(ICON)
Prudential
Equity
Income
Fund
ANNUAL
REPORT
Oct. 31, 1998
(LOGO)
<PAGE>
Prudential Equity Income Fund
Performance At A Glance.
Investors, afraid of the global consequences of the
recession in Asia, showed
a strong preference for the stocks of a few large companies.
In our view,
these stocks were expensive even as our reporting period
began. Because the
Prudential Equity Income Fund adheres to a disciplined value
investing style,
we owned smaller companies. These smaller company stocks
performed poorly,
pulling our return slightly negative and well below the
Lipper Equity Income
Fund Average.
Cumulative Total Returns1
As of 10/31/98
<TABLE>
<CAPTION>
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A -0.65% 93.05%
N/A 224.66%
Class B -1.35 86.05
246.93% 273.08
Class C -1.35 N/A
N/A 81.92
Class Z -0.40 N/A
N/A 52.16
Lipper Equity
Income Fund Avg.3 9.49 101.70
262.70 ***
</TABLE>
Average Annual Total Returns1
As of 9/30/98
<TABLE>
<CAPTION>
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A -14.65% 11.87%
N/A 12.99%
Class B -15.85 12.06
12.75% 11.30
Class C -11.85 N/A
N/A 13.66
Class Z -9.92 N/A
N/A 14.71
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1 Source: Prudential Investments Fund Management and Lipper,
Inc. The
cumulative total returns do not take into account sales
charges. The average
annual total returns do take into account applicable sales
charges. The Fund
charges a maximum front-end sales load of 5% for Class A
shares. Class B
shares are subject to a declining contingent deferred sales
charge (CDSC) of
5%, 4%, 3%, 2%, 1% and 1% for six years. Class B shares
will automatically
convert to Class A shares, on a quarterly basis,
approximately seven years
after purchase. Class C shares are subject to a front-end
sales charge of 1%
and a CDSC of 1% for 18 months. Class C shares bought before
November 2, 1998
have a 1% CDSC if sold within one year. Class Z shares are
not subject to a
sales charge or distribution fee.
2 Inception dates: Class A, 1/22/90; Class B, 1/22/87; Class
C, 8/1/94;
Class Z, 3/1/96.
3 Lipper average returns are for all funds in each share
class for the one-,
five-, and ten-year periods in the Equity Income Fund
category.
***Lipper Since Inception returns are 211.60% for Class A,
275.33% for Class
B, 102.01% for Class C, and 51.93% for Class Z based on all
funds in each
share class.
How Investments Compared.
(As of 10/31/98)
(GRAPH)
Source: Lipper, Inc. Financial markets change, so a mutual
fund's past
performance should never be used to predict future results.
The risks to each
of the investments listed above are different -- we provide
12-month total
returns for several Lipper mutual fund categories to show
you that reaching
for higher returns means tolerating more risk. The greater
the risk, the
larger the potential reward or loss. In addition, we've
included historical
20-year average annual returns. These returns assume the
reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments,
state agencies and/or municipalities. This investment
provides income that is
usually exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant
share value; they
don't fluctuate much in price but, historically, their
returns have been
generally among the lowest of the major investment
categories.
<Page.
Warren E. Spitz, Fund Manager
(PHOTO)
Portfolio
Manager's Report
The Prudential Equity Income Fund seeks both current income
and capital
appreciation by investing primarily in stocks and
convertible securities
that provide investment income returns above those of the
Standard & Poor's
500 Stock Index or the NYSE Composite Index. It emphasizes
stocks that are
considered undervalued, given their earnings, cash flow or
asset values. There
can be no assurance that the Fund will achieve its
investment objective.
Size Counted.
Over the past year, a few large companies accounted for most
of the return of
the S&P 500, whereas by October 31, about half our assets
were invested in
companies with market capitalizations (the price of all of a
company's stock)
below $5 billion. We focused on them because we believe
there have been better
investment values among the neglected smaller companies as
investors have
competed for the stocks of the same familiar, globally
oriented companies.
When economic uncertainty increased, that investor
preference became intense,
making the smaller firms an even better value now.
Strategy Session.
We remain focused in financials, industrials, and consumer
cyclicals. About
14% of our holdings are real estate investment trusts
(REITs). We believe that
today REITs offer the best combination of dividend yield and
growth in the
high-yielding sector of the equity market. The considerable
advantages of
owning real estate through publicly traded companies have
not yet been
reflected in REIT prices. Not only are there economies of
scale in purchasing
furnishings, materials, etc., but the REIT mechanism
provides the funding for
superior managers to leverage their abilities by acquiring
additional
property. Ease in buying and selling (liquidity) also makes
real estate more
attractive. Although short-term fears have pushed the price
of REIT shares
below the value of their underlying properties, we think
well-managed
companies eventually will trade at a premium because of the
added value of the
REIT structure.
Our industrials (including our largest holdings, Aluminum
Company of America
and Dow Chemical) and our consumer cyclicals (such as autos,
retailers, and
housing-related companies) reflect our confidence that the
U.S. econ-omy will
continue to expand. Despite some Asia-induced slowing, the
economy is
fundamentally strong. However, companies that tend to do
well in a growing
economy -- industrials and consumer cyclicals -- have been
priced as though a
recession was imminent. This makes them very inexpensive in
terms of what we
must pay for a dollar of their earnings.
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 10/31/98.
(PIE CHART)
<PAGE>
What Went Well.
A year ago, we had to look hard for something bad to say.
This year, very
little went well for us. One bright spot was our automobile
holdings,
particularly Chrysler (up 42%) and Ford (up 91%). Investors
have been very
unenthusiastic about American automobile manufacturers, so
these companies
have been attractive on our value discipline for some time.
Even after this
year's rise, they are selling for single-digit multiples of
their earnings,
while the S&P 500 sells for 24 times earnings. The value was
recognized by
Daimler, the German manufacturer of Mercedes-Benz cars,
which bought Chrysler.
Although we took some profits on Chrysler, we will hold our
shares in the
combined company unless the price rises above what we
consider fair value.
Demand by investors tracking the European market indexes may
push the price up.
There is a silver lining to this year's stock market cloud.
We think investors
overreacted to the threat that events in Asia would cause a
global recession.
That was a possible outcome, but exports to Asia are too
small a part of U.S.
and European exports to make it very probable. Fear creates
opportunities for
value investors who keep a cool head and an eye on long-term
earnings
prospects and stock prices. We see some real value now.
What Could Have Gone Better.
Although the stock market rebounded, its concern about
contagion from Asia
took the form of a strong focus on the largest globally
oriented companies,
which many investors believed would have more stable
earnings growth. We had
avoided these stocks because they have been expensive for
some time. The less-
expensive mid-size companies that we thought were better
values lost favor. We
considered this a buying opportunity. They are even better
values now.
RJR Nabisco suffered from strong competition among food
companies. The
settlement between tobacco companies and state governments
may help its share
price and also may make it easier to separate the food and
tobacco operations.
Should they do so, the separate companies should sell for
more than the
current combined entity.
Our industrial and energy holdings generally lagged the
strong market, and
Pioneer Natural Resources, an independent exploration and
production company,
suffered because its production was below prior estimates.
