<PAGE>
Prudential
Equity
Income Fund
------------------------------------------------
Prudential Mutual Funds
BUILDING YOUR FUTURE
(LOGO)
ON OUR STRENGTH
<PAGE>
LETTER TO SHAREHOLDERS
December 6, 1993
Dear Shareholder:
Stocks with above-average dividend yields, the kind typically purchased by
the Prudential Equity Income Fund, have been strong performers in the past
year. During this time, declining interest rates and the slow growth economy
strengthened prices of common stocks and convertible securities that pay
above-average dividends, contributing to your Fund's solid performance.
Stock Market Performance
In the past 12 months, the economic environment has been positive for stocks
with above-average dividend yields. These companies often perform well when
overall economic growth is modest. The rally in bond prices also gave these
stocks a boost.
The recession of 1990 and 1991, followed by three years of lackluster
growth, has led many American companies to pare employees and improve
productivity through automation. The low interest rate environment has also
helped numerous corporations trim debt levels and strengthen their balance
sheets. We believe many companies will emerge from this kind of adversity with
stronger earnings and stock prices--one of the apparent reasons these stocks
have done well this year despite the economy.
In addition to these factors, we believe that natural gas, aerospace/defense
and insurance companies should be strong earners in the next few years. These
industries boast companies with the potential to generate higher than average
discretionary cash flow, arising mostly from pricing flexibility or low
research and development costs. While we have had some gains in
aerospace/defense and insurance already this year, we still view these as
promising sectors.
Looking to 1994
Barring any unexpected market shocks, the U.S. economy appears to be
settling into an extended period of steady--but slow--growth. Although there
are signs inflation may be creeping back in the picture, new U.S. taxes in
1993 and 1994 may dampen both growth and inflation. If the current economic
environment continues, however, the market's strong performance of the past
few years could be maintained. On the other hand, a substantial downturn in
economic growth in the U.S. and/or abroad could weaken stock prices.
3
<PAGE>
Once again, we are pleased to have you as a Prudential Equity Income Fund
shareholder and to take the opportunity to report our activities to you.
Sincerely,
Lawrence C. McQuade
Chairman
Warren E. Spitz
Portfolio Manager
Company Highlights
Several well-known companies have joined the Prudential Equity Income Fund's
list of largest holdings. Stocks like Westinghouse and Tenneco Inc. fit into
our growing emphasis on cyclicals. In addition, although the Fund has taken
profits in aerospace/defense and insurance, these sectors still figure
prominently in its portfolio.
Westinghouse Electric. The electronics giant recently divested itself of a
troublesome consumer finance unit and has recaptured its core industrial focus.
We believe new management is likely to continue aggressive cost-cutting
measures.
Northrop Corp., Thiokol Corp., Martin Marietta Corp. These defense contractors
may begin to pay out the "peace dividend" in the form of higher than expected
earnings, since they don't need to spend astronomical sums on research and
development anymore.
Cigna Corp., Aetna Life & Casualty. These insurance companies, which combined
comprise 3.7% of the portfolio, should have increased pricing flexibility in
coming years. Overall, most insurers should receive authorization to increase
premiums in the wake of the string of disasters that hurt their balance sheets
this year.
4
<PAGE>
Following is an interview with Warren Spitz, portfolio manager of the
Prudential Equity Income Fund.
Q. Why is the Fund's dividend yield lower than comparable funds?
A. Although the Fund concentrates on sectors that are traditionally known for
high dividends, I manage it to produce both current income and capital
appreciation. In other words, I concentrate on companies that have the
potential to increase their sales and earnings, along with their stock
prices. This emphasis leads me to many "special situations"--companies that
look positioned to improve. I won't invest in companies for potential yield
if it comes at too high a price in terms of potential capital gains.
Q. Do you plan to maintain your 34% weighting in electric utilities?
A. Traditional electric utilities powered their way to substantial returns
during the 1980s, but I don't believe they'll fare as well in the 1990s, so
I've begun to trim my exposure and will continue to do so. In their place,
I'm purchasing telecommunications and natural gas utilities, especially
companies overseas. These industries should continue to grow during the coming
decade. I'm very bullish, for instance, on Canadian natural gas producers and
pipelines. New supply levels in this industry have been stagnant, and gas
prices should benefit from an increase in demand brought on by higher oil
prices due to the new U.S. tax.
