N-30D 1 mf15765.txt PRUDENTIAL SMALL COMPANY FUND -- 9/30/2002 ANNUAL REPORT SEPTEMBER 30, 2002 PRUDENTIAL SMALL COMPANY FUND, INC. FUND TYPE Small-capitalization stock OBJECTIVE Capital growth This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. The views expressed in this report and information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ, and its affiliates. PRUDENTIAL FINANCIAL (LOGO) Prudential Small Company Fund, Inc. Performance at a Glance INVESTMENT GOALS AND STYLE The Prudential Small Company Fund, Inc.'s (the Fund) investment objective is capital growth. The Fund invests primarily in stocks of small companies located mostly in the United States. We consider companies small if their total market value is less than the largest total market value of any company in the Standard & Poor's SmallCap 600 Index (S&P SmallCap 600 Index)--$2.6 billion as of September 30, 2002. The gap between the return on small companies and that on large companies can be substantial in either direction any year. That is why investors are often advised to own both for diversification. We focus on stocks that we believe have above-average prospects for earnings growth, but that also can be purchased at below-average multiples of their earnings or at discounts to their intrinsic values. This approach is often referred to as GARP, or "growth at a reasonable price." There can be no assurance that the Fund will achieve its investment objective. Portfolio Composition Sectors expressed as a percentage of net assets as of 9/30/02 23.0% Industrials 18.6 Consumer Discretionary 15.7 Financials 12.1 Healthcare 10.9 Information Technology 7.6 Energy 3.3 Consumer Staples 2.9 Materials 1.5 Telecommunication Services 1.2 Utilities 3.2 Cash & Equivalents Ten Largest Holdings Expressed as a percentage of net assets as of 9/30/02 2.2% Fisher Scientific International, Inc. Electronic Equipment & Instruments 2.1 Big Lots, Inc. Multiline Retail 2.0 Advance Auto Parts, Inc. Specialty Retail 1.8 Apogent Technologies, Inc. Healthcare Equipment & Supplies 1.8 Omnicare, Inc. Healthcare Providers and Services 1.8 Speedway Motorsports, Inc. Hotels Restaurants & Leisure 1.7 Pentair, Inc. Machinery 1.7 Pride International, Inc. Energy Equipment and Services 1.7 Endocare, Inc. Healthcare Equipment & Supplies 1.5 Corporate Executive Board Co. Commercial Services and Supplies Holdings are subject to change. www.prudential.com (800) 225-1852 Annual Report September 30, 2002 Cumulative Total Returns1 As of 9/30/02
One Year Five Years Ten Years Since Inception2 Class A -11.14% -25.18% 101.29% 181.25% Class B -11.86 -27.97 86.67 544.11 Class C -11.86 -27.97 N/A 48.36 Class Z -10.94 -24.17 N/A 24.22 Russell 2000 Index3 -9.30 -14.97 116.09 *** S&P SmallCap 600 Index4 -1.79 4.20 182.12 **** Lipper Small-Cap Core Funds Avg.5 -6.62 1.35 155.06 *****
Average Annual Total Returns1 As of 9/30/02 One Year Five Years Ten Years Since Inception2 Class A -15.58% -6.60% 6.70% 8.05% Class B -16.27 -6.50 6.44 8.89 Class C -13.62 -6.54 N/A 4.82 Class Z -10.94 -5.38 N/A 3.35 Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1Source: Prudential Investments LLC and Lipper Inc. The cumulative total returns do not take into account sales charges. The average annual total returns do take into account applicable sales charges. Without the distribution and service (12b-1) fee waiver for Class A shares, the returns would have been lower. The Fund charges a maximum front-end sales charge of 5% for Class A shares. Class B shares are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for the first six years respectively. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares on a quarterly basis. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for shares redeemed within 18 months of purchase. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. The cumulative and average annual total returns in the tables above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or following the redemption of fund shares. 2Inception dates: Class A, 1/22/90; Class B, 11/13/80; Class C, 8/1/94; and Class Z, 3/1/96. 3The Russell 2000 Index is an unmanaged capital-weighted index of the smallest 2,000 stocks among the largest 3,000 U.S. corporations and represents approximately 8% of their aggregate market value. 4The S&P SmallCap 600 Index is an unmanaged capital-weighted index of 600 small company U.S. common stocks that cover all industry sectors. It gives a broad look at how small- cap stock prices have performed. 5The Lipper Average is unmanaged, and is based on the average return for all funds in each share class for the one-year, five- year, ten-year, and since inception periods in the Lipper Small-Cap Core Funds category. Funds in the Lipper Small-Cap Core Funds Average invest at least 75% of their assets in companies with market capitalizations of less than 250% of the dollar- weighted median of the smallest 500 of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Small-cap core funds have a wide latitude in the companies in which they invest, and have an above-average price/earnings ratio, price-to-book ratio, and three-year sales-per-share growth value. Investors cannot invest directly in an index. The returns for the Russell 2000 Index, S&P SmallCap 600 Index, and Lipper Average would be lower if they included the effect of sales charges, operating expenses or taxes.***The Russell 2000 Index Since Inception returns are 186.85% for Class A, 659.80% for Class B, 66.35% for Class C, and 21.74% for Class Z. ****The S&P SmallCap 600 Index Since Inception returns are 263.85% for Class A, 427.31% for Class B, 120.66% for Class C, and 58.28% for Class Z. The S&P SmallCap 600 Index began 2/29/84. Therefore, the return for Class B shares represents an inception from that time until present (9/30/02). *****Lipper Since Inception returns are 252.87% for Class A, 685.90% for Class B, 102.38% for Class C, and 55.04% for Class Z, based on all funds in each share class. 1 PRUDENTIAL FINANCIAL (LOGO) November 15, 2002 DEAR SHAREHOLDER, The 12-month period ending September 30, 2002, was disappointing for stock investors. At the beginning of the period, in the wake of the terrorist attacks, interest-rate reductions in the United States and Europe spurred hopes that the global economy would recover quickly. Signs of greater economic activity encouraged that optimism. Soon, however, a series of bankruptcies, indictments, earnings disappointments, conflicting economic signs, and the possibility of war with Iraq threw the stock market into a steep and broadening decline. Small-cap stocks, which historically are more sensitive to economic expectations, were particularly volatile in response to the rising uncertainty. They had substantial gains, far outperforming large-cap stocks during the early part of the period, and the Prudential Small Company Fund outperformed its benchmark. For the second half of the Fund's fiscal year, however, small caps trailed large caps slightly, and the Fund performed poorly in comparison with its peers. Over the full 12-month reporting period, the Fund's loss was somewhat greater than the decline of the Russell 2000 Index and substantially worse than the Lipper Small-Cap Core Funds Average. In the following pages, the Fund's adviser describes its performance in this unsettled environment. We encourage you to talk with your financial professional about the impact of recent events on your investment plan. We appreciate your continued confidence in Prudential mutual funds through these trying times. Sincerely, David R. Odenath, Jr., President Prudential Small Company Fund, Inc. 2 Prudential Small Company Fund, Inc. Annual Report September 30, 2002 INVESTMENT ADVISER'S REPORT OVERVIEW OF THE ENVIRONMENT AND PERFORMANCE Investor enthusiasm produced a very strong market return for stocks in general over the first half of the Fund's fiscal year--the last calendar quarter of 2001 and the first quarter of 2002. Small-company stocks were particularly good performers. In part, this was because they still were significantly cheaper than large caps in comparison to the firms' revenues, earnings, and book values. This relationship of share price to measures of intrinsic value is known as the share's valuation. Small caps, which historically have tended to outperform large caps in the early stages of an economic recovery, were expected to benefit from the strong economic medicine being applied to the U.S. economy. During this period, the Fund had a strong gain. However, in March, investors began to see a string of poor earnings reports and financial scandals. There was increasing evidence that the spurt of rapid economic growth in the first quarter of 2002 was due largely to a one-time boost after excess inventories had been liquidated, and that a recovery in profits may come more slowly. Amid poor economic news and increasing uncertainty in the Middle East, investors pulled back from the equity markets generally. Stocks in every economic sector shared in a very steep decline. The two and a half-year run in which small- cap stocks outperformed large-cap stocks came to an end, in part because the huge gap in valuations that had been caused by several years of small-cap underperformance was largely closed by early 2002. In addition, the profitability of small companies is more sensitive to the overall economy. Just as investors strongly favored small-company stocks in the fourth quarter of 2001 when they expected quick economic recovery, they avoided small-company stocks when they became more pessimistic about the economic outlook. The largest underperformance came during the months when companies gave advance notice of disappointing quarter-end financial reports. This pessimism affected these stocks as a group. During this falling market, the Fund had a substantially negative return. 