Letter to Shareholders
December 8, 1994
Dear Shareholder:
In the past year, the stock market has provided both good and bad times for
mutual fund investors. Stock market returns slowed at the end of 1993, and
despite a short summer rally, they have been modest all during 1994. We are
pleased to announce that despite the ups and downs of this difficult stock
market, the Prudential Equity Income Fund earned above-average returns.
Our Objective
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 Index or the NYSE Composite Index. The Fund may hold up to 30% of
assets in securities of foreign issue and up to 35% of assets in bonds. We may
also use derivatives like options to hedge risk, although we have not done so
during this reporting period.
Strong Earnings & Rising Rates Battle It Out
As strong corporate earnings reports and steadily rising interest rates
battled for dominance of the financial headlines this year, the U.S. stock
market reacted to each in turn. While the rounds of favorable earnings reports
bolstered stock prices, the Federal Reserve's course of interest rate hikes
shook investor confidence. To weather this turbulence, we have been emphasizing
stocks of companies expected to benefit from economic recovery--like industrial
and technology stocks.
Benefitting from Industrial Strength--Steel, Paper and Chemicals
Stocks of industrial companies, representing almost one-quarter of Fund
assets, comprised the largest concentration of holdings as of October 31, 1994.
This significant position represents the Fund's strategy of emphasizing
companies we believe will benefit from increasing economic activity around the
globe. In keeping with its value investment philosophy, the Fund has sought
stocks that seem to be bargains, especially after recent price declines within
the steel, paper and chemical industries.
-1-
<PAGE>
Finance: Opportunities in Real Estate, Financial Services & Insurance
Rising U.S. interest rates may have created value investment opportunities in
the finance sector. Accordingly, finance represents the second largest sector
of the Fund's holdings as of October 31, 1994, approximately one-fifth of Fund
assets. Within this sector, the Fund holds real estate investment trusts
(REITs) and traditional high dividend stocks of insurance and financial
services firms, such as securities brokerages. REITs, trusts invested in
commercial real estate like office buildings and retail malls, are currently
the Fund's largest financial holding. We believe they may offer the potential
for above-average dividend and price appreciation. Of course, to finance these
payouts, REITs rely on financing sources; a robust stock market is the key to
their continued growth.
Utilities and Energy
Stocks of two other traditional high dividend industries, utilities and
energy, continue to be important areas for the Fund although our emphasis in
utilities may decline over the long haul. Increasing demand spurred by an
upswing in economic activity should help raise oil and natural gas prices and
such price increases tend to benefit stocks of companies in these industries
and the energy sector in general. Over the short term, selected utility stocks
may represent value opportunities; this sector has also suffered dramatic price
declines as a result of increasing U.S. interest rates. For the long run, we
believe some areas of the utility sector may have good growth potential, like
telecommunications services, the Fund's second largest industry holding, which
is benefitting from increasing cellular phone usage and expansion overseas. Of
course, stocks in these sectors also traditionally offer attractive yields.
Outlook
The strengthening global economy, rising interest rates and the specter of
returning inflation have made 1994 a difficult year for equity mutual fund
investors. Despite the volatility seen throughout the first three quarters of
the year, we expect that the strong earnings of U.S. corporations and the
fundamental soundness of the U.S. economy will help keep inflation at bay and
allow the U.S. stock market to post modest positive returns for the full
-2-
<PAGE>
year 1994. Selection of individual securities will be increasingly important in
such an environment, and we will continue to focus on the sectors and the stocks
we expect to weather the changing market well.
Thank you for selecting the Prudential Equity Income Fund for the portion of
your portfolio devoted to high dividend stocks.
Sincerely,
Lawrence C. McQuade Warren E. Spitz
President Portfolio Manager
-3-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Warren Spitz
We talked with portfolio manager Warren Spitz about his favorite sectors.
Q: Why do you expect industrial stocks to continue to outperform consumer
stocks?
A. Many of industrial companies manufactured goods at levels far below their
maximum output potential--known as capacity utilization--during the 1980s.
