Letter to Shareholders
May 24, 1994
Dear Shareholder:
What a difference six months makes. Since last October's report of good
news, long-term interest rates have risen about 1.3%, dampening the spirits of
stock market investors in general and hurting interest-sensitive stocks in
particular. Despite the troubled markets, however, we are pleased to report
that the Prudential Equity Income Fund provided above average returns in
this environment.
The Prudential Equity Income Fund seeks to provide both current income
and capital appreciation through a portfolio of common stocks and
convertible securities that provide investment income returns above those of
the Standard & Poor's 500 Stock Index. The Fund may hold up to 30% of
assets in securities of foreign issuers and 35% of assets in bonds.
Rising Rates Dampen High Dividend Stocks
Rising interest rates are hard on traditional high dividend sectors -
energy, finance and utility companies - because the increase in company
borrowing costs can negatively affect earnings and dividends. And interest
rates have been rising steadily this year, in response to the Federal Reserve's
attempts to curb growth and cut off inflation before it has a chance to take
root.
We tried to minimize this effect by focusing more heavily on stocks that
could benefit from an economic recovery, including industrial and technology
stocks. Although many of these equities are sensitive to interest rates,
their fortunes also depend heavily on the pace of economic growth, which
picked up at a robust rate of 3.0% for the first quarter.
The Best Defense May Be Defense
When we last reported to you six months ago, aerospace and defense
companies were the largest industries in the Fund, at slightly more than 11%
of assets. We figured the cost cutting measures by defense contractors in the
post-Cold War environment would translate directly into increased earnings
and cash flow for these companies, making them attractive takeover
candidates as well. In March, the Fund benefitted when Grumman found
itself courted by both Northrop (1.8% of the portfolio at the end of April) and
Martin Marietta and the stock prices of all three companies rose. Since then,
we have scaled back our aerospace/defense holdings and sold Grumman
<PAGE>
(0.72%) of the portfolio on April 4) and Martin Marietta (0.56% on April 6).
However, at about 6% of assets at the end of April, aerospace defense stocks
still figure prominently in the portfolio.
Energy Stocks And Real Estate: Traditional Havens
Energy stocks have also become an important focus. As an economy
expands, prices of raw commodities like oil and aluminum generally rise in
response to increased demand. Until recently, oil prices had not moved up as
fast as other commodity prices, and stocks of oil companies floundered as
well. We began buying energy stocks, in anticipation of oil prices catching up
to other commodity prices, particularly as the worldwide economic recovery
strengthened. In the meantime, many of these stocks offer attractive yields.
We also like several natural gas companies as well. Natural gas - the cleaner
burning fuel - is expected to gain in popularity over the next decade. We
believe this could translate to good performance from natural gas company
stocks.
We are also investing in companies involved in real estate. Specifically,
real estate investment trusts, or REITs, now offer attractive yields and may
enjoy price gains as well if the economic recovery increases the occupancy
rates of the commercial office buildings and retail malls that are included
in the trusts.
A Bright Outlook for Industrial Stocks
Finally, your Fund also has significant investments in industrial
companies. Although not traditionally considered "high dividend" stocks,
many industrials currently have attractive yields, in part because their stock
prices declined during the past recession. Industrial companies should also
continue to benefit from the economic recovery, particularly as the
manufacturing sector gathers momentum.
As investors cope with both a growing economy, rising interest rates and
the threat of renewed price inflation, 1994 is shaping up to be a turbulent
year in financial markets. Despite this volatility, we are optimistic that the
domestic stock market will produce positive returns this year. And at 7.5%,
long-term interest rates seem too high given the low inflation rate. As
investors realize that inflation is not likely to reignite soon, long-term
rates may have room to decline slightly.
As always, it is a pleasure to have you as a shareholder of the Prudential
Equity Income Fund and to take the opportunity to report our activities to you.
