(ICON)
Prudential
Equity Income
Fund
ANNUAL
REPORT
Oct. 31, 1996
(LOGO)
<PAGE>
Performance At A Glance.
What a wonderful time to be invested in U.S. stocks! In the
past year, the Dow
Jones Industrial Average surged beyond 6000, its third 1000-
point hurdle in as
many years, on a wave of higher corporate profits,
moderating economic growth
and subdued inflation. Your Fund also delivered impressive
returns -- more than
15% -- yet it substantially trailed the average fund in its
category as
measured by Lipper Analytical Services. That's primarily
because your Fund held
fewer assets in consumer stocks (which were strong) and more
in industrial
stocks (which were not).
Cumulative Total Returns1 As of
10/31/96
<TABLE>
<CAPTION>
One Three
Since
Year Years
Inception2
<S> <C> <C>
<C>
Class A 16.0% 85.4%
124.3%
Class B 15.1 78.3
161.6
Class C 15.1 N/A
27.5
Class Z N/A N/A
4.6
Lipper Equity Inc. Fund Avg.3 20.7 88.3
**
</TABLE>
Average Annual Total Returns1 As
of 9/30/96
<TABLE>
<CAPTION>
One Three
Since
Year Years
Inception2
<S> <C> <C>
<C>
Class A 5.2% 12.3%
12.0%
Class B 5.0 12.5
10.4
Class C 9.0 N/A
11.9
</TABLE>
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so that an investor's shares,
when redeemed,
may be worth more or less than their original cost.
1Source: Prudential Mutual Funds and Lipper Analytical
Services. Cumulative
total returns do not take into account sales charges.
Average annual total
returns do take into account sales charges. The Fund charges
a maximum front
end sales load of 5% for Class A shares. Class B shares are
subject to a
declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1%,
during the first six years. Class C shares are subject to a
1-year contingent
deferred sales charge of 1%. Class B shares will
automatically convert to Class
A shares on a quarterly basis, approximately seven years
after purchase. Class
Z shares are not subject to a sales charge or a distribution
fee and are
offered to a limited group of investors. Class Z shares have
been in existence
for less than one year and average annual total returns are
not available.
2Inception dates: 1/22/90 Class A; 1/22/87 Class B; 8/1/94
Class C; 3/1/96
Class Z.
3These are the average returns of 151 funds in the equity
fund category for one
year and 57 funds for five years.
**The Lipper Since Inception category return for Class A
shares is 121.7%,
which includes 49 funds; for Class B is 174% for 24 funds;
for Class C is 45.2%
for 102 funds and for Class Z is 9.4% for 169 funds.
How Investments Compared.
(As of 10/31/96)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher yields means tolerating more risk.
The greater the
risk, the larger the potential reward or loss. In addition,
we've included
historical 20-year average annual returns. These returns
assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Warren E. Spitz, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Prudential Equity Income Fund seeks both income and
capital appreciation by
investing primarily in stocks that provide investment income
returns above
those of the S&P 500. It invests in stocks that are
considered undervalued
given their earnings, cash flow, or asset values. There can
be no assurance
that the Fund will be able to achieve its investment
objective.
What Are REITs?
We hold 18% of our Fund's assets in Real Estate Investment
Trusts (REITs),
which are publicly traded companies that own and manage
income-producing
property, such as apartments, shopping malls and commercial
office space.
These stocks pay some of the highest dividends available
because REITs by law
must pay out at least 95% of their earnings in dividends.
Strategy Session.
We are value investors. We look for underpriced stocks in
out-of-favor areas
that we believe are likely to appreciate. During the last
year, we've seen
three major opportunities develop -- three areas in which
we've invested
because the potential rewards seem high:
- - Industrials.
After superior performance two decades ago, the stocks of
industrial
companies -- like steel manufacturers, airlines, and
aluminum makers -- have
significantly trailed consumer growth companies -- through
most of the 1980s
and 1990s. That represents a buying opportunity,
particularly now. There has
been a sharp shift in consumer sentiment. The financial
health of many
industrial companies like steel manufacturers are now the
best they've been in
years because of restructuring. So we increased our holdings
in industrial
stocks this year to 21%, one and a half times their share of
the market.
- - REITs.
The real estate industry is being securitized -- companies
are buying
properties and then selling shares in themselves.
Institutional investors are
now buying shares in these publicly traded Real Estate
Investment Trusts
(REITs), rather than owning the real estate itself. The
advantages: shares in
REITs are much easier to sell than the underlying real
estate, they make
diversification easier, and they offer professional
management.
- - Securities Brokerages.
The Federal Reserve is contemplating new regulations
permitting banks to be
more involved in investment banking, so as a result
securities brokers might
become acquisition targets. The securities brokerage stocks
also appear quite
inexpensive, possibly because some investors fear a stock
market correction --
an anathema to securities firms. We hold 10% of our Fund's
assets in the major
brokerage houses, such as Lehman Brothers, Salomon, Paine
Webber and Bear
Stearns.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 10/31/96.
(GRAPH)
<PAGE>
What Went Well.
REITs Rallied.
We hold 18% of our Fund in REITs, and many of them rallied
over the last six
months. More and more investors seemed to discover that
REITs could benefit the
most from the increasing trend toward the securitization of
real estate. Our
two largest holdings appreciated nicely over the last six
months. Equity
Residential was up nearly 18%, while Crescent Real Estate
appreciated 27%.
Energy Was Exciting.
Energy was the second best performing group in the stock
market during the last
12 months, as prices of crude oil for future delivery surged
to a five-year
high -- the highest since the Gulf War. Leading this group
have been the
drilling and oil service stocks, because there's a shortage
of oil drilling
rigs. (Day rental rates for this sophisticated, expensive
equipment have
boomed.) Some of our holdings of oil drilling and service
stocks that have done
particularly well are Baker Hughes, Sonat Offshore and
Global Marine. Because
prices ran up so high this year, we've cut our energy
holdings slightly. (We
now hold 6% of our Fund's assets in energy, down from 9.5% a
year earlier.)
And Not So Well.
We Were Early. Again.
One of the hallmarks of value investors like ourselves is
that we tend to be
early investors in out-of-favor industries. Although we
believed strongly that
industrial stocks were undervalued and a good investment,
other investors have
been slower to recognize the value we see. Industrial stocks
in general were
only average performers and our heavy focus there hurt per-
formance. We still
believe strongly in these stocks, and expect that they will
prove themselves
when investors begin to balk at paying ever higher prices
for other stocks.
Banks Would Have Helped.
