<PAGE>
Prudential Equity Income Fund
- -------------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1997
(REVISED AS OF JUNE 1, 1998)
- -------------------------------------------------------------------------------
Prudential Equity Income Fund (the Fund) is an open-end, diversified, manage-
ment investment company. Its investment objective is both current income and
capital appreciation. It seeks to achieve this objective by investing primar-
ily in common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE Com-
posite Index. In normal circumstances, the Fund intends to invest at least 65%
of its total assets in such securities. The balance of the Fund's assets may
be invested in other common stocks, other securities convertible into common
stocks, debt securities and certain derivatives, including options on stocks
and stock indices. Common stocks may include securities of foreign issuers.
There can be no assurance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies." The
Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New Jer-
sey 07102-4077, and its telephone number is (800) 225-1852.
The Fund's purchase and sale of put and call options and related short-term
trading may result in a high portfolio turnover rate. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
The Fund may also buy and sell stock index futures and options thereon for the
purpose of hedging its securities portfolio or enhancing its return and may
buy and sell options on stock indices, in each case in accordance with limits
described herein. See "How the Fund Invests--Investment Objective and Poli-
cies."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated December 30, 1997,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above. The Commission maintains
a Web site (http://www.sec.gov) that contains the Statement of Additional In-
formation, material incorporated by reference, and other information regarding
the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- -------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERN-
MENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL EQUITY INCOME FUND?
Prudential Equity Income Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve
its investment objective. Technically, the Fund is an open-end,
diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective 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. There can be no assurance that the Fund's objective will
be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 9.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund may invest up to 30% of its total assets in the securities of
foreign issuers and up to 35% of its total assets in fixed-income
obligations, including securities rated Baa or lower by Moody's Investors
Service, Inc. or BBB or lower by Standard & Poor's Ratings Group or Duff &
Phelps Credit Rating Co. or another nationally recognized statistical
rating organization, which may be subject to special risks. See "How the
Fund Invests--Investment Objective and Policies" at page 9. The Fund may
also engage in various hedging and return enhancement strategies, including
utilizing derivatives. These activities may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund
Invests--Hedging and Return Enhancement Strategies--Risks of Hedging and
Return Enhancement Strategies" at page 13. As with an investment in any
mutual fund, an investment in this Fund can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services 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 Fund's average daily net assets between $500 million and $1
billion, .475 of 1% of average daily net assets between $1 billion and $1.5
billion and .45 of 1% of average daily net assets in excess of $1.5
billion. As of November 30, 1997, PIFM served as manager or administrator
to 63 investment companies, including 41 mutual funds, with aggregate
assets of approximately $60 billion. The Prudential Investment Corporation
(PIC), doing business as Prudential Investments (PI, the Subadviser or the
investment adviser), furnishes investment advisory services in connection
with the management of the Fund under a Subadvisory Agreement with PIFM.
See "How the Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as
the Distributor of the Fund's Class A, Class B, Class C and Class Z shares
and is paid a distribution and service fee with respect to Class A shares
which is currently being charged at the annual rate of .25 of 1% of the
average daily net assets of the Class A shares and is paid a distribution
and service fee with respect to Class B and Class C shares at an annual
rate of 1% of the average daily net assets of each of the Class B and Class
C shares. The Distributor incurs the expense of distributing the Fund's
Class Z shares under a Distribution Agreement with the Fund, none of which
is reimbursed or paid for by the Fund. See "How the Fund is Managed--
Distributor" at page 17.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. There is no minimum investment
requirement for certain retirement and employee savings plans or custodial
accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund"
at page 23 and "Shareholder Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per share
(NAV) next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor, plus a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. Dealers may charge their customers a
separate fee for handling purchase transactions. See "How the Fund Values its
Shares" at page 19 and "Shareholder Guide--How to Buy Shares of the Fund" at
page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
. Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after your
Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. See "Shareholder Guide--How to Sell Your Shares" at page 27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, quarterly
and make distributions of any net capital gains at least annually. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions made None
decreasing by 1% annually within one year of purchase
to 1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