Now that the economy is expanding at a healthy clip, that situation has
reversed itself and many are reaching their peak capacity. That gives them
pricing power, or the ability to charge higher prices because their goods
are becoming more valuable, and higher prices should translate to higher
stock prices. As long as the U.S. economy keeps expanding this way, I expect
companies in the industrial sector, particularly in chemicals, paper and
steel, to benefit. At the same time, consumer-oriented companies are still
feeling the pricing pressure that will keep their stock prices in check for
the near future. Of course, if the stock market stumbles, my outlook for
this sector will be less optimistic.
Q. What opportunities do you see in Real Estate Investment Trusts (REITs)?
A. In the current market environment, where rising interest rates have put
pressure on traditional high dividend sectors, REITs offer one of the best
opportunities for above-average dividend and price appreciation. Rising
interest rates have also brought price reductions to this sector, which
created some good opportunities to buy securities that are undervalued. We
also expect an increase in the amount of REITs issued will be readily
absorbed by pension funds and insurers. Traditionally, these companies
bought real estate directly, but after being burned by falling prices in the
1980s and early 1990s, they're beginning to prefer this more-liquid real
estate investment option. Once again, a strong stock market is key to my
outlook for REITs.
Q: What's your outlook for energy stocks?
A. I think energy companies have drastically reduced their budgets for research
and development, especially in oil exploration and production, for the past
five or ten years. Growing demand and stagnant supply levels, mostly as a
result of this underinvestment, may in the near future put upward pressure
on energy prices. The most direct beneficiaries? I believe it will be oil
exploration and oil services stocks; consequently, I continue to explore
opportunities inthese industries.
-4-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND Portfolio of Investments
October 31, 1994
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--93.6%
Common Stocks--68.9%
Aerospace/Defense--5.9%
91,800 Alliant Techsystems,
Inc.*..................... $ 3,155,625
159,500 E-Systems, Inc.............. 6,619,250
35,500 Moog, Inc.*................. 297,313
583,600 Northrop Grumman Corp....... 25,605,450
134,400 Rockwell International
Corp...................... 4,687,200
1,006,400 Thiokol Corp................ 24,782,600
------------
65,147,438
------------
Automobiles & Trucks--0.5%
150,000 General Motors Corp......... 5,925,000
------------
Banking--0.1%
15,100 First Fidelity Bancorp...... 679,500
------------
Chemicals--0.6%
180,100 Potash Corp. Saskatchewan,
Inc....................... 6,371,037
------------
Computer Hardware--2.9%
93,900 Digital Equipment Corp.*.... 2,875,688
390,900 International Business
Machines Corp............. 29,122,050
------------
31,997,738
------------
Computer Software & Services--0.7%
831,100 Intergraph Corp.*........... 7,168,238
25,200 Shared Medical Systems
Corp...................... 743,400
------------
7,911,638
------------
Conglomerate--0.7%
88,300 ITT Corp.................... 7,792,475
------------
Drugs & Medical Supplies--0.9%
400,000 Baxter International,
Inc....................... 10,400,000
------------
Electrical Equipment--1.6%
1,220,100 Westinghouse Electric
Corp...................... 17,233,913
------------
Electric Utilities--3.1%
81,000 Central & South West
Corp...................... 1,822,500
26,200 Central Hudson Gas &
Electric Co............... 641,900
47,000 Central Louisiana Electric