3 Prudential Small Company Fund, Inc. Annual Report September 30, 2002 We compare the Fund's performance to two index benchmarks. The Russell 2000 Index is more representative of the universe from which we select stocks. It includes most of the companies of non- negligible size in the United States that are smaller than the largest 1000. Over the Fund's fiscal year, the Russell 2000 Index return was -9.3%. The S&P SmallCap 600 Index, which includes a smaller group of larger and more stable companies, returned -1.79% over the period. The -6.62% return of the Lipper Small-Cap Core Funds Average, representing the Fund's peers, fell between these two benchmarks. The Fund's net return over the full 12-month reporting period trailed both our peers and our benchmark indexes. THE WIRELESS RECOVERY WAS FURTHER DELAYED At the beginning of the Fund's fiscal year, 6.5% of its net assets were invested in wireless telecommunications stocks, and Western Wireless was its largest single position. Together, wireless stocks accounted for more than half of the Fund's negative return, victims, in our view, of the economic slowdown. Some companies reported slower subscriber growth, with new subscribers spending less than the old customers. Our rural cellular service holdings (Western Wireless and Rural Cellular) had been benefiting from high roaming revenues, but rates continued to decline. Wireless stocks across the entire industry dropped sharply. Western Wireless and AirGate PCS (a Sprint PCS affiliate) were the two worst detractors from the Fund's return. We continue to like the long-term prospects of the wireless telecommunications industry. Although we are concerned about the poor results announced by many wireless companies, we think that the share prices dropped to levels that represent compelling values. We expect wireless usage in the United States will eventually approach the much higher rates achieved in both Europe and Asia. The industry is suffering, however, because there are currently too many companies competing in the limited capacity of the portion of the broadcast band allotted to wireless. We expect consolidation in the industry to lift the values of all the remaining firms. We consolidated our exposure, selling our position in Rural Cellular and adding at lower 4 www.prudential.com (800) 225-1852 prices to our positions in Western Wireless (the stronger of the companies serving the less competitive rural market) and AirGate PCS . Our total exposure to the industry at period-end was reduced to less than 1% of net assets. TWO COMPANIES WITH SHORT-TERM PROBLEMS We had significant losses on two companies with sound businesses that experienced problems that we believe are limited in scope. Stillwater Mining Co., a platinum and palladium mining company, had higher mining and development costs than expected, a weakened balance sheet, and soft prices for palladium, their principal product. In addition, the Securities and Exchange Commission tried to force the company to reclassify its reserves. Stillwater eventually prevailed on the reserves issue, and while we are concerned about the future profitability of some Stillwater operations, we expect the company's earnings to return to acceptable levels. We think that its financial condition is satisfactory, and the stock appears undervalued to us. Flowserve makes industrial pumps, valves, and seals for a variety of end-market applications, primarily in the chemical, energy, and power industries. We expected its margins to grow as it assimilated several companies it had recently acquired. We thought that its revenue would be relatively steady because its products eventually wear out and must be replaced. The margins on these "aftermarket" sales are higher than those on primary sales. After a strong stock performance in the first half of the Fund's reporting period, Flowserve reported disappointing earnings as the economic slowdown led its customers to stretch out these replacement cycles. The share price fell substantially as a result. The company's long-term prospects haven't changed and we think its shares are an even better value at the lower price. We continue to hold our position. WE UNDERWEIGHTED TECHNOLOGY The good news about the Fund's technology exposure is that it was a smaller part of the portfolio than the sector's representation in either the Russell 2000 Index or the S&P SmallCap 600 Index. This helped the Fund's return 5 Prudential Small Company Fund, Inc. Annual Report September 30, 2002 relative to those indexes. Its technology holdings nonetheless caused a substantial detraction from the Fund's return. The lack of enterprise investment in technology or of upgrades in telecommunications equipment, together with rising price competition from Asian manufacturers, hurt a broad range of technology companies. Of this group, the largest detraction from the Fund's return came from Pemstar, Inc., a contract manufacturer of electronic components such as handsets and defense electronics. Six of its customers filed for bankruptcy during this period, leaving Pemstar with inventory for which it had not been paid. Its shares plummeted. We still hold a small position. We believe the company is strengthening its weakened balance sheet, will be profitable during the next two quarters (the period for which we have forecasts), and can survive in the long term. CONSUMER SPENDING SUPPORTED RETAIL STOCKS Some of the Fund's positions in retailers and their suppliers had positive impacts on its return. We took our profits on some of these because we suspected that consumer-oriented stocks may lag as other sectors recover. The largest contribution to the Fund's return came from Pier 1 Imports. The upward move of its shares regained strength after Pier 1 reported a quarter of above-expectation sales growth. We sold our position before the subsequent fall in its share price. Big Lots, Advance Auto Parts (see Comments on Largest Holdings for both), and Whole Foods Market also were large positions in retail businesses that had substantial share-price gains. We took our profits on Whole Foods, an organic food chain. We continue to be exposed to that growing industry with our position in United Natural Foods, which also gained during the Fund's reporting period. We continued the Fund's exposure to IMAX through a downturn when competition among theater chains drove several into bankruptcy. The recovery 6 www.prudential.com (800) 225-1852 that we expected in this industry has begun. We had a substantial gain because the theater chains have emerged from bankruptcy and are again in a position to upgrade, and the IMAX release of Apollo 13 was a critical and financial success. IMAX is hoping to simultaneously release its versions when first-run films are released. Its shares more than quadrupled in price over the Fund's reporting period, and we took some profits. HEALTH SERVICE STOCKS CONTINUED TO RISE We continue to like health service and certain related service companies. The sector as a whole has excellent long-term prospects because the large baby boom generation is reaching old age. During this reporting period, the Fund's holdings of HMOs, hospital managers, and specialty companies such as a drug distributor and a dialysis firm made a small net positive contribution to its return. Two of the Fund's largest positions at period-end, Fisher Scientific International, Inc. and Omnicare, Inc. (see Comments on Largest Holdings for both), were healthcare-related. The former had a moderate gain and the latter a small loss during this period. OTHER CONSUMER-ORIENTED SERVICES DID WELL The Fund had somewhat smaller gains on regional bank and radio stocks. Regional banks, unlike the very largest banks, had relatively little exposure to credit or capital market-related problems. They benefited from very low interest rates, which reduced their costs and encouraged borrowing. In addition, short-term interest rates were significantly lower than long-term rates throughout the period. This improved banks' profits, since they tend to pay short-term rates to savers and lend at long-term rates. Radio advertising was more stable than expected. In addition, the Fund's holdings gained market share over this period. The largest contribution came from Entravision Communications, which is a Spanish- language operation. This is a rapidly expanding market segment. 7 Prudential Small Company Fund, Inc. Annual Report September 30, 2002 LOOKING AHEAD Profits at small companies are projected to grow faster than those at large companies through 2002, with an even larger advantage in 2003. This is not surprising. Profits at small companies are more sensitive to the health of the overall economy. When economic growth picks up, small-company profits and share prices historically have benefited disproportionately. This sensitivity was evident in both directions during this reporting period. Shares of small companies are still less expensive (have lower valuations) than those of larger firms. We also believe that the current cleansing of financial reporting will favor small-cap stocks. We have seen the shares of some of the largest and most respected companies in the world hurt because of their complexity. It is harder for investors to understand what has generated reported earnings in complicated financial statements. With their simpler accounting, small companies have less "accounting risk"--risk due to unpredictable accounting issues. Another purely financial factor is that the falling equity market has reduced the value of pension portfolios just when there is pressure for more realistic accounting of pension liabilities. We think many large companies are going to take substantial charges to their earnings in order to fund their pension obligations. Small companies tend to be less exposed to this because they are less likely to have defined benefit pension plans (plans that guarantee a certain level of payments to retirees). Even if they do, small companies are likely to be younger, with less time to have built up unfunded obligations. It can happen, however, so we consider pension liabilities when we evaluate candidates for purchase. We think this will become an increasingly salient issue over the next year or so. Prudential Small Company Fund Management Team 8 www.prudential.com (800) 225-1852 Holdings expressed as a percentage of the Fund's net assets Comments on Largest Holdings As of 9/30/02 ------------------------------------------------------ 2.2% Fisher Scientific International, Inc./ Electronic Equipment & Instruments Fisher distributes scientific and healthcare equipment and supplies. A large part of its business is in consumables such as chemicals, drug packaging, and testing kits. This business is largely independent of the economic cycle. Fisher has used its large cash flow to broaden its product line with a series of acquisitions. 2.1% Big Lots, Inc./Multiline Retail Big Lots is the largest closeout retailer in the United States, with a dominating market share and industry-leading gross margins (sales minus cost of goods). However, it had very poor operating margins (after other expenses are subtracted) because it had grown through acquisitions and was inefficient. It responded by rebranding its stores to the Big Lots name and achieving economies of scale from its more than 1,350 stores. Its shares rose erratically, but gained more than 90% over this reporting period. We added to our position on dips. We think that its operating margins can improve further and that the share price has room to grow. 2.0% Advance Auto Parts, Inc./Specialty Retail Advance is the second largest auto parts retail chain in the United States and continues to grow by acquiring other firms. Like Big Lots, its margins were depressed because of inefficiencies created by its acquisitions. Its strong management team is restructuring the chain to improve margins. In addition, it is moving into the wholesale parts business (supplying garages). We expect industry consolidation and its own internal changes to improve its profitability. 1.8% Apogent Technologies, Inc./Healthcare Equipment & Supplies Apogent makes laboratory consumables--such as microscope slides, beakers, test kits, and diagnostic reagents--and laboratory equipment. Its products are used by hospitals, drug- stores, and research laboratories. When capital spending fell, the equipment portion of its business was weak and its share price fell to attractive levels. Apogent has strong cash flow and is growing through acquisitions. Its basic business derives from research and development spending, which tends to be sustained throughout an economic cycle. 