Pioneer's large oil
reserves and excellent management position it well to
benefit from a recovery
in demand.
Five Largest Holdings.
4.6% Aluminum Co. Of America
Aluminum
4.5% Dow Chemical Co.
Chemicals
3.9% McDermott Int'l., Inc.
Energy Systems
3.5% Hanson PLC, S.A. ADR
Miscellaneous Industrial
3.4% RJR Nabisco Holdings Corp.
Tobacco
Expressed as a percentage of net assetsas of 10/31/98.
Looking Ahead.
As this is written, early in November, with third-quarter
economic growth in
the United States measured at a 3.9% annual rate, it is
difficult to recall
the anxieties about global recession that accompanied the
summer stock market
decline. Consumer confidence and spending continue to be
strong in the United
States and there are signs that Asian economies are
stabilizing. We believe
the cyclical industries we have favored will benefit from
these trends and
their stock prices will benefit even more from the surge of
investor
confidence.
- ------------------------------------------------------------
- -------------------
1
<PAGE>
An Interview With Warren Spitz.
Q. A year ago, you had the number 1 fund in your category.
This year, you are
trailing. What happened?
A. We said at the time that several investment themes had
paid off at the same
time last year. That generally has to be true for a number 1
ranking, and that
is why there is normally turnover at the top. We believe
that last year
investors saw the value in several of our holdings, but
their favorable
opinions were swamped this year in a widespread fear-driven
movement to the
stocks of a very few large and well-known companies.
It is interesting that our financial stocks -- particularly
Lehman Brothers
(an investment bank) and our real estate investment trusts -
- - contributed to
both last year's strong performance and this year's weak
one. These are stocks
with strong prospects for earnings growth that are
undervalued, in our opinion,
because they also have certain risk exposures. When
investors are able to look
dispassionately at the firms we own, the stocks have done
well; when investors
react in fear, the stocks fall. We believe this presents an
investment
opportunity.
Q. The poor return on small- and mid-cap stocks hurt your
performance. Are
you a mid-cap manager?
A. No. I manage an equity income fund. I manage it in a
value style because I
believe research has shown that a value style beats growth
over the long
run, particularly because it holds up better in falling
markets. (I realize
that this wasn't true over the past 12 months, but investors
behaved in an
unusual way this year. They tended to move toward stocks
that already were
expensive instead of toward better value. We believe this
was a panic reaction
not typical of investor behavior.) In recent years, my value
style has led me
away from stocks of the largest firms. The market-leading
stocks reached
record levels of price to earnings ratios -- 60 to 70 times
annual earnings
per share and more. I don't believe those are conservative
investments over
the long term.
Smaller companies are more exposed to economic swings. Their
stocks tend to
perform exceptionally well when the U.S. economy begins a
growth phase and to
do poorly when investors fear a recession. This year, we had
an unfounded fear
of recession that made small company stocks extraordinary
values. For most of
the period, their earnings growth held up better than that
of larger
companies, while their stock prices trailed. We hold a
substantial part of our
assets in these stocks because today they represent good
value.
Q. What good is that if the stock prices languish?
A. If you own shares in a company with strong earnings, you
benefit even if
the stock price doesn't reflect the earnings. The company
should be either
reinvesting the earnings or returning them to you in
dividend income. The
reinvested earnings mean greater potential for future
dividends. REITs, in
particular, are required to pass on their earnings to
shareholders, which make
them a good choice for an equity income fund. We also
believe that investors
may overlook value in the short term, but will come to
recognize it eventually.
Over the long term (the appropriate time period for equity
investors), the
stocks that are good values today should rise to match the
overall market in
price-to-earnings and price-to-book value ratios. That sets
us up for another
period of superior performance.
- ------------------------------------------------------------
- -------------------
2
<PAGE>
President's Letter
December 18, 1998
(PHOTO)
Dear Shareholder:
As 1998 draws to a close, the news from the financial
markets is decidedly
mixed. After a series of sharp sell-offs in late summer,
some stock prices
began to rebound in early fall, helped by three interest
rate cuts by the
Federal Reserve.
There was other good news. U.S. Treasuries and Western
European bonds
appreciated during the year as investors fled troubled Asian
markets and other
emerging markets. The U.S. economy remained strong with
steady growth and low
inflation.
The periods of uncertainty we experienced in 1998 illustrate
why it is
important to manage your expectations and diversify your
portfolio.
Keep A Good Perspective.
Experienced mutual fund investors understand that financial
markets will
always rise and fall - that's what markets do. Although past
performance may
not be indicative of future results, stocks and bonds have,
over time,
consistently produced attractive returns that have kept
ahead of inflation. In
fact, investors who remained focused on the long term and
did not sell during
summer's volatility were rewarded. Stock prices, as measured
by the Standard &
Poor's 500 Index, recovered strongly in November regaining
lost ground and
even setting a new record high.
Diversify. Diversify. Diversify.
Because asset classes seldom move in lockstep, owning a mix
of stock, bond,
and money market mutual funds can help lessen the effects of
a market downturn
over time. In fact, a well-diversified portfolio may retain
or perhaps even
gain value during times of uncertainty.
We're Here To Help.
How diversified is your portfolio? Your Prudential
professional will be glad
to review your current allocations. He or she will recommend
adjustments based
upon your goals, market conditions, risk tolerance, and
potential investment
opportunities.
Thank you for your confidence in Prudential mutual funds.
We'll continue to
do our part in keeping you informed.
Sincerely,
Brian M. Storms
President
- ------------------------------------------------------------
- -------------------
3
<PAGE>
Portfolio of Investments as of October 31, 1998 PRUDENTIAL
EQUITY INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--98.6%
COMMON STOCKS--93.9%
- ------------------------------------------------------------
Airlines--3.5%
966,000 AMR Corp.(a) $
64,722,000
1,290,000 Trans World Airlines, Inc.(a)
6,450,000
54,500 US Airways Group, Inc.
3,082,656
---------
- ------
74,254,656
- ------------------------------------------------------------
Aluminum--7.8%
1,231,700 Aluminum Co. of America
97,612,225
309,820 Kaiser Aluminum Corp.(a)
1,955,739
1,087,284 Reynolds Metals Co.
65,169,084
---------
- ------
164,737,048
- ------------------------------------------------------------
Apparel--0.8%
572,700 Kellwood Co.
15,606,075
40,800 Oxford Industries, Inc.
1,155,150
---------
- ------
16,761,225
- ------------------------------------------------------------
Automobiles & Trucks--7.0%
1,281,658 Chrysler Corp.
61,679,791
750,000 Ford Motor Co.
40,687,500
715,000 General Motors Corp.
45,089,688
---------
- ------
147,456,979
- ------------------------------------------------------------
Building & Construction--1.8%
687,500 Kaufman & Broad Home Corp.
19,636,719
732,400 Ryland Group, Inc.
18,218,450
---------
- ------
37,855,169
- ------------------------------------------------------------
Business Services
161,780 Crescent Operating, Inc.(a)
798,789
- ------------------------------------------------------------
Chemicals--5.5%
1,015,800 Dow Chemical Co.
95,104,275
856,628 Millennium Chemicals, Inc.