Co........................ 1,016,375
227,311 CINergy Corp................ 5,256,558
457,800 Entergy Corp................ $ 10,701,075
116,900 NIPSCO Industries, Inc...... 3,258,587
170,700 Pinnacle West Capital
Corp...................... 3,179,288
100,000 Public Service Enterprise,
Inc....................... 2,625,000
280,600 SCE Corp.................... 3,893,325
75,000 Texas Utilities Co.......... 2,446,875
------------
34,841,483
------------
Electronics--1.5%
348,900 Esterline Technologies
Corp.*.................... 4,317,638
462,800 IMO Industries, Inc.*....... 4,396,600
5,400 Kollmorgen Corp............. 35,100
379,400 Newport Corp................ 2,892,925
114,100 Pacific Scientific Co....... 5,419,750
------------
17,062,013
------------
Energy Equipment & Services--2.0%
101,000 Smith International,
Inc.*..................... 1,691,750
375,400 Sonat Offshore Drilling,
Inc....................... 7,461,075
218,300 USX Corp.................... 8,186,250
740,300 Varco International, Inc.... 5,182,100
------------
22,521,175
------------
Energy Systems--8.4%
773,700 Baker Hughes, Inc........... 15,860,850
683,100 Dresser Industries, Inc..... 14,430,488
595,000 Halliburton Co.............. 22,015,000
954,500 McDermott International,
Inc....................... 24,459,063
1,025,000 Morrison Knudsen Corp....... 16,015,624
------------
92,781,025
------------
Financial Services--5.9%
147,900 Alex Brown, Inc............. 4,085,738
800,000 Bear Stearns Cos., Inc...... 13,000,000
330,900 Edwards (A.G.), Inc......... 6,121,650
111,600 Legg Mason, Inc............. 2,343,600
1,169,600 Lehman Brothers Holdings,
Inc....................... 18,128,800
300,000 Merrill Lynch & Co., Inc.... 11,812,500
150,000 Morgan Stanley Group,
Inc....................... 9,806,250
------------
65,298,538
------------
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Gas Distribution--2.0%
259,800 British Gas plc., ADS
(United Kindom)........... $ 12,308,025
76,400 Equitable Resources, Inc.... 2,330,200
237,450 KN Energy, Inc.............. 5,847,206
58,450 Yankee Energy System,
Inc....................... 1,307,819
------------
21,793,250
------------
Gas Pipelines--2.4%
462,000 Panhandle Eastern Corp...... 10,857,000
208,300 Sonat, Inc.................. 6,769,750
410,000 TransCanada Pipelines,
Ltd....................... 5,330,000
228,900 Transco Energy Co........... 3,290,438
------------
26,247,188
------------
Insurance--5.1%
175,400 Aetna Life & Casualty Co.... 8,090,325
981,100 Alexander & Alexander
Services, Inc............. 19,867,275
138,700 Allstate Corp............... 3,346,138
548,200 Continental Corp............ 8,291,525
113,400 Jefferson-Pilot Corp........ 6,151,950
49,000 Lincoln National Corp....... 1,776,250
85,400 Ohio Casualty Corp.......... 2,497,950
56,300 SAFECO Corp................. 2,822,037
140,100 Selective Insurance Group,
Inc....................... 3,537,525
------------
56,380,975
------------
Integrated Producers--5.5%
19,000 Kerr-McGee Corp............. 933,375
33,300 Mobil Corp.................. 2,863,800
544,300 Occidental Petroleum
Corp...................... 11,906,562
49,800 Petroleum Heat & Power,
Inc....................... 460,650
382,800 Quaker State Corp........... 5,215,650
469,170 Societe Nationale ELF
Aquitaine, ADR
(France).................. 17,183,351
158,700 Sun Co., Inc................ 5,098,238
39,400 Texaco, Inc................. 2,575,775
762,000 USX Marathon Group.......... 14,287,500
------------
60,524,901
------------
Machinery--0.2%
277,300 Terex Corp.*................ $ 2,149,075
------------
Media--0.4%
132,700 Pulitzer Publishing Co...... 4,744,025
------------
Miscellaneous Industrial--1.9%
60,000 Hanson plc., ADR (United
Kingdom).................. 1,117,500