5
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--82.5%
Common Stocks--67.9%
Aerospace/Defense--11.3%
270,400 Alliant Techsystems, Inc.*... $ 7,875,400
119,500 E-Systems, Inc............... 5,422,312
184,400 Grumman Corp................. 6,845,850
107,900 Lockheed Corp................ 7,431,613
211,000 Loral Corp................... 6,699,250
169,400 Martin Marietta Corp......... 7,495,950
21,800 McDonnell Douglas Corp....... 2,043,750
35,500 Moog, Inc.................... 275,125
391,900 Northrop Corp................ 13,618,525
134,400 Rockwell International
Corp....................... 4,821,600
337,100 Thiokol Corp................. 8,891,013
------------
71,420,388
------------
Chemicals--3.9%
14,000 American Cyanamid Co......... 763,000
185,200 Dow Chemical Co.............. 10,278,600
55,600 Imperial Chemical Industries,
ADR........................ 2,390,800
83,500 Monsanto Co.................. 5,771,937
166,900 Potash Corp. Saskatchewan,
Inc........................ 3,233,687
111,000 Union Carbide Corp........... 2,192,250
------------
24,630,274
------------
Computer Hardware--3.9%
425,700 Digital Equipment Corp.*..... 15,165,562
207,600 International Business
Machines Corp.............. 9,549,600
------------
24,715,162
------------
Computer Software & Services--0.1%
25,200 Shared Medical Systems
Corp....................... 630,000
------------
Drugs & Medical Supplies--1.1%
34,200 Allergan, Inc................ 782,325
194,200 Upjohn Co.................... 6,335,775
------------
7,118,100
------------
Electrical Equipment--3.2%
1,402,400 Westinghouse Electric
Corp....................... $ 20,334,800
------------
Electric Utilities--1.7%
26,200 Central Hudson Gas & Electric
Co......................... 835,125
47,000 Central Louisiana Electric
Co......................... 1,239,625
28,500 Northeast Utilities Co....... 748,125
33,300 Philadelphia Electric Co..... 1,040,625
222,200 PSI Resources, Inc........... 5,916,075
38,000 SCE Corp..................... 798,000
------------
10,577,575
------------
Electronics--1.6%
236,300 Esterline Technologies
Corp....................... 1,772,250
87,600 Harris Corp.................. 4,051,500
40,000 IMO Inds., Inc............... 305,000
272,400 Newport Corp................. 1,736,550
116,800 Pacific Scientific Co........ 2,190,000
------------
10,055,300
------------
Energy Equipment & Services--3.1%
697,800 Baroid Corp.................. 5,756,850
180,600 Smith International*......... 2,009,175
152,700 Sonat Offshore Drilling,
Inc........................ 3,149,438
146,400 USX Corp..................... 5,490,000
403,600 Varco International, Inc..... 3,178,350
------------
19,583,813
------------
Financial Services--1.3%
167,500 American Express Co.......... 5,401,875
92,500 GFC Financial Corp........... 2,879,062
------------
8,280,937
------------
Forest Products--0.3%
27,300 Georgia-Pacific Corp......... 1,754,025
------------
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Gas Distribution--2.5%
82,100 British Gas plc., ADS........ $ 4,392,350
76,400 Equitable Resources, Inc..... 2,989,150
237,450 KN Energy, Inc............... 6,529,875
58,450 Yankee Energy System, Inc.... 1,680,437
------------
15,591,812
------------
Gas Pipelines--4.8%
158,500 Enserch Corp................. 3,150,187
450,000 Panhandle Eastern Corp....... 10,687,500
103,600 Sonat, Inc................... 3,224,550
410,000 TransCanada Pipelines,
Ltd........................ 6,252,500
228,900 Transco Energy Co............ 3,691,013
54,100 Williams Cos., Inc........... 3,212,188
------------
30,217,938
------------
Insurance--8.7%
179,100 Aetna Life & Casualty Co..... 11,775,825
265,900 Alexander & Alexander
Services, Inc.............. 5,484,187
45,600 American Reinsurance
Corp.*..................... 1,316,700
173,400 CIGNA Corp................... 11,639,475
309,200 Continental Corp............. 10,087,650
59,600 Lincoln National Corp........ 2,711,800
42,700 Ohio Casualty Corp........... 2,764,825
56,300 SAFECO Corp.................. 3,265,400
75,600 Selective Insurance Group,
Inc........................ 2,324,700
109,000 Travelers Corp............... 3,842,250
------------
55,212,812
------------
Integrated Producers--6.9%
164,500 British Petroleum Ltd., plc,
ADS........................ 10,240,125
3,600 Exxon Corp................... 235,350
19,000 Kerr-McGee Corp.............. 957,125
33,300 Mobil Corp................... 2,713,950
236,000 Occidental Petroleum Corp.... 4,366,000
53,800 Petroleum Heat & Power,
Inc........................ 511,100