20,880,307
---------
- ------
115,984,582
Computer Hardware--0.2%
632,300 Intergraph Corp.(a) $
4,109,950
- ------------------------------------------------------------
Diversified Consumer Products--0.8%
219,200 Eastman Kodak Co.
16,988,000
- ------------------------------------------------------------
Diversified Industries--1.1%
851,555 CBS Corp.
23,790,318
- ------------------------------------------------------------
Electrical Equipment--1.8%
602,000 Esterline Technologies Corp.(a)
12,040,000
154,800 Instron Corp.
2,399,400
700,000 Kuhlman Corp.
18,550,000
364,400 Newport Corp.
5,192,700
---------
- ------
38,182,100
- ------------------------------------------------------------
Energy Systems--3.9%
2,795,800 McDermott International, Inc.
81,951,887
- ------------------------------------------------------------
Financial Services--7.1%
959,577 Bear Stearns Cos., Inc.
34,244,904
325,800 Edwards (A.G.), Inc.
11,260,462
1,612,000 Lehman Brothers Holdings, Inc.
61,155,250
1,324,500 PaineWebber Group, Inc.
44,287,969
---------
- ------
150,948,585
- ------------------------------------------------------------
Forest & Paper--2.9%
72,600 Fletcher Challenge Forest Ltd.,
ADR (New Zealand)
254,100
392,400 Georgia-Pacific Corp.
20,306,700
1,296,400 Louisiana-Pacific Corp.
23,011,100
206,800 Potlatch Corp.
7,548,200
200,000 Weyerhaeuser Co.
9,362,500
---------
- ------
60,482,600
- ------------------------------------------------------------
Gas Distribution--1.5%
914,467 BG PLC, ADR (United Kingdom)
30,748,953
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of October 31, 1998 PRUDENTIAL
EQUITY INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Gas Pipelines--1.1%
280,100 Sonat, Inc. $
8,490,531
951,860 TransCanada Pipelines Ltd.
14,575,357
---------
- ------
23,065,888
- ------------------------------------------------------------
Health Care Services--1.5%
800,000 Columbia/HCA Healthcare Corp.
16,800,000
2,000,000 PhyCor, Inc.(a)
14,500,000
---------
- ------
31,300,000
- ------------------------------------------------------------
Hotels--0.6%
428,900 Hilton Hotels Corp.
8,604,806
353,700 Prime Hospitality Corp.
3,227,513
---------
- ------
11,832,319
- ------------------------------------------------------------
Insurance--3.6%
298,949 Allied Zurich PLC(a)
7,106,252
879,300 Marsh & McLennan Cos., Inc.
48,801,150
393,400 Ohio Casualty Corp.
14,850,850
356,800 Selective Insurance Group, Inc.
6,533,900
---------
- ------
77,292,152
- ------------------------------------------------------------
Integrated Producers--1.8%
676,000 Elf Aquitaine, S.A. ADR (France)
39,208,000
- ------------------------------------------------------------
Mining--0.4%
705,058 Ashanti Goldfields Co. Ltd., GDR
(Africa)
6,037,059
194,678 Coeur D'Alene Mines Corp.(a)
1,095,064
298,499 Echo Bay Mines, Ltd.(a)
671,623
---------
- ------
7,803,746
- ------------------------------------------------------------
Miscellaneous Industrial--3.5%
2,085,600 Hanson PLC, S.A. ADR (United
Kingdom)
73,647,750
- ------------------------------------------------------------
Oil & Gas Exploration/Production--2.3%
1,000,000 Occidental Petroleum Corp.
19,875,000
1,896,527 Pioneer Natural Resources Co.
28,566,438
---------
- ------
48,441,438
Oil Refining & Marketing--1.0%
1,500,000 Quaker State Corp. $
21,187,500
- ------------------------------------------------------------
Paper & Packaging--1.1%
759,900 Gibson Greetings Inc.(a)
7,931,456
1,345,600 Longview Fibre Co.
16,147,200
---------
- ------
24,078,656
- ------------------------------------------------------------
Printing
44,000 R.H. Donnelley Corp.
616,000
- ------------------------------------------------------------
Real Estate-Development
40,000 Vornado Operating Company(a)
250,000
- ------------------------------------------------------------
Real Estate Investment Trusts--13.7%
271,000 AMLI Residential Properties
Trust
6,097,500
134,300 Bradley Real Estate, Inc.
2,820,300
590,000 Capital Automotive REIT
8,333,750
642,600 CCA Prison Realty Trust
15,101,100
500,000 Center Trust Retail Properties,
Inc.
5,437,500
2,293,300 Crescent Real Estate Equities,
Inc.
57,475,831
1,242,900 Crown American Realty Trust
9,943,200
21,800 Equity Inns Inc.
228,900
559,426 Equity Office Properties Trust
13,426,224
1,605,100 Equity Residential Properties
Trust
67,414,200
543,900 Gables Residential Trust
14,311,369
530,300 Glimcher Realty Trust
8,584,231
388,100 Irvine Apartment Communities,
Inc.
10,187,625
52,350 JDN Realty Corp.
1,115,709
96,000 JP Realty, Inc.
2,010,000
62,550 Kimco Realty Corp.
2,490,272
223,800 Malan Realty Investors, Inc.
3,370,988
410,300 Manufactured Home Communities,
Inc.
10,231,856
62,600 Pennsylvania Real Estate
Investment Trust
1,275,475
327,400 Starwood Hotels and Resorts
9,269,512
198,700 Sunstone Hotel Investors, Inc.
1,800,719
166,600 TriNet Corporate Realty Trust,
Inc.
4,789,750
808,800 Vornado Realty Trust
27,246,450
355,000 Walden Residential Properties,
Inc.
8,187,188
---------
- ------
291,149,649
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of October 31, 1998 PRUDENTIAL
EQUITY INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail--3.6%
1,396,200 Heilig-Meyers Co. $
10,733,288
1,509,300 Limited, Inc. (The)
38,675,812
587,300 Penney (J.C.) Co., Inc.
27,896,750
---------
- ------
77,305,850
- ------------------------------------------------------------
Steel--3.3%
1,377,000 AK Steel Holding Corp.
23,839,312
1,200,000 Bethlehem Steel Corp.
10,800,000
672,500 LTV Corp.
4,119,063
1,375,100 USX-U.S. Steel Group, Inc.
31,971,075
---------
- ------
70,729,450
- ------------------------------------------------------------
Telecommunication Services--2.5%
358,300 Telebras ADR (Brazil)
27,208,406
470,200 Telefonos de Mexico, S.A. ADR
(Mexico)
24,832,438
---------
- ------
52,040,844
- ------------------------------------------------------------
Tobacco--6.2%
298,974 B.A.T. Industries PLC, ADR
(United Kingdom)
5,437,589
548,200 Imperial Tobacco Group PLC,
ADR(a) (United Kingdom)
10,826,950
850,000 Philip Morris Co., Inc.
43,456,250
2,487,420 RJR Nabisco Holdings Corp.
71,046,934
---------
- ------
130,767,723
- ------------------------------------------------------------
Trucking & Shipping--0.6%
209,250 Alexander & Baldwin Inc.