Sincerely,
Lawrence C. McQuade Warren E. Spitz
President Portfolio Manager
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--93.4%
Common Stocks--75.2%
Aerospace/Defense--6.4%
270,400 Alliant Techsystems,
Inc.*..................... $ 6,117,800
119,500 E-Systems, Inc.............. 4,794,938
107,900 Lockheed Corp............... 6,622,362
90,300 McDonnell Douglas Corp...... 10,610,250
35,500 Moog, Inc.*................. 310,625
433,600 Northrop Corp............... 16,585,200
134,400 Rockwell International
Corp...................... 5,241,600
337,100 Thiokol Corp................ 8,132,537
39,800 Whittaker Corp.*............ 547,250
------------
58,962,562
------------
Automobiles & Trucks--2.4%
150,000 Chrysler Corp............... 7,181,250
116,100 Ford Motor Co............... 6,777,338
150,000 General Motors Corp......... 8,512,500
------------
22,471,088
------------
Banking--0.1%
15,100 First Fidelity Bancorp...... 700,263
------------
Chemicals--4.7%
14,000 American Cyanamid Co........ 658,000
2,000 Cytec Industries, Inc.*..... 28,750
298,800 Dow Chemical Co............. 18,749,700
115,175 Eastman Chemical Co......... 5,125,287
55,600 Imperial Chemical
Industries, ADR (United
Kingdom).................. 2,766,100
63,500 Monsanto Co................. 5,222,875
180,100 Potash Corp. Saskatchewan,
Inc....................... 4,592,550
261,000 Union Carbide Corp.......... 6,883,875
------------
44,027,137
------------
Computer Hardware--4.1%
406,500 Digital Equipment Corp.*.... $ 8,536,500
507,600 International Business
Machines Corp............. 29,060,100
------------
37,596,600
------------
Computer Software & Services--0.2%
147,200 Intergraph Corp.*........... 1,398,400
25,200 Shared Medical Systems
Corp...................... 645,750
------------
2,044,150
------------
Conglomerate--0.6%
60,000 ITT Corp.................... 5,385,000
------------
Drugs & Medical Supplies--0.6%
34,200 Allergan, Inc............... 735,300
194,200 Upjohn Co................... 5,194,850
------------
5,930,150
------------
Electrical Equipment--1.8%
1,437,200 Westinghouse Electric
Corp...................... 16,707,450
------------
Electric Utilities--0.8%
26,200 Central Hudson Gas &
Electric Co............... 763,075
47,000 Central Louisiana Electric
Co........................ 1,186,750
222,200 PSI Resources, Inc.......... 4,971,725
38,000 SCE Corp.................... 608,000
------------
7,529,550
------------
Electronics--1.7%
306,900 Esterline Technologies
Corp.*.................... 2,301,750
87,600 Harris Corp................. 3,843,450
462,800 IMO Industries, Inc.*....... 4,859,400
321,400 Newport Corp................ 1,968,575
106,700 Pacific Scientific Co....... 2,667,500
------------
15,640,675
------------
</TABLE>
--5-- See Notes to Financial Statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Energy Equipment & Services--2.0%
351,000 Smith International,
Inc.*..................... $ 4,387,500
363,000 Sonat Offshore Drilling,
Inc....................... 6,443,250
146,400 USX Corp.................... 4,977,600
537,300 Varco International, Inc.... 2,887,988
------------
18,696,338
------------
Energy Systems--6.5%
723,700 Baker Hughes, Inc........... 13,297,987
200,000 Crestar Energy, Inc.*....... 2,351,920
633,100 Dresser Industries, Inc..... 14,403,025
595,000 Halliburton Co.............. 17,626,875
590,300 McDermott International,
Inc....................... 12,543,875
------------
60,223,682
------------
Exploration & Production--1.0%
200,000 Burlington Resources,
Inc....................... 8,975,000
------------
Forest Products--0.2%
103,300 Boise Cascade Corp.......... 2,220,950
------------
Gas Distribution--2.0%
206,200 British Gas plc., ADS
(United Kingdom).......... 9,021,250
76,400 Equitable Resources, Inc.... 2,769,500
237,450 KN Energy, Inc.............. 5,550,394
58,450 Yankee Energy System,
Inc....................... 1,271,287
------------
18,612,431
------------
Gas Pipelines--2.7%
25,700 Enserch Corp................ 363,013
462,000 Panhandle Eastern Corp...... 9,297,750
119,700 Sonat, Inc.................. 3,635,887
410,000 TransCanada Pipelines,
Ltd....................... 5,535,000
228,900 Transco Energy Co........... 3,462,112