1.8% Omnicare,Inc./Healthcare Providers & Services Omnicare has more than half of the U.S. market for distributing drugs to nursing homes and assisted living facilities. The stock became cheap when low government reimbursement rates were threatening its clients' profitability; reimbursement rates are now higher. Omnicare benefits from the economies of scale in the distribution business and from large barriers to entry because a distributor needs an extensive supply system. It is not dependent upon any single drug manufacturer. Holdings are subject to change. 9 ANNUAL REPORT SEPTEMBER 30, 2002 PRUDENTIAL SMALL COMPANY FUND, INC. FINANCIAL STATEMENTS Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS 96.8% COMMON STOCKS ------------------------------------------------------------------------------------- Aerospace & Defense 1.1% 214,800 Armor Holdings, Inc.(a) $ 3,219,852 217,500 BE Aerospace, Inc.(a) 1,035,300 -------------- 4,255,152 ------------------------------------------------------------------------------------- Airlines 0.9% 270,200 SkyWest, Inc. 3,539,620 ------------------------------------------------------------------------------------- Auto Components 0.5% 328,000 Tower Automotive, Inc.(a) 2,197,600 ------------------------------------------------------------------------------------- Banks 2.7% 144,120 Brookline Bancorp, Inc. 1,693,554 174,100 Silicon Valley Bancshares(a) 2,947,513 96,000 Southwest Bancorporation of Texas, Inc.(a) 3,495,360 68,400 UCBH Holdings, Inc. 2,691,540 -------------- 10,827,967 ------------------------------------------------------------------------------------- Beverages 1.3% 330,100 Cott Corp. (Canada)(a) 5,001,015 ------------------------------------------------------------------------------------- Chemicals 1.9% 66,900 Cambrex Corp. 2,461,920 197,900 Crompton Corp. 1,988,895 147,300 Spartech Corp. 3,116,868 -------------- 7,567,683 ------------------------------------------------------------------------------------- Commercial Services & Supplies 13.7% 253,500 Alliance Data Systems Corp.(a) 3,840,525 178,300 Bright Horizons Family Solutions, Inc.(a) 4,974,570 206,700 Corporate Executive Board Co.(a) 5,901,285 118,200 Education Management Corp.(a) 5,232,714 586,100 Exult, Inc.(a) 1,728,995 265,300 Insight Enterprises, Inc.(a) 2,692,795 174,000 Iron Mountain, Inc.(a) 4,348,260 345,600 NCO Group, Inc.(a) 3,936,384 280,500 NDCHealth Corp. 4,361,775
See Notes to Financial Statements 11 Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ 392,000 Pegasus Solutions, Inc.(a) $ 4,135,600 147,500 Waste Connections, Inc.(a) 5,131,525 292,100 Watson Wyatt & Co. Holdings(a) 5,842,000 200,400 West Corp.(a) 2,803,596 -------------- 54,930,024 ------------------------------------------------------------------------------------- Communications Equipment 1.2% 111,000 Advanced Fibre Communications, Inc.(a) 1,472,970 176,200 CommScope, Inc.(a) 1,194,636 164,600 PC-Tel, Inc.(a) 857,566 315,950 REMEC, Inc.(a) 1,077,389 -------------- 4,602,561 ------------------------------------------------------------------------------------- Diversified Financials 3.6% 145,200 Allied Capital Corp. 3,178,428 182,400 Eaton Vance Corp. 5,041,536 236,000 Gladstone Capital Corp. 3,983,680 127,400 W.P. Stewart & Co. Ltd. (Bermuda) 2,172,170 -------------- 14,375,814 ------------------------------------------------------------------------------------- Diversified Telecommunication Services 0.8% 94,400 Commonwealth Telephone Enterprises, Inc.(a) 3,282,288 ------------------------------------------------------------------------------------- Electrical Equipment 0.8% 236,900 Belden, Inc. 3,179,198 ------------------------------------------------------------------------------------- Electronic Equipment & Instruments 2.8% 286,100 Fisher Scientific International, Inc.(a) 8,683,135 658,700 Pemstar, Inc.(a) 797,027 70,200 Tech Data Corp.(a) 1,853,280 -------------- 11,333,442 ------------------------------------------------------------------------------------- Energy Equipment & Services 4.4% 622,000 Hanover Compressor Co.(a) 5,162,600 344,600 Maverick Tube Corp.(a) 3,056,602
12 See Notes to Financial Statements Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ 96,700 Patterson-UTI Energy, Inc.(a) $ 2,466,817 523,100 Pride International, Inc.(a) 6,800,300 -------------- 17,486,319 ------------------------------------------------------------------------------------- Food & Drug Retailing 1.7% 88,033 SUPERVALU, Inc. 1,421,733 239,600 United Natural Foods, Inc.(a) 5,517,988 -------------- 6,939,721 ------------------------------------------------------------------------------------- Food Products 0.3% 80,500 Chiquita Brands International, Inc.(a) 1,243,725 ------------------------------------------------------------------------------------- HealthCare Equipment & Supplies 6.3% 569,600 Align Technology, Inc.(a) 1,571,526 383,400 Apogent Technologies, Inc.(a) 7,154,244 464,100 Endocare, Inc.(a) 6,641,271 319,600 Intuitive Surgical, Inc.(a) 2,553,604 309,000 MedSource Technologies, Inc.(a) 2,323,680 203,100 Priority Healthcare Corp. Class B(a) 5,118,120 -------------- 25,362,445 ------------------------------------------------------------------------------------- HealthCare Providers & Services 5.3% 162,900 Odyssey Healthcare, Inc.(a) 4,878,855 336,400 Omnicare, Inc. 7,104,768 134,000 Renal Care Group, Inc.(a) 4,407,260 122,708 Triad Hospitals, Inc.(a) 4,656,769 -------------- 21,047,652 ------------------------------------------------------------------------------------- Hotels Restaurants & Leisure 2.9% 146,100 Jack in the Box, Inc.(a) 3,331,080 299,100 Speedway Motorsports, Inc.(a) 7,043,805 127,400 The Steak n Shake Co.(a) 1,401,400 -------------- 11,776,285 ------------------------------------------------------------------------------------- Household Durables 1.6% 158,000 Applica, Inc.(a) 837,400 156,400 Furniture Brands International, Inc.(a) 3,589,380 55,800 The Ryland Group, Inc. 2,074,086 -------------- 6,500,866
See Notes to Financial Statements 13 Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ Insurance 5.7% 113,327 AmerUs Group Co. $ 3,213,954 27,100 Everest Re Group Ltd. (Barbados) 1,486,706 20,100 Markel Corp.(a) 4,003,518 294,400 Max Re Capital Ltd. (Bermuda) 2,996,992 169,400 Scottish Annuity & Life Holdings Ltd. (Bermuda)(a) 2,888,270 85,200 StanCorp Financial Group, Inc. 4,507,080 12,500 White Mountains Insurance Group Ltd. 3,681,250 -------------- 22,777,770 ------------------------------------------------------------------------------------- IT Consulting & Services 0.5% 892,500 Answerthink, Inc.(a) 1,294,125 14,100 Cognizant Technology Solutions Corp.(a) 810,327 -------------- 2,104,452 ------------------------------------------------------------------------------------- Leisure Equipment & Products 0.7% 624,200 Concord Camera Corp.(a) 2,908,772 ------------------------------------------------------------------------------------- Machinery 5.7% 144,150 CLARCOR, Inc. 4,425,405 417,200 Flowserve Corp.(a) 4,172,000 101,400 Graco, Inc. 2,514,720 186,100 Joy Global, Inc.(a) 1,544,630 183,200 Pentair, Inc. 6,809,544 173,935 Robbins & Myers, Inc. 3,243,888 -------------- 22,710,187 ------------------------------------------------------------------------------------- Media 6.8% 416,900 Alliance Atlantis Communications, Inc. Class B (Canada)(a) 4,135,231 92,900 Entercom Communications Corp.(a) 4,400,673 371,500 Entravision Communications Corp. Class A(a) 4,922,375 884,400 Imax Corp. (Canada)(a) 4,024,020 379,100 Insight Communications Co., Inc.(a) 3,499,093 470,700 Regent Communications, Inc.(a) 2,391,156 86,600 Scholastic Corp.(a) 3,869,288 -------------- 27,241,836
14 See Notes to Financial Statements Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ Metals & Mining 1.0% 139,200 Liquidmetal Technologies(a) $ 1,112,208 461,400 Stillwater Mining Co.(a) 2,768,400 -------------- 3,880,608 ------------------------------------------------------------------------------------- Multiline Retail 2.1% 534,200 Big Lots, Inc.(a) 8,456,386 ------------------------------------------------------------------------------------- Oil & Gas 3.2% 265,900 Encore Aquisition Co.(a) 4,374,055 107,200 Newfield Exploration Co.(a) 3,600,848 150,400 Remington Oil & Gas Corp.(a) 2,120,640 279,100 Swift Energy Co.(a) 2,902,640 -------------- 12,998,183 ------------------------------------------------------------------------------------- Pharmaceuticals 0.5% 425,300 Impax Laboratories, Inc.(a) 2,066,958 ------------------------------------------------------------------------------------- Real Estate Investment Trust 3.7% 78,500 Alexandria Real Estate Equities, Inc. 3,334,680 165,500 Cousins Properties, Inc. 3,806,500 111,700 Kilroy Realty Corp. 2,648,407 156,100 Liberty Property Trust 4,839,100 -------------- 14,628,687 ------------------------------------------------------------------------------------- Road & Rail 0.8% 170,400 Heartland Express, Inc.(a) 3,193,296 ------------------------------------------------------------------------------------- Semiconductor Equipment & Products 2.4% 206,800 Brooks-PRI Automation, Inc.(a) 2,361,656 47,400 Cabot Microelectronics Corp.(a) 1,765,176 474,700 GlobespanVirata, Inc.(a) 1,120,292 126,600 Monolithic System Technology, Inc.(a) 1,266,000 505,300 Oak Technology, Inc.(a) 1,606,854 127,600 Power Integrations, Inc.(a) 1,555,444 -------------- 9,675,422
See Notes to Financial Statements 15 Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ Software 4.0% 195,700 Documentum, Inc.(a) $ 2,260,335 624,100 J.D. Edwards & Co.(a) 5,772,925 183,300 Macrovision Corp.(a) 2,241,759 76,900 Manhattan Associates, Inc.(a) 1,039,688 186,500 MRO Software, Inc.(a) 1,622,550 210,900 Networks Associates, Inc.(a) 2,241,867 158,900 S1 Corp.(a) 851,704 -------------- 16,030,828 ------------------------------------------------------------------------------------- Specialty Retail 4.0% 203,600 Abercrombie & Fitch Co. Class A(a) 4,004,812 152,500 Advanced Auto Parts, Inc.(a) 8,042,850 113,700 Ross Stores, Inc. 4,052,268 -------------- 16,099,930 ------------------------------------------------------------------------------------- Utilities 1.2% 660,600 Aquila, Inc. 2,708,460 181,000 El Paso Electric Co.(a) 2,150,280 -------------- 4,858,740 ------------------------------------------------------------------------------------- Wireless Telecommunication Services 0.7% 707,600 AirGate PCS, Inc.(a) 311,344 600,300 US Unwired, Inc. Class A(a) 420,210 852,700 Western Wireless Corp. Class A(a) 2,242,601 -------------- 2,974,155 -------------- Total common stocks (cost $486,160,498) 388,055,587 -------------- WARRANT 87,500 Student Advantage, Inc. Expires May 1, 2005(a)(b) (cost $0) 455 -------------- Total long-term investments (cost $486,160,498) 388,056,042 --------------
16 See Notes to Financial Statements Prudential Small Company Fund, Inc. Portfolio of Investments as of September 30, 2002 Cont'd.