4,250,391
590,500 Yellow Corp.(a)
9,484,906
---------
- ------
13,735,297
- ------------------------------------------------------------
Waste Management--0.7%
314,417 Waste Management, Inc.
14,188,067
Wood Processing--0.7%
396,700 Rayonier Inc. $
15,545,681
---------
- ------
Total common stocks
(cost $1,696,110,859)
1,989,236,851
---------
- ------
- ------------------------------------------------------------
PREFERRED STOCKS--3.5%
- ------------------------------------------------------------
Integrated Producers--0.1%
48,099 Unocal Capital Trust,
Conv. 6.25%
2,477,098
- ------------------------------------------------------------
Manufacturing--0.1%
262,500 Worthington Industries Inc.,
Conv. 7.25%
2,460,938
- ------------------------------------------------------------
Real Estate Investment Trusts--0.1%
86,027 Archstone Community Trust
2,093,018
- ------------------------------------------------------------
Retail--2.0%
741,600 K-Mart Financing I,
Conv. 7.75%
41,112,450
- ------------------------------------------------------------
Steel--0.7%
250,800 Bethlehem Steel Corp.,
Conv. $3.50
9,781,200
118,900 USX Capital Trust I
Conv., 6.75%
5,112,700
---------
- ------
14,893,900
- ------------------------------------------------------------
Transportation-Road & Rail--0.5%
243,900 Union Pacific Capital Trust
11,341,350
---------
- ------
Total preferred stocks
(cost $82,714,365)
74,378,754
---------
- ------
------------------------------------------------------
- ------
Units
- -------------
WARRANTS(a)
- ------------------------------------------------------------
Engineering & Construction
12,044 Morrison Knudsen Corp.
expiring 03/11/2003 @$12.00
(cost $0)
42,154
---------
- ------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments as of October 31, 1998 PRUDENTIAL
EQUITY INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value
(Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
CONVERTIBLE BONDS--0.8%
- ------------------------------------------------------------
Integrated Oil--0.1%
Oryx Energy Co.,
Sub. Deb.,
Ba3 $1,871 7.50%, 5/15/14 $
1,871,000
- ------------------------------------------------------------
Mining--0.1%
Hecla Mining Co.,
60,000 Conv. 7.00%, Ser. B
2,520,000
- ------------------------------------------------------------
Real Estate Investment Trusts--0.3%
Centertrust Retail
Properties Inc., Sub.
Deb., Ser. A,
B2 700 7.50%, 1/15/01
650,125
B2 1,200 7.50%, 1/15/01, Sub.
Deb.
1,114,500
Malan Realty Investors,
Inc.,
Sub. Deb.,
B3 3,800 9.50%, 7/15/04
3,738,250
-------
- -------
5,502,875
- ------------------------------------------------------------
Retail--0.3%
Charming Shoppes Inc.
B2 8,000 7.50%, 7/15/06
7,409,440
-------
- -------
Total convertible bonds
(cost $18,524,382)
17,303,315
-------
- -------
FOREIGN GOVERNMENT OBLIGATIONS--0.4%
New Zealand Gov't.
Bonds,
NR NZ$15,580 8.00%, 4/15/04
(cost $10,819,084) $
9,292,165
-------
- -------
Total long-term
investments
(cost $1,808,168,690)
2,090,253,239
-------
- -------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.1%
REPURCHASE AGREEMENT
US$22,397 Joint Repurchase
Agreement Account
5.40%, 11/2/98
(cost $22,397,000;
Note 5)
22,397,000
-------
- -------
- ------------------------------------------------------------
Total Investments--99.7%
(cost $1,830,565,690;
Note 4)
2,112,650,239
Other assets in excess
of
liabilities--0.3%
6,764,431
-------
- -------
Net Assets--100%
$2,119,414,670
-------
- -------
-------
- -------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
NR--Not rated by Moody's or Standard & Poor's.
PLC--Public Limited Company.
The Fund's current Statement of Additional Information
contains a description of
Moody's ratings.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 7
<PAGE>
Statement of Assets and Liabilities
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
Assets
October 31, 1998
<S>
<C>
Investments, at value (cost
$1,830,565,690).............................................
.................. $ 2,112,650,239
Cash........................................................
..............................................
174,317
Receivable for investments
sold........................................................
................... 14,215,546
Receivable for Fund shares
sold........................................................
................... 2,688,644
Dividends and interest
receivable..................................................
....................... 5,149,110
Other
assets......................................................
........................................
50,123
- ----------------
Total
assets......................................................
..................................... 2,134,927,979
- ----------------
Liabilities
Payable for investments
purchased...................................................
...................... 9,145,690
Payable for Fund shares
reacquired..................................................
...................... 3,545,651
Distribution fee
payable.....................................................
............................. 1,190,876
Management fee
payable.....................................................
............................... 852,972
Accrued
expenses....................................................
...................................... 579,801
Foreign withholding tax
payable.....................................................
...................... 198,319
- ----------------
Total
liabilities.................................................
..................................... 15,513,309
- ----------------
Net
Assets......................................................
.......................................... $
2,119,414,670
- ----------------
- ----------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 1,139,805
Paid-in capital in excess of
par.........................................................
.............. 1,701,029,064
- ----------------
1,702,168,869
Undistributed net investment
income......................................................
.............. 500,009
Accumulated net realized
gains.......................................................
.................. 134,664,183
Net unrealized appreciation on investments and foreign
currencies......................................
282,081,609
- ----------------
Net assets, October 31,
1998........................................................
...................... $ 2,119,414,670
- ----------------
- ----------------
Class A:
Net asset value and redemption price per share
($638,547,014 / 34,270,077 shares of beneficial
interest issued and outstanding)....................
$18.63
Maximum sales charge (5% of offering
price)......................................................
...... 0.98
- ----------------
Maximum offering price to
public......................................................
................. $19.61
- ----------------
- ----------------
Class B:
Net asset value, offering price and redemption price per
share
($1,299,961,590 / 69,999,085 shares of beneficial
interest issued and outstanding)..................
$18.57
- ----------------
- ----------------
Class C:
Net asset value, offering price and redemption price per
share
($37,988,269 / 2,045,529 shares of beneficial interest
issued and outstanding)......................
$18.57
- ----------------
- ----------------
Class Z:
Net asset value, offering price and redemption price per
share
($142,917,797 / 7,665,811 shares of beneficial
interest issued and outstanding).....................
$18.64
- ----------------
- ----------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
- --------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income October 31,
1998
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $579,418)............................ $
62,315,024
Interest...................................
5,461,868
-----------
- -----
Total income............................
67,776,892
-----------
- -----
Expenses
Management fee.............................
10,945,895
Distribution fee--Class A..................
1,639,439
Distribution fee--Class B..................
13,918,264
Distribution fee--Class C..................
313,449
Transfer agent's fees and expenses.........
2,770,000
Reports to shareholders....................
240,000
Registration fees..........................
240,000
Custodian's fees and expenses..............
173,000
Insurance..................................
34,000
Trustees' fees and expenses................
32,000
Audit fee and expenses.....................
25,000
Legal fees and expenses....................