While we held about 34% of total net assets in financial
stocks, we didn't own
the kinds of financial stocks that helped this group lead
the market in
performance over the last 12 months. Banking stocks, because
of falling
interest rates and mergers and acquisitions, were the
hottest area here, an
area in which we were underrepresented. We think the bank
stocks are vulnerable
considering their generally high prices and sensitivity to
bad news on
inflation and interest rates.
Looking Ahead.
Things run in cycles. As the market hurtles toward higher
and higher prices,
we suspect that investors will reach the point where they
will decide they
won't pay high prices any more. Then they will turn to
stocks with more
reasonable prices.
We expect pricing power is going to flow to industrial
companies that don't
sell directly to the consumer like the steel companies, the
aluminum
manufacturers, and the trucking companies. These stocks have
been priced
inexpensively for some time now. Consumer growth stock
prices have been rising
for 14 years and we think it's time for a change. While we
can't predict what
will trigger it, history tells us that the market doesn't
tolerate this type of
imbalance for long. We've positioned the Fund to take
advantage of it.
Five Largest
Issuers.
5.1% IBM
Computer hardware &
software
3.9 Equity Residential
Real Estate Investment
Trust
3.9 Lehman Brothers
Financial Services
3.8 Chrysler
Automobiles & Trucks
3.6 Elf Aquitaine
Integrated Producers
Expressed as a percentage of total net assets as of
10/31/96.
1
<PAGE>
A Conversation with Portfolio Manager Warren Spitz.
The good news is that the Fund has produced double-digit
returns for two years
in a row. The bad news is that it has performed below the
average equity-income
fund measured by Lipper. We caught up with Prudential Equity
Income Fund
Portfolio Manager Warren Spitz the other day and asked him
to explain why.
Q. Warren, the last two years have been difficult. What
happened?
A. I've been buying stocks that are unpopular and
inexpensive, not what's
popular and expensive. In the past two years, the stock
market has shown a
clear preference for what's popular and "high priced" --
consumer growth
stocks. I've been wrong for the last two years, but
cycles, by definition,
shift. In fact, I believe a fundamental shift is on its
way -- one that
could last five-10 years. I think that the industrial
stocks -- stocks like
steel, the airlines, trucking companies, aluminum -- are
extremely
underpriced when compared with the consumer non-durables
- -- the cereals,
the beverages, the pharmaceuticals.
Q. What do you see that the rest of the market doesn't yet?
A. Historically, from 1987 to 1991, prices of industrial
stocks have been
falling in relationship to the consumer non-durables. So
I started buying
industrials in 1992. Then, 1993 and 1994 were very good
for the
industrials -- as good as 1995 was bad. And when prices
fell in 1995, I
bought more.
Q. What makes you think we're due for another 1993 or 1994?
A. The consumer stocks have had a great run -- 14 years --
and that's a long
time. There was a time when consumers would pay top
dollar for brand names.
Not any more. Consumers want value. In many instances
this translates into
lower prices for products.
Q. What happens to earnings when prices fall?
A. At a minimum, profit growth slows, but it is possible for
earnings to turn
down. In my opinion, these companies have very little
pricing power -- the
power to raise prices. I believe that power is now
shifting to the
industrial companies. You can already notice the
difference. Look at the
steel companies -- despite a temporary dip in demand last
year, most have
stayed profitable. Their balance sheets are the best they
have been in
years. Not so with the consumer companies. Their earnings
growth is starting
to hit resistance, and this could ultimately weaken their
share prices.
Q. What triggers this great shift in the market?
A. It could be stronger economic growth. The economy is now
running close to
capacity, at full employment. Typically that increases
inflation, which can
make it easier for the industrial companies to increase
prices. I expect
prices will be rising faster at the wholesale level than
the retail level.
But we may not have to wait for that. Values of consumer
stocks versus the
industrials have been stretched so far that they might
just snap back. It
can happen quickly.
2
<PAGE>
President's Letter December 2,
1996
(PICTURE)
Dear Shareholder:
For many investors, 1996 may well be the second year of back-
to-back,
double-digit stock market returns. In late November, the
Dow Jones Industrial
Average passed 6500 -- only weeks after breaking the 6000
mark in mid-October.
America's economic expansion is entering its sixth year and
there seems little
evidence of an end to the continued modest growth and low
inflation we've
enjoyed for the last several years.
This is good news. For most investors it's meant an increase
in their share
values for college funds, retirement nest eggs or other long-
term financial
goals. However, as you read your year-end account statements
and make plans
for 1997, it's important to remember that there never is a
"sure thing" when
it comes to investment returns. Stock and bond markets go
down just as they go
up. (Did you notice the brief period of decline this past
summer?) No one likes
to see the value of their investments fall but such periods
remind us we must
keep our expectations realistic.
Regardless of the market's direction, a wise investor plans
for tomorrow's
needs today. Your Financial Advisor or Registered
Representative can help you:
- - Review your portfolio and suggest strategies for 1997,
such as diversifying
across different types of investments. Financial markets
seldom move in
lockstep. By investing in a mix of stock and bond funds
(foreign & domestic)
and money market funds you may be in a better position to
achieve your
long-term goals and to weather periods of uncertainty.
- - See why annuities have become popular retirement planning
tools. The choices
are broader than ever. Our new Discovery SelectSM Variable
Annuity offers you
many of the keys to successful retirement planning,
including a personalized
asset allocation program and a choice of 21 variable- or
fixed-rate
investment options offering a broad array of investment
objectives and
styles.
- - Explain new retirement savings developments. For example,
Congress has
expanded the contribution limit on spousal IRAs. And don't
forget, it's not
too late for you to make a contribution to your IRA or
open one for 1996. The
IRS deadline is April 15, 1997, but it's best to act
sooner.
Why not contact your Financial Advisor or Registered
Representative today? If
you are interested in Discovery SelectSM call for a
prospectus, which contains
more complete information. Read it carefully before you
invest.
Sincerely,
Richard A. Redeker
President
P.S. Your 1997 Prudential IRA contribution may qualify you
for a waiver of the
annual custodial fee. Ask your financial representative for
details.
3
<PAGE>
Portfolio of Investments as of
October 31, 1996 PRUDENTIAL EQUITY
INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
-----------------------------------------------------------
- -
LONG-TERM INVESTMENTS--98.8%
COMMON STOCKS--84.3%
-----------------------------------------------------------
- -
Aerospace/Defense--3.9%
403,800 Northrop Grumman Corp. $
32,606,850
443,500 Thiokol Corp.
18,571,563
---------
- ------
51,178,413
- ------------------------------------------------------------
Airlines--2.6%
408,000 AMR Corp.*
34,272,000
- ------------------------------------------------------------
Apparel--0.8%
572,700 Kellwood Co.