Shares Description Value (Note 1) ------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT 3.9% ------------------------------------------------------------------------------------- Mutual Fund 15,415,293 Prudential Core Investment Fund - Taxable Money Market Series (cost $15,415,293; Note 3) $ 15,415,293 -------------- Total Investments 100.7% (cost $501,575,791; Note 5) 403,471,335 Liabilities in excess of other assets (0.7%) (2,774,037) -------------- Net Assets 100% $ 400,697,298 -------------- --------------
------------------------------ (a) Non-income producing security. (b) Fair-valued security--value is determined by the Valuation Committee or Board of Directors in consultation with the investment advisor. See Notes to Financial Statements 17 Prudential Small Company Fund, Inc. Statement of Assets and Liabilities
September 30, 2002 ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $501,575,791) $ 403,471,335 Cash 177,168 Receivable for investments sold 4,366,345 Receivable for Fund shares sold 267,697 Dividends receivable 244,513 Prepaid expenses 13,899 ------------------- Total assets 408,540,957 ------------------- LIABILITIES Payable for Fund shares reacquired 4,847,255 Payable for investments purchased 2,047,249 Accrued expenses 551,169 Management fee payable 247,198 Distribution fee payable 150,788 ------------------- Total liabilities 7,843,659 ------------------- NET ASSETS $ 400,697,298 ------------------- ------------------- Net assets were comprised of: Common stock, at par $ 363,957 Paid-in capital in excess of par 512,143,268 ------------------- 512,507,225 Accumulated net realized loss on investments (13,705,471) Net unrealized depreciation on investments (98,104,456) ------------------- Net assets, September 30, 2002 $ 400,697,298 ------------------- -------------------
18 See Notes to Financial Statements Prudential Small Company Fund, Inc. Statement of Assets and Liabilities Cont'd.
September 30, 2002 ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($216,955,499 / 19,016,434 shares of common stock issued and outstanding) $11.41 Maximum sales charge (5% of offering price) .60 ------------------- Maximum offering price to public $12.01 ------------------- ------------------- Class B: Net asset value, offering price and redemption price per share ($100,894,177 / 10,054,828 shares of common stock issued and outstanding) $10.03 ------------------- ------------------- Class C: Net asset value and redemption price per share ($14,989,465 / 1,493,771 shares of common stock issued and outstanding) $10.03 Sales charge (1% of offering price) .11 ------------------- Offering price to public $10.14 ------------------- ------------------- Class Z: Net asset value, offering price and redemption price per share ($67,858,157 / 5,830,705 shares of common stock issued and outstanding) $11.64 ------------------- -------------------
See Notes to Financial Statements 19 Prudential Small Company Fund, Inc. Statement of Operations
Year Ended September 30, 2002 ---------------------------------------------------------------------------------------- NET INVESTMENT LOSS Income Dividends $ 3,587,619 Interest 144,173 ------------------- Total income 3,731,792 ------------------- Expenses Management fee 3,795,767 Distribution fee--Class A 715,299 Distribution fee--Class B 1,437,480 Distribution fee--Class C 208,119 Transfer agent's fees and expenses 1,104,000 Reports to shareholders 105,000 Custodian's fees and expenses 101,000 Registration fees 60,000 Audit fee 27,000 Legal fees and expenses 25,000 Directors' fees 15,000 Miscellaneous 16,988 ------------------- Total expenses 7,610,653 ------------------- Net investment loss (3,878,861) ------------------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investment transactions (379,498) Net change in unrealized depreciation on investments (47,025,373) ------------------- Net loss on investments (47,404,871) ------------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (51,283,732) ------------------- -------------------
20 See Notes to Financial Statements Prudential Small Company Fund, Inc. Statement of Changes in Net Assets
Year Ended September 30, ---------------------------------------- 2002 2001 ------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS Operations Net investment loss $ (3,878,861) $ (3,762,790) Net realized gain (loss) on investment transactions (379,498) 27,179,082 Net change in unrealized depreciation on investments (47,025,373) (91,988,237) ------------------ ------------------ Net decrease in net assets resulting from operations (51,283,732) (68,571,945) ------------------ ------------------ Fund share transactions (Note 6) (net of share conversions) Net proceeds from shares sold 141,807,870 224,948,862 Cost of shares reacquired (183,336,579) (278,777,868) ------------------ ------------------ Net decrease in net assets from Fund share transactions (41,528,709) (53,829,006) ------------------ ------------------ Total decrease (92,812,441) (122,400,951) NET ASSETS Beginning of year 493,509,739 615,910,690 ------------------ ------------------ End of year $ 400,697,298 $ 493,509,739 ------------------ ------------------ ------------------ ------------------
See Notes to Financial Statements 21 Prudential Small Company Fund, Inc. Notes to Financial Statements Prudential Small Company Fund, Inc. (the 'Fund') is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The investment objective of the Fund is to achieve capital growth by investing in a carefully selected portfolio of common stocks. Investment income is of incidental importance, and the Fund may invest in securities which do not produce any income. Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Securities Valuation: Investments traded on a national securities exchange are valued at the last reported sales price on the primary exchange on which they are traded. Securities traded in the over-the-counter market (including securities listed on exchanges whose primary market is believed to be over-the-counter) and listed securities for which no sale was reported on that date are valued at the mean between the last reported bid and asked prices. Any security for which a reliable market quotation is unavailable is valued at fair value as determined in good faith by or under the direction of the Fund's Board of Directors. Investments in mutual funds are valued at their net asset value as of the close of the New York Stock Exchange on the date of valuation. Short-term securities which mature in more than 60 days are valued based upon current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost, which approximates market value. Repurchase Agreements: In connection with transactions in repurchase agreements with United States financial institutions, it is the Fund's policy that its custodian or designated subcustodians under triparty repurchase agreements, as the case may be, take possession of the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of investments 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. The Fund amortizes premiums and discounts on purchases of debt securities as adjustments to interest 22 Prudential Small Company Fund, Inc. Notes to Financial Statements income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (loss), (other than distribution fees) and unrealized and realized gains (losses) are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable net income and capital gains, if any, to shareholders. Therefore, no federal income tax provision is required. Dividends and Distributions: The Fund expects to pay dividends of any net investment income semi-annually and distributions of net realized capital and currency gains, if any, annually. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Note 2. Agreements The Fund has a management agreement with Prudential Investments LLC ('PI'). Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadvisor's performance of such services. PI has entered into a subadvisory agreement with Jennison Associates LLC ('Jennison'). The subadvisory agreement provides that Jennison furnish investment advisory services in connection with the management of the Fund. PI pays for the services of Jennison, the cost of compensation of officers and employees of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid to PI is computed daily and payable monthly, at an annual rate of .70 of 1% of the Fund's average daily net assets. The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of expenses actually incurred by them. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor of the Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%, of the average daily net assets of the Class A, B and C shares, respectively. Such expenses 23 Prudential Small Company Fund, Inc. Notes to Financial Statements Cont'd. were .25 of 1%, 1% and 1% of the average daily net assets of the Class A, Class B and Class C shares, respectively, for the year ended September 30, 2002. PIMS has advised the Fund that it received approximately $116,600 and $8,900 in front-end sales charges resulting from sales of Class A and Class C shares during the year ended September 30, 2002. From these fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn paid commissions to salespersons and incurred other distribution costs. PIMS has advised the Fund that for the year ended September 30, 2002, it received approximately $246,000 and $3,000 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PI, PIMS and Jennison are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. ('Prudential'). The Fund, along with other affiliated registered investment companies (the 'Funds'), is a party to a syndicated credit agreement ('SCA') with a group of banks. For the year ended September 30, 2002, the amounts of the commitment were as follows: $930 million from October 1, 2001 through December 31, 2001 and $500 million from January 1, 2002 through May 3, 2002. On May 3, 2002, the Funds renewed and amended the SCA, which effectively increased the banks' commitment to $800 million and allows the Funds to increase the commitment to $1 billion, if necessary. Interest on any borrowings under the SCA will be incurred at market rates. The Funds pay a commitment fee of .08 of 1% of the unused portion of the SCA. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The purpose of the SCA is to serve as an alternative source of funding for capital share redemptions. The expiration date of the SCA is May 2, 2003. The Fund did not borrow any amounts pursuant to the SCA during the year ended September 30, 2002. Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential, serves as the Fund's transfer agent. During the year ended September 30, 2002 the Fund incurred fees of approximately $986,000 for the services of PMFS. As of September 30, 2002 approximately $78,000 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations also include certain out-of-pocket expenses paid to nonaffliates. The Fund pays networking fees to Prudential Securities, Inc. ('PSI'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential. These networking fees are payments made to broker/dealers that clear mutual fund transactions through a national mutual fund clearing system. The total amount of PSI networking fees incurred by the Fund during the year ended September 30, 2002 was approximately 24 Prudential Small Company Fund, Inc. Notes to Financial Statements $83,500 and is included in transfer agent's fees and expenses in the Statement of Operations. As of September 30, 2002, approximately $7,400 of such fees were due to PSI. The Fund 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 year ended September 30, 2002, the Fund earned income of $369,572 from the Series by investing its excess cash, of which approximately $5,133 is receivable at September 30, 2002. Note 4. Portfolio Securities Purchases and sales of investment securities, other than short-term investments, for the year ended September 30, 2002 were $370,664,221 and $411,483,389, respectively. Note 5. Distributions and Tax Information Distributions to shareholders, which are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principals, are recorded on the ex-dividend date. In order to present undistributed net investment income and accumulated net losses on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, undistributed net investment income and accumulated net realized loss on investments. For the year ended September 30, 2002, the adjustments were to increase undistributed net investment income and decrease paid-in capital by $3,878,861 due to a net operating loss. Net investment income, net realized losses and net assets were not affected by this change. As of September 30, 2002, the Fund had a capital loss carryforward for tax purposes of approximately $11,493,000 which expires in 2008. Accordingly, no capital gains distribution is expected to be paid to shareholders until net gains have been realized in excess of such carryforward. The United States federal income tax basis of the Fund's investments and the net unrealized depreciation as of September 30, 2002 were as follows:
Tax Basis Net Unrealized of Investments Appreciation Depreciation Depreciation ---------------- ---------------- ---------------- ---------------- $503,788,344 $41,154,984 $(141,471,993) $(100,317,009)
The difference between book basis and tax basis was primarily attributable to deferred losses on wash sales. 25 Prudential Small Company Fund, Inc. Notes to Financial Statements Cont'd. Note 6. Capital The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 5%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualify to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. There are 1 billion shares of common stock authorized $.01 par value per share, divided into four classes, designated Class A, Class B, Class C and Class Z common stock. Class A, Class B, Class C and Class Z shares each consist of 250 million authorized shares. As of September 30, 2002, Prudential owned 272,571 Class Z shares. Transactions in shares of common stock were as follows:
Class A Shares Amount ---------------------------------------------------------- ----------- ------------- Year ended September 30, 2002: Shares sold 5,222,799 $ 76,158,483 Shares reacquired (7,365,833) (105,711,204) ----------- ------------- Net increase (decrease) in shares outstanding before conversion (2,143,034) (29,552,721) Shares issued upon conversion from Class B 934,949 13,525,113 ----------- ------------- Net increase (decrease) in shares outstanding (1,208,085) $ (16,027,608) ----------- ------------- ----------- ------------- Year ended September 30, 2001: Shares sold 10,031,929 $ 142,230,061 Shares reacquired (11,891,484) (168,388,091) ----------- ------------- Net increase (decrease) in shares outstanding before conversion (1,859,555) (26,158,030) Shares issued upon conversion from Class B 1,987,502 27,749,512 ----------- ------------- Net increase (decrease) in shares outstanding 127,947 $ 1,591,482 ----------- ------------- ----------- ------------- Class B Year ended September 30, 2002: Shares sold 1,937,754 $ 25,598,424 Shares reacquired (2,508,741) (30,897,871) ----------- ------------- Net increase (decrease) in shares outstanding before conversion (570,987) (5,299,447) Shares reacquired upon conversion into Class A (1,059,436) (13,525,113) ----------- ------------- Net increase (decrease) in shares outstanding (1,630,423) $ (18,824,560) ----------- ------------- ----------- -------------
26 Prudential Small Company Fund, Inc. Notes to Financial Statements
Class B Shares Amount ---------------------------------------------------------- ----------- ------------- Year ended September 30, 2001: Shares sold 1,991,217 $ 25,046,850 Shares reacquired (3,426,408) (43,007,435) ----------- ------------- Net increase (decrease) in shares outstanding before conversion (1,435,191) (17,960,585) Shares reacquired upon conversion into Class A (2,234,084) (27,749,512) ----------- ------------- Net increase (decrease) in shares outstanding (3,669,275) $ (45,710,097) ----------- ------------- ----------- ------------- Class C ---------------------------------------------------------- Year ended September 30, 2002: Shares sold 522,850 $ 6,761,168 Shares reacquired (684,914) (8,471,326) ----------- ------------- Net increase (decrease) in shares outstanding (162,064) $ (1,710,158) ----------- ------------- ----------- ------------- Year ended September 30, 2001: Shares sold 940,758 $ 11,816,134 Shares reacquired (768,066) (9,591,596) ----------- ------------- Net increase (decrease) in shares outstanding 172,692 $ 2,224,538 ----------- ------------- ----------- ------------- Class Z ---------------------------------------------------------- Year ended September 30, 2002: Shares sold 2,192,489 $ 33,289,795 Shares reacquired (2,629,405) (38,256,178) ----------- ------------- Net increase (decrease) in shares outstanding (436,916) $ (4,966,383) ----------- ------------- ----------- ------------- Year ended September 30, 2001: Shares sold 3,167,531 $ 45,855,817 Shares reacquired (4,065,704) (57,790,746) ----------- ------------- Net increase (decrease) in shares outstanding (898,173) $ (11,934,929) ----------- ------------- ----------- -------------
27 Prudential Small Company Fund, Inc. Financial Highlights
Class A ------------------- Year Ended September 30, 2002 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 12.84 ---------- Income from investment operations Net investment income (loss) (.08) Net realized and unrealized gain (loss) on investment transactions (1.35) ---------- Total from investment operations (1.43) ---------- Less distributions Distributions from net realized gains -- ---------- Net asset value, end of year $ 11.41 ---------- ---------- TOTAL RETURN(b): (11.14)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 216,956 Average net assets (000) $ 286,120 Ratios to average net assets: Expenses, including distribution fees and service (12b-1) fees 1.22% Expenses, excluding distribution fees and service (12b-1) fees .97% Net investment income (loss) (.53)% For Class A, B, C and Z shares: Portfolio turnover rate 72%
------------------------------ (a) Calculated based upon average shares outstanding during the year. (b) Total return of shares does not consider 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 year reported and includes reinvestment of dividends and distributions. 28 See Notes to Financial Statements Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class A ------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------------------------------------------------- 2001(a) 2000(a) 1999(a) 1998(a) ------------------------------------------------------------------------------------- $ 14.52 $ 12.54 $ 13.79 $ 18.95 ---------------- ---------------- ---------------- ---------------- (.06) .01 (.01) -- (1.62) 1.97 .29 (3.31) ---------------- ---------------- ---------------- ---------------- (1.68) 1.98 .28 (3.31) ---------------- ---------------- ---------------- ---------------- -- -- (1.53) (1.85) ---------------- ---------------- ---------------- ---------------- $ 12.84 $ 14.52 $ 12.54 $ 13.79 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- (11.57)% 15.70% 1.48% (18.90)% $259,762 $291,869 $319,779 $365,431 $286,251 $284,681 $360,707 $443,189 1.31% 1.37% 1.27% 1.17% 1.06% 1.12% 1.02% .92% (.45)% .04% (.09)% -- 83% 92% 39% 36%
See Notes to Financial Statements 29 Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class B ------------------- Year Ended September 30, 2002 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 11.38 ---------- Income from investment operations Net investment loss (.18) Net realized and unrealized gain (loss) on investment transactions (1.17) ---------- Total from investment operations (1.35) ---------- Less distributions Distributions from net realized gains -- ---------- Net asset value, end of year $ 10.03 ---------- ---------- TOTAL RETURN(b): (11.86)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 100,894 Average net assets (000) $ 143,748 Ratios to average net assets: Expenses, including distribution fees and service (12b-1) fees 1.97% Expenses, excluding distribution fees and service (12b-1) fees .97% Net investment income (loss) (1.28)%