25,000
Miscellaneous..............................
10,519
-----------
- -----
Total expenses..........................
30,366,566
-----------
- -----
Net investment income.........................
37,410,326
-----------
- -----
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions....................
138,250,848
Foreign currency transactions..............
(197,586)
-----------
- -----
138,053,262
-----------
- -----
Net change in unrealized appreciation
(depreciation) on:
Investments................................
(224,424,733)
Foreign currency transactions..............
12,702
-----------
- -----
(224,412,031)
-----------
- -----
Net loss on investments and foreign currency
transactions...............................
(86,358,769)
-----------
- -----
Net decrease in Net Assets
Resulting from Operations.....................
$(48,948,443)
-----------
- -----
-----------
- -----
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
- --------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
---------------------------
- -----
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 37,410,326 $
29,370,366
Net realized gain on
investments and foreign
currency transactions.... 138,053,262
184,439,985
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies............... (224,412,031)
363,934,627
-------------- ---------
- -----
Net increase (decrease) in
net assets resulting from
operations............... (48,948,443)
577,744,978
-------------- ---------
- -----
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A.................. (14,084,914)
(10,388,275)
Class B.................. (19,144,502)
(17,820,066)
Class C.................. (438,559)
(186,974)
Class Z.................. (2,479,859)
(1,432,974)
-------------- ---------
- -----
(36,147,834)
(29,828,289)
-------------- ---------
- -----
Distributions from net
realized gains
Class A.................. (54,361,373)
(16,446,394)
Class B.................. (114,880,805)
(44,123,354)
Class C.................. (1,798,135)
(407,245)
Class Z.................. (8,584,415)
(2,197,282)
-------------- ---------
- -----
(179,624,728)
(63,174,275)
-------------- ---------
- -----
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold... 1,012,745,142
699,979,865
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 198,544,772
84,965,746
Cost of shares reacquired... (740,383,287)
(681,144,020)
-------------- ---------
- -----
Net increase in net assets
from Fund share
transactions............. 470,906,627
103,801,591
-------------- ---------
- -----
Total increase................. 206,185,622
588,544,005
Net Assets
Beginning of year.............. 1,913,229,048
1,324,685,043
-------------- ---------
- -----
End of year(a)................. $2,119,414,670
$1,913,229,048
-------------- ---------
- -----
-------------- ---------
- -----
- ---------------
(a) Includes undistributed
net investment income
of...................... $ 500,009 --
-------------- ---------
- -----
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 9
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
Prudential Equity Income Fund (the 'Fund') is registered
under the Investment
Company Act of 1940 as a diversified, open-end, management
investment company.
The investment objective of the Fund is both current income
and capital
appreciation. It seeks to achieve this objective by
investing primarily in
common stocks and convertible securities that provide
investment income returns
above those of the Standard & Poor's 500 Stock Index or the
NYSE Composite
Index. The ability of the issuers of the debt securities
held by the Fund to
meet their obligations may be affected by economic
developments in a specific
industry or country.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments in securities traded on a
national securities
exchange (or reported on the Nasdaq national market) are
valued at the last sale
price on such exchange on the day of valuation or, if there
was no sale on such
day, the mean between the last bid and asked prices quoted
on such day or at the
bid price in the absence of an asked price. Securities that
are actively traded
in the over-the-counter market, including listed securities
for which the
primary market is believed to be over-the-counter, are
valued by an independent
pricing agent or principal market maker. Securities for
which reliable market
quotations are not available or for which the pricing agent
or principal market
maker does not provide a valuation or methodology or
provides a valuation or
methodology that does not represent fair value, are valued
in accordance with
procedures adopted by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are
valued based upon
current market quotations. Short-term securities which
mature in 60 days or less
are valued at amortized cost which approximates market
value.
In connection with transactions in repurchase agreements, it
is the Fund's
policy that its custodian or designated subcustodians under
triparty repurchase
agreements, as the case may be, take possession of the
underlying collateral
securities, the value of which exceeds the principal amount
of the repurchase
transaction, including accrued interest. If the seller
defaults and the value of
the collateral declines or if bankruptcy proceedings are
commenced with respect
to the seller of the security, realization of the collateral
by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the
Fund are maintained
in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and
liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income
and expenses--at the
rates of exchange prevailing on the respective dates of such
transactions.
Although the net assets of the Fund are presented at the
foreign exchange rates
and market values at the close of the period, the Fund does
not isolate that
portion of the results of operations arising as a result of
changes in the
foreign exchange rates from the fluctuations arising from
changes in the market
prices of the securities held at period end. Similarly, the
Fund does not
isolate the effect of changes in foreign exchange rates from
the fluctuations
arising from changes in the market prices of long-term debt
securities sold
during the period. Accordingly, such realized foreign
currency gains and losses
are included in the reported net realized gains/losses on
investment
transactions.
Net realized losses on foreign currency transactions of
$197,586 represents net
foreign exchange gains and losses from sales and maturities
of short-term
securities and forward currency contracts, holding of
foreign currencies,
currency gains or losses realized between the trade and
settlement dates on
securities transactions, and the difference between the
amounts of interest and
foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent
amounts actually received or paid. Net currency gains and
losses from valuing
foreign currency denominated assets (excluding investments)
and liabilities at
period end exchange rates are reflected as a component of
net unrealized
appreciation/depreciation on investments and foreign
currencies.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of U.S.
companies as a result of,
among other factors, the possibility of political or
economic instability and
the level of governmental supervision and regulation of
foreign securities
markets.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of investments
are calculated on the identified cost basis. Dividend income
is recorded on the
ex-dividend date; interest income is recorded on the accrual
basis. Expenses are
recorded on the accrual basis which may require the use of
certain estimates by
management.
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
of the Fund based
upon the relative proportion of net assets of each class at
the beginning of the
day.
- ------------------------------------------------------------
- --------------------
10
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
Federal Income Taxes: It is the Fund's policy to continue to
meet the
requirements of the Internal Revenue Code applicable to
regulated investment
companies and to distribute all of its taxable net income to
its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided
for in accordance with
the Fund's understanding of the applicable country's tax
rates.
Dividends and Distributions: The Fund expects to pay
dividends out of net
investment income quarterly and make distributions at least
annually of any net
capital gains. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles. These differences are primarily due to differing
treatment of
distributions from Real Estate Investment Trusts.
Reclassification of Capital Accounts: The Fund accounts for
and reports
distributions to shareholders in accordance with American
Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2:
Determination,
Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and
Return of Capital Distributions by Investment Companies. The
effect of applying
this statement was to increase accumulated net realized
gains on investments by
$5,366, increase net unrealized appreciation on investments
by $192,220 and
decrease undistributed net investment income by $197,586.
Net investment income,
net realized gains and net assets were not affected by these
changes.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential
Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has
responsibility for all
investment advisory services and supervises the subadviser's
performance of such
services. Pursuant to a subadvisory agreement between PIFM
and The Prudential
Investment Corporation ('PIC'), PIC furnishes investment
advisory services in
connection with the management of the Fund. PIFM pays for
the cost of the
subadviser's services, the compensation of officers of the
Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund
bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable
monthly at an annual
rate of .60 of 1% of the Fund's average daily net assets up
to $500 million, .50
of 1% of the next $500 million, .475 of 1% of the next $500
million and .45 of
1% of the average daily net assets in excess of $1.5
billion.