452,000 Tenneco, Inc................ 20,001,000
------------
21,118,500
------------
Realty Investment Trust--10.5%
271,000 AMLI Residential Property
Trust..................... 5,149,000
315,000 Avalon Properties, Inc...... 6,142,500
231,200 Beacon Properties........... 4,363,900
24,600 Carr Reality Corp........... 479,700
68,100 Charles E. Smith Residential
Realty, Inc............... 1,685,474
611,000 Crescent Real Estate
Equities.................. 16,497,000
776,900 Equity Residential Property
Trust..................... 23,209,887
161,900 First Union Real Estate
Equity & Mortgage
Investments............... 1,254,725
457,700 Gables Residential Trust.... 9,840,550
300,000 Glimcher Reality Trust...... 5,812,500
400,000 Irvine Apartment
Communities, Inc.......... 7,100,000
96,000 JP Reality, Inc............. 1,884,000
41,700 Kimco Reality Corp.......... 1,527,262
230,000 Malan Reality
Investors, Inc............ 3,450,000
300,000 Manufactured Home
Communities, Inc.......... 5,587,500
386,742 Property Trust of America... 6,236,215
285,700 Simon Property Group,
Inc....................... 6,821,087
196,200 Vornado Reality Trust....... 6,180,300
69,600 Weingarten Realty Investors,
Inc....................... 2,383,800
------------
115,605,400
------------
Retail
13,100 Bradlees, Inc............... 201,413
------------
Steel
59,600 Tubos De Acero De Mexico,
S.A., ADR*(Mexico)........ 312,900
------------
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Telecommunication Services--6.1%
13,600 Ameritech Corp.............. $ 549,100
100,000 BellSouth Corp.............. 5,325,000
165,900 GTE Corp.................... 5,101,425
196,700 NYNEX Corp.................. 7,720,475
885,800 Telefonos de Mexico, S.A.,
ADR
(Mexico).................. 48,829,725
11,600 U.S. West, Inc.............. 436,450
------------
67,962,175
------------
Total common stocks
(cost $733,942,598)......... 763,002,775
------------
Preferred Stocks--14.8%
Aluminum--1.3%
422,500 Kaiser Aluminum Corp.,
Conv. $8.25............... 4,753,125
193,500 Reynolds Metals Co., Conv.
$3.31..................... 10,158,750
------------
14,911,875
------------
Automobiles & Trucks--2.7%
118,000 Chrysler Corp., Conv.
$4.63..................... 16,077,500
143,000 Ford Motor Co., Conv.
$4.20..................... 13,835,250
------------
29,912,750
------------
Electrical Equipment--2.3%
1,743,000 Westinghouse Electric Corp.,
Conv. $1.30............... 25,491,375
------------
Electric Utilities--0.1%
2,100 Gulf States Utilities Co.,
$5.08, Class E............ 120,093
11,205 Gulf States Utilities Co.,
$8.08, Class K............ 1,131,705
------------
1,251,798
------------
Energy Systems--0.7%
100,000 McDermott International,
Inc., Conv. $5.75, Ser.
C......................... 4,262,500
149,300 Reading & Bates Corp.,*
Conv. $1.63............... 3,639,187
------------
7,901,687
------------
Insurance--0.5%
102,200 Alexander & Alexander
Services, Inc.,
Conv. $3.63, Ser. A....... $ 4,394,600
12,700 USF & G Corp., Conv. $4.10,
Ser. A.................... 590,550
------------
4,985,150
------------
Integrated Producers--1.0%
110,000 Noble Drilling Corp.,*
Conv. $1.50............... 2,695,000
49,000 Unocal Corp., Conv. $3.50... 2,707,250
118,900 USX Marathon Group, Conv.
6.5%...................... 5,989,587
------------
11,391,837
------------
Mining--0.6%
100,000 Echo Bay Finance Corp.,
Conv. $1.75 Ser. A........ 3,737,500
60,000 Hecla Mining Co.
Conv. 7%, Ser. B.......... 3,015,000
------------
6,752,500
------------
Oil & Gas Exploration & Production--0.4%
85,000 Parker & Parsley Capital,
Conv. 6.25%............... 4,430,625
------------
Paper--1.3%
181,800 Bowater, Inc., Conv. 7%,
Ser. B.................... 4,726,800
451,200 James River Corp., Conv.