10,308,600
40,800 Oxford Industries, Inc.
744,600
---------
- ------
11,053,200
- ------------------------------------------------------------
Automobiles & Trucks--4.1%
1,493,558 Chrysler Corp.
50,220,888
150,000 Ford Motor Co.
4,687,500
---------
- ------
54,908,388
- ------------------------------------------------------------
Chemicals--2.9%
448,600 Dow Chemical Co.
34,878,650
156,628 Millennium Chemicals Inc.*
3,171,717
---------
- ------
38,050,367
- ------------------------------------------------------------
Computer Hardware--9.1%
1,000,000 Amdahl Corp.*
10,250,000
354,500 Digital Equipment Corp.*
10,457,750
719,800 Intergraph Corp.*
6,748,125
521,100 International Business Machines
Corp.
67,221,900
528,000 Texas Instruments Inc.
25,410,000
---------
- ------
120,087,775
Computer Related Equipment--1.7%
561,000 Micron Technology Inc. $
14,235,375
400,000 National Semiconductor Corp.*
7,700,000
---------
- ------
21,935,375
- ------------------------------------------------------------
Electrical Equipment--4.5%
301,000 Esterline Technologies Corp.*
7,035,875
455,800 IMO Industries Inc.*
2,051,100
700,000 Kuhlman Corp.
11,287,500
355,300 Newport Corp.
2,931,225
210,200 Pacific Scientific Co.
2,285,925
1,970,200 Westinghouse Electric Corp.
33,739,675
---------
- ------
59,331,300
- ------------------------------------------------------------
Energy Systems--2.4%
1,782,300 McDermott International, Inc.
31,635,825
- ------------------------------------------------------------
Financial Services--9.9%
913,883 Bear Stearns Cos., Inc.
21,590,486
217,200 Edwards (A.G.), Inc.
6,488,850
2,032,000 Lehman Brothers Holdings, Inc.
51,054,000
943,900 Paine Webber Group, Inc.
22,181,650
660,000 Salomon, Inc.
29,782,500
---------
- ------
131,097,486
- ------------------------------------------------------------
Forest & Paper--0.5%
72,600 Fletcher Challenge Forest Ltd.,
ADR
(New Zealand)
1,206,975
71,600 Louisiana-Pacific Corp.
1,494,650
81,900 Potlatch Corp.
3,501,225
---------
- ------
6,202,850
</TABLE>
- ------------------------------------------------------------
- --------------------
4 See Notes to
Financial Statements.
<PAGE>
Portfolio of Investments as of
October 31, 1996 PRUDENTIAL EQUITY
INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
-----------------------------------------------------------
- -
Gas Distribution--0.7%
224,950 KN Energy, Inc. $
8,407,506
51,450 Yankee Energy System, Inc.
1,170,488
---------
- ------
9,577,994
- ------------------------------------------------------------
Gas Pipelines--2.4%
318,200 PanEnergy Corp.
12,250,700
280,100 Sonat, Inc.
13,794,925
360,800 TransCanada Pipelines, Ltd.
6,088,500
---------
- ------
32,134,125
- ------------------------------------------------------------
Insurance--5.5%
933,400 Alexander & Alexander Services,
Inc.
14,234,350
293,100 Marsh & McLennan Cos., Inc.
30,519,037
328,400 Ohio Casualty Corp.
10,673,000
306,400 SAFECO Corp.
11,566,600
178,400 Selective Insurance Group Inc.
6,110,200
---------
- ------
73,103,187
- ------------------------------------------------------------
Integrated Producers--3.6%
1,200,000 Elf Aquitaine, ADR (France)
48,150,000
- ------------------------------------------------------------
Media--1.1%
220,000 Dun & Bradstreet Corp.
12,732,500
40,700 Harland (John H.) Co.
1,266,788
---------
- ------
13,999,288
- ------------------------------------------------------------
Mining--0.4%
194,678 Coeur D'Alene Mines Corp.
2,847,166
298,499 Echo Bay Mines, Ltd.
2,332,023
---------
- ------
5,179,189
- ------------------------------------------------------------
Miscellaneous Industrial--1.2%
2,192,800 Hanson Plc., ADR (United
Kingdom)
13,979,100
26,400 Tenneco, Inc.
1,306,800
---------
- ------
15,285,900
- ------------------------------------------------------------
Paper & Packaging--1.6%
922,000 Gibson Greetings Inc.*
14,406,250
435,300 Stone Container Corp.
6,638,325
---------
- ------
21,044,575
Realty Investment Trust--17.9%
271,000 AMLI Residential Properties
Trust $
5,962,000
315,000 Avalon Properties, Inc.
7,284,375
231,200 Beacon Properties Corp.
6,791,500
300,000 Bradley Real Estate, Inc.
4,987,500
30,200 CarrAmerica Realty Corp.
758,775
68,100 Charles E. Smith Residential
Realty, Inc.
1,659,938
808,900 Crescent Real Estate Equities,
Inc.
33,771,575
815,400 Crown American Realty Trust
6,319,350
1,400,100 Equity Residential Property
Trust
51,453,675
567,700 Gables Residential Trust
13,766,725
585,000 Glimcher Realty Trust
11,261,250
500,000 Haagen (Alexander) Properties
Inc.
7,375,000
392,000 Irvine Apartment Communities,
Inc.
9,016,000
353,500 JDN Realty Corp.
8,837,500
96,000 JP Realty, Inc.
2,184,000
62,550 Kimco Realty Corp.
1,806,131
230,000 Malan Realty Investors, Inc.
3,248,750
692,100 Manufactured Home Communities,
Inc.
13,495,950
218,100 Patriot American Hospitality,
Inc.
7,660,762
62,600 Pennsylvania Real Estate
Investment Trust
1,400,675
586,093 Security Capital Pacific Trust
13,187,092
285,700 Simon DeBartolo Group Inc.
7,535,338
300,000 Sunstone Hotel Investors Inc.
3,225,000
286,300 Vornado Realty Trust
12,310,900
5,000 Walden Residential Properties,
Inc.
116,875
61,200 Weingarten Realty Investors,
Inc.
2,348,550
---------
- ------
237,765,186
- ------------------------------------------------------------
Retail--2.4%
352,000 K-Mart Corp.
3,432,000
538,400 Penney (J.C.) Co., Inc.
28,266,000
---------
- ------
31,698,000
- ------------------------------------------------------------
Steel--2.3%
1,106,200 USX-US Steel Group, Inc.