108,200 Williams Cos., Inc.......... 2,786,150
------------
25,079,912
------------
Gold Mines--0.6%
250,000 Ashant Goldfield Ltd., GDR*
(Denmark)................. $ 5,593,750
------------
Insurance--6.9%
309,200 Aetna Life & Casualty Co.... 16,078,400
1,081,100 Alexander & Alexander
Services, Inc............. 15,811,087
138,700 Allstate Corp............... 3,311,462
16,300 American Reinsurance
Corp.*.................... 456,400
176,300 CIGNA Corp.................. 10,313,550
309,200 Continental Corp............ 6,957,000
49,000 Lincoln National Corp....... 1,868,125
85,400 Ohio Casualty Corp.......... 2,626,050
56,300 SAFECO Corp................. 3,033,163
140,100 Selective Insurance Group,
Inc....................... 3,467,475
------------
63,922,712
------------
Integrated Producers--7.7%
164,500 British Petroleum Ltd.,
plc., ADS (United
Kingdom).................. 11,515,000
3,600 Exxon Corp.................. 226,350
19,000 Kerr-McGee Corp............. 850,250
33,300 Mobil Corp.................. 2,605,725
544,300 Occidental Petroleum
Corp...................... 9,661,325
51,300 Petroleum Heat & Power,
Inc....................... 410,400
469,900 Quaker State Corp........... 6,343,650
49,100 Royal Dutch Petroleum Co.... 5,351,900
452,300 Societe Nationale ELF
Aquitaine, ADR (France)... 16,452,412
158,700 Sun Co., Inc................ 5,375,963
39,400 Texaco, Inc................. 2,536,375
33,200 Unocal Corp................. 917,150
562,000 USX Marathon Group.......... 9,483,750
------------
71,730,250
------------
Machinery--0.3%
21,400 Gerber Scientific, Inc...... 323,675
277,300 Terex Corp.*................ 2,149,075
------------
2,472,750
------------
</TABLE>
--6-- See Notes to Financial Statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Media--1.9%
121,300 Foote Cone & Belding
Communications, Inc....... $ 5,185,575
132,700 Pulitzer Publishing Co...... 4,860,138
2,147,200 WPP Group, plc., ADS
(United Kingdom).......... 7,917,800
------------
17,963,513
------------
Miscellaneous Industrial--3.5%
60,000 Hanson plc., ADR (United
Kingdom).................. 1,237,500
582,500 Tenneco, Inc................ 29,853,125
27,200 Textron, Inc................ 1,434,800
------------
32,525,425
------------
Realty Investment Trust--9.8%
242,200 AMLI Residential Property
Trust*.................... 5,146,750
315,000 Avalon Properties, Inc...... 7,402,500
24,600 Carr Realty Corp............ 584,250
176,700 Crescent Real Estate
Equities*................. 4,660,339
479,800 Equity Residential Property
Trust..................... 15,713,450
457,700 Gables Residential Trust.... 11,099,225
300,000 Glimcher Realty Trust....... 6,262,500
400,000 Irvine Apartment
Communities, Inc.......... 8,150,000
96,000 JP Realty, Inc.............. 2,016,000
41,700 Kimco Realty Corp........... 1,495,987
300,000 Manufactured Home
Communities, Inc.......... 6,712,500
386,742 Property Trust of America... 7,203,070
285,700 Simon Property Group,
Inc....................... 7,642,475
133,800 Vornado Realty Trust........ 4,398,675
69,600 Weingarten Realty Investors,
Inc....................... 2,627,400
------------
91,115,121
------------
Retail--0.1%
23,700 Petrie Stores Corp.......... 604,350
------------
Steel--0.1%
49,988 Allegheny Ludlum Corp....... $ 956,021
59,600 Tubos De Acero De Mexico
S.A., ADR* (Mexico)....... 294,275
------------
1,250,296
------------
Telecommunication Services--5.6%
13,600 Ameritech Corp.............. 535,500
67,700 BellSouth Corp.............. 4,121,238
165,900 GTE Corp.................... 5,246,587
187,300 NYNEX Corp.................. 6,813,037
342,100 Sprint Corp................. 12,572,175
89,400 Telecomunicoes Brasilera,
ADR*
(Brazil).................. 3,151,350
326,800 Telefonos de Mexico S.A.*,
ADR
(Mexico).................. 19,240,350
11,600 U.S. West, Inc.............. 472,700
------------
52,152,937
------------
Tobacco--0.8%
226,500 American Brands, Inc........ 7,672,688
------------
Wood Processing--0.1%
15,000 Rayonier, Inc.*............. 423,750
------------
Total common stocks
(cost $675,297,216)......... 698,230,480
------------
Preferred Stocks--13.4%
Aluminum--1.3%
332,500 Kaiser Aluminum Corp.,*
Conv. $8.25............... 3,117,188
193,500 Reynolds Metals Co., Conv.