assets) -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees........ .52% .52% .52% .52%
12b-1 Fees (After Re-
duction).............. .25++ 1.00 1.00 None
Other Expenses......... .17 .17 .17 .17
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)............ .94% 1.69% 1.69% .69%
=== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period:
Class A................................. $59 $79 $100 $161
Class B................................. $67 $84 $102 $172
Class C................................. $27 $54 $ 92 $201
Class Z................................. $ 7 $22 $ 39 $ 87
You would pay the following expenses on the
same investment, assuming no redemption:
Class A................................. $59 $79 $100 $161
Class B................................. $17 $54 $ 92 $172
Class C................................. $17 $54 $ 92 $201
Class Z................................. $ 7 $22 $ 39 $ 87
</TABLE>
The above example is based on data for the Fund's fiscal year ended
October 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
--------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of
the Fund may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on each class of the Fund
rather than on a per shareholder basis. Therefore, long-term shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to limit
its distribution fees with respect to the Class A shares of the Fund to .25
of 1% of the average daily net assets of the Class A shares for the fiscal
year ending October 31, 1998. Total Fund Operating Expenses without such
limitation would be .99%. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the six
years ended October 31, 1996 and the period from January 22, 1990 through
October 31, 1990 have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEAR ENDED OCTOBER 31, THROUGH
----------------------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59
-------- -------- -------- -------- -------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .45 .47 .48 .41 .47 .47 .38 .25
Net realized and
unrealized gain (loss)
on
investment transac-
tions.................. 6.29 1.75 .95 .06 2.65 .60 2.50 (1.01)
-------- -------- -------- -------- -------- ------- ------ ------
Total from investment
operations............ 6.74 2.22 1.43 .47 3.12 1.07 2.88 (.76)
-------- -------- -------- -------- -------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.43) (.49) (.54) (.29) (.46) (.47) (.37) (.30)
Distributions from net
realized gains......... (.74) (.70) (.52) (.53) (.44) (.48) -- --
-------- -------- -------- -------- -------- ------- ------ ------
Total distributions.... (1.17) (1.19) (1.06) (.82) (.90) (.95) (.37) (.30)
-------- -------- -------- -------- -------- ------- ------ ------
Net asset value, end of
period................. $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16 $12.04 $ 9.53
======== ======== ======== ======== ======== ======= ====== ======
TOTAL RETURN(C):........ 45.68% 15.97% 11.15% 3.48% 26.93% 9.50% 30.62% (7.36)%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $570,146 $341,717 $276,990 $150,502 $104,017 $51,165 $4,013 $1,098
Average net assets
(000).................. $454,892 $310,335 $236,688 $131,398 $ 70,895 $21,931 $2,084 $ 752
Ratios to average net
assets:
Expenses, including
distribution fees..... .94% .98% 1.03% 1.09% 1.07% 1.22% 1.37% 1.59%(b)
Expenses, excluding
distribution fees..... .69% .73% .78% .85% .87% 1.02% 1.17% 1.39%(b)
Net investment income.. 2.32% 3.26% 3.36% 2.97% 3.44% 3.22% 3.43% 3.12%(b)
Portfolio turnover...... 36% 36% 74% 70% 57% 43% 64% 58%
Average commission rate
paid per share......... $ .0488 $ .0563 N/A N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights for the year ended October 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and for
the nine years ended October 31, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class B share of
beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is
based on data contained in the financial statements. Further performance
information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(a)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 15.39 $ 14.36 $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .29 .39 .37 .31 .37 .37 .30 .28 .32 .28
Net realized and
unrealized gain (loss)
on investment
transactions........... 6.29 1.71 .95 .06 2.64 .59 2.49 (1.32) 1.26 1.47
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations............ 6.58 2.10 1.32 .37 3.01 .96 2.79 (1.04) 1.58 1.75
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.30) (.37) (.44) (.19) (.36) (.37) (.29) (.32) (.32) (.27)
Distributions from net
realized gains......... (.74) (.70) (.52) (.53) (.44) (.48) -- -- -- (.33)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total distributions.... (1.04) (1.07) (.96) (.72) (.80) (.85) (.29) (.32) (.32) (.60)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of
year................... $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
========== ======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL RETURN(B):........ 44.60% 15.12% 10.29% 2.73% 25.93% 8.55% 29.58% (9.77)% 16.68% 21.85%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000).................. $1,250,216 $929,948 $906,793 $954,951 $527,868 $190,846 $151,538 $120,032 $143,169 $60,733
Average net assets
(000).................. $1,072,118 $951,220 $911,856 $784,063 $304,898 $169,524 $136,602 $142,179 $ 84,157 $63,013
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.69% 1.73% 1.78% 1.85% 1.87% 2.02% 2.17% 2.22% 2.08% 2.30%
Expenses, excluding
distribution fees..... .69% .73% .78% .85% .87% 1.02% 1.17% 1.22% 1.12% 1.29%
Net investment income.. 1.60% 2.51% 2.66% 2.21% 2.58% 3.05% 2.67% 2.70% 2.89% 3.19%
Portfolio turnover ..... 36% 36% 74% 70% 57% 43% 64% 58% 60% 35%
Average commission rate
paid per share......... $ .0488 $ .0563 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
(a) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the two
years ended October 31, 1996 and the period from August 1, 1994 through
October 31, 1994, have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------
AUGUST 1,
YEAR ENDED 1994(a)
OCTOBER 31, THROUGH