------------------------------ (a) Calculated based upon average shares outstanding during the year. (b) Total return of shares does not consider 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 year reported and includes reinvestment of dividends and distributions. 30 See Notes to Financial Statements Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class B ------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------------------------------------------------- 2001(a) 2000(a) 1999(a) 1998(a) ------------------------------------------------------------------------------------- $ 12.97 $ 11.28 $ 12.63 $ 17.64 ---------------- ---------------- ---------------- ---------------- (.15) (.08) (.10) (.12) (1.44) 1.77 .28 (3.04) ---------------- ---------------- ---------------- ---------------- (1.59) 1.69 .18 (3.16) ---------------- ---------------- ---------------- ---------------- -- -- (1.53) (1.85) ---------------- ---------------- ---------------- ---------------- $ 11.38 $ 12.97 $ 11.28 $ 12.63 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- (12.26)% 14.88% .74% (19.52)% $132,990 $199,149 $335,013 $514,159 $167,639 $250,061 $444,747 $678,462 2.06% 2.12% 2.02% 1.92% 1.06% 1.12% 1.02% .92% (1.21)% (0.69)% (.82)% (.75)%
See Notes to Financial Statements 31 Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class C ------------------- Year Ended September 30, 2002 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 11.38 ---------- Income from investment operations Net investment loss (.18) Net realized and unrealized gain (loss) on investment transactions (1.17) ---------- Total from investment operations (1.35) ---------- Less distributions Distributions from net realized gains -- ---------- Net asset value, end of year $ 10.03 ---------- ---------- TOTAL RETURN(b): (11.86)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 14,989 Average net assets (000) $ 20,812 Ratios to average net assets: Expenses, including distribution fees and service (12b-1) fees 1.97% Expenses, excluding distribution fees and service (12b-1) fees .97% Net investment loss (1.28)%
------------------------------ (a) Calculated based upon average shares outstanding during the year. (b) Total return of shares does not consider 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 year reported and includes reinvestment of dividends and distributions. 32 See Notes to Financial Statements Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class C ------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------------------------------------------------- 2001(a) 2000(a) 1999(a) 1998(a) ------------------------------------------------------------------------------------- $ 12.97 $ 11.28 $ 12.63 $ 17.64 ---------------- ---------------- ---------------- ---------------- (.15) (.08) (.10) (.12) (1.44) 1.77 .28 (3.04) ---------------- ---------------- ---------------- ---------------- (1.59) 1.69 .18 (3.16) ---------------- ---------------- ---------------- ---------------- -- -- (1.53) (1.85) ---------------- ---------------- ---------------- ---------------- $ 11.38 $ 12.97 $ 11.28 $ 12.63 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- (12.26)% 14.88% .74% (19.52)% $ 18,847 $ 19,236 $ 25,207 $ 26,804 $ 19,433 $ 20,159 $ 27,813 $ 29,259 2.06% 2.12% 2.02% 1.92% 1.06% 1.12% 1.02% .92% (1.21)% (.70)% (.83)% (.75)%
See Notes to Financial Statements 33 Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class Z ------------------- Year Ended September 30, 2002 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 13.07 ---------- Income from investment operations Net investment income (loss) (.04) Net realized and unrealized gain (loss) on investment transactions (1.39) ---------- Total from investment operations (1.43) ---------- Less distributions Distributions from net realized gains -- ---------- Net asset value, end of year $ 11.64 ---------- ---------- TOTAL RETURN(b): (10.94)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 67,858 Average net assets (000) $ 91,573 Ratios to average net assets: Expenses, including distribution fees and service (12b-1) fees .97% Expenses, excluding distribution fees and service (12b-1) fees .97% Net investment income (loss) (.28)%
------------------------------ (a) Calculated based upon average shares outstanding during the year. (b) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. 34 See Notes to Financial Statements Prudential Small Company Fund, Inc. Financial Highlights Cont'd.
Class Z ------------------------------------------------------------------------------------- Year Ended September 30, ------------------------------------------------------------------------------------- 2001(a) 2000(a) 1999(a) 1998(a) ------------------------------------------------------------------------------------- $ 14.74 $ 12.70 $ 13.92 $ 19.04 ---------------- ---------------- ---------------- ---------------- (.03) .04 .02 .04 (1.64) 2.00 .29 (3.31) ---------------- ---------------- ---------------- ---------------- (1.67) 2.04 .31 (3.27) ---------------- ---------------- ---------------- ---------------- -- -- (1.53) (1.85) ---------------- ---------------- ---------------- ---------------- $ 13.07 $ 14.74 $ 12.70 $ 13.92 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- (11.33)% 15.97% 1.70% (18.58)% $ 81,911 $105,656 $105,355 $125,770 $ 99,657 $ 98,623 $131,013 $154,623 1.06% 1.12% 1.02% .92% 1.06% 1.12% 1.02% .92% (.21)% .29% .16% .25%
See Notes to Financial Statements 35 Prudential Small Company Fund, Inc. Report of Independent Accountants To the Shareholders and Board of Directors of Prudential Small Company Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, 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 Prudential Small Company Fund, Inc. (the 'Fund') at September 30, 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 Fund'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 September 30, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York November 15, 2002 36 ANNUAL REPORT SEPTEMBER 30, 2002 PRUDENTIAL SMALL COMPANY FUND, INC. -------------------------------------------------------------------------------- MANAGEMENT OF THE FUND Prudential Small Company Fund, Inc. www.prudential.com (800) 225-1852 Management of the Fund (Unaudited) Information pertaining to the Directors of the Fund is set forth below. Directors who are not deemed to be 'interested persons' of the Fund (as defined in the 1940 Act), are referred to as 'Independent Directors.' Directors who are deemed to be 'interested persons' of the Fund are referred to as 'Interested Directors.' 'Fund Complex' consists of the Fund and any other investment companies managed by Prudential Investments LLC (PI). Independent Directors ---------------------
Number of Term of Portfolios in Position Office*** Fund Complex Other with the and Length Principal Occupations Overseen by Directorships Held Name, Address** and Age Fund of Time Served During Past 5 Years Director by the Director**** ----------------------------------------------------------------------------------------------------------------------------------- Saul K. Fenster, Ph.D. (69) Director Since 2000 Currently President Emeritus 79 Member (since 2000), of New Jersey Institute of Board of Directors of Technology; formerly President IDT Corporation. (1978-2002) of New Jersey Institute of Technology; Commissioner (1998-2002) of the Middle States Association, Commission on Higher Education; Commissioner (1985-2002) of the New Jersey Commission on Science and Technology; Trustee (since 1998) of Society of Manufacturing Engineering Education Foundation, formerly a director or trustee of Liberty Science Center, the Research and Development Council of New Jersey, New Jersey State Chamber of Commerce, and National Action Council for Minorities in Engineering. Delayne Dedrick Gold (64) Director Since 1982 Marketing Consultant. 89 Douglas H. McCorkindale (63) Director Since 1996 Formerly Vice Chairman (March 75 Chairman (since 1984-May 2000) of Gannett Co. February 2001), Chief Inc. Executive Officer (since June 2000) and President (since September 1997) of Gannett Co. Inc. (publishing and media); Director of Continental Airlines, Inc.; Director (since May 2001) of Lockheed Martin Corp. (aerospace and defense); Director of The High Yield Plus Fund, Inc. (since 1996).
38 39 Prudential Small Company Fund, Inc. www.prudential.com (800) 225-1852 Management of the Fund (Unaudited) Cont'd.
Number of Term of Portfolios in Position Office*** Fund Complex Other with the and Length Principal Occupations Overseen by Directorships Held Name, Address** and Age Fund of Time Served During Past 5 Years Director by the Director**** ----------------------------------------------------------------------------------------------------------------------------------- W. Scott McDonald, Jr. (65) Director Since 2000 Vice President (since 1997) of 79 Kaludis Consulting Group, Inc., (company serving higher education); formerly principal (1995-1997) of Scott McDonald & Associates; Chief Operating Officer (1991-1995) of Fairleigh Dickinson University, Executive Vice President and Chief Operating Officer (1975-1991) of Drew University; Interim President (1988-1990), Drew University; and a former director of School, College and University Underwriters Ltd. Thomas T. Mooney (61) Director Since 1996 President of Greater Rochester 95 Director, President and Metro Chamber of Commerce; Treasurer (since 1986) formerly Rochester City of First Financial Manager; formerly Deputy Fund, Inc. and Director Monroe County Executive; (since 1988) of The Trustee of Center for High Yield Plus Fund, Governmental Research, Inc.; Inc. Director of Blue Cross of Rochester; Monroe County Water Authority and Executive Service Corps of Rochester. Stephen P. Munn (60) Director Since 1991 Formerly Chief Executive 73 Chairman of the Board Officer (1988-2001) and (since January 1994) President of Carlisle and Director (since Companies Incorporated. 1988) of Carlisle Companies Incorporated (manufacturer of industrial products); Director of Gannett Co. Inc. (publishing and media). Richard A. Redeker (59) Director Since 1995 Formerly management consultant 73 of Invesmart, Inc. (August 2001-October 2001); formerly employee of Prudential Investments (October 1996-December 1998). Robin B. Smith (63) Director Since 1996 Chairman and Chief Executive 69 Director of BellSouth Officer (since August 1996) of Corporation (since Publishers Clearing House 1992) and Kmart (publishing); formerly Corporation (retail) President and Chief Executive (since 1996). Officer (January 1988-August 1996) of Publishers Clearing House.