$3.31..................... 8,925,187
------------
12,042,375
------------
Electric Utilities--0.1%
2,100 Gulf States Utilities Co.*,
$5.08, Class E............ 136,500
11,205 Gulf States Utilities Co.*,
$8.08, Class K............ 1,134,506
------------
1,271,006
------------
</TABLE>
--7-- See Notes to Financial Statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Electrical Equipment--2.6%
1,943,000 Westinghouse Electric
Corp.,* Conv.............. $ 24,530,375
------------
Energy Equipment & Services--0.3%
102,500 Chiles Offshore Corp.*,
Conv. $1.50............... 2,357,500
------------
Energy Systems--0.8%
100,000 McDermott International,
Inc.,
Conv., Ser. C............. 4,087,500
149,300 Reading & Bates Corp.,*
Conv. $1.63............... 3,732,500
------------
7,820,000
------------
Insurance--0.5%
102,200 Alexander & Alexander
Services, Inc.,*
Conv. $3.63, Ser. A......... 3,934,700
12,700 USF & G Corp., Conv. $4.10,
Ser A..................... 627,063
------------
4,561,763
------------
Integrated Producers--0.9%
49,000 Unocal Corp.,* Conv.
$3.50..................... 2,639,875
118,900 USX Marathon Group, Conv.... 5,945,000
------------
8,584,875
------------
Mining--0.7%
100,000 Echo Bay Finance Corp.,*
Conv. $1.75, Ser A........ $ 3,775,000
60,000 Hecla Mining Co., Conv., Ser
B......................... 2,985,000
------------
6,760,000
------------
Oil & Gas Exploration & Production--1.0%
175,000 Parker & Parsley Capital,
Conv...................... 9,471,875
------------
Paper--0.1%
7,500 Bowater, Inc., Conv., Ser.
B......................... 168,750
------------
Realty Investment Trust--0.2%
54,600 Property Trust of America,
Conv., Ser. A............. 1,487,850
------------
Steel--2.2%
360,000 Bethlehem Steel Corp.,*
Conv. $3.50............... 20,295,000
------------
Surgical Devices--0.8%
324,200 U.S. Surgical, Inc.,* Conv.
$2.20..................... 7,051,350
------------
Tobacco--1.9%
2,765,900 RJR Nabisco Holdings, Inc.,*
Conv., PERCS.............. 17,978,350
------------
Total preferred stocks
(cost $131,369,264)......... 124,381,069
------------
</TABLE>
--8-- See Notes to Financial Statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Value
Rating (000) Description (Note 1)
<S> <C> <C> <C>
Convertible Bonds--4.8%
Computer Hardware--2.4%
Conner Peripherals,
Inc.,
Sub. Deb.,
B2 $ 2,300 6.75%, 3/1/01........ $ 1,986,625
Quantum Corp., Deb.,
B2 5,250 6.375%, 4/1/02....... 5,761,875
Seagate Technology,
Deb.,
B1 3,407 6.75%, 5/1/12........ 3,023,712
Sub. Deb.,
NR 10,500 5.00%, 11/1/03....... 11,602,500
------------
22,374,712
------------
Fertilizer--0.4%
IMC Fertilizer Group,
Deb.,
Caa 4,500 6.25%, 12/1/01....... 3,892,500
------------
Integrated Oil--0.5%
Amoco Canada
Petroleum
Co., Sub. Exch.
Deb.,
Aa3 339 7.375%, 9/1/13....... 390,274
Cross Timbers Oil
Co., Deb.,
B2 2,583 5.25%, 11/1/03....... 2,243,981
Oryx Energy Co., Sub.