----------------------- OCTOBER 31,
1997 1996 1995 1994
------- ------ ------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $ 15.39 $14.36 $14.00 $13.99
------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .37 .38 .40 .08
Net realized and unrealized gain
(loss) on
investment transactions.............. 6.21 1.72 .92 (.02)
------- ------ ------ ------
Total from investment operations..... 6.58 2.10 1.32 .06
------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.. (.30) (.37) (.44) (.05)
Distributions from net realized gains. (.74) (.70) (.52) --
------- ------ ------ ------
Total distributions.................. (1.04) (1.07) (.96) (.05)
------- ------ ------ ------
Net asset value, end of period........ $ 20.93 $15.39 $14.36 $14.00
======= ====== ====== ======
TOTAL RETURN(C):...................... 44.60% 15.12% 10.29% 0.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $17,911 $8,511 $4,586 $1,527
Average net assets (000).............. $11,432 $6,730 $3,132 $ 762
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.69% 1.73% 1.78% 2.05%(b)
Expenses, excluding distribution
fees................................ .69% .73% .78% 1.05%(b)
Net investment income................ 1.53% 2.51% 2.57% 2.42%(b)
Portfolio turnover.................... 36% 36% 74% 70%
Average commission rate paid per
share................................ $ .0488 $.0563 N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the
period from March 1, 1996 through October 31, 1996, have been audited by
Deloitte & Touche LLP, independent auditors, whose reports thereon were
unqualified. This information should be read in conjunction with the financial
statements and notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class Z
share of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. The information
is based on data contained in the financial statements. Further performance
information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-----------------------
MARCH 1,
1996(a)
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
1997 1996
PER SHARE OPERATING PERFORMANCE: ----------- -----------
<S> <C> <C>
Net asset value, beginning of period............... $ 15.42 $ 15.13
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. .36 .38
Net realized and unrealized gain (loss) on
investment transactions........................... 6.43 .30
------- -------
Total from investment operations................. 6.79 .68
------- -------
LESS DISTRIBUTIONS
Dividends from net investment income............... (.47) (.39)
Distributions from net realized gains.............. (.74) --
------- -------
Total distributions.............................. (1.21) (.39)
------- -------
Net asset value, end of period..................... $ 21.00 $ 15.42
======= =======
TOTAL RETURN (C): ................................. 46.12% 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................... $74,956 $44,509
Average net assets (000)........................... $57,369 $24,641
Ratios of average net assets:
Expenses, including distribution fees............ .69% .73%(b)
Expenses, excluding distribution fees............ .69% .73%(b)
Net investment income............................ 2.58% 3.51%(b)
Portfolio turnover................................. 36% 36%
Average commission rate paid per share............. $ .0488 $ .0563
</TABLE>
--------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS BOTH CURRENT INCOME AND CAPITAL
APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT 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. In selecting these investments, the Fund puts emphasis
on earnings, balance sheet and cash flow analyses and the relationships that
these factors have to the price and return of a given security. Under normal
circumstances, the Fund will invest at least 65% of its total assets
(determined at the time of purchase) in such securities. THERE CAN BE NO
ASSURANCE THAT THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment
Objective and Policies" in the Statement of Additional Information.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE BALANCE OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN OTHER EQUITY-
RELATED SECURITIES, DEBT SECURITIES (INCLUDING MONEY MARKET INSTRUMENTS) AND
OPTIONS ON STOCK AND ON STOCK INDICES. Common stocks may include securities of
foreign issuers. Equity-related securities include common stocks, preferred
stocks, securities convertible or exchangeable for common stocks or preferred
stocks, equity investments in partnerships, joint ventures and other forms of
non-corporate investments, American Depositary Receipts (ADRs), and warrants
and rights exercisable for equity securities.
IN ADDITION, THE FUND MAY (I) PURCHASE AND SELL STOCK INDEX FUTURES AND
OPTIONS THEREON FOR HEDGING OR RETURN ENHANCEMENT PURPOSES OR, WITH RESPECT TO
WRITING OPTIONS ON FUTURES, TO REALIZE A GREATER RETURN (SEE "HEDGING AND
RETURN ENHANCEMENT STRATEGIES" BELOW), (II) PURCHASE SECURITIES ON A WHEN-
ISSUED OR DELAYED DELIVERY BASIS (SEE "OTHER INVESTMENTS AND POLICIES--WHEN-
ISSUED AND DELAYED DELIVERY SECURITIES" BELOW), (III) MAKE SHORT SALES
AGAINST-THE-BOX (SEE "OTHER INVESTMENTS AND POLICIES--SHORT SALES AGAINST-THE-
BOX" BELOW), AND (IV) ENTER INTO REPURCHASE AGREEMENTS (SEE "OTHER INVESTMENTS
AND POLICIES--REPURCHASE AGREEMENTS" BELOW).
CONVERTIBLE SECURITIES
A CONVERTIBLE SECURITY IS TYPICALLY A BOND, DEBENTURE, CORPORATE NOTE,
PREFERRED STOCK OR OTHER SIMILAR SECURITY THAT MAY BE CONVERTED AT A STATED
PRICE WITHIN A SPECIFIED PERIOD OF TIME INTO A SPECIFIED NUMBER OF SHARES OF
COMMON STOCK OR OTHER EQUITY SECURITIES OF THE SAME OR A DIFFERENT ISSUER. A
warrant or right entitles the holder to purchase equity securities at a
specific price for a specific period of time. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but
are usually subordinated to similar non-convertible securities. While
providing a fixed income stream (generally higher in yield than the income
derivable from a common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities also include
preferred stocks which technically are equity securities.