40 41 Prudential Small Company Fund, Inc. www.prudential.com (800) 225-1852 Management of the Fund (Unaudited) Cont'd.
Number of Term of Portfolios in Position Office*** Fund Complex Other with the and Length Principal Occupations Overseen by Directorships Held Name, Address** and Age Fund of Time Served During Past 5 Years Director by the Director**** ----------------------------------------------------------------------------------------------------------------------------------- Louis A. Weil, III (61) Director Since 1991 Formerly Chairman (January 73 1999-July 2000), President and Chief Executive Officer (January 1996-July 2000) and Director (since September 1991) of Central Newspapers, Inc.; formerly Chairman of the Board (January 1996-July 2000), Publisher and Chief Executive Officer (August 1991-December 1995) of Phoenix Newspapers, Inc. Clay T. Whitehead (64) Director Since 1996 President (since 1983) of 91 Director (since 2000) P.O. Box 8090 National Exchange Inc. (new of First Financial McLean, VA 22106-8090 business development firm). Fund, Inc. and Director (since 2000) of The High Yield Plus Fund, Inc.
Interested Directors --------------------
Number of Term of Portfolios in Position Office*** Fund Complex Other with the and Length Principal Occupations Overseen by Directorships Held Name, Address** and Age Fund of Time Served During Past 5 Years Director by the Director**** ------------------------------------------------------------------------------------------------------------------------------------ *Robert F. Gunia (55) Vice Since 1996 Executive Vice President and 112 Vice President and President Chief Administrative Officer Director (since May and Director (since June 1999) of 1989) of The Asia Prudential Investments LLC; Pacific Fund, Inc. 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 Incorporated (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-September 1996) of Prudential Mutual Fund Management, Inc. (PMF); Vice President and Director (since May 1992) of Nicholas-Applegate Fund, Inc.
42 43 Prudential Small Company Fund, Inc. www.prudential.com (800) 225-1852 Management of the Fund (Unaudited) Cont'd.
Number of Term of Portfolios in Position Office*** Fund Complex Other with the and Length Principal Occupations Overseen by Directorships Held Name, Address** and Age Fund of Time Served During Past 5 Years Director by the Director**** ------------------------------------------------------------------------------------------------------------------------------------ *David R. Odenath, Jr. (45) President Since 1999 President, Chief Executive 115 and Director Officer and Chief Operating Officer (since June 1999) of PI; Senior Vice President (since June 1999) of Prudential; formerly Senior Vice President (August 1993-May 1999) of PaineWebber Group, Inc. *Judy A. Rice (54) Vice Since 2000 Executive Vice President 111 President (since 1999) of PI; formerly and Director various positions to Senior Vice President (1992-1999), 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.
Information pertaining to the Officers of the Fund who are not also Directors is set forth below. Officers --------
Term of Position Office*** with the and Length Principal Occupations Name, Address** and Age Fund of Time Served During Past 5 Years -------------------------------------------------------------------------------------------- Grace C. Torres (43) Treasurer Since 1998 Senior Vice President (since and January 2000) of PI; formerly Principal First Vice President (December Financial 1996-January 2000) of PI and and First Vice President (March Accounting 1993-1999) of Prudential Officer Securities. Maria G. Master (32) Secretary Since 2002 Vice President and Corporate Counsel (since August 2001) of Prudential; formerly Financial/Economic Analyst with the Federal Reserve Bank of New York (April 1999-July 2001), Associate Attorney of Swidler Berlin Shereff Friedman LLP (March 1997-April 1999) and Associate Attorney of Riker, Danzig, Scherer, Hyland & Perretti LLP (August 1995-March 1997).
44 45 Prudential Small Company Fund, Inc. www.prudential.com (800) 225-1852 Management of the Fund (Unaudited) Cont'd.
Term of Position Office*** with the and Length Principal Occupations Name, Address** and Age Fund of Time Served During Past 5 Years -------------------------------------------------------------------------------------------- Marguerite E.H. Morrison (46) Assistant Since 2002 Vice President and Chief Legal Secretary Officer-Mutual Funds and Unit Investment Trusts (since August 2000) of Prudential; Senior Vice President and Assistant Secretary (since February 2001) of PI; Vice President and Assistant Secretary of PIMS (since October 2001), previously Vice President and Associate General Counsel (December 1996-February 2001) of PI and Vice President and Associate General Counsel (September 1987-September 1996) of Prudential Securities. Maryanne Ryan (38) Compliance Since 2002 Vice President, Prudential Officer (since November 1998; First Vice President of Prudential Securities (March 1997-May 1998)
------------------ * 'Interested' Director, as defined in the 1940 Act, by reason of affiliation with the Manager (Prudential Investments LLC), the Adviser (Jennison Associates LLC) or the Distributor (Prudential Investment Management Services LLC). ** Unless otherwise noted, the address of the Directors 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 Directors and Officers. The Independent Directors have adopted a retirement policy, which calls for the retirement of Directors on December 31 of the year in which they reach the age of 75. The table shows the number of years for which they have served as a Director and/or Officer. **** This column includes only directorships of companies required to register or file reports with the Commission under the Securities Exchange Act of 1934 (that is, 'public companies') or other investment companies registered under the 1940 Act.
Additional information about the Fund's Trustees is included in the Fund's Statement of Additional Information which is available without charge, upon request, by calling (800) 225-1852 or (732) 482-7555 (Calling from outside the U.S.) 46 47 www.prudential.com (800) 225-1852 Getting the Most from Your Prudential Mutual Fund When you invest through Prudential Mutual Funds, you receive financial advice from a Prudential Securities Financial Advisor or Pruco Securities registered representative. Your financial professional can provide you with the following services: THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT? Your financial professional can help you match the reward you seek with the risk you can tolerate. Risk can be difficult to gauge--sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction. There are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets, and who knows you! KEEPING UP WITH THE JONESES A financial professional can help you wade through the numerous available mutual funds to find the ones that fit your individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals--not at you personally. Your financial professional will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance--not just based on the current investment fad. BUY LOW, SELL HIGH Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial professional can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul. Prudential Small Company Fund, Inc. Prudential Mutual Funds Prudential offers a broad range of mutual funds designed to meet your individual needs. For information about these funds, contact your financial professional or call us at (800) 225-1852. Read the prospectus carefully before you invest or send money. PRUDENTIAL MUTUAL FUNDS ------------------------------------------- Stock Funds Large Capitalization Stock Funds Prudential 20/20 Focus Fund Prudential Equity Fund, Inc. Prudential Index Series Fund Prudential Stock Index Fund Prudential Tax-Managed Funds Prudential Tax-Managed Equity Fund Prudential Value Fund The Prudential Investment Portfolios, Inc. Prudential Jennison Growth Fund Small- to Mid-Capitalization Stock Funds Nicholas-Applegate Fund, Inc. Nicholas-Applegate Growth Equity Fund Prudential Small Company Fund, Inc. Prudential Tax-Managed Small-Cap Fund, Inc. Prudential U.S. Emerging Growth Fund, Inc. The Prudential Investment Portfolios, Inc. Prudential Jennison Equity Opportunity Fund Sector Stock Funds Prudential Natural Resources Fund, Inc. Prudential Real Estate Securities Fund Prudential Sector Funds, Inc. Prudential Financial Services Fund Prudential Health Sciences Fund Prudential Technology Fund Prudential Utility Fund Global/International Stock Funds Prudential Europe Growth Fund, Inc. Prudential Pacific Growth Fund, Inc. Prudential World Fund, Inc. Prudential Global Growth Fund Prudential International Value Fund Prudential Jennison International Growth Fund Balanced/Allocation Fund The Prudential Investment Portfolios, Inc. Prudential Active Balanced Fund Bond Funds Taxable Bond Funds Prudential Government Income Fund, Inc. Prudential High Yield Fund, Inc. Prudential Short-Term Corporate Bond Fund, Inc. Income Portfolio Prudential Total Return Bond Fund, Inc. Municipal Bond Funds Prudential California Municipal Fund California Series California Income Series Prudential Municipal Bond Fund High Income Series Insured Series www.prudential.com (800) 225-1852 Prudential Municipal Series Fund Florida Series New Jersey Series New York Series Pennsylvania Series Prudential National Municipals Fund, Inc. Global/International Bond Fund Prudential Global Total Return Fund, Inc. Money Market Funds Taxable Money Market Funds Cash Accumulation Trust Liquid Assets Fund National Money Market Fund Prudential Government Securities Trust Money Market Series U.S. Treasury Money Market Series Prudential Institutional Liquidity Portfolio, Inc. Institutional Money Market Series Prudential MoneyMart Assets, Inc. Municipal Money Market Funds Prudential California Municipal Fund California Money Market Series Prudential Municipal Series Fund New Jersey Money Market Series New York Money Market Series Tax-Free Money Market Funds Command Tax-Free Fund Prudential Tax-Free Money Fund, Inc. Other Money Market Funds Command Government Fund Command Money Fund Special Money Market Fund, Inc.* Money Market Series STRATEGIC PARTNERS MUTUAL FUNDS** -------------------------------------------------- Strategic Partners Asset Allocation Funds Strategic Partners Conservative Growth Fund Strategic Partners Moderate Growth Fund Strategic Partners High Growth Fund Strategic Partners Style Specific Funds Strategic Partners Large Capitalization Growth Fund Strategic Partners Large Capitalization Value Fund Strategic Partners Small Capitalization Growth Fund Strategic Partners Small Capitalization Value Fund Strategic Partners International Equity Fund Strategic Partners Total Return Bond Fund Strategic Partners Opportunity Funds Strategic Partners Focused Growth Fund Strategic Partners New Era Growth Fund Strategic Partners Focused Value Fund Strategic Partners Mid-Cap Value Fund Special Money Market Fund, Inc.