531,700 Quaker State Corp............ 7,377,337
49,100 Royal Dutch Petroleum Co..... 5,192,325
158,700 Sun Co., Inc................. 4,959,375
39,400 Texaco, Inc.................. $ 2,684,125
33,200 Unocal Corp.................. 971,100
184,200 USX Marathon Group........... 3,407,700
------------
43,615,612
------------
Machinery--0.4%
21,400 Gerber Scientific, Inc....... 299,600
277,300 Terex Corp................... 2,114,413
------------
2,414,013
------------
Media--1.9%
121,300 Foote Cone & Belding
Communications, Inc........ 4,624,562
132,700 Pulitzer Publishing Co....... 4,462,038
1,056,200 WPP Group, plc, ADS.......... 3,036,575
------------
12,123,175
------------
Miscellaneous Industrial--3.2%
107,900 Ametek, Inc.................. 1,483,625
60,900 Fischer And Porter Co........ 966,787
60,000 Hanson plc, ADR.............. 1,207,500
90,300 Kollmorgen Corp.............. 699,825
282,500 Tenneco, Inc................. 14,407,500
27,200 Textron, Inc................. 1,519,800
------------
20,285,037
------------
Railroads--0.5%
188,000 Southern Pacific Rail
Corp....................... 3,360,500
------------
Realty Investment Trust--2.9%
24,600 Carr Realty Corp............. 571,950
73,500 Equity Residential Property
Trust...................... 2,544,937
41,700 Kimco Realty Corp............ 1,527,263
386,742 Property Trust of America.... 7,783,183
83,500 Vornado Realty Trust......... 3,256,500
69,600 Weingarten Realty Investors,
Inc........................ 2,784,000
------------
18,467,833
------------
Recreation--0.6%
60,700 Eastman Kodak Co............. 3,824,100
------------
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Retail--0.1%
23,700 Petrie Stores Corp........... $ 690,263
------------
Steel--0.3%
59,000 Athlone Industries, Inc...... 1,017,750
50,000 Bethlehem Steel Corp.*....... 837,500
------------
1,855,250
------------
Telecommunication Services--2.9%
6,800 Ameritech Corp............... 576,300
24,300 BellSouth Corp............... 1,524,825
65,900 GTE Corp..................... 2,619,525
105,200 NYNEX Corp................... 4,444,700
232,100 Sprint Corp.................. 8,355,600
11,600 U.S. West, Inc............... 581,450
------------
18,102,400
------------
Tobacco--0.7%
136,300 American Brands, Inc......... 4,702,350
------------
Total common stocks
(cost $373,214,402).......... 429,563,469
------------
Preferred Stocks--7.9%
Electric Utilities--0.3%
2,100 Gulf States Utilities Co.
Class E.................... 165,900
12,304 Gulf States Utilities Co.
Class K.................... 1,267,312
------------
1,433,212
------------
Energy Systems--1.2%
100,000 McDermott International,
Inc., Conv., Ser C......... 5,225,000
77,800 Reading & Bates Corp., Conv.
$1.63...................... 2,489,600
------------
7,714,600
------------
Insurance--0.9%
102,200 Alexander & Alexander
Services, Inc.,
Conv. $3.63, Ser. A.......... $ 5,020,575
12,700 USF & G Corp., Conv. $4.10,
Ser A...................... 650,875
------------
5,671,450
------------
Integrated Producers--1.5%
49,000 Unocal Corp., Conv. $3.50.... 2,976,750
118,900 USX Marathon Group, Conv..... 6,569,225
------------
9,545,975
------------
Mining--1.1%
100,000 Echo Bay Finance Corp., Conv.
$1.75, Ser A............... 4,225,000
60,000 Hecla Mining Co., Conv., Ser
B.......................... 3,015,000
------------
7,240,000
------------
Retail--0.6%
72,700 K-Mart Corp., Conv., PERCS... 3,598,650
------------
Steel--1.9%
230,000 Bethlehem Steel Corp., Conv.
$3.50...................... 12,132,500
------------
Trucking--0.4%
122,100 Consolidated Freightways,
Inc., Conv., PERCS......... 2,716,725
------------
Total preferred stocks
(cost $47,765,607)....... 50,053,112
------------
</TABLE>
-8- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <C>
Convertible Bonds--6.7%
Computer Hardware--2.0%
Conner Peripherals,
Inc., Sub. Deb.,
B1 $ 2,300 6.75%, 3/1/01........ $ 1,966,500
Quantum Corp., Deb.,
B2 5,250 6.375%, 4/1/02....... 5,171,250
Seagate Technology,
Sub. Deb.,
B2 3,407 6.75%, 5/1/12........ 3,083,335
Storage Technology
Corp., Sub. Deb.,
B2 2,200 8.00%, 5/31/15....... 2,301,750
------------
12,522,835
------------
Energy System--1.2%
Baker Hughes, Inc.,
A3 12,375 Zero Coupon,
5/5/08............. 7,486,875
------------
Fertilizer--0.7%
IMC Fertilizer Group,
Deb.,
B3 4,500 6.25%, 12/1/01....... 4,218,750
------------
Integrated Oil--0.7%
Amoco Canada
Petroleum Co.,
Sub. Exch. Deb.,
Aa3 339 7.375%, 9/1/13....... 419,513
Cross Timbers Oil
Co., Deb.,
B2 2,034 5.25%, 11/1/03....... 2,074,680
Oryx Energy Co., Sub.