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In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying common
stock. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. While no securities investment
is without some risk, investments in convertible securities generally entail
less risk than investments in the common stock of the same issuer.
MONEY MARKET INSTRUMENTS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN MONEY MARKET
INSTRUMENTS UNDER NORMAL CIRCUMSTANCES. The Fund may invest in such
instruments without limit when the investment adviser believes that market
conditions warrant a temporary defensive investment posture or pending
investment of proceeds from sales of the Fund's shares. These instruments
include obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; commercial paper; certificates of deposit;
bankers' acceptances and other obligations of domestic and foreign banks. Such
obligations (other than U.S. Government securities) will be rated, at the time
of purchase, within the two highest quality grades as determined by a
nationally recognized statistical rating organization (NRSRO), such as Moody's
Investors Service, Inc. (Moody's), Standard & Poor's Ratings Group (S&P) or
Duff & Phelps Credit Rating Co. (Duff & Phelps) or, if unrated, will be of
equivalent quality in the judgment of the Fund's investment adviser.
OTHER FIXED-INCOME OBLIGATIONS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN OTHER FIXED-INCOME
OBLIGATIONS. The Fund anticipates that it will primarily invest in fixed-
income securities rated A or better by Moody's or S&P or BBB+ or better by
Duff & Phelps or comparably rated by another NRSRO. The Fund may also invest
in fixed-income securities rated Baa or lower by Moody's or BBB or lower by
S&P or Duff & Phelps or another NRSRO (although the Fund will not invest in
fixed-income securities rated lower than Ca, CC or CCC by Moody's, S&P or Duff
& Phelps or another NRSRO, respectively). Subsequent to its purchase by the
Fund, a fixed-income obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio. Securities rated Baa by Moody's have speculative characteristics
and changes in economic conditions or other circumstances could lead to a
weakened capacity to make principal and interest payments than higher grade
securities. Securities rated BB, Ba or BB+ or lower by S&P, Moody's or Duff &
Phelps, respectively, are generally considered to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal. A
description of corporate bond ratings is contained in the Appendix to the
Statement of Additional Information. The Fund may also invest in unrated
fixed-income securities which, in the opinion of the investment adviser, are
of a quality comparable to rated securities in which the Fund may invest.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. See "Investment
Objective and Policies--Risks of Investing in High Yield Securities" in the
Statement of Additional Information.
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FOREIGN SECURITIES
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN FOREIGN MONEY MARKET
INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes of this limitation,
American Depositary Receipts are not deemed to be foreign securities. In many
instances, foreign securities may provide higher yields but may be subject to
greater fluctuations in price than securities of domestic issuers which have
similar maturities and quality. Under certain market conditions these invest-
ments may be less liquid than the securities of U.S. corporations and are cer-
tainly less liquid than securities issued or guaranteed by the U.S. Govern-
ment, its instrumentalities or agencies.
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED CARE-
FULLY BY AN INVESTOR IN THE FUND. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting inter-
national trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to
greater fluctuations in price than securities issued by U.S. corporations or
issued or guaranteed by the U.S. Government, its instrumentalities or agen-
cies. In addition, there may be less publicly available information about a
foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, with respect to certain foreign coun-
tries, there is a possibility of expropriation, confiscatory taxation or dip-
lomatic developments which could affect investment in those countries. Final-
ly, in the event of a default of any such foreign debt obligations, it may be
more difficult for the Fund to obtain, or to enforce a judgment against, the
issuers of such securities.
If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into forward foreign currency exchange contracts for the purchase or
sale of foreign currency for hedging purposes. See "Investment Objective and
Policies--Special Risks Related to Forward Foreign Currency Exchange
Contracts" in the Statement of Additional Information.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. To qualify, a REIT must distribute
at least 95% of its taxable income to its shareholders and receive at least
75% of that income from rents, mortgages and sales of property. REITs offer
investors greater liquidity and diversification than direct ownership of a
handful of properties, as well as greater income potential than an investment
in common stocks. Like any investment in real estate, though, a REIT's
performance depends on several factors, such as its ability to find tenants
for its properties, to renew leases and to finance property purchases and
renovations.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND ALSO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies currently include the
use of options, forward foreign currency exchange contracts and futures
contracts and options thereon. The Fund's ability to use these strategies may
be limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. See
"Investment Objective and Policies" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information. New financial products and risk
management techniques continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
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OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON SECURI-
TIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE OVER-THE-
COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THE FUND'S PORTFOLIO. These op-
tions will be on equity securities and financial indices (e.g., S&P 500). The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
See "Investment Objective and Policies--Limitations on Purchase and Sale of
Stock Options, Options on Stock Indices, Stock Index Futures and Options
Thereon" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES SUBJECT TO THE
OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract,
the underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open. There
is no limitation on the amount of call options the Fund may write.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT FOR A
SPECIFIED PERIOD OF TIME TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put
option, in return for the premium, has the obligation, upon exercise of the
option, to acquire the securities underlying the option at the exercise price.