The Fund had a distribution agreement with Prudential
Securities Incorporated
('PSI'), which acted as the distributor of the Class A,
Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential
Investment
Management Services LLC ('PIMS') became the distributor of
the Fund effective
June 1, 1998 and is serving the Fund under the same terms
and conditions as
under the agreement with PSI. The Fund compensated PSI and
PIMS for distributing
and servicing the Fund's Class A, Class B and Class C
shares, pursuant to plans
of distribution (the 'Class A, B and C Plans'), regardless
of expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
No distribution or service fees are paid to PIMS as
distributor for Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI and PIMS for
distribution-related activities at an annual rate of up to
.30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C
shares, respectively.
Such expenses under the Plans were .25 of 1% of the average
daily net assets of
Class A shares and 1% of the average daily net assets of
both the Class B and C
shares for the year ended October 31, 1998.
PSI and PIMS have advised the Fund that they have received
approximately
$2,101,600 in front-end sales charges resulting from sales
of Class A shares
during the year ended October 31, 1998. From these fees, PSI
and PIMS paid such
sales charges to affiliated broker-dealers, which in turn
paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended
October 31, 1998,
they received approximately $1,368,400 and $25,100 in
contingent deferred sales
charges imposed upon certain redemptions by Class B and
Class C shareholders,
respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned
subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment
companies (the
'Funds'), entered into a credit agreement (the 'Agreement')
with an unaffiliated
lender. The maximum commitment under the Agreement is
$200,000,000. Interest on
any such borrowings outstanding will be at market rates. The
purpose of the
Agreement is to serve as an alternative source of funding
for capital share
redemptions. The Fund did not borrow any amounts pursuant to
the Agreement
during the year ended October 31, 1998. The Funds pay a
commitment fee at an
annual rate of .055 of 1% on the unused portion of the
credit facility. The
commitment fee is accrued and paid quarterly on a pro rata
basis by the Funds.
The Agreement expired on December 30, 1997 and has been
extended through
December 29, 1998 under the same terms.
- ------------------------------------------------------------
- --------------------
11
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned
subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended
October 31, 1998, the
Fund incurred fees of approximately $2,339,700 for the
services of PMFS. As of
October 31, 1998, approximately $210,400 of such fees were
due to PMFS. Transfer
agent fees and expenses in the Statement of Operations
include certain
out-of-pocket expenses paid to nonaffiliates.
For the year ended October 31, 1998, PSI earned
approximately $166,500 in
brokerage commissions from portfolio transactions executed
on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the year ended October 31, 1998 were $810,275,699 and
$466,261,341,
respectively.
The cost basis of investments for federal income tax
purposes at October 31,
1998 was $1,834,449,111 and, accordingly, net unrealized
appreciation for
federal income tax purposes was $278,201,128 (gross
unrealized
appreciation--$425,372,275; gross unrealized depreciation--
$147,171,147).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment
companies, transfers
uninvested cash balances into a single joint account, the
daily aggregate
balance of which is invested in one or more repurchase
agreements collateralized
by U.S. Treasury or Federal agency obligations. As of
October 31, 1998, the Fund
had a 2.38% undivided interest in repurchase agreements in
the joint account.
The undivided interest for the Fund represented $22,397,000
in principal amount.
As of such date, each repurchase agreement in the joint
account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 5.40%, in the principal amount of
$260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the
collateral
including accrued interest was $265,935,719.
Salomon Smith Barney Inc., 5.40%, in the principal amount of
$260,000,000,
repurchase price $260,117,000, due 11/2/98. The value of the
collateral
including accrued interest was $265,365,298.
Deutsche Morgan Grenfell Inc., 5.41%, in the principal
amount of $260,000,000,
repurchase price $260,117,217, due 11/2/98. The value of the
collateral
including accrued interest was $265,200,735.
SBC Warburg Dillon Read, Inc., 5.38%, in the principal
amount of $160,825,000,
repurchase price $160,897,103, due 11/2/98. The value of the
collateral
including accrued interest was $164,045,205.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z
shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B
shares are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Prior to November 2,
1998 Class C shares
were sold with a contingent deferred sales charge of 1%
during the first year.
Effective November 2, 1998, Class C shares are sold with a
front-end sales
charge of 1% and a contingent deferred sales charge of 1%
during the first 18
months. Class B shares will automatically convert to Class A
shares on a
quarterly basis approximately seven years after purchase. A
special exchange
privilege is also available for shareholders who qualify to
purchase Class A
shares at net asset value or Class Z shares. Class Z shares
are not subject to
any sales or redemption charge and are offered exclusively
for sale to a limited
group of investors.
The Fund has authorized an unlimited number of shares of
beneficial interest at
$.01 par value divided into four classes, designated Class
A, Class B, Class C
and Class Z.
Transactions in shares of beneficial interest for the fiscal
years ended October
31, 1998 and October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1998:
Shares sold...................... 18,187,422 $
372,808,932
Shares issued in reinvestment of
dividends and distributions.... 3,225,575
63,494,283
Shares reacquired................ (16,281,521)
(328,591,719)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 5,131,476
107,711,496
Shares issued upon conversion
and/or exchanged from Class
B.............................. 1,987,257
39,239,381
----------- ---------
- ----
Net increase in shares
outstanding.................... 7,118,733 $
146,950,877
----------- ---------
- ----
----------- ---------
- ----
Year ended October 31, 1997:
Shares sold...................... 24,088,902 $
429,955,821
Shares issued in reinvestment of
dividends and distributions.... 1,457,169
24,726,140
Shares reacquired................ (23,710,223)
(422,399,190)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 1,835,848
32,282,771
Shares issued upon conversion
and/or exchanged from Class
B.............................. 3,168,790
57,758,918
----------- ---------
- ----
Net increase in shares
outstanding.................... 5,004,638 $
90,041,689
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
12
<PAGE>
Notes to Financial Statements
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1998:
Shares sold...................... 21,354,121 $
438,253,055
Shares issued in reinvestment of
dividends and distributions.... 6,214,814
121,857,308
Shares reacquired................ (15,295,489)
(302,422,093)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 12,273,446
257,688,270
Shares reacquired upon conversion
and/or exchanged into Class
B.............................. (1,995,029)
(39,239,381)
----------- ---------
- ----
Net increase in shares
outstanding.................... 10,278,417 $
218,448,889
----------- ---------
- ----
----------- ---------
- ----
Year ended October 31, 1997:
Shares sold...................... 11,692,362 $
220,160,621
Shares issued in reinvestment of
dividends and distributions.... 3,363,615
56,041,561
Shares reacquired................ (12,575,129)
(224,049,253)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 2,480,848
52,152,929
Shares reacquired upon conversion
and/or exchanged into Class
A.............................. (3,179,464)
(57,758,918)
----------- ---------
- ----
Net decrease in shares
outstanding.................... (698,616) $
(5,605,989)
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
Year ended October 31, 1998:
Shares sold...................... 1,490,743 $
30,682,873
Shares issued in reinvestment of
dividends and distributions.... 109,439
2,144,607
Shares reacquired................ (410,298)
(8,131,504)
----------- ---------
- ----
Net increase in shares
outstanding.................... 1,189,884 $
24,695,976
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended October 31, 1997:
Shares sold...................... 479,888 $
9,368,720
Shares issued in reinvestment of
dividends and distributions.... 33,855
567,873
Shares reacquired................ (211,033)
(3,840,172)
----------- ---------
- ----
Net increase in shares
outstanding.................... 302,710 $
6,096,421
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class Z
- ---------------------------------
Year ended October 31, 1998:
Shares sold...................... 8,469,492 $
171,000,282
Shares issued in reinvestment of
dividends and distributions.... 563,480
11,048,574
Shares reacquired................ (4,936,214)
(101,237,971)
----------- ---------
- ----
Net increase in shares
outstanding.................... 4,096,758 $
80,810,885
----------- ---------
- ----
----------- ---------
- ----
Year ended October 31, 1997:
Shares sold...................... 2,149,748 $
40,494,703
Shares issued in reinvestment of
dividends and distributions.... 213,923
3,630,172
Shares reacquired................ (1,680,122)
(30,855,405)
----------- ---------
- ----
Net increase in shares
outstanding.................... 683,549 $
13,269,470
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends
On December 7, 1998 the Board of Trustees of the Fund
declared the following
dividends per share, payable on December 9, 1998 to
shareholders of record on
December 8, 1998.