Deb.,
B1 2,121 7.50%, 5/15/14....... 2,179,328
------------
4,673,521
------------
Mining--1.3%
Coeur D'Alene Mines
Corp., Deb.,
B2 3,000 7.00%, 11/30/02...... 4,275,000
Freeport McMoran,
Inc., Deb.,
Ba3 1,000 6.55%, 1/15/01....... 897,500
Hecla Mining Co.,
Sub. Deb.,
B3 7,000 Zero Coupon,
6/14/04............ 3,045,000
------------
8,217,500
------------
Miscellaneous Industrial--0.7%
Terex Corp., Deb.,
NR $ 5,650 13.00%, 8/1/96....... $ 4,491,750
------------
Steel--0.1%
USX Corp., Sub. Deb.,
BB+** 710 7.00%, 6/15/17....... 686,925
------------
Total convertible
bonds
(cost $41,304,676)... 42,298,156
------------
Total long-term
investments
(cost
$462,284,685)...... 521,914,737
------------
SHORT-TERM INVESTMENTS--17.2%
Joint Repurchase
Agreement
Account,
108,387 2.93%, 11/1/93
(cost $108,387,000;
Note 5)............ 108,387,000
------------
Total Investments--99.7%
(cost $570,671,685;
Note 4)............ 630,301,737
Other assets in
excess of
liabilities--0.3%... 1,583,139
------------
Net Assets--100%..... $631,884,876
------------
------------
<FN>
- ---------------
* Non-income producing security.
** Standard & Poor's rating.
ADR--American Depository Receipt.
ADS--American Depository Shares.
PERCS--Preferred Equity Redemption Cumulative Stock.
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.
NR--Not rated by Moody's or Standard & Poor's.
</TABLE>
-9- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1993
----------------
<S> <C>
Investments, at value (cost $570,671,685)................................................... $630,301,737
Receivable for Fund shares sold............................................................. 8,182,867
Receivable for investments sold............................................................. 3,570,287
Dividends and interest receivable........................................................... 1,789,722
Deferred expenses and other assets.......................................................... 5,567
----------------
Total assets.............................................................................. 643,850,180
----------------
Liabilities
Bank overdraft.............................................................................. 1,022,722
Payable for investments purchased........................................................... 9,786,128
Due to Distributors......................................................................... 444,629
Due to Manager.............................................................................. 307,579
Accrued expenses............................................................................ 218,480
Payable for Fund shares reacquired.......................................................... 158,837
Foreign withholding tax payable............................................................. 26,929
----------------
Total liabilities......................................................................... 11,965,304
----------------
Net Assets.................................................................................. $631,884,876
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................... $ 440,210
Paid-in capital in excess of par.......................................................... 544,286,685
----------------
544,726,895
Undistributed net investment income....................................................... 2,542,710
Accumulated net realized gains............................................................ 24,985,219
Net unrealized appreciation............................................................... 59,630,052
----------------
Net assets, October 31, 1993................................................................ $631,884,876
----------------
----------------
Class A:
Net asset value and redemption price per share ($104,016,660 / 7,235,274 shares of
beneficial interest issued and outstanding)............................................. $14.38
Maximum sales charge (5.25% of offering price)............................................ .80
Maximum offering price to public.......................................................... $15.18
Class B:
Net asset value, offering price and redemption price per share ($527,868,216 / 36,785,745
shares of beneficial interest issued and outstanding)................................... $14.35
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $167,410)................... $14,326,125
Interest and discount earned........... 2,446,136
-----------
Total income......................... 16,772,261
-----------
Expenses
Distribution fee--Class A.............. 141,790
Distribution fee--Class B.............. 3,048,976
Management fee......................... 2,254,755
Transfer agent's fees and expenses..... 583,000
Custodian's fees and expenses.......... 143,000
Registration fees...................... 97,000
Reports to shareholders................ 54,000
Trustees' fees......................... 45,000
Audit fee.............................. 36,000
Legal fees............................. 26,000
Franchise taxes........................ 22,000
Miscellaneous.......................... 16,616
-----------
Total expenses....................... 6,468,137
-----------
Net investment income.................... 10,304,124
-----------
Realized and Unrealized
Gain on Investments
Net realized gain on:
Investment transactions................ 24,810,840
Financial futures contracts............ 423,450
-----------
25,234,290
-----------
Net change in unrealized appreciation of
investments............................ 45,035,883
-----------
Net gain on investments.................. 70,270,173
-----------
Net Increase in Net Assets
Resulting from Operations................ $80,574,297
-----------
-----------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1993 1992
------------ -------------
<S> <C> <C>
Operations
Net investment income...... $ 10,304,124 $ 5,878,222
Net realized gain on
investment
transactions............. 25,234,290 9,228,512
Net change in unrealized
appreciation of
investments.............. 45,035,883 447,132
------------ -------------
Net increase in net assets
resulting from
operations............... 80,574,297 15,553,866