The Fund might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or other liquid assets, in an amount equal to or greater than its
obligation under the option. Under the first circumstance, the Fund's losses
are limited because it owns the underlying security; under the second
circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. See "Investment Objective and Policies--Limitations on
Purchase and Sale of Stock Options, Options on Stock Indices, Stock Index
Futures and Options Thereon" in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot
(i.e., cash) basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract. See "Investment Objective and Policies--Special
Risks Related to Forward Foreign Currency Exchange Contracts" in the Statement
of Additional Information.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIED TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio
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security positions denominated or quoted in that currency or in a different
foreign currency (cross hedge). Although there are no limits on the number of
forward contracts which the Fund may enter into, the Fund may not position
hedge (including cross hedges) with respect to a particular currency for an
amount greater than the aggregate market value (determined at the time of
making any sale of foreign currency) of the securities being hedged.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR
CERTAIN HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN
IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION.
THESE FUTURES CONTRACTS AND OPTIONS THEREON WILL BE ON FINANCIAL INDICES. THE
FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF
THESE STRATEGIES.
A STOCK INDEX FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL CASH
EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE DIFFERENCE BETWEEN THE VALUE OF A
SPECIFIC STOCK INDEX AT THE CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND
THE PRICE AT WHICH THE AGREEMENT IS MADE. No physical delivery of the
underlying stocks in the index is made.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator", subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for bona fide hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value
of all futures contracts sold will not exceed the total market value of the
Fund's portfolio.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE
USED IN SELECTING PORTFOLIO SECURITIES. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. Certain futures exchanges or
boards of trade have established daily limits on the amount that the price of
futures contracts or options thereon may vary, either up or down, from the
previous day's settlement price. These daily limits may restrict the Fund's
ability to purchase or sell certain futures contracts or options thereon on
any particular day.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED IN-
VESTMENT COMPANY. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATE-
GIES. If the investment adviser's predictions of movements in the direction of
the securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options, for-
eign currency and futures contracts and options on futures contracts include
(1) dependence on the
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investment adviser's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect cor-
relation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (3) the
fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax conse-
quences; and (6) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Fund to sell a portfolio security at a disad-
vantageous time, due to the need for the Fund to maintain "cover" or to segre-
gate securities in connection with hedging transactions. See "Taxes, Dividends
and Distributions" and "Investment Objective and Policies" in the Statement of
Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed deliv-
ery basis. When-issued or delayed delivery transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous price
and yield to the Fund at the time of entering into the transaction. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or other
liquid assets, having a value equal to or greater than the Fund's purchase
commitments. The securities so purchased are subject to market fluctuation and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities the value may be more or
less than the purchase price and an increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed de-
livery basis may increase the volatility of the Fund's net asset value.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, with or without payment of any further consideration, such securities;
provided that if further consideration is required in connection with the con-
version or exchange, cash or other liquid assets, in an amount equal to such
consideration must be put in a segregated account, for an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such sales. The Fund does not
intend to have more than 5% of its net assets (determined at the time of the
short sale) subject to short sales against-the-box during the coming year.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a mu-
tually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number
of months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of the instruments declines, the Fund will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss. The Fund participates in a
joint repurchase account with other investment companies managed by PIFM pur-
suant to an order of the Commission.
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BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes, or for the clearance of transactions and to take advan-
tage of investment opportunities. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at
least 100%, determined daily, of the market value of the securities loaned
which are maintained in a segregated account pursuant to applicable
regulations. During the time portfolio securities are on loan, the borrower
will pay the Fund an amount equivalent to any dividend or interest paid on
such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. As a matter of fundamental policy, the Fund cannot lend
more than 33% of the value of its total assets. The Fund may pay reasonable
administration and custodial fees in connection with a loan. See "Investment
Objective and Policies--Lending of Securities" in the Statement of Additional
Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities, in-
cluding repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted secu-
rities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a read-
ily available market are not considered illiquid for purposes of this limita-
tion. The investment adviser will monitor the liquidity of such restricted se-
curities under the supervision of the Trustees. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested
in purchasing Rule 144A securities. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.
PORTFOLIO TURNOVER
The Fund does not expect to trade in securities for short-term gain. It is
anticipated that the portfolio turnover rate may exceed 100%, although the
rate is not expected to exceed 200%. The portfolio turnover rate is calculated
by dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. High portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Fund. See "Portfolio
Transactions and Brokerage" in the Statement of Additional Information. In
addition, high portfolio turnover may result in increased short-term capital
gains which, when distributed to shareholders, are treated as ordinary income.