Deb.,
B1 2,121 7.50%, 5/15/14....... 1,919,505
------------
4,553,760
------------
Mining--0.8%
Coeur D'Alene Mines
Corp.,
Sub. Deb.,
CCC+** 3,000 7.00%, 11/30/02...... 3,967,500
Freeport McMoran,
Inc.,
Deb.,
Ba3 1,000 6.55%, 1/15/01....... 891,250
Hecla Mining Co.,
Sub. Deb.,
B3 7,000 Zero Coupon,
6/14/04............ 3,123,750
------------
7,982,500
------------
Miscellaneous Industrial--0.6%
Terex Corp., Deb.,
NR $ 5,650 13.00%, 8/1/96....... $ 5,424,000
------------
Steel--0.1%
USX Corp., Sub. Deb.,
Ba2 710 7.00%, 6/15/17....... 621,250
------------
Total convertible
bonds
(cost
$42,541,860)....... 44,848,722
------------
Total long-term
investments
(cost
$849,208,340)...... 867,460,271
------------
SHORT-TERM INVESTMENTS--6.5%
60,247 Joint Repurchase
Agreement
Account, 3.54%,
5/2/94
(cost $60,247,000;
Note 5)............ 60,247,000
------------
Total Investments--99.9%
(cost $909,455,340;
Note 4)............ 927,707,271
Other assets in
excess of
liabilities--0.1%... 766,408
------------
Net Assets--100%..... $928,473,679
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
** Standard & Poor's rating.
ADR--American Depository Receipt.
ADS--American Depository Shares.
GDR--Global Depository Receipts.
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.
--9-- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets
April 30, 1994
--------------
<S>
<C>
Investments, at value (cost
$909,455,340)......................................................
$927,707,271
Cash..........................................................................
................. 244,448
Receivable for investments
sold................................................................
55,834,322
Receivable for Fund shares
sold................................................................
5,462,939
Dividends and interest
receivable..............................................................
2,402,536
Prepaid expenses and other
assets..............................................................
223,203
--------------
Total
assets........................................................................
......... 991,874,719
--------------
Liabilities
Payable for investments
purchased..............................................................
60,515,920
Payable for Fund shares
reacquired.............................................................
1,614,505
Distribution fee
payable.......................................................................
665,394
Management fee
payable.........................................................................
413,738
Accrued
expenses......................................................................
......... 155,850
Foreign withholding tax
payable................................................................
35,633
--------------
Total
liabilities...................................................................
......... 63,401,040
--------------
Net
Assets........................................................................
............. $928,473,679
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at
par........................................................ $ 691,345
Paid-in capital in excess of
par............................................................. 891,547,710
--------------
892,239,055
Undistributed net investment
income.......................................................... 6,430,293
Accumulated net realized
gains...............................................................
11,552,599
Net unrealized
appreciation..................................................................
18,251,732
--------------
Net assets, April 30,
1994.....................................................................
$928,473,679
--------------
--------------
Class A:
Net asset value and redemption price per share
($133,107,276 / 9,893,488 shares of beneficial interest issued and
outstanding)............ $13.45
Maximum sales charge (5.25% of offering
price)............................................... .75
--------------
Maximum offering price to
public.............................................................
$14.20
Class B:
Net asset value, offering price and redemption price per share
($795,366,403 / 59,240,973 beneficial interest issued and
outstanding)..................... $13.43
</TABLE>
See Notes to Financial Statements.