------------ -------------
Net equalization credits..... 1,785,921 217,876
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (2,383,733) (659,875)
Class B.................. (8,100,377) (5,206,396)
------------ -------------
(10,484,110) (5,866,271)
------------ -------------
Distributions to
shareholders from net
realized gains on
investment transactions
Class A.................. (1,901,042) (177,489)
Class B.................. (7,217,743) (6,139,444)
------------ -------------
(9,118,785) (6,316,933)
------------ -------------
Fund share transactions (Note
6)
Proceeds from shares
subscribed............... 398,239,834 131,072,403
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 17,714,556 10,978,645
Cost of shares
reacquired................. (88,837,779) (59,179,985)
------------ -------------
Net increase in net assets
from Fund share
transactions............. 327,116,611 82,871,063
------------ -------------
Total increase............... 389,873,934 86,459,601
Net Assets
Beginning of year............ 242,010,942 155,551,341
------------ -------------
End of year.................. $631,884,876 $ 242,010,942
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-11-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Notes to Financial Statements
Prudential Equity Income Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was organized as an unincorporated business trust in
Massachusetts on September 18, 1986 and had no operations until December 22,
1986 when 10,309 shares of beneficial interest were sold at $9.70 per share to
Prudential Securities Incorporated (``PSI''). Investment operations commenced on
January 22, 1987. The investment objective of the Fund is both current income
and capital appreciation. It seeks to achieve this objective by investing
primarily in common stocks and convertible securities that provide investment
income returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. The ability of the issuers of the debt securities held by the
Fund to meet their obligations may be affected by economic developments in a
specific industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund in the preparation
of its financial statements.
Securities Valuation: Investments in securities traded on a national securities
exchange (or reported on the NASDAQ national market) are valued at the last sale
price on such exchange on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices quoted on such day.
Corporate bonds (other than convertible debt securities) and U.S. Government
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the most recently quoted bid
and asked prices provided by principal market makers. Other securities are
valued at the mean between the most recently quoted bid and asked prices.
Securities which are otherwise not readily marketable or securities for which
market quotations are not readily available are valued in good faith at fair
value in accordance with procedures adopted by the Fund's Board of Trustees.
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.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
amounts equal to a certain percentage of the contract amount. This is known as
the ``initial margin''. Subsequent payments, known as ``variation margin'', are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market conditions. Should market conditions move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is
-12-
<PAGE>
recorded on the ex-dividend date; interest income is recorded on the accrual
basis.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly and make distributions at least annually of any net
capital gains. 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. These differences are primarily due to differing
treatments for wash sales.
Reclassification of Capital Accounts: Effective November 1, 1992, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2; Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. The effect caused by adopting this statement was to
decrease paid-in capital by $2,048, increase undistributed net investment income
by $577 and increase accumulated net realized gains on investments by $1,471
with respect to amounts reported through October 31, 1993. Net investment
income, net realized gains and net assets were not affected by this change.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers 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 PMF is computed daily and payable monthly at an
annual rate of .60 of 1% of the average daily net assets of the Fund up to $500
million and .50 of 1% of the average daily net assets in excess of $500 million.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and PSI, which acts as distributor of the Class B shares of
the Fund (collectively, the ``Distributors''). To reimburse the Distributors for
their expenses incurred in distributing and servicing the Fund's Class A and B
shares, the Fund, pursuant to plans of distribution, pays the Distributors a
reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .20 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended October 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
-13-
<PAGE>
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Fund under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $1,497,600 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Class B Plan. PSI has advised the Fund that for the fiscal year ended
October 31, 1993, it received approximately $538,500 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at October 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $10,271,700.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the fiscal year ended October 31, 1993, the Fund incurred fees of
approximately $549,900 for the services of PMFS. As of October 31, 1993,
approximately $63,800 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
For the fiscal year ended October 31, 1993, PSI earned approximately $193,100
in brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of
Securities investment securities, other
than short-term investments, for the fiscal year
ended October 31, 1993 were $413,063,973 and $193,859,516, respectively.