$9.00..................... 9,926,400
------------
14,653,200
------------
Realty Investment Trust--0.1%
54,600 Property Trust of America,
Conv. $1.75, Ser. A....... 1,180,725
------------
Steel--1.1%
228,000 Bethleham Steel Corp.,
Conv. $3.50............... 12,255,000
------------
Tobacco--2.7%
4,400,000 RJR Nabisco Holdings, Inc.,
Conv. $0.60, PERCS........ 30,250,000
------------
Total preferred stocks
(cost $162,231,512)....... 165,368,522
------------
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Convertible Bonds--4.7%
Computer Hardware--1.8%
B2 $ 2,300 Conner Peripherals, Inc.,
Sub. Deb.,
6.75%, 3/1/01... $ 1,799,750
B2 5,250 Quantum Corp.,
Deb.,
6.375%, 4/1/02.... 5,197,500
Seagate
Technology,
B1 3,407 Deb.,
6.75%, 5/1/12... 2,912,985
B1 9,000 Sub. Deb.,
5.00%,
11/1/03......... 9,767,610
--------------
19,677,845
--------------
Fertilizer--0.4%
Caa 4,500 IMC Fertilizer
Group, Deb.,
6.25%, 12/1/01.... 4,117,500
--------------
Integrated Oil--0.4%
Aa3 339 Amoco Canada
Petroleum Co.,
Sub. Exch. Deb.,
7.375%,
9/1/13.......... 419,513
B2 2,583 Cross Timbers Oil
Co., Deb.,
5.25%, 11/1/03.... 2,208,465
B1 2,121 Oryx Energy Co.,
Sub. Deb.,
7.50%, 5/15/14.... 1,619,914
--------------
4,247,892
--------------
Integrated Producers--1.3%
Baa3 14,299 Noble Affiliates,
Inc.,
Sub. Notes,
4.25%,
11/1/03......... 13,870,030
--------------
Mining--0.4%
CCC+** 3,000 Coeur D'Alene
Mines
Corp., Sub.
Deb.,
7.00%,
11/30/02........ 3,810,000
Ba3 1,000 Freeport McMoran,
Inc.,
Deb.,
6.55%,
1/15/01......... 903,130
--------------
4,713,130
--------------
Real Estate--0.3%
NR $ 3,800 Malan Reality
Investors,
Inc., Sub. Deb.,
9.50%,
7/15/04......... $ 3,458,000
--------------
Steel--0.1%
BB-** 710 USX Corp., Sub
Deb.,
7.00%, 6/15/17.... 628,350
--------------
Total convertible
bonds
(cost
$55,293,712).... 50,712,747
--------------
U. S. Government
Securities--5.2%
71,500 United States
Treasury Bonds,
6.25%, 8/15/23
(cost
$60,751,449).... 57,222,185
--------------
Total long-term
investments
(cost
$1,012,219,269).. 1,036,306,229
--------------
SHORT-TERM INVESTMENTS--4.3%
48,057 Joint Repurchase Agreement
Account, 4.77%, 11/1/94
(cost $48,057,000;
Note 5)......... 48,057,000
--------------
Total Investments--98.0%
(cost
$1,060,276,269;
Note 4)......... 1,084,363,229
Other assets in
excess of
liabilities--2.0%... 22,615,858
--------------
Net Assets--100%.. $1,106,979,087
--------------
--------------
</TABLE>
- ---------------
* 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.