<TABLE>
<CAPTION>
Class Class B
Class
A and C
Z
--------- ---------
- ------
<S> <C> <C>
<C>
Ordinary Income................... $.115 $ .08
$ .125
Short-Term Capital Gains.......... $ .37 $ .37
$ .37
Long-Term Capital Gains........... $ .69 $ .69
$ .69
</TABLE>
- ------------------------------------------------------------
- --------------------
13
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
-----------------
- -------------------------------------------
Year Ended October 31,
-----------------
- -------------------------------------------
1998
1997 1996 1995 1994
-------- ----
- ---- -------- -------- --------
<S> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 21.00 $
15.43 $ 14.40 $ 14.03 $ 14.38
-------- ----
- ---- -------- -------- --------
Income from investment operations
Net investment income................... .45
.45 .47 .48 .41
Net realized and unrealized gain (loss)
on investment transactions........... (.49)
6.29 1.75 .95 .06
-------- ----
- ---- -------- -------- --------
Total from investment operations..... (.04)
6.74 2.22 1.43 .47
-------- ----
- ---- -------- -------- --------
Less distributions
Dividends from net investment income.... (.44)
(.43) (.49) (.54) (.29)
Distributions from net realized gains... (1.89)
(.74) (.70) (.52) (.53)
-------- ----
- ---- -------- -------- --------
Total distributions.................. (2.33)
(1.17) (1.19) (1.06) (.82)
-------- ----
- ---- -------- -------- --------
Net asset value, end of year............ $ 18.63 $
21.00 $ 15.43 $ 14.40 $ 14.03
-------- ----
- ---- -------- -------- --------
-------- ----
- ---- -------- -------- --------
TOTAL RETURN(a):........................ (.65)%
45.68% 15.97% 11.15% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $638,547
$570,146 $341,717 $276,990 $150,502
Average net assets (000)................ $655,776
$454,892 $310,335 $236,688 $131,398
Ratios to average net assets:
Expenses, including distribution
fees.............................. .91%
.94% .98% 1.03% 1.09%
Expenses, excluding distribution
fees.............................. .66%
.69% .73% .78% .85%
Net investment income................ 2.19%
2.32% 3.26% 3.36% 2.97%
For Class A, B, C and Z shares:
Portfolio turnover rate................. 22%
36% 36% 74% 70%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 14
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B
-----------------
- -------------------------------------------------
Year Ended October 31,
-----------------
- -------------------------------------------------
1998
1997 1996 1995 1994
---------- --
- -------- ---------- -------- --------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 20.93 $
15.39 $ 14.36 $ 14.00 $ 14.35
---------- --
- -------- ---------- -------- --------
Income from investment operations
Net investment income................... .29
.29 .39 .37 .31
Net realized and unrealized gain (loss)
on investment transactions........... (.48)
6.29 1.71 .95 .06
---------- --
- -------- ---------- -------- --------
Total from investment operations..... (.19)
6.58 2.10 1.32 .37
---------- --
- -------- ---------- -------- --------
Less distributions
Dividends from net investment income.... (.28)
(.30) (.37) (.44) (.19)
Distributions from net realized gains... (1.89)
(.74) (.70) (.52) (.53)
---------- --
- -------- ---------- -------- --------
Total distributions.................. (2.17)
(1.04) (1.07) (.96) (.72)
---------- --
- -------- ---------- -------- --------
Net asset value, end of year............ $ 18.57 $
20.93 $ 15.39 $ 14.36 $ 14.00
---------- --
- -------- ---------- -------- --------
---------- --
- -------- ---------- -------- --------
TOTAL RETURN(a):........................ (1.35)%
44.60% 15.12% 10.29% 2.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $1,299,962
$1,250,216 $ 929,948 $906,793 $954,951
Average net assets (000)................ $1,391,826
$1,072,118 $ 951,220 $911,856 $784,063
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.66%
1.69% 1.73% 1.78% 1.85%
Expenses, excluding distribution
fees.............................. .66%
.69% .73% .78% .85%
Net investment income................ 1.44%
1.60% 2.51% 2.66% 2.21%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 15
<PAGE>
Financial Highlights
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C Class Z
-----------------
- ---------------------------------------- ---------------
- ---------
August 1,
1994(c)
Year
Ended October 31, Through Year Ended
October 31,
-----------------
- ------------------------ October 31, ---------------
- ---------
1998 1997
1996 1995 1994 1998 1997
------- -----
- -- ------ ------ ----------- -------- --
- ---------
<S> <C> <C>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 20.93 $
15.39 $14.36 $14.00 $ 13.99 $ 21.00
$ 15.42
------- -----
- -- ------ ------ ----- -------- --
- ---------
Income from investment operations
Net investment income................... .30
.37 .38 .40 .08 .52
.36
Net realized and unrealized gain (loss)
on investment transactions........... (.49)
6.21 1.72 .92 (.02) (.51)
6.43
------- -----
- -- ------ ------ ----- -------- --
- ---------
Total from investment operations..... (.19)
6.58 2.10 1.32 .06 .01
6.79
------- -----
- -- ------ ------ ----- -------- --
- ---------
Less distributions
Dividends from net investment income.... (.28)
(.30) (.37) (.44) (.05) (.48)
(.47)
Distributions from net realized gains... (1.89)
(.74) (.70) (.52) -- (1.89)
(.74)
------- -----
- -- ------ ------ ----- -------- --
- ---------
Total distributions.................. (2.17)
(1.04) (1.07) (.96) (.05) (2.37)
(1.21)
------- -----
- -- ------ ------ ----- -------- --
- ---------
Net asset value, end of period.......... $ 18.57 $
20.93 $15.39 $14.36 $ 14.00 $ 18.64
$ 21.00
------- -----
- -- ------ ------ ----- -------- --
- ---------
------- -----
- -- ------ ------ ----- -------- --
- ---------
TOTAL RETURN(a):........................ (1.35)%
44.60% 15.12% 10.29% 0.45% (.40)%
46.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $37,988
$17,911 $8,511 $4,586 $ 1,527 $142,918
$74,956
Average net assets (000)................ $31,345
$11,432 $6,730 $3,132 $ 762 $103,474
$57,369
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.66%
1.69% 1.73% 1.78% 2.05%(b) .66%
.69%
Expenses, excluding distribution
fees.............................. .66%
.69% .73% .78% 1.05%(b) .66%
.69%
Net investment income................ 1.47%
1.53% 2.51% 2.57% 2.42%(b) 2.49%
2.58%
<CAPTION>
March 1,
1996(d)
Through
October 31,
1996
-----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 15.13
-----------
Income from investment operations
Net investment income................... .38
Net realized and unrealized gain (loss)
on investment transactions........... .30
-----------
Total from investment operations..... .68
-----------
Less distributions
Dividends from net investment income.... (.39)
Distributions from net realized gains... --
-----------
Total distributions.................. (.39)
-----------
Net asset value, end of period.......... $ 15.42
-----------
-----------
TOTAL RETURN(a):........................ 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $44,509
Average net assets (000)................ $24,641
Ratios to average net assets:
Expenses, including distribution
fees.............................. .73%(b)
Expenses, excluding distribution
fees.............................. .73%(b)
Net investment income................ 3.51%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less than a