The federal income tax basis of the Fund's investments, at October 31, 1993
was $571,009,768 and, accordingly, net unrealized appreciation for federal
income tax purposes was $59,291,969 (gross unrealized appreciation--$68,087,576;
gross unrealized depreciation--$8,795,607).
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest
Agreement ment companies, transfers
Account uninvested cash balances
into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of October 31, 1993, the Fund
has an 8.0% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $108,387,000 in
principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:
CS First Boston Corp., 2.93%, in the principal amount of $360,000,000,
repurchase price $360,087,900, due 11/1/93, collateralized by $47,400,000 U.S.
Treasury Notes, 6.75%, due 2/28/97; $40,000,000 U.S. Treasury Notes, 11.25%, due
2/15/95; $100,000,000 U.S. Treasury Bonds, 7.50%, due 11/15/16; $50,00,000 U.S.
Treasury Bonds, 10.375%, due 11/15/12 and $50,000,000 U.S. Treasury Bonds,
12.00%, due 5/15/05; aggregate value including accrued interest--$368,368,052.
Goldman Sachs & Co., 2.93%, in the principal amount of $450,154,000,
repurchase price $450,263,913, due 11/1/93, collateralized by $104,915,000 U.S.
Treasury Bonds, 12.00%, due 8/15/13 and $200,000,000 U.S. Treasury Bonds,
10.75%, due 8/15/05; aggregate value including accrued interest--$462,739,932.
Kidder, Peabody & Co. Inc., 2.95%, in the principal amount of $305,000,000,
repurchase price $305,074,979, due 11/1/93, collateralized by $210,030,000 U.S.
Treasury Bonds, 9.875%, due 11/15/15; value including accrued
interest--$311,527,136.
Nomura Securities International, Inc., 2.90%, in the principal amount of
$60,889,000, repurchase price $60,903,715, due 11/1/93, collateralized by
$8,280,000 U.S. Treasury Notes, 7.75%, due 2/15/95; $25,000,000 U.S. Treasury
-14-
<PAGE>
Notes, 7.375%, due 5/15/96 and $22,775,000 U.S. Treasury Notes, 8.875%, due
2/15/96; aggregate value including accrued interest--$62,140,276.
Smith Barney Shearson, Inc., 2.94%, in the principal amount of $175,000,000,
repurchase price $175,042,875, due 11/1/93, collateralized by $4,465,000 U.S.
Treasury Bonds, 12.00%, due 5/15/05; $11,435,000 U.S. Treasury Notes, 9.125%,
due 5/15/99; $75,000,000 U.S. Treasury Bonds, 8.125%, due 8/15/19 and
$50,000,000 U.S. Treasury Bonds, 8.00%, due 11/15/21; aggregate value including
accrued interest--$178,771,706.
Note 6. Capital The Fund offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 5.25%. 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. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value divided into two classes, designated Class A and Class B.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31,
1993:
Shares sold................ 3,950,176 $ 53,801,595
Shares issued in
reinvestment of
dividends and
distributions............ 308,487 3,893,566
Shares reacquired.......... (1,232,317) (16,658,314)
---------- ------------
Increase in shares
outstanding.............. 3,026,346 $ 41,036,847
---------- ------------
---------- ------------
<CAPTION>
Shares Amount
---------- ------------
<S> <C> <C>
Year ended October 31,
1992:
Shares sold................ 534,597 $ 6,385,385
Shares issued--merger...... 3,584,907 42,652,014
Shares issued in
reinvestment of
dividends and
distributions............ 63,805 755,032
Shares reacquired.......... (307,736) (3,704,537)
---------- ------------
Increase in shares
outstanding.............. 3,875,573 $ 46,087,894
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------
<S> <C> <C>
Year ended October 31,
1993:
Shares sold................ 25,419,549 $344,438,239
Shares issued in
reinvestment of
dividends and
distributions............ 1,098,086 13,820,990
Shares reacquired.......... (5,453,744) (72,179,465)
---------- ------------
Increase in shares
outstanding.............. 21,063,891 $286,079,764
---------- ------------
---------- ------------
Year ended October 31,
1992:
Shares sold................ 6,854,296 $ 82,035,004
Shares issued in
reinvestment of
dividends and
distributions............ 891,406 10,223,613
Shares reacquired.......... (4,623,152) (55,475,448)
---------- ------------
Increase in shares
outstanding.............. 3,122,550 $ 36,783,169
---------- ------------
---------- ------------
</TABLE>
Note 7. Dividends On December 9, 1993, the
Board of Trustees of the Fund declared ordinary
income dividends of $0.07 per Class A share and $0.045 per Class B share and a
$0.345 long-term capital gain distribution and a $0.18 short-term capital gain
distribution for both Class A and Class B shares payable on December 22, 1993 to
shareholders of record on December 15, 1993.