30,143,950
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
Portfolio of Investments as of
October 31, 1996 PRUDENTIAL EQUITY
INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
-----------------------------------------------------------
- -
Telecommunication Services--0.6%
247,700 Telefonos de Mexico, S.A. de
C.V., ADR (Mexico) $
7,554,850
- ------------------------------------------------------------
Tobacco--1.0%
548,200 Imperial Tobacco Group Plc.,
ADR*
(United Kingdom)
6,424,219
244,100 RJR Nabisco Holdings Corp.
7,048,387
---------
- ------
13,472,606
- ------------------------------------------------------------
Trucking & Shipping--0.8%
287,950 Alexander & Baldwin Inc.
7,090,769
315,000 Yellow Corp.*
4,114,687
---------
- ------
11,205,456
- ------------------------------------------------------------
Wood Processing--0.4%
150,000 Rayonier Inc.
5,943,750
---------
- ------
Total common stocks
(cost $978,575,420)
1,116,011,035
---------
- ------
PREFERRED STOCKS--9.0%
- ------------------------------------------------------------
Aluminum--0.9%
371,800 Kaiser Aluminum Corp., Conv.
$8.25
4,089,800
170,300 Reynolds Metals Co., Conv. $3.31
8,323,412
---------
- ------
12,413,212
- ------------------------------------------------------------
Electrical Equipment--2.1%
1,743,000 Westinghouse Electric Corp.,
Conv. $1.30
27,888,000
- ------------------------------------------------------------
Energy Systems--0.3%
88,000 McDermott International, Inc.,
Conv. $5.75, Ser. C
3,454,000
- ------------------------------------------------------------
Insurance--0.4%
102,200 Alexander & Alexander Services,
Inc.,
Conv. $3.63, Ser. A
4,650,100
12,700 USF&G Corp., Conv. $4.10, Ser. A $
635,000
---------
- ------
5,285,100
- ------------------------------------------------------------
Integrated Producers--0.9%
107,800 Noble Drilling Corp., Conv.
$1.50
5,039,650
48,099 Unocal Corp., Conv. 6.25%
2,585,321
118,900 USX Marathon Group, Conv. 6.50%
5,008,663
---------
- ------
12,633,634
- ------------------------------------------------------------
Mining--0.2%
60,000 Hecla Mining Co., Conv. 7.00%,
Ser. B
2,790,000
- ------------------------------------------------------------
Oil & Gas Exploration/Production--0.3%
74,800 Parker & Parsley Petroleum Co.,
Conv. 6.25%
4,263,600
- ------------------------------------------------------------
Realty Investment Trust--0.1%
54,600 Security Capital Pacific Trust,
Conv. $1.75, Ser. A
1,467,375
- ------------------------------------------------------------
Retail--0.9%
251,700 K-Mart Financing I,
Trust Conv. 7.75%
11,955,750
- ------------------------------------------------------------
Steel--0.7%
250,800 Bethlehem Steel Corp., Conv.
$3.50
9,279,600
- ------------------------------------------------------------
Textiles--0.3%
90,200 Fieldcrest Cannon, Inc., Conv.
$3.00, Ser. A
3,427,600
- ------------------------------------------------------------
Tobacco--1.9%
4,400,000 RJR Nabisco Holdings Inc.,
Conv. $0.60, PERCS
24,750,000
---------
- ------
Total preferred stocks
(cost $127,746,692)
119,607,871
---------
- ------
</TABLE>
- ------------------------------------------------------------
- --------------------
6 See Notes to
Financial Statements.
<PAGE>
Portfolio of Investments as of
October 31, 1996 PRUDENTIAL EQUITY
INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value
(Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
CONVERTIBLE BONDS--2.3%
- ------------------------------------------------------------
Integrated Oil--0.4%
B2 $ 2,695 Cross Timbers Oil Co.,
Deb.,
5.25%, 11/1/03 $
2,944,287
B1 1,871 Oryx Energy Co., Sub.
Deb.,
7.50%, 5/15/14
1,768,095
-------
- --------
4,712,382
- ------------------------------------------------------------
Integrated Producers--0.9%
NR 10,451 Noble Affiliates, Inc.,
Sub. Notes,
4.25%, 11/1/03
12,527,823
- ------------------------------------------------------------
Realty Investment Trust--0.4%
Haagen (Alexander)
Properties Inc.,
Sub. Deb.,
NR 1,200 7.50%, 1/15/01
1,104,000
Sub. Deb., Ser. A,
B3 700 7.50%, 1/15/01
644,000
B3 3,800 Malan Realty Investors,
Inc.,
Sub. Deb.,
9.50%, 7/15/04
3,515,000
-------
- --------
5,263,000
- ------------------------------------------------------------
Retail--0.6%
B2 8,000 Charming Shoppes Inc.
7.50%, 7/15/06
7,641,680
- ------------------------------------------------------------
Steel
BB-D 620 USX Corp., Sub. Deb.,
7.00%, 6/15/17
601,400
-------
- --------
Total convertible bonds
(cost $28,513,118)
30,746,285
-------
- --------
FOREIGN GOVERNMENT OBLIGATIONS--0.9%
NR NZ$ 15,580 New Zealand Gov't.
Bonds,
8.00%, 4/15/04
(cost $10,819,084) $
11,456,835
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--2.3%
Aaa 30,000 United States Treasury
Bonds,
6.75%, 8/15/26
(cost $29,009,559)
30,356,100
-------
- --------
Total long-term
investments
(cost $1,174,663,873;
Note 4)
1,308,178,126
-------
- --------
SHORT-TERM INVESTMENTS--0.9%
- ------------------------------------------------------------
REPURCHASE AGREEMENT--0.9%
$ 11,928 Joint Repurchase
Agreement Account,
5.55%, 11/1/96
(cost $11,928,000;
Note 5)
11,928,000
- ------------------------------------------------------------
Total Investments--99.7%
(cost $1,186,591,873)
1,320,106,126
Other assets in excess
of
liabilities--0.3%
4,578,917
-------
- --------
Net Assets--100% $
1,324,685,043
-------
- --------
-------
- --------
</TABLE>
- ---------------
* Non-income producing security.
D Rated by Standard & Poor's
ADR--American Depository Receipt.
PERCS--Preferred Equity Redemption Cumulative Stock.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's ratings.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
7 -----
<PAGE>
Statement of Assets and Liabilities
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<S>
<C>
Assets
October 31, 1996
Investments, at value (cost
$1,186,591,873).............................................
.................... $1,320,106,126
Foreign currency, at value (cost
$432,838)...................................................
............... 440,580
Cash........................................................
................................................
193,406
Dividends and interest
receivable..................................................
......................... 4,750,513
Receivable for Fund shares
sold........................................................
..................... 3,131,073
Deferred
expenses....................................................
....................................... 32,839
- --------------
Total
assets......................................................
