(ICON)
Prudential
Small
Companies
Fund, Inc.
SEMI
ANNUAL
REPORT
March 31, 1998
(LOGO)
<PAGE>
Prudential Small Company Value Fund, Inc.
Performance At A Glance.
The Prudential Small Company Value Fund finished the
six months ended March 31,
1998 almost four full percentage points ahead of the
Lipper Small-Cap Fund
Average. Our industrial stocks provided the largest
contribution to our
return, although our consumer stocks and financials
also added considerably.
We outperformed in late 1997 when small-caps were
falling and kept up with the
pace in the 1998 bull market.
Cumulative Total Returns1 As of 3/31/98
<TABLE>
<CAPTION>
Six One
Five Ten Since
Months Year
Years Years Inception2
<S> <C> <C>
<C> <C> <C>
Class A 9.27% 45.20%
150.18% N/A 310.74%
Class B 8.84 44.14
140.92 371.17% 873.28
Class C 8.84 44.14
N/A N/A 124.17
Class Z 9.49 45.79
N/A N/A 79.35
Lipper Small-Cap
Fund Avg3 5.32 43.53
133.72 382.02 ***
</TABLE>
Average Annual Total Returns1 As of
3/31/98
<TABLE>
<CAPTION>
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A 37.94% 18.91%
N/A 18.09%
Class B 39.14 19.13
16.77% 13.99
Class C 43.14 N/A
N/A 24.65
Class Z 45.79 N/A
N/A 32.41
</TABLE>
How Investments Compared.
(As of 3/31/98)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are
different -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher returns means tolerating more
risk. The greater the
risk, the larger the potential reward or loss. In
addition, we've included
historical 20-year average annual returns. These
returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal.
Investors have received higher
historical total returns from stocks than from most
other invest-ments.
Smaller capitalization stocks offer greater potential
for long-term growth but
may be more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock
funds, which can help smooth
out their total returns year by year. But their prices
still fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by
state governments, state
agencies and/or municipalities. This investment
provides income that is usually
exempt from federal and state income taxes.
U.S Taxable Money Funds attempt to preserve a constant
share value; they don't
fluctuate much in price but, historically, their
returns have been generally
among the lowest of the major investment categories.
<PAGE>
Roger Ford and Jay S. Kaplan, Fund Managers
Portfolio
Managers' Report
(PHOTOS)
The Prudential Small Company Value Fund invests in
stocks of small companies
(those with a total market value of $1.5 billion or
less) mostly located in
the U.S. We follow a traditional value investment
style: we look for good
businesses with sound management that are selling for
substantially less than
a fair price. Historically, stocks of small companies
have fluctuated a great
deal, so we try to buy when they are bargains and sell
when they are
expensive. We have been seeking good risk-adjusted
returns consistently, year
after year. There can be no assurance that the Fund
will achieve its
investment objective.
No New Accounts.
The Prudential Small Company Value Fund was closed to
new shareholders on
April 24, 1998 in order to protect the interests of
current shareholders who
still will be able to add to existing accounts. It
became difficult to find
enough attractive investment opportunities as the
Fund's assets more than
doubled to more than $1.5 billion over the past 12
months. We hope to welcome
new shareholders sometime in the future.
Strategy Session.
- -------------------------------------------------
We purchase stocks that are inexpensive on the basis of
such factors as
price/cash flow, price/earnings, price/book value,
asset values, breakup
values, and private market values. We tend to focus on
cash flow. Our stocks
are typically among the 15% to 20% lowest-priced small
companies. Some of our
larger purchases during the period illustrate our
approach:
- - We bought Standard Products, a leading supplier of
rubber products to the
auto industry. Other investors were slow to recognize
positive changes as a
new CEO helped engineer a turnaround. It now has
stronger earnings and new
growth opportunities. Our industry contacts called it
to our attention; we met
with the new management and were impressed. We have
already seen a 15% return
on our investment.
- - Another recent purchase was Doncasters, a British
firm that shapes
difficult-to-form metal parts. It had been neglected
as a small part of Inco,
a large metals and mining firm. With its spin-off
early in 1997, Doncasters
flourished. We bought early. The stock rose sharply,
then suffered a reversal
because of concerns about slowing orders from its
aerospace customers and the
company's planned acquisition of Triplex Lloyd. We
took advantage of the
decline to buy more shares at steep discounts to the
prices of similar
companies. Today, the aerospace business is healthy
and the acquisition is
performing better than expected.