-15-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
--------------------------------------
January
22, Class B
1990+ ----------------------------------------------------
through
Year Ended October 31, October Year Ended October 31,
--------------------------- 31, ----------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
-------- ------- ------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 12.16 $ 12.04 $ 9.53 $10.59 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
-------- ------- ------ -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income.......... .47 .47 .38 .25 .37 .37 .30 .28 .32
Net realized and unrealized
gain (loss) on investment
transactions................. 2.65 .60 2.50 (1.01) 2.64 .59 2.49 (1.32) 1.26
-------- ------- ------ -------- -------- -------- -------- -------- --------
Total from investment
operations................. 3.12 1.07 2.88 (.76) 3.01 .96 2.79 (1.04) 1.58
-------- ------- ------ -------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income....................... (.46) (.47) (.37) (.30) (.36) (.37) (.29) (.32) (.32)
Distributions from net realized
gains........................ (.44) (.48) -- -- (.44) (.48) -- -- --
-------- ------- ------ -------- -------- -------- -------- -------- --------
Total distributions.......... (.90) (.95) (.37) (.30) (.80) (.85) (.29) (.32) (.32)
-------- ------- ------ -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 14.38 $ 12.16 $12.04 $ 9.53 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89
-------- ------- ------ -------- -------- -------- -------- -------- --------
-------- ------- ------ -------- -------- -------- -------- -------- --------
TOTAL RETURN#:................. 26.93% 9.50% 30.62% (7.36)% 25.93% 8.55% 29.58% (9.77)% 16.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $104,017 $51,165 $4,013 $1,098 $527,868 $190,846 $151,538 $120,032 $143,169
Average net assets (000)....... $ 70,895 $21,931 $2,084 $ 752 $304,898 $169,524 $136,602 $142,179 $ 84,157
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.07% 1.22% 1.37% 1.59%* 1.87% 2.02% 2.17% 2.22% 2.08%
Expenses, excluding
distribution fees.......... .87% 1.02% 1.17% 1.39%* .87% 1.02% 1.17% 1.22% 1.12%
Net investment income........ 3.44% 3.22% 3.43% 3.12%* 2.58% 3.05% 2.67% 2.70% 2.89%
Portfolio turnover............. 57% 43% 64% 58% 57% 43% 64% 58% 60%
</TABLE>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# 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.
See Notes to Financial Statements.
-16-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Equity Income Fund
We have audited the accompanying statement of assets and liabilities of
Prudential Equity Income Fund, including the portfolio of investments, as of
October 31, 1993, the related statements of operations for the year then ended
and of changes in 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. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Equity
Income Fund as of October 31, 1993, the results of its operations, the changes
in its net assets and the financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
December 9, 1993
FEDERAL INCOME TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Fund's fiscal year end (October 31, 1993) as to the federal income tax
status of dividends paid by the Fund during such fiscal year. Accordingly, we
are advising you that during its fiscal year ended October 31, 1993, the Fund
paid distributions for Class A shares totaling $0.90 per share, comprised of
$0.532 per share ordinary income and short-term capital gains which are taxable
as ordinary income and $0.368 per share long-term capital gains which is taxable
as such. The Fund paid distributions for Class B shares totaling $0.80 per
share, comprised of $0.432 per share ordinary income and short-term capital
gains which are taxable as ordinary income and $0.368 per share long-term
capital gains which is taxable as such. Further, we wish to advise you that 71%
of the dividends (excluding short-term and long-term capital gains) paid in the
fiscal year ended October 31, 1993 qualified for the corporate dividends
received deduction available to corporate taxpayers.
In January 1994, you will be advised on IRS Form 1099, DIV or substitute Form
1099, as to the federal tax status of the distributions received by you in
calendar 1993. The amounts that will be reported on such Form 1099 DIV will be
the amounts to use on your 1993 federal income tax return and will differ from
the amounts which we must report for the Fund's fiscal year ended October 31,
1993.