See "Taxes, Dividends and Distributions."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE
FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended October 31, 1997, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were .94%, 1.69%, 1.69% and .69%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.60 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO $500 MILLION, .50 OF 1%
OF AVERAGE DAILY NET ASSETS BETWEEN $500 MILLION AND $1 BILLION, .475 OF 1% OF
AVERAGE DAILY NET ASSETS BETWEEN $1 BILLION AND $1.5 BILLION AND .45 OF 1% OF
AVERAGE DAILY NET ASSETS IN EXCESS OF $1.5 BILLION. PIFM is organized in New
York as a limited liability company. For the fiscal year ended October 31,
1997, the Fund paid management fees to PIFM of .52% of the Fund's average net
assets. See "Manager" in the Statement of Additional Information.
As of November 30, 1997, PIFM served as the manager to 41 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $60 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH
SERVICES. Under the Management Agreement, PIFM continues to have
responsibility for all investment advisory services and supervises PI's
performance of such services.
The current portfolio manager of the Fund is Warren E. Spitz, a Managing
Director of PI. Mr. Spitz has responsibility for the day-to-day management of
the Fund's portfolio. Mr. Spitz has managed the Fund's portfolio since January
1987 and has been employed by PI as a portfolio manager since 1987. Mr. Spitz
also serves as the portfolio manager of Prudential Series Fund-High Dividend
Stock Portfolio.
Mr. Spitz utilizes a "value" investing style in managing the Fund. Value
investing is a disciplined approach which attempts to identify strong
companies whose stock is selling at a discount from its perceived true worth.
Mr. Spitz seeks to invest in companies that in his view have the potential to
produce both above-average earnings and dividend growth over the long term.
Stocks of these types of companies are sometimes referred to as "high dividend
stocks." He seeks to invest in securities at prices which in his view are
temporarily low relative to the company's earnings, assets, cash flow and
dividends.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
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<PAGE>
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated, One Seaport Plaza, New York, New York 10292, previously served
as the exclusive distributor of Fund shares and will serve as a co-distributor
of the Fund for shares sold through its financial advisors until approximately
July 1, 1998. Thereafter, Prudential Investment Management Services LLC will
serve as the exclusive distributor of Fund shares. Prudential Securities
Incorporated is an indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. The Distributor also
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which is reimbursed by or paid for by the
Fund. These expenses include commissions and account servicing fees paid to,
or on account of, Dealers or financial institutions which have entered into
agreements with the Distributor, advertising expenses, the cost of printing
and mailing prospectuses to potential investors and indirect and overhead
costs of the Distributor associated with the sale of the Fund's shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1% of the average daily net assets of the Class A shares. The Distributor
has agreed to limit its distribution-related fees payable under the Class A
Plan to .25 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending October 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT
AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to the Distributor of (i) an asset-based sales charge of .75 of 1% of
the average daily net assets of each of the Class B and Class C shares and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. The Distributor also
receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
For the fiscal year ended October 31, 1997, the Fund paid distribution
expenses of .25%, 1% and 1% of the average daily net assets of the Class A,
Class B and Class C shares of the Fund, respectively. The Fund records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
17
<PAGE>
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees of the Fund, including a majority of
the Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest
in the operation of the Plan or any agreement related to the Plan (the Rule
12b-1 Trustees), vote annually to continue the Plan. Each Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Trustees or of
a majority of the outstanding shares of the applicable class of the Fund. The
Fund will not be obligated to pay distribution and service fees incurred under
any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS
The Distributor has agreed to limit its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers will increase the
Fund's total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address
is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15035, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
18
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S
NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. For valuation purposes, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV per share of the four classes will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified
period of time (i.e., one, five or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in the Fund over a one-month or 30-
day period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Fund's annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
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<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL AND CURRENCY GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked-
to-market" for federal income tax purposes; that is, treated as having been
sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Certain gains or losses from fluctuations in foreign
currency exchange rates (Section 988 gains and losses) will affect the amount
of ordinary income the Fund will be able to pay as dividends. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) and net currency gains distributed to
shareholders, will be taxable as ordinary income to the shareholder whether or
not reinvested. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Any net capital gains (i.e., the excess of net long-
term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as long-term capital gains to the shareholders,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
individual shareholders for securities held between 12 and 18 months currently
is 28% and for securities held more than 18 months is 20%. The maximum tax
rate for ordinary income is 39.6%. The maximum long-term capital gains rate
for corporate shareholders currently is 35%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign dividends, interest income, capital gain net income,
gain or loss from Section 1256 contracts and income from some other sources
will not be eligible for the corporate dividends received deduction. See
"Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as
20
<PAGE>
short-term capital gain or loss. Any such loss with respect to shares that are
held for six months or less, however, will be treated as long-term capital
loss to the extent of any capital gain distributions received by the
shareholder. With respect to non-corporate shareholders, gain or loss on
shares held more than 18 months will be considered in determining a holder's
adjusted net capital gain subject to a maximum statutory tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of certain shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Withholding at this
rate is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to
backup withholding. Dividends of net investment income and short-term capital
gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
QUARTERLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN
EXCESS OF CAPITAL LOSSES. Dividends paid by the Fund with respect to each
class of shares, to the extent any dividends are paid, will be calculated in