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 3/31/98.
(GRAPH)
<PAGE>
What Went Well.
- -------------------------------------------------
Our largest holding was Financial Security Assurance,
which gained 18% over the
past six months. A long-term holding for us, it is a
well-run company that
insures municipal bonds. It has been undervalued on
the stock market for a
long time, so its management bought back shares. Now it
is getting the market
recognition it deserves.
Our third largest holding is Universal Health.
Universal is the third-largest
manager of for-profit hospitals in the U.S. Its shares
appreciated by 35%
over the past six months.
Our utilities, particularly our cellular telephone
companies, also performed
well over this period, gaining 33%. Our largest
utility holding was Centennial
Cellular, which rose 48%. Our large cable company
holdings, Century
Communications (up 80%) and TCA Cable TV (up 50%),
together with television
station operator Young Broadcasting (up 44%), made the
media industry a major
contributor to our return this period.
And Not So Well.
- -------------------------------------------------
Broad stock market measures continue to reach new
record highs. In this
environment, we are taking profits on our fully valued
stocks. Because stocks
are expensive, we are having difficulty reinvesting the
proceeds in the kinds
of value stocks we like. Our cash holdings rose to 10%
at March 31. We have
now closed the Fund to new investors, giving ourselves
some breathing room.
Our holdings suffered from the recent steep drop in the
price of oil and from
difficulties in the electronics industry. About 6% of
our holdings are related
to oil exploration and production. Oil production has
been rising while a mild
winter in North America and the drastic economic
slowdown in Asia both reduced
demand for oil, driving the price of oil and oil-
related stocks down. Pioneer
Natural Resources took a particularly large 39% drop.
Electronics companies
also are having cyclical problems. We own some
companies -- such as Pioneer
Standard Electronics and Marshall Industries -- that
distribute electronic
components to technology companies. Their stocks have
declined over the past
six months because of weakness in demand.
Five Largest Holdings.
2.1% Financial Security Assurance
Insurance
2.0% Blount International Inc.
Misc. Industrial
2.0% Universal Health
Hospital Management
1.8% Astoria Financial Corp.
Savings & Loan
1.7% Big Flower Holdings
Printing & Publishing
Expressed as a percentage of net assets as of 3/31/98.
Looking Ahead.
- -------------------------------------------------
We measure the attractiveness of small-cap stocks
relative to larger company
stocks by comparing their prices to various indicators
of a share's true value:
cash flow, earnings, and book value. On some of these
measures, small-caps have
not been this relatively inexpensive since before 1980.
We can't predict the
future, but we can say that now our stocks are more
attractively priced than
the market as a whole. Currently, all stocks are
expensive, by historical
standards, and we caution against expecting returns
like those of the past
three years to continue.
1
What Is A Small Company Value Stock?
- -------------------------------------------------------
- ------------------------
Prudential Small Company Value Fund Co-manager Jay
Kaplan explains your Fund's
investing style.
Q. Many investors associate small companies with
growth. What does a value
investing style offer?
A. Value investors also look for growth potential -- we
just won't pay a high
price for it. Because small companies are less well
known than the larger
firms, we often can find companies with strong
earnings prospects that sell
at bargain prices. Currently, investors have picked
over the stock market
very thoroughly, and our expertise pays off most
among the companies too
small to attract much analytical attention. Some of
these firms are followed
by only one or two analysts, or even none, so they
haven't been bid up as
much.
Q. Does the investment environment tend to favor one
style?
A. Yes. As 1997 ended, investors feared an economic
slowdown and the Russell
2000 Growth Index (which measures small company
growth stocks) declined by
more than 8%, small company value stocks delivered a
positive return. In
1998, investors became more optimistic, giving the
growth style an
advantage. Historically, however, value stocks in
the Russell 2000 universe
performed better than average over the past 1-, 3-,
5-, and 10-year periods
(as did our Fund). A value style may hold up better
in difficult markets
because when you've paid less for a stock, you hope
to be less exposed
should it decline. Of course, past performance is
not indicative of future
results.