--10--
<PAGE>
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income April 30, 1994
--------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $70,201).................. $ 10,500,775
Interest and discount earned......... 3,546,995
--------------
Total income....................... 14,047,770
--------------
Expenses
Distribution fee--Class A............ 140,337
Distribution fee--Class B............ 3,388,814
Management fee....................... 2,240,999
Transfer agent's fees and expenses... 478,000
Custodian's fees and expenses........ 88,000
Registration fees.................... 87,000
Reports to shareholders.............. 30,000
Trustees' fees....................... 22,500
Audit fee............................ 18,000
Legal fees........................... 15,000
Miscellaneous........................ 8,393
--------------
Total expenses..................... 6,517,043
--------------
Net investment income.................. 7,530,727
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on
investment transactions.............. 12,766,300
Net change in unrealized
appreciation/depreciation
of investments....................... (41,378,320)
--------------
Net loss on investments................ (28,612,020)
--------------
Net Decrease in Net Assets
Resulting from Operations.............. $(21,081,293)
--------------
--------------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended October 31,
in Net Assets April 30, 1994 1993
--------------- ------------
<S> <C> <C>
Operations
Net investment income...... $ 7,530,727 $ 10,304,124
Net realized gain on
investment
transactions............. 12,766,300 25,234,290
Net change in unrealized
appreciation/depreciation
of investments........... (41,378,320) 45,035,883
--------------- ------------
Net increase (decrease) in
net assets resulting from
operations............... (21,081,293) 80,574,297
--------------- ------------
Net equalization credits..... 2,183,505 1,785,921
--------------- ------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (1,220,894) (2,383,733)
Class B.................. (4,605,755) (8,100,377)
--------------- ------------
(5,826,649) (10,484,110)
--------------- ------------
Distributions to
shareholders from net
realized gains
Class A.................. (4,060,372) (1,901,042)
Class B.................. (22,138,548) (7,217,743)
--------------- ------------
(26,198,920) (9,118,785)
--------------- ------------
Fund share transactions (Note
6)
Net proceeds from shares
subscribed............... 415,411,140 398,239,834
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 29,118,655 17,714,556
Cost of shares
reacquired................. (97,017,635) (88,837,779)
--------------- ------------
Net increase in net assets
from Fund share
transactions............. 347,512,160 327,116,611
--------------- ------------
Total increase............... 296,588,803 389,873,934
Net Assets
Beginning of period.......... 631,884,876 242,010,942
--------------- ------------
End of period................ $ 928,473,679 $631,884,876
--------------- ------------
--------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
--11--
<PAGE>
<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 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 country.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies 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.
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 trnsactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, 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.
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 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.
--12--
<PAGE>
<PAGE>
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 Prudential Securities Incorporated (``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 two
months ended December 31, 1993 and .25 of 1% of the average daily net assets of
the Class A shares thereafter. 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.
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 $1,411,401 in
front-end sales charges resulting from sales of Class A shares during the six
months ended April 30, 1994. 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 six months ended April
30, 1994, it received approximately $581,600 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Fund that at April 30, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $15,470,700. 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 Ser
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended April 30, 1994, the Fund incurred fees of
approximately $521,100 for the services of PMFS. As of April 30, 1994,
approximately $107,800 of such fees were due to PMFS.
For the six months ended April 30, 1994, PSI earned approximately $93,900 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest
Securities ment securities, other than
short-term investments, for the six months ended
April 30, 1994 were $551,181,637 and $177,429,445, respectively.
--13--
<PAGE>
<PAGE>
The federal income tax basis of the Fund's investments, at April 30, 1994 was
$909,910,782 and, accordingly, net unrealized appreciation for federal income
tax purposes was $17,796,489 (gross unrealized appreciation--$58,959,397; gross
unrealized depreciation--$41,162,908).
Note 5. Joint The Fund, along with other affili
Repurchase ated registered investment com
Agreement panies, transfers uninvested
Account 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. At April 30, 1994, the Fund had a 6.16% undivided
interest in the repurchase agreements in the joint account. The undivided
interest for the Fund represented $60,247,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the value of the
collateral therefor was as follows:
Barclays de Zoete Wedd, Inc., 3.55%, in the principal amount of $53,000,000,
repurchase price $53,015,679, due 5/2/94. The value of the collateral including
accrued interest is $54,060,428.
Goldman Sachs & Co., 3.50%, in the principal amount of $315,000,000,
repurchase price $315,091,875, due 5/2/94. The value of the collateral including
accrued interest is $321,300,231.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.55%, in the principal amount
of $315,000,000, repurchase price $315,093,188, due 5/2/94. The value of the
collateral including accrued interest is $321,300,584.
Morgan (J.P.) Securities, Inc., 3.58%, in the principal amount of
$295,000,000, repurchase price $295,088,008, due 5/2/94. The value of the
collateral including accrued interest is $300,901,625.