....................................... 1,328,654,537
- --------------
Liabilities
Payable for Fund shares
reacquired..................................................
........................ 2,161,916
Distribution fee
payable.....................................................
............................... 877,450
Management fee
payable.....................................................
................................. 602,276
Accrued
expenses....................................................
........................................ 313,597
Foreign withholding tax
payable.....................................................
........................ 14,255
- --------------
Total
liabilities.................................................
....................................... 3,969,494
- --------------
Net
Assets......................................................
............................................
$1,324,685,043
- --------------
- --------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
........... $ 860,044
Paid-in capital in excess of
par.........................................................
................ 1,126,605,733
- --------------
1,127,465,777
Undistributed net investment
income......................................................
................ 3,375,392
Accumulated net realized
gains.......................................................
.................... 60,320,527
Net unrealized appreciation on investments and foreign
currencies........................................
133,523,347
- --------------
Net assets, October 31,
1996........................................................
........................ $1,324,685,043
- --------------
- --------------
Class A:
Net asset value and redemption price per share
($341,717,532 / 22,146,706 shares of beneficial
interest issued and outstanding)......................
$15.43
Maximum sales charge (5% of offering
price)......................................................
........ .81
- --------------
Maximum offering price to
public......................................................
................... $16.24
- --------------
- --------------
Class B:
Net asset value, offering price and redemption price per
share
($929,948,408 / 60,419,284 shares of beneficial
interest issued and outstanding)......................
$15.39
- --------------
- --------------
Class C:
Net asset value, offering price and redemption price per
share
($8,510,542 / 552,935 shares of beneficial interest
issued and outstanding)...........................
$15.39
- --------------
- --------------
Class Z:
Net asset value, offering price and redemption price per
share
($44,508,561 / 2,885,504 shares of beneficial interest
issued and outstanding)........................
$15.42
- --------------
- --------------
</TABLE>
- ------------------------------------------------------------
- --------------------
8 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
- --------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31,
1996
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $578,989)................... $ 48,540,986
Interest................................ 5,852,484
--------------
- --
Total income......................... 54,393,470
--------------
- --
Expenses
Distribution fee--Class A............... 775,838
Distribution fee--Class B............... 9,512,198
Distribution fee--Class C............... 67,297
Management fee.......................... 6,851,420
Transfer agent's fees and expenses...... 1,807,000
Reports to shareholders................. 260,000
Registration fees....................... 152,000
Custodian's fees and expenses........... 125,000
Audit fee and expenses.................. 39,000
Trustees' fees and expenses............. 38,000
Insurance............................... 31,500
Legal fees and expenses................. 25,000
Miscellaneous........................... 9,492
--------------
- --
Total expenses....................... 19,693,745
--------------
- --
Net investment income...................... 34,699,725
--------------
- --
Realized and Unrealized
Gain on Investments
Net realized gain on:
Investment transactions................. 61,032,399
Foreign currency transactions........... 3,313
--------------
- --
61,035,712
--------------
- --
Net change in unrealized appreciation of:
Investments............................. 84,674,179
Foreign currencies...................... 12,437
--------------
- --
84,686,616
--------------
- --
Net gain on investments and foreign
currency transactions................... 145,722,328
--------------
- --
Net Increase in Net Assets
Resulting from Operations.................. $180,422,053
--------------
- --
--------------
- --
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
--------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income....... $ 34,699,725 $
32,331,538
Net realized gain on
investments.............. 61,035,712
57,394,480
Net change in unrealized
appreciation/depreciation
of investments and
foreign currencies....... 84,686,616
24,749,771
-------------- ---------
- -----
Net increase in net assets
resulting from
operations............... 180,422,053
114,475,789
-------------- ---------
- -----
Net equalization debits........ --
(34,109)
-------------- ---------
- -----
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A.................. (10,168,241)
(8,544,147)
Class B.................. (23,129,087)
(28,652,286)
Class C.................. (166,270)
(88,434)
Class Z.................. (610,849)
- --
-------------- ---------
- -----
(34,074,447)
(37,284,867)
-------------- ---------
- -----
Distributions from net
realized gains
Class A.................. (13,884,497)
(5,627,572)
Class B.................. (43,458,487)
(35,965,908)
Class C.................. (241,179)
(68,654)
-------------- ---------
- -----
(57,584,163)
(41,662,134)
-------------- ---------
- -----
Fund share transactions (net of
share conversion) (Note 6)
Proceeds from shares sold... 396,300,467
314,835,425
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 83,809,013
71,744,648
Cost of shares reacquired... (432,557,290)
(340,684,429)
-------------- ---------
- -----
Net increase in net assets
from Fund share
transactions............. 47,552,190
45,895,644
-------------- ---------
- -----
Total increase................. 136,315,633
81,390,323
Net Assets
Beginning of year.............. 1,188,369,410
1,106,979,087
-------------- ---------
- -----
End of year.................... $1,324,685,043
$1,188,369,410
-------------- ---------
- -----
-------------- ---------
- -----
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
9 -----
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
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 Policies
The following is a summary 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.
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.
Foreign Currency Translation: The books and records of the
Fund are maintained
in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and
liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income
and expenses--at the
rates of exchange prevailing on the respective dates of such
transactions.
Although the net assets of the Fund are presented at the
foreign exchange rates
and market values at the close of the period, the Fund does
not isolate that
portion of the results of operations arising as a result of
changes in the
foreign exchange rates from the fluctuations arising from
changes in the market
prices of the securities held at period end. Similarly, the
Fund does not
isolate the effect of changes in foreign exchange rates from
the fluctuations
arising from changes in the market prices of long-term debt
securities sold
during the period. Accordingly, such realized foreign
currency gains and losses
are included in the reported net realized gains/losses on
investment
transactions.
Net realized losses on foreign currency transactions
represents net foreign
exchange gains and losses from sales and maturities of short-
term securities and
forward currency contracts, holding of foreign currencies,
currency gains or
losses realized between the trade and settlement dates on
securities
transactions, and the difference between the amounts of
interest and foreign
taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts
actually received or paid. Net currency gains and losses
from valuing foreign
currency denominated assets (excluding investments) and
liabilities at period
end exchange rates are reflected as a component of net
unrealized
appreciation/depreciation on investments and foreign
currencies.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of U.S.
companies as a result of,
among other factors, the possibility of political or
economic instability and
the level of governmental supervision and regulation of
foreign securities
markets.
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. Expenses are
recorded on the accrual basis which may require the use of
certain estimates by
management.
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
of the
- ------------------------------------------------------------
- --------------------
10
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
Fund based upon the relative proportion of net assets of
each class at the
beginning of the day.
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.