-17-
<PAGE>
Trustees
Edward D. Beach
Donald D. Lennox
Douglas H. McCorkindale
Lawrence C. McQuade
Thomas T. Mooney
Richard A. Redeker
Louis A. Weil, III
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
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, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche
1633 Broadway
New York, NY 10019
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610
One Seaport Plaza
New York, NY 10292
Toll free (800) 225-1852
Collect (201) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
743916207 MF131E
743916108 Cat.#4441355
<PAGE>
I. Prudential Equity Income Fund
Chart entitled Prudential Mutual Funds: Risk/Reward Spectrum.
The chart shows a graphic representation of the spectrum of risks
of various categories of Prudential Mutual Funds including stock
funds, tax-exempt bond funds, taxable bond funds and global taxable
bond funds. The chart rates the risk of individual Prudential
Mutual Funds relative to other Prudential Mutual Funds in each
category.
Under the category of stock funds, the chart lists from low risk to
high risk the following funds (beginning at the low end of the
spectrum):
FlexiFund (The Conservatively Managed Portfolio)
IncomeVertible Fund
FlexiFund (The Strategy Portfolio)
Equity Income Fund
Utility Fund
Global Utility Fund
Equity Fund
Growth Fund
Global Fund
Nicholas-Applegate Growth Equity Fund
Growth Opportunity Fund
Multi-Sector Fund
Global Natural Resources Fund
Global Genesis Fund
Pacific Growth Fund
Under the category of tax-exempt bond funds, the chart lists from
low risk to high risk the following funds (beginning at the low end
of the spectrum):
Municipal Bond Fund (Modified Term Series)
Municipal Bond Fund (Insured Series)
National Municipals Fund
Municipal Series Fund (State Series Fund)
California Municipal Fund (California Income Series)
Municipal Bond Fund (High Yield Series)
Under the category of taxable bond funds, the chart lists from low
risk to high risk the following funds (beginning at the low end of
the spectrum):
Adjustable Rate Securities Fund
The BlackRock Government Income Fund
Structured Maturity Fund (Income Portfolio)
Government Securities Trust (Intermediate Term Series)
GNMA Fund
Government Plus Fund
U.S. Government Fund
High Yield Fund
Under the category of global taxable bond funds, the chart lists
from low risk to high risk the following funds (beginning at the
low end of the spectrum):
<PAGE>
Short-Term Global Income Fund (Global Assets Portfolio)
Short-Term Global Income Fund (Short-Term Global Income
Portfolio)
Intermediate Global Income Fund
<PAGE>
II. Prudential Equity Income Fund
Performance Charts
A. Historical Investment Results
The chart shows comparative historical investment results for the
one-year, five-year and since inception periods ended October 31,
1993 for the Class A shares of the Fund, the Class B shares of the
Fund, the Lipper Equity Income Average and the S&P 500 Index, without
taking into account front-end or contingent deferred sales charges.
B. Average Annual Total Returns
The chart also shows the average annual total returns for the one-
year, five-year and since inception periods ended September 30,
1993 for Class A and Class B shares taking into account any
applicable sales charges.
<PAGE>
III. Prudential Equity Income Fund
Mountain Charts
Two mountain charts show the growth of an assumed investment
of $10,000 in Prudential Pacific Growth Fund. The charts represent
historical performance and are not a guarantee of future
performance of Class A shares or Class B shares.
A. Class A shares
The chart shows the growth of a $10,000 investment in Class A
shares from inception on January 22, 1990 through September 30, 1993,
and assumes a front-end sales charge of 5.25%. The chart shows the
value of the investment as of September 30, 1993 (i) with the
reinvestment of dividends and distributions in additional shares of
the Fund and (ii) with all dividends and distributions taken in
cash.
B. Class B shares
The chart shows the growth of a $10,000 investment in Class B
shares from inception on January 20, 1987 through September 30, 1993,
and does not assume the effect of a contingent deferred sales
charge on redemptions. The chart shows the value of the investment
as of September 30, 1993 (i) with the reinvestment of dividends and
distributions in additional shares of the Fund and (ii) with all
dividends and distributions taken in cash.
<PAGE>
IV. Prudential Equity Income Fund
Bar chart showing the Fund's five largest industries as a percent of net assets
as of October 31, 1993. The industries are Aerospace/Defense, 11.3%; Insurance,
9.6%; Integrated Producers, 8.4%; Computer Hardware, 5.9%; and Gas Pipeline,
4.8%.
<PAGE>
V. Prudential Equity Income Fund
SEC Required Charts
The following two charts compare a $10,000 investment in Class
A shares and Class B shares, with a similar investment in the
Morgan Stanley Pacific Index. Included in the charts are the
average annual total returns for Class A for the one-year and
since inception periods with and without sales charges and Class B
for the one-year, five year and since inception periods with and
without sales charges.