Q. Is this a good environment now?
A. We believe most U.S. stocks are expensive now:
investors are paying more
for a dollar of company earnings than ever before --
about 20 times next
year's estimated earnings for the Russell 2000. Some
people argue that this
is justified because both inflation and interest
rates are very low, but we
are cautious. Historically, small company stocks
have been more expensive
than large company stocks because of their greater
growth potential. Today,
the large company S&P 500 is even more expensive:
about 22 times next year's
earnings. So buying small company stocks is now
relatively less expensive
while still offering higher growth potential. As far
as value versus growth
styles are concerned, 1998 has been a growth year so
far, but corporate
earnings growth has slowed considerably. It hasn't
been easy for us to find
bargain stocks recently, but that can change quickly
- -- we have seen two
market declines in the past 12 months.
2
President's Letter
May 15, 1998
- -------------------------------------------------------
- ------------------------
(PHOTS)
See You On the Net!
Dear Shareholder:
We are proud to be part of the worldwide web and we
invite you to visit our two
web sites, if you have not already done so. Yes, we
currently offer two
sites -- each with its own distinctive identity.
http://www.prudential.com
The Prudential web site features information on
personal investing, retirement
planning, commercial and residential real estate
opportunities, as well as
insurance products for life, health, home and property.
You can look up performance data on your Prudential
mutual funds, learn about
proven investment strategies, or take one of our many
interactive quizzes that
will help guide you in determining long-term goals --
like how much to save for
your child's college education or for your retirement.
http://www.prusec.com
The Prudential Securities Virtual Branch Office is a
full-service brokerage
web site specifically designed to provide investors
with the information they
need to make informed financial decisions. It was rated
the No. 1 full-service
brokerage web site of its type by Financial Net News
(February 1998), a
subsidiary of Institutional Investor magazine, and was
also rated among the
top corporate web sites by Fortune magazine (Winter
1998).
What investors can find here are -- daily market
commentaries, stock quotes,
economic forecasts, product news, and current market
research, in addition to
interactive investing programs. Investors, through
their Prudential Securities
Financial Advisors, may also enroll in Prudential
Online(R) and have access to
their personal account information which includes
balances, security values,
transactions and account activities. They can also
easily E-mail their
Financial Advisor.
Both sites also contain professional opportunities for
people who are searching
for employment or considering a change of career paths.
We plan to make further enhancements to our web pages
as the year progresses.
So please, the next time you are "web browsing" or
"surfing the net," pay us a
visit. Let us know what you think and what you'd like
to see added in the
future.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
3
<PAGE>
Portfolio of Investments as of
PRUDENTIAL SMALL COMPANY
March 31, 1998 (Unaudited) VALUE
FUND, INC.
- -------------------------------------------------------
- ---------------
0A Months
Ended
Year Ended September 30,
March 31,
- -------------------------------------------------------
- -----
1998
1997 1996 1995 1994
1993
---------
- -------- -------- -------- -------- ---
- -----
[S] [C]
[C] [C] [C] [C] [C]
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period.... $ 17.64
$ 14.49 $ 13.56 $ 11.99 $ 12.74 $
11.08
---------
- -------- -------- -------- -------- ---
- -----
Income from investment operations
Net investment income (loss)............ (.06 )
(.09) (.06) (.06) (.09)
(.06)
Net realized and unrealized gain on
investment transactions.............. 1.35
5.67 1.66 2.47 .13
3.08
---------
- -------- -------- -------- -------- ---
- -----
Total from investment operations..... 1.29
5.58 1.60 2.41 .04
3.02
---------
- -------- -------- -------- -------- ---
- -----
Less distributions
Distributions from net realized gains... (1.85 )
(2.43) (.67) (.84) (.79)
(1.36)
---------
- -------- -------- -------- -------- ---
- -----
Net asset value, end of period.......... $ 17.08
$ 17.64 $ 14.49 $ 13.56 $ 11.99 $
12.74
---------
- -------- -------- -------- -------- ---
- -----
---------
- -------- -------- -------- -------- ---
- -----
TOTAL RETURN(b):........................ 8.84 %
44.91% 12.56% 22.37% .34%
29.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $755,547
$645,579 $378,861 $361,873 $425,502
$376,068
Average net assets (000)................ $671,626
$443,761 $355,636 $349,929 $399,920
$278,659
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.99
%(c) 1.96% 1.99% 2.08% 2.09%
1.97%
Expenses, excluding distribution
fees.............................. .99
%(c) .96% .99% 1.08% 1.09%
.97%
Net investment income (loss)......... (.76
)%(c) (.60)% (.42)% (.51)% (.76)%
(.54)%
[/TABLE]
- ---------------
(a) Calculated based upon weighted average shares
outstanding during the period.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the
first day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less
than a full year are not
annualized.