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>
Six months ended April 30,
1994:
Shares sold................... 3,579,762 $ 49,652,308
Shares issued in reinvestment
of
dividends and
distributions............... 359,133 4,858,534
Shares reacquired............. (1,280,681) (17,771,832)
---------- ------------
Net increase in shares
outstanding................. 2,658,214 $ 36,739,010
---------- ------------
---------- ------------
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)
---------- ------------
Net increase in shares
outstanding................. 3,026,346 $ 41,036,847
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
Six months ended April 30,
1994:
Shares sold................... 26,412,413 $365,758,832
Shares issued in reinvestment
of
dividends and
distributions............... 1,803,399 24,260,121
Shares reacquired............. (5,760,584) (79,245,803)
---------- ------------
Net increase in shares
outstanding................. 22,455,228 $310,773,150
---------- ------------
---------- ------------
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)
---------- ------------
Net increase in shares
outstanding................. 21,063,891 $286,079,764
---------- ------------
---------- ------------
</TABLE>
--14--
<PAGE>
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
January
22,
Class B
1990(D)
- -----------------------------------------------------------------
Six Months through Six Months
Ended Year Ended October 31, October Ended
Year Ended October 31,
April 30, --------------------------- 31, April 30,
- ----------------------------------------------------
1994 1993 1992 1991 1990 1994
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
---------- -------- ------- ------ -------- ----------
- -------- -------- -------- -------- --------
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59 $ 14.35 $
12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
--------- -------- ------- ------ ------ ---------
- -------- -------- -------- -------- --------
Income
from
investment
operations
Net
investment
income... .18 .47 .47 .38 .25 .13
.37 .37 .30 .28 .32
Net
realized
and
unrealized
gain
(loss)
on
investment
transactions.. (.44) 2.65 .60 2.50 (1.01) (.43)
2.64 .59 2.49 (1.32) 1.26
--------- -------- ------- ------ ------ ---------
- -------- -------- -------- -------- --------
Total
from
investment
operations... (.26) 3.12 1.07 2.88 (.76) (.30)
3.01 .96 2.79 (1.04) 1.58
--------- -------- ------- ------ ------ ---------
- -------- -------- -------- -------- --------
Less
distributions
Dividends
from
net
investment
income... (.14) (.46) (.47) (.37) (.30) (.09)
(.36) (.37) (.29) (.32) (.32)
Distributions
from net
realized
gains... (.53) (.44) (.48) -- -- (.53)
(.44) (.48) -- -- --
---------- -------- ------- ------ -------- ----------
- -------- -------- -------- -------- --------
Total
distributions.. (.67) (.90) (.95) (.37) (.30) (.62)
(.80) (.85) (.29) (.32) (.32)
---------- -------- ------- ------ -------- ----------
- -------- -------- -------- -------- --------
Net
asset
value,
end of
period.. $ 13.45 $ 14.38 $ 12.16 $12.04 $ 9.53 $ 13.43 $
14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89
---------- -------- ------- ------ -------- ----------
- -------- -------- -------- -------- --------
---------- -------- ------- ------ -------- ----------
- -------- -------- -------- -------- --------
TOTAL
RETURN#:.. (1.86)% 26.93% 9.50% 30.62% (7.36)% (2.14)%
25.93% 8.55% 29.58% (9.77)% 16.68%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(000)... $ 133,107 $104,017 $51,165 $4,013 $1,098 $ 795,366
$527,868 $190,846 $151,538 $120,032 $143,169
Average
net
assets
(000)... $ 120,449 $ 70,895 $21,931 $2,084 $ 752 $ 683,380
$304,898 $169,524 $136,602 $142,179 $ 84,157
Ratios
to
average
net
assets:
Expenses,
including
distribution
fees... .98%* 1.07% 1.22% 1.37% 1.59%* 1.75%*
1.87% 2.02% 2.17% 2.22% 2.08%
Expenses,
excluding
distribution
fees... .75%* .87% 1.02% 1.17% 1.39%* .75%*
.87% 1.02% 1.17% 1.22% 1.12%
Net
investment
income... 2.57%* 3.44% 3.22% 3.43% 3.12%* 1.77%*
2.58% 3.05% 2.67% 2.70% 2.89%
Portfolio
turnover... 25% 57% 43% 64% 58% 25%
57% 43% 64% 58% 60%
</TABLE>
- ---------------
* Annualized.
(D) 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.
--15--
<PAGE>