* Money Market Series * This Fund is not a direct purchase money fund and is only an exchangeable money fund. **Not exchangeable with Prudential mutual funds. Prudential Small Company Fund, Inc. Class A Growth of a $10,000 Investment (CHART) Average Annual Total Returns as of 9/30/02 One Year Five Years Ten Years Since Inception With Sales Charge -15.58% -6.60% 6.70% 8.05% Without Sales Charge -11.14% -5.64% 7.25% 8.49% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund returns can fluctuate from year to year by measuring the best and worst calendar years in terms of annual total returns for the past 10 years. The graph compares a $10,000 investment in the Prudential Small Company Fund, Inc. (Class A shares) with a similar investment in the Russell 2000 Index and the Standard & Poor's SmallCap 600 Index (S&P SmallCap 600 Index) by portraying the initial account values at the beginning of the 10-year period of Class A shares (September 30, 1992) and the account values at the end of the current fiscal year (September 30, 2002), as measured on a quarterly basis. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the maximum applicable front-end sales charge was deducted from the initial $10,000 investment in Class A shares; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. Without the distribution and service (12b-1) fee waiver for Class A shares, the returns would have been lower. The average annual total returns in the table and the returns on investment in the graph do not reflect the deduction of taxes that a shareholder would pay on the Fund's distributions or following the redemption of the Fund's shares. The Russell 2000 Index is an unmanaged capital- weighted index of the smallest 2,000 stocks among the largest 3,000 equity-capitalized U.S. corporations and represents approximately 8% of their aggregate market value. The S&P SmallCap 600 Index is an unmanaged capital-weighted index of 600 small company U.S. common stocks that cover all industry sectors. It gives a broad look at how small-cap stock prices have performed. The total returns of both indexes include the reinvestment of all dividends, but do not include the effect of sales charges, operating expenses, or taxes of a mutual fund. These returns would be lower if they included the effect of sales charges, operating expenses, or taxes. The securities that comprise these indexes may differ substantially from the securities in the Fund. They are not the only indexes that may be used to characterize performance of stock funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with Securities and Exchange Commission (SEC) regulations. www.prudential.com (800) 225-1852 Class B Growth of a $10,000 Investment (CHART) Average Annual Total Returns as of 9/30/02 One Year Five Years Ten Years Since Inception With Sales Charge -16.27% -6.50% 6.44% 8.89% Without Sales Charge -11.86% -6.35% 6.44% 8.89% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund returns can fluctuate from year to year by measuring the best and worst calendar years in terms of annual total returns for the past 10 years. The graph compares a $10,000 investment in the Prudential Small Company Fund, Inc. (Class B shares) with a similar investment in the Russell 2000 Index and the S&P SmallCap 600 Index by portraying the initial account values at the beginning of the 10-year period of Class B shares (September 30, 1992) and the account values at the end of the current fiscal year (September 30, 2002), as measured on a quarterly basis. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the maximum applicable contingent deferred sales charge (CDSC) was deducted from the value of the investment in Class B shares, assuming full redemption on September 30, 2002; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares, on a quarterly basis. The average annual total returns in the table and the returns on investment in the graph do not reflect the deduction of taxes that a shareholder would pay on the Fund's distributions or following the redemption of the Fund's shares. The Russell 2000 Index is an unmanaged capital- weighted index of the smallest 2,000 stocks among the largest 3,000 equity-capitalized U.S. corporations and represents approximately 8% of their aggregate market value. The S&P SmallCap 600 Index is an unmanaged capital-weighted index of 600 small company U.S. common stocks that cover all industry sectors. It gives a broad look at how small-cap stock prices have performed. The total returns of both indexes include the reinvestment of all dividends, but do not include the effect of sales charges, operating expenses, or taxes of a mutual fund. These returns would be lower if they included the effect of sales charges, operating expenses, or taxes. The securities that comprise these indexes may differ substantially from the securities in the Fund. They are not the only indexes that may be used to characterize performance of stock funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. Prudential Small Company Fund, Inc. Class C Growth of a $10,000 Investment (CHART) Average Annual Total Returns as of 9/30/02 One Year Five Years Ten Years Since Inception With Sales Charge -13.62% -6.54% N/A 4.82% Without Sales Charge -11.86% -6.35% N/A 4.95% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund returns can fluctuate from year to year by measuring the best and worst calendar years in terms of annual total returns since inception of the share class. The graph compares a $10,000 investment in the Prudential Small Company Fund, Inc. (Class C shares) with a similar investment in the Russell 2000 Index and the S&P SmallCap 600 Index by portraying the initial account values at the commencement of operations of Class C shares (August 1, 1994) and the account values at the end of the current fiscal year (September 30, 2002), as measured on a quarterly basis. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the applicable front-end sales charge was deducted from the initial $10,000 investment in Class C shares; (b) the maximum applicable CDSC was deducted from the value of the investment in Class C shares, assuming full redemption on September 30, 2002; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions were reinvested. The average annual total returns in the table and the returns on investment in the graph do not reflect the deduction of taxes that a shareholder would pay on the Fund's distributions or following the redemption of the Fund's shares. The Russell 2000 Index is an unmanaged capital- weighted index of the smallest 2,000 stocks among the largest 3,000 equity-capitalized U.S. corporations and represents approximately 8% of their aggregate market value. The S&P SmallCap 600 Index is an unmanaged capital-weighted index of 600 small company U.S. common stocks that cover all industry sectors. It gives a broad look at how small-cap stock prices have performed. The total returns of both indexes include the reinvestment of all dividends, but do not include the effect of sales charges, operating expenses, or taxes of a mutual fund. These returns would be lower if they included the effect of sales charges, operating expenses, or taxes. The securities that comprise these indexes may differ substantially from the securities in the Fund. They are not the only indexes that may be used to characterize performance of stock funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. www.prudential.com (800) 225-1852 Class Z Growth of a $10,000 Investment (CHART) Average Annual Total Returns as of 9/30/02 One Year Five Years Ten Years Since Inception -10.94% -5.38% N/A 3.35% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund returns can fluctuate from year to year by measuring the best and worst calendar years in terms of annual total returns since inception of the share class. The graph compares a $10,000 investment in the Prudential Small Company Fund, Inc. (Class Z shares) with a similar investment in the Russell 2000 Index and the S&P SmallCap 600 Index by portraying the initial account values at the commencement of operations of Class Z shares (March 1, 1996) and the account values at the end of the current fiscal year (September 30, 2002), as measured on a quarterly basis. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) all recurring fees (including management fees) were deducted; and (b) all dividends and distributions were reinvested. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. The average annual total returns in the table and the returns on investment in the graph do not reflect the deduction of taxes that a shareholder would pay on the Fund's distributions or following the redemption of the Fund's shares. The Russell 2000 Index is an unmanaged capital- weighted index of the smallest 2,000 stocks among the largest 3,000 equity-capitalized U.S. corporations and represents approximately 8% of their aggregate market value. The S&P SmallCap 600 Index is an unmanaged capital-weighted index of 600 small company U.S. common stocks that cover all industry sectors. It gives a broad look at how small-cap stock prices have performed. The total returns of both indexes include the reinvestment of all dividends, but do not include the effect of sales charges, operating expenses, or taxes of a mutual fund. These returns would be lower if they included the effect of sales charges, operating expenses, or taxes. The securities that comprise these indexes may differ substantially from the securities in the Fund. They are not the only indexes that may be used to characterize performance of stock funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 Visit Prudential's website at: www.prudential.com DIRECTORS Saul K. Fenster Delayne Dedrick Gold Robert F. Gunia Douglas H. McCorkindale W. Scott McDonald, Jr. Thomas T. Mooney Stephen P. Munn David R. Odenath, Jr. Richard A. Redeker Judy A. Rice Robin B. Smith Louis A. Weil, III Clay T. Whitehead OFFICERS David R. Odenath, Jr., President Robert F. Gunia, Vice President Judy A. Rice, Vice President Grace C. Torres, Treasurer Maria G. Master, Secretary Marguerite E. H. Morrison, Assistant Secretary Maryanne Ryan, Anti-Money Laundering Compliance Officer MANAGER Prudential Investments LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 INVESTMENT ADVISER Jennison Associates LLC 466 Lexington Avenue New York, NY 10017 DISTRIBUTOR Prudential Investment Management Services LLC Gateway Center Three, 14th Floor Newark, NJ 07102-4077 CUSTODIAN State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 TRANSFER AGENT Prudential Mutual Fund Services LLC PO Box 8098 Philadelphia, PA 19101 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 LEGAL COUNSEL Sullivan & Cromwell 125 Broad Street New York, NY 10004-2498 Mutual funds are not bank guaranteed or FDIC insured, and may lose value. Fund Symbols Nasdaq CUSIP ------------ ------- ----- Class A PGOAX 743968109 Class B CHNDX 743968208 Class C PSCCX 743968307 Class Z PSCZX 743968406 MF109E IFS-A075692