Equalization: Effective November 1, 1995, the Fund
discontinued the accounting
practice of equalization. Equalization is a practice whereby
a portion of the
proceeds from sales and costs of repurchases of capital
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. The balance of $6,100,050 of undistributed net
investment income at
October 31, 1995, resulting from equalization was
transferred to paid-in capital
in excess of par. Such reclassification has no effect on net
assets, results of
operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts for
and reports
distributions to shareholders in accordance with American
Institute of Certified
Public Accountants (AICPA) 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 of applying
this statement was to increase undistributed net investment
income and decrease
accumulated net realized gains on investments by $3,313
relating to net realized
foreign currency gains. Net investment income, net realized
gains and net assets
were not affected by these changes.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management LLC
(``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 Fund's average daily net assets up
to $500 million,
.50 of 1% of the next $500 million, .475 of 1% of the next
$500 million and .45
of 1% of the average daily net assets in excess of $1.5
billion.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Prudential Securities
Incorporated (``PSI'')
became the distributor of the Class A shares of the Fund
effective January 2,
1996 and is serving the Fund under the same terms and
conditions as under the
arrangement with PMFD and continues as the distributor of
the Class B and Class
C shares of the Fund. PSI also seves as the distributor of
Class Z shares. The
Fund compensates PMFD and PSI 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.
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 Plans were .25 of 1%
of the average daily
net assets of Class A shares and 1% of the average daily net
assets of both the
Class B and C shares for the fiscal year ended October 31,
1996.
PMFD and PSI have advised the Fund that they have received
approximately
$528,900 in front-end sales charges resulting from sales of
Class A shares
during the fiscal year ended October 31, 1996. From these
fees, PMFD and PSI
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, 1996, it
received approximately $2,070,500 and $4,900 in contingent
deferred sales
charges imposed upon certain redemptions by Class B and
Class C shareholders,
respectively.
- ------------------------------------------------------------
- --------------------
11 -----
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
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 Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent and during the
fiscal year ended
October 31, 1996, the Fund incurred fees of approximately
$1,570,000 for the
services of PMFS. As of October 31, 1996, approximately
$131,000 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, 1996, PSI earned
approximately $55,600 in
brokerage commissions from portfolio transactions executed
on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the fiscal year ended October 31, 1996 were $473,157,998
and $450,763,115,
respectively.
The federal income tax basis of the Fund's investments at
October 31, 1996 was
$1,187,385,715 and, accordingly, net unrealized appreciation
for federal income
tax purposes was $132,720,411 (gross unrealized appreciation-
- -$212,868,508;
gross unrealized depreciation--$80,148,097).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment
companies, transfers
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, 1996, the Fund
had a 1.4% undivided interest in the repurchase agreements
in the joint account.
The undivided interest for the Fund represented $11,928,000
in principal amount.
As of such date, each repurchase agreement in the joint
account and the value of
the collateral therefor was as follows:
Bear, Stearns & Co., 5.53%, in the principal amount of
$277,000,000, repurchase
price $277,042,550, due 11/1/96. The value of the collateral
including accrued
interest was $282,667,606.
CS First Boston Corp., 5.56%, in the principal amount of
$100,000,000,
repurchase price $100,015,444, due 11/1/96. The value of the
collateral
including accrued interest was $102,000,453.
Deutsche Bank Securities Corp., 5.55%, in the principal
amount of $175,000,000,
repurchase price $175,026,979, due 11/1/96. The value of the
collateral
including accrued interest was $178,500,400.
Morgan Stanley & Co., Inc., 5.65%, in the principal amount
of $26,585,000,
repurchase price $26,589,172, due 11/1/96. The value of the
collateral including
accrued interest was $27,128,601.
Smith Barney, Inc., 5.55%, in the principal amount of
$277,000,000, repurchase
price $277,042,704, due 11/1/96. The value of the collateral
including accrued
interest was $282,541,278.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z
shares. Class A shares are
sold with a front-end sales charge of up to 5.00%. 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. Special exchange privileges are
also available for
shareholders who qualify to purchase Class A shares at net
asset value or Class
Z shares. Class Z shares are not subject to any sales or
redemption charge and
are offered exclusively for sale to a limited group of
investors.
The Fund has authorized an unlimited number of shares of
beneficial interest at
$.01 par value divided into four classes, designated Class
A, Class B, Class C
and Class Z.
Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 12,763,330 $
192,448,233
Shares issued in reinvestment of
dividends and distributions.... 1,507,878
22,207,619
Shares reacquired................ (14,423,817)
(217,449,877)
----------- ---------
- ----
Net decrease in shares
outstanding before
conversion..................... (152,609)
(2,794,025)
Shares issued upon conversion
and/or exchange from Class B... 3,062,717
46,622,970
----------- ---------
- ----
Net increase in shares
outstanding.................... 2,910,108 $
43,828,945
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
12
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1995:
Shares sold...................... 9,069,984 $
126,481,791
Shares issued in reinvestment of
dividends and distributions.... 988,308
13,123,973
Shares reacquired................ (9,432,145)
(132,413,659)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 626,147
7,192,105
Shares issued upon conversion
and/or exchange from Class B
and Class C.................... 7,880,523
103,261,849
----------- ---------
- ----
Net increase in shares
outstanding.................... 8,506,670 $
110,453,954
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 9,998,793 $
149,942,657
Shares issued in reinvestment of
dividends and distributions.... 4,135,093
60,601,069
Shares reacquired................ (13,775,123)
(206,554,247)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 358,763
3,989,479
Shares reacquired upon conversion
and/or exchange into Class A... (3,073,755)
(46,622,970)
----------- ---------
- ----
Net decrease in shares
outstanding.................... (2,714,992) $
(42,633,491)
----------- ---------
- ----
----------- ---------
- ----
Year ended October 31, 1995:
Shares sold...................... 13,508,457 $
185,025,545
Shares issued in reinvestment of
dividends and distributions.... 4,535,064
58,469,219
Shares reacquired................ (15,235,600)
(207,693,768)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 2,807,921
35,800,996
Shares reacquired upon conversion
and/or exchange into Class A... (7,898,828)
(103,261,498)
----------- ---------
- ----
Net decrease in shares
outstanding.................... (5,090,907) $
(67,460,502)
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 325,017 $
4,877,161
Shares issued in reinvestment of
dividends and distributions.... 26,486
389,591
Shares reacquired................ (117,902)
(1,769,009)
----------- ---------
- ----
Net increase in shares
outstanding.................... 233,601 $
3,497,743
----------- ---------
- ----
----------- ---------
- ----
Year ended October 31, 1995:
Shares sold...................... 238,881 $
3,328,089
Shares issued in reinvestment of
dividends and distributions.... 11,418
151,456
Shares reacquired................ (40,015)
(577,002)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 210,284
2,902,543
Shares reacquired upon exchange
into Class A................... (27)
(351)
----------- ---------
- ----
Net increase in shares
outstanding.................... 210,257 $
2,902,192
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class Z
- ---------------------------------
<S> <C> <C>
March 1, 1996* through
October 31, 1996:
Shares sold...................... 3,294,056 $
49,032,416
Shares issued in reinvestment of
dividends and distributions.... 39,927
610,734
Shares reacquired................ (448,479)
(6,784,157)
----------- ---------
- ----
Net increase in shares
outstanding.................... 2,885,504 $
42,858,993
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 7. Dividends
On December 5, 1996 the Board of Trustees of the Fund
declared the following
dividends per share, payable on December 13, 1996 to
shareholders of record on
December 10, 1996.