-8- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1994
----------------
<S> <C>
Investments, at value (cost $1,060,276,269).................................................. $1,084,363,229
Cash......................................................................................... 232,809
Receivable for investments sold.............................................................. 33,723,970
Dividends and interest receivable............................................................ 4,896,197
Receivable for Fund shares sold.............................................................. 3,213,254
Deferred expenses and other assets........................................................... 10,495
----------------
Total assets............................................................................... 1,126,439,954
----------------
Liabilities
Payable for investments purchased............................................................ 15,333,395
Payable for Fund shares reacquired........................................................... 2,255,287
Distribution fee payable..................................................................... 828,063
Management fee payable....................................................................... 503,562
Accrued expenses............................................................................. 483,880
Foreign withholding tax payable.............................................................. 56,680
----------------
Total liabilities.......................................................................... 19,460,867
----------------
Net Assets................................................................................... $1,106,979,087
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................... $ 790,642
Paid-in capital in excess of par........................................................... 1,027,127,251
----------------
1,027,917,893
Undistributed net investment income........................................................ 13,861,666
Accumulated net realized gain on investments............................................... 41,112,568
Net unrealized appreciation of investments................................................. 24,086,960
----------------
Net assets, October 31, 1994................................................................. $1,106,979,087
----------------
----------------
Class A:
Net asset value and redemption price per share
($150,501,747 / 10,729,928 shares of beneficial interest issued and outstanding)......... $14.03
Maximum sales charge (5.00% of offering price)............................................. .74
----------------
Maximum offering price to public........................................................... $14.77
-------
-------
Class B:
Net asset value, offering price and redemption price per share
($954,950,559 / 68,225,183 shares of beneficial interest issued and outstanding)......... $14.00
-------
-------
Class C:
Net asset value, offering price and redemption price per share
($1,526,781 / 109,077 shares of beneficial interest issued and outstanding).............. $14.00
-------
-------
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1994
----------------
<S> <C>
Income
Dividends (net of foreign
withholding
taxes of $356,524).............. $ 30,417,969
Interest.......................... 6,772,275
----------------
Total income.................... 37,190,244
----------------
Expenses
Distribution fee--Class A......... 319,509
Distribution fee--Class B......... 7,840,632
Distribution fee--Class C......... 1,880
Management fee.................... 5,078,246
Transfer agent's fees and
expenses.......................... 1,448,000
Reports to shareholders........... 500,000
Registration fees................. 330,000
Custodian's fees and expenses..... 296,000
Legal fees........................ 56,000
Trustees' fees.................... 37,500
Audit fee......................... 36,000
Insurance expense................. 15,000
Miscellaneous..................... 14,965
----------------
Total expenses.................. 15,973,732
----------------
Net investment income............... 21,216,512
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on
investment transactions........... 42,485,087
Net change in unrealized
appreciation/depreciation
of investments.................... (35,543,092)
----------------
Net gain on investment
transactions...................... 6,941,995
----------------
Net Increase in Net Assets
Resulting from Operations........... $ 28,158,507
----------------
----------------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) --------------------------------
in Net Assets 1994 1993
----------------- ------------
<S> <C> <C>
Operations
Net investment income.... $ 21,216,512 $ 10,304,124
Net realized gain on
investment
transactions........... 42,485,087 25,234,290
Net change in unrealized
appreciation/depreciation
of investments......... (35,543,092) 45,035,883
----------------- ------------
Net increase in net
assets resulting from
operations............. 28,158,507 80,574,297
----------------- ------------
Net equalization credits... 3,591,448 1,785,921
----------------- ------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................ (2,741,569) (2,383,733)
Class B................ (10,744,017) (8,100,377)
Class C................ (3,204) --
----------------- ------------
(13,488,790) (10,484,110)
----------------- ------------
Distributions from net
realized gains
Class A................ (4,073,407) (1,901,042)
Class B................ (22,284,545) (7,217,743)
----------------- ------------
(26,357,952) (9,118,785)
----------------- ------------
Fund share transactions
(Note 6)
Proceeds from shares
subscribed............. 668,069,397 398,239,834
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 36,142,786 17,714,556
Cost of shares
reacquired............... (221,021,185) (88,837,779)
----------------- ------------
Net increase in net
assets from Fund share
transactions........... 483,190,998 327,116,611
----------------- ------------
Total increase............. 475,094,211 389,873,934
Net Assets
Beginning of year.......... 631,884,876 242,010,942
----------------- ------------
End of year................ $ 1,106,979,087 $631,884,876
----------------- ------------
----------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-10-
<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 transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. 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.
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.
-11-
<PAGE>
<PAGE>
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 with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B and Class C shares of the Fund (collectively,
the ``Distributors''). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the ``Class A, B and C Plans''), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were charged at an effective
rate of .24 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended October 31, 1994 and are currently charged at a rate of .25 of
1% of the average daily net assets of the Class A shares. Such expenses under
the Class B and C Plans were both 1% of the average daily net assets of the
Class B and C shares for the fiscal year ended October 31, 1994.
