwriters Ltd. Joseph Weber, Ph.D. (78)/1/ Committee Since 1985 Vice President, Finance, 62 Member Interclass (international corporate learning) since 1991; formerly President, The Alliance for learning; retired Vice President, Member of the Board of Directors and Member of the Executive and Operating Committees, Hoffmann-LaRoche Inc; Member, Board of Overseas, New Jersey Institute of Technology; Trustee and Vice Chairman Emeritus, Fairleigh Dickinson University.
INTERESTED COMMITTEE MEMBERS
NUMBER OF PORTFOLIOS IN TERM OF FUND COMPLEX OTHER OFFICE*** OVERSEEN BY DIRECTORSHIPS HELD POSITION WITH AND LENGTH OF PRINCIPAL OCCUPATIONS COMMITTEE BY THE COMMITTEE NAME, ADDRESS** AND AGE VCA-2 TIME SERVED DURING PAST 5 YEARS MEMBER MEMBER**** --------------------------- ------------- ------------- --------------------------------- ------------- ------------------ David R. Odenath, Jr. (46) Chairman and Since 1999 President, Chief Executive 115 Committee Officer and Chief Operating Member Officer (since June 1999) of PI; Senior Vice President (since June 1999) of The Prudential Insurance Company of America; formerly Senior Vice President (August 1993-May 1999) of PaineWebber Group, Inc.
Information pertaining to the Officers of the Account who are not also Committee Members is set forth below. OFFICERS
TERM OF OFFICE*** POSITION WITH AND LENGTH OF PRINCIPAL OCCUPATIONS NAME, ADDRESS** AND AGE VCA-2 TIME SERVED DURING PAST 5 YEARS ----------------------- -------------- ------------- ------------------------------- Robert F. Gunia (56) Vice President Since 1999 Executive Vice President and Chief Administrative Officer (since June 1999) of PI; Executive Vice President and Treasurer (since January 1996) of PI; President (since April 1999) of Prudential Investment Management Services LLC (PIMS); Corporate Vice President (since September 1997) of The Prudential Insurance Company of America (Prudential); formerly Senior Vice President (March 1987-May 1999) of Prudential Securities; formerly Chief Administrative Officer (July 1989-September 1996), Director (January 1989-September 1996) and Executive Vice President, Treasurer and Chief Financial Officer (June 1987-December 1996) of PMF; Vice President and Director (since May 1992) of Nicholas-Applegate Fund, Inc. Jody A. Rice (55) Vice President Since 2001 Executive Vice President (since 1999) of PI; formerly various positions to Senior Vice President (1992-1999) of Prudential Securities; and various positions to Managing Director (1975-1992) of Salomon Smith Barney; Member of Board of Governors of the Money Management Institute; Member of the Prudential Securities Operating Council and a Member of the Board of Directors for the National Association for Variable Annuities.
TERM OF OFFICE*** POSITION WITH AND LENGTH OF PRINCIPAL OCCUPATIONS NAME, ADDRESS** AND AGE VCA-2 TIME SERVED DURING PAST 5 YEARS ----------------------- -------------- ------------- ------------------------------- Jonathan D. Shain (44) Secretary Since 2001 Vice President and Corporate Counsel (since August 1998) of Prudential; formerly Attorney with Fleet Bank, N.A. (January 1997-July 1998) and Associate Counsel (August 1994-January 1997) of New York Life Insurance Company. Grace C. Torres (43) Treasurer and Since 1997 Senior Vice President (since Principal January 2000) of PI; formerly Financial and First Vice President (December Accounting 1996-January 2000) of PI and Officer First Vice President (March 1993-1999) of Prudential Securities. Jeffrey Scarbel (38) Assistant Since 2000 Vice President (since November Treasurer 2000) of PI; formerly Director (October 1996-November 2000) Of PI.
---------- /1/ Mr. Weber is scheduled to retire from the Committees as of December 31, 2002. * "Interested" Committee Member, as defined in the 1940 Act, by reason of employment with the Manager (as defined below) and/or the Distributor (as defined below). ** Unless otherwise noted, the address of the Committee Members and Officers is c/o: Prudential Investments LLC, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. *** There is no set term of office for Committee Members and Officers. The Independent Committee Members have adopted a retirement policy, which calls for the retirement of Committee Members on December 31 of the year in which they reach the age of 75. The table shows how long they have served as Committee Member and/or Officer. **** This column includes only directorships of companies required to register, or file reports with the SEC under the Securities Exchange Act of 1934 (i.e., "public companies") or other investment companies registered under the 1940 Act. Additional information about VCA-2's Committee Members is included in the VCA-2's Statement of Additional Information which is available without charge, upon request, by calling (800) 458-6333. THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT - 2 COMMITTEE MEMBERS DAVID R. ODENATH, JR. W. SCOTT MCDONALD, JR., PH.D. Chairman, Vice President, The Prudential Variable Kaludis Consulting Group Contract Accounts -2 SAUL K. FENSTER, PH.D. JOSEPH WEBER, PH.D. President, Vice President New Jersey Institute of Technology Interclass (international corporate learning) The toll-free number shown below can be used to make transfers and reallocations, review how your premiums are being allocated, and receive current investment option values in your contract. Unit values for each investment option are available to all Participants from the toll-free number. The phone lines are open each business day during the hours shown. Please be sure to have your contract number available when you call. [GRAPHIC APPEARS HERE] (800)458-6333 8 a.m. - 8 p.m. Eastern time In the past, Participants who held several variable contracts at the same address received multiple copies of annual and semiannual reports. In an effort to lessen waste and reduce expenses of postage and printing, we will attempt to mail only one copy of this report based on our current records for Participants with the same last name and same address. No action on your part is necessary. Upon request, we will furnish you with additional reports. The toll-free number listed on the inside back cover should be used to request additional copies. Proxy material and tax information will continue to be sent to each account of record. [LOGO OF PRUDENTIAL FINANCIAL] 30 Scranton Office Park PRESORTED Scranton, PA 18507-1789 STANDARD U.S.Postage PAID Prudential [RECYCLE SYMBOL] Printed in the U.S.A. LT.RS.001 on recycled Paper. IFS-A077792 Ed.02/2003