the same manner, at the same time, on the same day and will be in the same
amount except that each class other than Class Z will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distributions of net capital
gains, if any, will be paid in the same amount per share for each class of
shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES
MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE
BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBU-
TIONS IN CASH. Such election should be submitted to Prudential Mutual Fund
Services LLC, Attention: Account Maintenance, P.O. Box 15035, New Brunswick,
New Jersey 08906-5015. The Fund will notify each shareholder after the close
of the Fund's taxable year of both the dollar amount and the taxable status of
that year's dividends and distributions on a per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY PRIOR TO THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE
LAWS OF MASSACHUSETTS ON SEPTEMBER 18, 1986 AS AN UNINCORPORATED BUSINESS
TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A
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<PAGE>
MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED
NUMBER OF SHARES OF BENEFICIAL INTEREST, DIVIDED INTO FOUR CLASSES, DESIGNATED
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. Each class of shares represents
an interest in the same assets of the Fund and is identical in all respects
except that (i) each class is subject to different sales charges and
distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to
a limited group of investors. See "How the Fund is Managed--Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize
the creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. Currently, the Fund is offering four classes,
designated Class A, Class B, Class C and Class Z shares.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares (with the exception of Class Z shares, which are not
subject to any distribution or services fees) bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable
to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Fund's shares do not have
cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON THE VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund beyond the amount of their investment in the Fund. The Declaration of
Trust of the Fund provides that shareholders will not be subject to any
personal liability for acts or obligations of the Fund and that every written
obligation, contract, instrument or undertaking made by the Fund will contain
a provision to the effect that shareholders are not individually bound
thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL
MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT
SERVICES, P.O. BOX 15035, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase
price is the NAV next determined following receipt of an order in proper form
by the Distributor, your Dealer or the Transfer Agent, plus a sales charge
which, at your option, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares).
Class Z shares are offered to a limited group of investors at NAV without any
sales charge. Dealers may charge their customers a separate fee for handling
purchase transactions. Payments may be made by cash, wire, check or through
your brokerage account. See "Alternative Purchase Plan" below. See also "How
the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the
Fund's NAV is computed that day and must transmit the order to the Distributor
that same day for you to receive that day's NAV.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for
Class C shares may be waived from time to time. There is no minimum initial
investment requirement for Class Z shares. The minimum subsequent investment
is $100 for all classes, except for Class Z shares, for which there is no such
minimum. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors.
For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who
hold their shares in street name with their Dealer will not receive share
certificates.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Equity Income Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you
are eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Equity Income
Fund, Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by
wire is $1,000.
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ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUC-
TURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUM-
STANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------ ------------------------ ------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived or
of 5% of the public offering (Currently being reduced for certain purchases
price charged at a rate
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven
the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any
distribution or service fees) bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class,
and (iii) only Class B shares have a conversion feature. The four classes also
have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares
of each class will be reduced by the amount of the distribution fee (if any)
of each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
24
<PAGE>
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in NAV, the effect of the return
on the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000............. 5.00% 5.26% 4.75%
$25,000 to $49,999............ 4.50 4.71 4.25
$50,000 to $99,999............ 4.00 4.17 3.75
$100,000 to $249,999.......... 3.25 3.36 3.00
$250,000 to $499,999.......... 2.50 2.56 2.40
$500,000 to $999,999.......... 2.00 2.04 1.90
$1,000,000 and above.......... None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined in the Securities Act.
The Distributor reserves the right, without prior notice to any Dealer, to
suspend or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay Dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such persons.
25
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (collectively, Benefit Plans), provided that the Benefit
Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) or 250 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly
with the Transfer Agent and for which the Transfer Agent does individual
account recordkeeping (Direct Account Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans
to the participant.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at
NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Transfer Agent, by the following persons: (a) officers of the Prudential
Mutual Funds (including the Fund), (b) employees of the Distributor and PIFM
and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at the Transfer Agent, (c) employees of
subadvisers of the Prudential Mutual Funds provided that purchases at NAV are
permitted by such person's employer, (d) Prudential, employees and special
agents of Prudential and its subsidiaries and all persons who have retired
directly from active service with Prudential or one of its subsidiaries, (e)
registered representatives and employees of Dealers, provided that purchases
at NAV are permitted by such person's employer, (f) investors in Individual
Retirement Accounts, provided the purchase is made with the proceeds of a tax-
free rollover of assets from a Benefit Plan for which Prudential Investments
serves as the recordkeeper or administrator, (g) investors previously eligible
to purchase Class A shares at NAV because of their participation in programs
sponsored by an affiliate of the Distributor for certain retirement plan or
deferred compensation plan participants, (h) orders placed by broker-dealers,
investment advisers or financial planners who have entered into an agreement
with the Distributor, who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee for
their services (e.g., mutual fund "wrap" or asset allocation programs), and
(i) orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for their own accounts if the accounts are
linked to the master account of such broker-dealer, investment adviser or
financial planner on the books and records of the broker-dealer, investment
adviser or financial planner (e.g., mutual fund "supermarket" programs).