<TABLE>
<CAPTION>
Class Class B
Class
A and C
Z
--------- ---------
- ------
<S> <C> <C>
<C>
Ordinary Income................... $ .1250 $ .0955
$.1350
Short-Term Capital Gains.......... $ .2600 $ .2600
$.2600
Long-Term Capital Gains........... $ .4500 $ .4500
$.4500
</TABLE>
- ------------------------------------------------------------
- --------------------
13 -----
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
----------
- ---------------------------------------------------
Year Ended October 31,
----------
- ---------------------------------------------------
1996
1995 1994 1993 1992
----------
- -------- -------- -------- -------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.40
$ 14.03 $ 14.38 $ 12.16 $ 12.04
----------
- -------- -------- -------- -------
Income from investment operations
Net investment income......................... .47
.48 .41 .47 .47
Net realized and unrealized gain on investment
transactions............................... 1.75
.95 .06 2.65 .60
----------
- -------- -------- -------- -------
Total from investment operations........... 2.22
1.43 .47 3.12 1.07
----------
- -------- -------- -------- -------
Less distributions
Dividends from net investment income.......... (.49)
(.54) (.29) (.46) (.47)
Distributions from net realized gains......... (.70)
(.52) (.53) (.44) (.48)
----------
- -------- -------- -------- -------
Total distributions........................ (1.19)
(1.06) (.82) (.90) (.95)
----------
- -------- -------- -------- -------
Net asset value, end of year.................. $ 15.43
$ 14.40 $ 14.03 $ 14.38 $ 12.16
----------
- -------- -------- -------- -------
----------
- -------- -------- -------- -------
TOTAL RETURN(a):.............................. 15.97%
11.15% 3.48% 26.93% 9.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $341,717
$276,990 $150,502 $104,017 $51,165
Average net assets (000)...................... $310,335
$236,688 $131,398 $ 70,895 $21,931
Ratios to average net assets:
Expenses, including distribution fees...... .98%
1.03% 1.09% 1.07% 1.22%
Expenses, excluding distribution fees...... .73%
.78% .85% .87% 1.02%
Net investment income...................... 3.26%
3.36% 2.97% 3.44% 3.22%
For Class A, B, C and Z shares:
Portfolio turnover............................ 36%
74% 70% 57% 43%
Average commission rate paid per share........ $ .0563
N/A N/A N/A N/A
</TABLE>
- ---------------
(a) 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.
- ------------------------------------------------------------
- --------------------
14 See Notes to
Financial Statements.
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B
----------
- ----------------------------------------------------
Year Ended October 31,
----------
- ----------------------------------------------------
1996
1995 1994 1993 1992
----------
- -------- -------- -------- --------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.36
$ 14.00 $ 14.35 $ 12.14 $ 12.03
----------
- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .39
.37 .31 .37 .37
Net realized and unrealized gain on investment
transactions............................... 1.71
.95 .06 2.64 .59
----------
- -------- -------- -------- --------
Total from investment operations........... 2.10
1.32 .37 3.01 .96
----------
- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.37)
(.44) (.19) (.36) (.37)
Distributions from net realized gains......... (.70)
(.52) (.53) (.44) (.48)
----------
- -------- -------- -------- --------
Total distributions........................ (1.07)
(.96) (.72) (.80) (.85)
----------
- -------- -------- -------- --------
Net asset value, end of year.................. $ 15.39
$ 14.36 $ 14.00 $ 14.35 $ 12.14
----------
- -------- -------- -------- --------
----------
- -------- -------- -------- --------
TOTAL RETURN(a):.............................. 15.12%
10.29% 2.73% 25.93% 8.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $929,948
$906,793 $954,951 $527,868 $190,846
Average net assets (000)...................... $951,220
$911,856 $784,063 $304,898 $169,524
Ratios to average net assets:
Expenses, including distribution fees...... 1.73%
1.78% 1.85% 1.87% 2.02%
Expenses, excluding distribution fees...... .73%
.78% .85% .87% 1.02%
Net investment income...................... 2.51%
2.66% 2.21% 2.58% 3.05%
</TABLE>
- ---------------
(a) 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.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
15 -----
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C Class Z
----------
- -------------------------------- -----------
August 1, March 1,
1994(c) 1996(d)
Year
Ended October 31, Through Through
----------
- ---------------- October 31, October 31,
1996
1995 1994 1996
----------
- ----------- ----------- -----------
<S> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $14.36
$ 14.00 $ 13.99 $ 15.13
-----
- ----- ----- -----------
Income from investment operations
Net investment income......................... .38
.40 .08 .38
Net realized and unrealized gain (loss) on
investment transactions.................... 1.72
.92 (.02) .30
-----
- ----- ----- -----------
Total from investment operations........... 2.10
1.32 .06 .68
-----
- ----- ----- -----------
Less distributions
Dividends from net investment income.......... (.37)
(.44) (.05) (.39)
Distributions from net realized gains......... (.70)
(.52) -- --
-----
- ----- ----- -----------
Total distributions........................ (1.07)
(.96) (.05) (.39)
-----
- ----- ----- -----------
Net asset value, end of period................ $15.39
$ 14.36 $ 14.00 $ 15.42
-----
- ----- ----- -----------
-----
- ----- ----- -----------
TOTAL RETURN(a):.............................. 15.12%
10.29% 0.45% 4.55%
RATIOS/SUPPLEMENTAL DATA:(e)
Net assets, end of period (000)............... $8,511
$ 4,586 $ 1,527 $44,509
Average net assets (000)...................... $6,730
$ 3,132 $ 762 $24,641
Ratios to average net assets:
Expenses, including distribution fees...... 1.73%
1.78% 2.05%(b) .73%(b)
Expenses, excluding distribution fees...... .73%
.78% 1.05%(b) .73%(b)
Net investment income...................... 2.51%
2.57% 2.42%(b) 3.51%(b)
</TABLE>
- ---------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Because of the event referred to in (d) and the timing
of such, the ratios
of Class Z are not necessarily comparable to that of
Class A, B and C
shares and are not necessarily indicative of future
ratios.