(c) Annualized.
- -------------------------------------------------------
- -------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL SMALL COMPANY
Financial Highlights (Unaudited) VALUE
FUND, INC.
- -------------------------------------------------------
- -------------------------
<TABLE>
<CAPTION>
Class C
-----------
- -------------------------------------------------------
- ---------
Six
August 1,
Months
1994(d)
Ended
Year Ended September 30, Through
March 31,
- -------------------------------------------
September 30,
1998
1997 1996 1995 1994
---------
- ------- ------------- ------------- -------
- ------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period.... $ 17.64
$ 14.49 $ 13.56 $ 11.99 $
11.61
---------
- ------- ----- ----- --
- ---
Income from investment operations
Net investment income (loss)............ (.06 )
(.09) (.06) (.06)
(.01)
Net realized and unrealized gain on
investment transactions.............. 1.35
5.67 1.66 2.47 .39
---------
- ------- ----- ----- --
- ---
Total from investment operations..... 1.29
5.58 1.60 2.41 .38
---------
- ------- ----- ----- --
- ---
Less distributions
Distributions from net realized gains... (1.85 )
(2.43) (.67) (.84) --
---------
- ------- ----- ----- --
- ---
Net asset value, end of period.......... $ 17.08
$ 17.64 $ 14.49 $ 13.56 $
11.99
---------
- ------- ----- ----- --
- ---
---------
- ------- ----- ----- --
- ---
TOTAL RETURN(b):........................ 8.84 %
44.91% 12.56% 22.37%
3.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 32,600
$22,049 $ 4,323 $ 1,545 $
269
Average net assets (000)................ $ 25,869
$ 8,762 $ 2,786 $ 784 $
179
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.99
%(c) 1.96% 1.99% 2.08%
2.22%(c)
Expenses, excluding distribution
fees.............................. .99
%(c) .96% .99% 1.08%
1.22%(c)
Net investment income (loss)......... (.76
)%(c) (.60)% (.42)% (.46)%
(.31)%(c)
<CAPTION>
Class Z
-------------
- --------------------------------
Six
March 1,
Months
1996(e)
Ended
Year Ended Through
March 31,
September 30, September 30,
1998
1997 1996
---------
- ------------- -------------
<S> <C>
<C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period.... $ 19.04
$ 15.32 $ 13.69
---------
- ------------- ------
Income from investment operations
Net investment income (loss)............ .02
.06 .05
Net realized and unrealized gain on
investment transactions.............. 1.51
6.09 1.58
---------
- ------------- ------
Total from investment operations..... 1.53
6.15 1.63
---------
- ------------- ------
Less distributions
Distributions from net realized gains... (1.85 )
(2.43) --
---------
- ------------- ------
Net asset value, end of period.......... $ 18.72
$ 19.04 $ 15.32
---------
- ------------- ------
---------
- ------------- ------
TOTAL RETURN(b):........................ 9.49 %
46.38% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $165,446
$ 151,215 $68,516
Average net assets (000)................ $156,363
$ 97,310 $66,228
Ratios to average net assets:
Expenses, including distribution
fees.............................. .99 %(c)
.96% .99%(c)
Expenses, excluding distribution
fees.............................. .99 %(c)
.96% .99%(c)
Net investment income (loss)......... .24 %(c)
.40% .58%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares
outstanding during the period.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the
first day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less
than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- -------------------------------------------------------
- -------------------------
See Notes to Financial Statements. 16
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
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.
The accompanying financial statements as of March 31,
1998 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
743968109
743968208 MF109E2
743968307 Cat#642000K
743968406