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale, either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, a Dealer or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to Dealers, financial advisers and other persons who
26
<PAGE>
sell Class B shares at the time of sale. This facilitates the ability of the
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection
with the sale of Class C shares, the Distributor will pay, from its own
resources, Dealers, financial advisers and other persons which distribute
Class C shares a sales commission of up to 1% of the purchase price at the
time of the sale.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by: (i)
pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and non-
qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least
$50 million in defined contribution assets; (ii) participants in any fee-based
program or trust program sponsored by any affiliate of the Distributor which
includes mutual funds as investment options and for which the Fund is an
available option; (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by an affiliate of the Distributor for
whom Class Z shares of the Prudential Mutual Funds are an available option;
(iv) Benefit Plans for which an affiliate of the Distributor serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders of
the Prudential Mutual Funds or (b) executed a letter of intent to purchase
Class Z shares of the Prudential Mutual Funds; (v) the Prudential Securities
Cash Balance Pension Plan, an employee defined benefit plan; (vi) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
and (vii) employees of an affiliate of the Distributor who participate in an
employer-sponsored employee savings plan. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay Dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV PER SHARE NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. See "How the Fund Values its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below. If you are redeeming your
shares through a Dealer, your Dealer must receive your sell order before the
Fund computes its NAV for that day (i.e., 4:15 P.M., New York time) in order
to receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS
REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15035, New Brunswick, New Jersey 08906-5010, the Distributor or to your
Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power
27
<PAGE>
must be guaranteed by an "eligible guarantor institution." An "eligible
guarantor institution" includes any bank, broker, dealer or credit union. The
Transfer Agent reserves the right to request additional information from, and
make reasonable inquiries of, any eligible guarantor institution.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. Such
payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends
and holidays, (b) when trading on such Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (d) during any
other period when the Commission, by order, so permits; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT
OF THE PURCHASE CHECK BY THE FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE
AVOIDED BY PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in
the same manner as in a regular redemption. See "How the Fund Values its
Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a NAV of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Fund's
Transfer Agent, either directly or through your Dealer or the Distributor, at
the time the repurchase privilege is exercised to adjust your account for the
CDSC you previously paid. Thereafter, any redemptions will be subject to the
CDSC applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes. For
more information on the rule which disallows a loss on the sale or exchange of
shares of the Fund which are replaced, see "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC
28
<PAGE>
will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
29
<PAGE>
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution or plan distributions following the death or disability
of the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
Dealer, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may
deem appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of
Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as
30
<PAGE>
described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion
date. For example, if 100 shares were initially purchased at $10 per share
(for a total of $1,000) and a second purchase of 100 shares was subsequently
made at $11 per share (for a total of $1,100), 95.24 shares would convert
approximately seven years from the initial purchase (i.e., $1,000 divided by
$2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The Manager
reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (ii) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS
OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED
FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER
FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the
time of the exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. For purposes of calculating
the holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will
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be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to
you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR
COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE
GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request
is received in good order.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15035, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through their Dealer that they are eligible
for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and
exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgment, such person, group or accounts were following a
market timing strategy or were otherwise engaging in excessive trading (Market
Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund
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<PAGE>
or its affiliates pursuant to which the Market Timer has agreed to abide by
certain procedures, which include a daily dollar limit on trading. The Fund
may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account. For additional information about this
service, you may contact the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal
or tax adviser with respect to the establishment and maintenance of such a
plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102. In addition, monthly
unaudited financial data is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102, or by
telephone at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those con-
tained in this Prospectus, in connection with the offer contained herein, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell, or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 9
Investment Objective and Policies......................................... 9
Hedging and Return Enhancement Strategies................................. 11
Other Investments and Policies............................................ 14
Investment Restrictions................................................... 15
HOW THE FUND IS MANAGED.................................................... 16
Manager................................................................... 16
Distributor............................................................... 17
Fee Waivers............................................................... 18
Portfolio Transactions.................................................... 18
Custodian and Transfer and Dividend Disbursing Agent...................... 18
Year 2000................................................................. 18
HOW THE FUND VALUES ITS SHARES............................................. 19
HOW THE FUND CALCULATES PERFORMANCE........................................ 19
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 20
GENERAL INFORMATION........................................................ 21
Description of Shares..................................................... 21
Additional Information.................................................... 22
SHAREHOLDER GUIDE.......................................................... 23
How to Buy Shares of the Fund............................................. 23
Alternative Purchase Plan................................................. 24
How to Sell Your Shares................................................... 27
Conversion Feature--Class B Shares........................................ 30
How to Exchange Your Shares............................................... 31
Shareholder Services...................................................... 33
</TABLE>
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MF131P
Class A: 743916-207
CUSIP Nos.: Class B:743916-108
Class C:743916-306
Class Z:743916-405
Prudential Equity Income Fund
Prospectus
[GRAPHIC]
December 30, 1997
[Revised June 1, 1998]
[LOGO] Prudential Investments