PMFD has advised the Fund that it has received approximately $1,542,700 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1994. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the fiscal year ended October 31, 1994, it
received approximately $1,587,700 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
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 fiscal year ended October 31, 1994, the Fund incurred fees of
approximately $1,198,800 for the services of PMFS. As of October 31, 1994,
approximately $116,000 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, 1994, PSI earned approximately $177,100
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 fiscal year ended
October 31, 1994 were $1,101,036,972 and $594,117,341, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was $1,060,713,598 and, accordingly, net unrealized appreciation for federal
income tax purposes was $23,649,631 (gross unrealized appreciation--$63,938,373;
gross unrealized depreciation--$40,288,742).
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. At October 31, 1994, the Fund
had a 5.34% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represented $48,057,000 in
principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:
Smith Barney, Inc., 4.80%, in the principal amount of $260,000,000,
repurchase price $260,034,667, due 11/1/94. The value of the collateral
including accrued interest is $265,200,122.
Nomura Securities International, Inc., 4.77%, in the principal amount of
$100,000,000, repurchase price $100,013,250, due 11/1/94. The value of the
collateral including accrued interest is $102,000,391.
-12-
<PAGE>
Goldman, Sachs & Co., 4.75%, in the principal amount of $275,000,000,
repurchase price $275,036,285, due 11/1/94. The value of the collateral
including accrued interest is $280,500,611.
CS First Boston Corp., 4.75%, in the principal amount of $265,000,000,
repurchase price $265,034,965, due 11/1/94. The value of the collateral
including accrued interest is $271,053,272.
Note 6. Capital The Fund currently offers
Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 5.00%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in or about February 1995.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value divided into three classes, designated Class A, Class B and
Class C.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ----------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold................... 6,678,218 $ 92,227,070
Shares issued in reinvestment
of
dividends and
distributions............... 461,830 6,268,096
Shares reacquired............. (3,645,394) (50,335,973)
----------- ------------
Net increase in shares
outstanding................. 3,494,654 $ 48,159,193
----------- ------------
----------- ------------
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 Shares Amount
- ------------------------------ ----------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold................... 41,661,976 $574,309,044
Shares issued in reinvestment
of
dividends and
distributions............... 2,213,613 29,871,685
Shares reacquired............. (12,436,151) (170,671,244)
----------- ------------
Net increase in shares
outstanding................. 31,439,438 $433,509,485
----------- ------------
----------- ------------
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
----------- ------------
----------- ------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
August 1, 1994* through
October 31, 1994:
Shares sold................... 109,870 $ 1,533,283
Shares issued in reinvestment
of dividends................ 215 3,005
Shares reacquired............. (1,008) (13,968)
----------- ------------
Net increase in shares
outstanding................. 109,077 $ 1,522,320
----------- ------------
----------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
Note 7. Dividends On December 7, 1994, the
and Distributions Board of Trustees of the Fund
declared the following dividends and distributions
per share, payable on December 19, 1994 to shareholders of record on December
13, 1994:
<TABLE>
<CAPTION>
Class A Class B and C
------- -------------
<S> <C> <C>
Ordinary Income....................... $ 0.200 $ 0.175
Short-Term Capital Gains.............. $ 0.130 $ 0.130
Long-Term Capital Gains............... $ 0.395 $ 0.395
</TABLE>
-13-
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------- ---------------------------------------------------- ------------
January 22, August 1,
1990(D) 1994(D)(D)
Year Ended October 31, through Year Ended October 31, through
-------------------------------------- October 31, ---------------------------------------------------- October 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
<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 $ 13.99
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Income
from
investment
operations
Net
investment
income... .41 .47 .47 .38 .25 .31 .37 .37 .30 .28 .08