- ------------------------------------------------------------
- --------------------
16 See Notes to
Financial Statements.
<PAGE>
Independent Auditors' Report
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Equity Income Fund
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Equity Income
Fund as of October 31,
1996, 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, 1996 by correspondence with the custodian and
brokers. 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, 1996, 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 5, 1996
Federal Income Tax Information
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Fund's fiscal year end (October 31, 1996) 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, 1996, the
Fund paid
distributions for Class A shares totaling $1.1875 per share,
comprised of
$0.7975 per share ordinary income and short-term capital
gains which are taxable
as ordinary income and $0.39 per share long-term capital
gains which is taxable
as such. The Fund paid distributions for Class B shares
totaling $1.07 per
share, comprised of $0.68 per share ordinary income and
short-term capital gains
which are taxable as ordinary income and $0.39 per share
long-term capital gains
which is taxable as such. The Fund paid distributions for
Class C shares
totaling $1.07 per share, comprised of $0.68 per share
ordinary income and
short-term capital gains which are taxable as ordinary
income and $0.39 per
share long-term capital gains which are taxable as such. The
Fund paid
distributions for Class Z shares totaling $0.392 per share
of ordinary income
which is taxable as such. Further, we wish to advise you
that 74% of the
dividends (excluding long-term capital gains) paid in the
fiscal year ended
October 31, 1996 qualified for the corporate dividends
received deduction
available to corporate taxpayers.
In January 1997, 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 1996. The amounts that will be reported on such
Form 1099 DIV will be
the amounts to use on your 1996 federal income tax return
and will differ from
the amounts which we must report for the Fund's fiscal year
ended October 31,
1996.
- ------------------------------------------------------------
- --------------------
17 -----
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Some mutual fund shareholders won't ever read this -- they
don't read annual
and semi-annual reports. It's quite understandable. These
annual and
semi-annual reports are prepared to comply with Federal
regulations. They are
often written in language that is difficult to understand.
So when most people
run into those particularly daunting sections of these
reports, they don't read
them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of income
and appreciation the Fund has achieved in various time
periods. The average
annual total return is an annualized representation of the
Fund's
performance -- it generally smoothes out returns and gives
you an idea how
much the Fund has earned in an average year, for a given
time period. Under the
performance box, you'll see legends that explain the
performance information,
whether fees and sales charges have been included in
returns, and the inception
dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past
performance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager who invests your money for you reports
onsuccessful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial Statements
This is the kind of technical material that can intimidate
readers, but it does
contain useful information. The Notes provide a brief
history and explanation
of your Fund's objectives. In addition, they also outline
how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the
Fund's shares, and more importantly, how much they are paid
for doing so.
Finally, the Notes explain how many shares are outstanding
and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a
tax advisor.
Performance Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a hypothetical
$10,000 investment in the Fund since its inception or for 10
years (whichever
is shorter). To help you put that return in context, we are
required to include
the performance of an unmanaged, broad based securities
index, as well. The
index does not reflect the cost of buying the securities it
contains or the
cost of managing a mutual fund. Of course, the index
holdings do not mirror
those of the fund -- the index is a broadly based reference
point commonly used
by investors to measure how well they are doing. A
definition of the selected
index is also provided. Investors generally cannot invest
directly in an index.
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
When you invest through Prudential Mutual Funds, you receive
financial advice
through a Prudential Securities financial advisor or
Prudential/Pruco
Securities registered representative. Your advisor or
representative can
provide you with the following services:
- ------------------------------------------------------------
- ----
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help
you match the
reward you seek with the risk you can tolerate. And risk can
be difficult to
gauge -- sometimes even the simplest investments bear
surprising risks. The
educated investor knows that markets seldom move in just one
direction -- there
are times when a market sector or asset class will lose
value or provide little
in the way of total return. Managing your own expectations
is easier with help
from someone who understands the markets and who knows you!
- ------------------------------------------------------------
- ----
Keeping Up With The Joneses.
A financial advisor or registered representative can help
you wade through the
numerous mutual funds available to find the ones that fit
your own individual
investment profile and risk tolerance. While the newspapers
and popular
magazines are full of advice about investing, they are aimed
at generic groups
of people or representative individuals, not at you
personally. Your financial
advisor or registered representative will review your
investment objectives
with you. This means you can make financial decisions based
on the assets and
liabilities in your current portfolio and your risk
tolerance -- not just based
on the current investment fad.
- ------------------------------------------------------------
- ----
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the
bottom are among the
most common investor mistakes. But sometimes it's difficult
to hold on to an
investment when it's losing value every month. Your
financial advisor or
registered representative can answer questions when you're
confused or worried
about your investment, and remind you that you're investing
for the long haul.
<PAGE>
Comparing A $10,000 Investment.
- -------------------------------
Prudential Equity Income Fund vs. the S&P 500 Index:
Class A
(GRAPH)
Class B
(GRAPH)
Class C
(GRAPH)
Class Z
(GRAPH)
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, may be
worth more or less than their original cost. The boxes on
top of the graphs
are designed to give you an idea how much the Fund's returns
can fluctuate
from year to year by measuring the best and worst calendar
years in terms of
total annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Equity Income
Fund (Class A,
Class B, Class C and Class Z) with a similar investment in
the S&P 500 Index
by portraying the initial account values at the commencement
of operations of
each class, and subsequent account values at the end of this
reporting period
(October 31), as measured on a quarterly basis, beginning in
1990 for Class A
shares, in 1987 for Class B shares, in 1994 for Class C
shares and in 1996 for
Class Z shares. For purposes of the graphs, and unless
otherwise indicated, in
the accompanying tables it has been assumed (a) that the
maximum applicable
front-end 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 and
Class C shares,
assuming full redemption on October 31, 1996; (c) all
recurring fees (including
management fees) were deducted; and (d) all dividends and
distributions were
reinvested. Class Z shares do not have a sales charge or a
distribution fee.
Class Z shares have been in existence less than one year and
average annual
total returns are not available. Class B shares will
automatically convert to
Class A shares, on a quarterly basis, beginning
approximately seven years after
purchase. This conversion feature 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 in the
S&P 500 may differ substantially from the securities in the
Fund. The S&P 500
is not the only index that may be used to characterize
performance of stock
funds and other indexes may portray different comparative
performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Delayne D. Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Fund's portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
743916207 MF131E
743916108 Cat. #4441355
743916306
743916405