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... .06 2.65 .60 2.50 (1.01) .06 2.64 .59 2.49 (1.32) (.02)
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Total
from
investment
operations. .47 3.12 1.07 2.88 (.76) .37 3.01 .96 2.79 (1.04) .06
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Less
distributions
Dividends
from
net
investment
income... (.29) (.46) (.47) (.37) (.30) (.19) (.36) (.37) (.29) (.32) (.05)
Distributions
from net
realized
gains... (.53) (.44) (.48) -- -- (.53) (.44) (.48) -- -- --
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Total
distri-
butions (.82) (.90) (.95) (.37) (.30) (.72) (.80) (.85) (.29) (.32) (.05)
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Net asset
value,
end of
period... $ 14.03 $ 14.38 $ 12.16 $12.04 $ 9.53 $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 14.00
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
TOTAL
RETURN#:... 3.48% 26.93% 9.50% 30.62% (7.36)% 2.73% 25.93% 8.55% 29.58% (9.77)% 0.45%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(000)... $150,502 $104,017 $51,165 $4,013 $1,098 $954,951 $527,868 $190,846 $151,538 $120,032 $ 1,527
Average
net
assets
(000)... $131,398 $ 70,895 $21,931 $2,084 $ 752 $784,063 $304,898 $169,524 $136,602 $142,179 $ 762
Ratios to average
net assets:##
Expenses,
including
distribution
fees... 1.09% 1.07% 1.22% 1.37% 1.59%* 1.85% 1.87% 2.02% 2.17% 2.22% 2.05%*
Expenses,
excluding
distribution
fees... .85% .87% 1.02% 1.17% 1.39%* .85% .87% 1.02% 1.17% 1.22% 1.05%*
Net
investment
income... 2.97% 3.44% 3.22% 3.43% 3.12%* 2.21% 2.58% 3.05% 2.67% 2.70% 2.42%*
Portfolio
turnover... 70% 57% 43% 64% 58% 70% 57% 43% 64% 58% 70%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C 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.
## Because of the event referred to in (D)(D) and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
-14-
<PAGE>
<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, 1994, 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, 1994 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, 1994, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
December 7, 1994
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, 1994) 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, 1994, the Fund
paid distributions for Class A shares totaling $0.82 per share, comprised of
$0.47 per share ordinary income and short-term capital gains which are taxable
as ordinary income and $0.35 per share long-term capital gains which is taxable
as such. The Fund paid distributions for Class B shares totaling $0.72 per
share, comprised of $0.37 per share ordinary income and short-term capital gains
which are taxable as ordinary income and $0.35 per share long-term capital gains
which is taxable as such. The Fund paid ordinary income dividends for Class C
shares totaling $0.053 per share. Further, we wish to advise you that 93% of the
dividends (excluding long-term capital gains) paid in the fiscal year ended
October 31, 1994 qualified for the corporate dividends received deduction
available to corporate taxpayers.
In January 1995, you will be advised on IRS Form 1099 DIV or substitute Form
1099 DIV as to the federal tax status of the distributions received by you in
calendar 1994. The amounts that will be reported on such Form 1099 DIV will be
the amounts to use on your 1994 federal income tax return and will differ from
the amounts which we must report for the Fund's fiscal year ended October 31,
1994.
-15-
<PAGE>
<PAGE>
Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential Equity Income Fund (Class A, Class
B and Class C) with a similar investment in the Standard & Poor's 500 Index
(S&P 500) by portraying the initial account values at the commencement of
operations of each class and subsequent account values at the end of each
fiscal year (October 31), as measured on a quarterly basis, beginning in
1990 for Class A shares, in 1987 for Class B shares and 1994 for Class C
shares. For purposes of the graphs and, unless otherwise indicated, the
accompanying tables, it has been assumed that (a) the maximum sales charge
was deducted from the initial $10,000 investment in Class A
shares; (b) the maximum applicable contingent deferred sales charge was deducted
from the value of the investment in Class B shares and Class C shares, assuming
full redemption on October 31, 1994; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. This conversion
feature is expected to be implemented in or about February 1995 and is not
reflected in the graph.
The S&P 500 is a capital-weighted index, representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities which comprise
the S&P 500 may differ substantially from the securities in the Fund's
portfolio. The S&P 500 is not the only index which may be used to characterize
performance of equity income funds and other indexes may portray different
comparative performance.
-16-
<PAGE>