full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 16
<PAGE>
Report of Independent Accountants
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
To the Shareholders and Board of Trustees of
Prudential Equity Income Fund
In our opinion, the accompanying statement of assets and
liabilities, including
the portfolio of investments, and the related statements of
operations and of
changes in net assets and the financial highlights present
fairly, in all
material respects, the financial position of Prudential
Equity Income Fund (the
'Fund') at October 31, 1998, the results of its operations
for the year then
ended, and the changes in its net assets and the financial
highlights for each
of the two years in the period then ended, in conformity
with generally accepted
accounting principles. These financial statements and
financial highlights
(hereafter referred to as 'financial statements') are the
responsibility of the
Fund's management; our responsibility is to express an
opinion on these
financial statements based on our audits. We conducted our
audits of these
financial statements in accordance with generally accepted
auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance
about whether the financial statements are free of material
misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles
used and significant estimates made by management, and
evaluating the overall
financial statement presentation. We believe that our
audits, which included
confirmation of securities at October 31, 1998 by
correspondence with the
custodian and brokers, provide a reasonable basis for the
opinion expressed
above. The accompanying financial highlights for each of the
three periods in
the period ended October 31, 1996 were audited by other
independent accountants,
whose opinion dated December 5, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 21, 1998
- ------------------------------------------------------------
- --------------------
17
<PAGE>
Federal Income Tax Information (Unaudited)
PRUDENTIAL EQUITY INCOME FUND
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Fund's fiscal year end (October 31, 1998) as to the federal
tax status of
dividends paid by the Fund during its fiscal year ended
October 31, 1998.
During the fiscal year ended October 31, 1998, the Fund paid
dividends of $2.325
per Class A share, $2.1725 per Class B share, $2.1725 per
Class C share and
$2.3675 per Class Z share. Of these amounts, $1.89 per Class
A, B, C and Z
shares represent distributions from long-term capital gains
of which $.5496 is
taxable at 28% rate gain and $1.3404 is taxable at 20% rate
gain. The remaining
$0.435 per Class A share, $0.2825 per Class B share, $0.2825
per Class C share
and $0.4775 per Class Z share represents dividends from
ordinary income.
Further, we wish to advise you that 48% of the ordinary
income dividends paid in
the fiscal year ended October 31, 1998 qualified for the
corporate dividends
received deduction available to corporate taxpayers.
For the purpose of preparing your annual federal income
tax return, however,
you should report the amounts as reflected on the
appropriate Form 1099-DIV or
substitute Form 1099-DIV.
- ------------------------------------------------------------
- --------------------
18
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
How many times have you read these letters -- or other
financial materials --
and stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll
use this space from time to time to explain some of the
words you might have
read, but not understood. And if you have a favorite word
that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis
points.
Call Option: A contract giving the holder a right to buy
stocks or bonds at a
predetermined price (called the strike price) before a
predetermined
expiration date. A buyer of a call option generally expects
to benefit from a
rise in the price of the stock or bond.
Collateralized Mortgage Obligations (CMOs): Pools of
mortgage-backed securities
sliced in maturity ranges that bear differing interest
rates. These instruments
are sensitive to changes in interest rates and homeowner
refinancing activity.
They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from other
securities. The
rate of return of these financial products rises and falls -
- - sometimes very
suddenly -- in response to changes in some specific interest
rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to
member banks.
Federal Funds Rate: The interest rate charged by one bank to
another on
overnight loans.
Futures Contract: An agreement to purchase or sell a
specific amount of a
commodity or financial instrument at a set price at a
specified date in the
future.
Leverage: The use of borrowed assets to enhance return on
equity. The
expectation is that the interest rate charged on borrowed
funds will be lower
than the return on the investment. While leverage can
increase profits, it can
also magnify losses.
Liquidity: The ease with which a financial instrument (or
mutual fund) can be
bought or sold (converted into cash) in the financial
markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings
per share for a 12-month period.
Option: An agreement to purchase or sell something, such as
shares of stock,
by a certain time for a specified price. An option need not
be exercised.
Spread: The difference between two values; often used to
describe the
difference between "bid" and "asked for" prices of a
security.
Yankee Bond: A bond sold by a foreign company or government
in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
When you invest through Prudential Mutual Funds, you receive
financial advice
through a Prudential Securities financial advisor or
Prudential/Pruco
Securities registered representative. Your advisor or
representative can
provide you with the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help
you match the
reward you seek with the risk you can tolerate. And risk can
be difficult to
gauge --sometimes even the simplest investments bear
surprising risks. The
educated investor knows that markets seldom move in just one
direction -- there
are times when a market sector or asset class will lose
value or provide little
in the way of total return. Managing your own expectations
is easier with help
from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help
you wade through the
numerous mutual funds available to find the ones that fit
your own individual
investment profile and risk tolerance. While the newspapers
and popular
magazines are full of advice about investing, they are aimed
at generic groups
of people or representative individuals, not at you
personally. Your financial
advisor or registered representative will review your
investment objectives
with you. This means you can make financial decisions based
on the assets and
liabilities in your current portfolio and your risk
tolerance -- not just
based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the
bottom are among the
most common investor mistakes. But sometimes it's difficult
to hold on to an
investment when it's losing value every month. Your
financial advisor or
registered representative can answer questions when you're
confused or worried
about your investment, and remind you that you're investing
for the long haul.
<PAGE>
Comparing A $10,000 Investment.
Prudential Equity Income Fund vs. the S&P 500 Index.
Past performance is not indicative of future results.
Principal and
investment return will fluctuate so an investor's shares,
when redeemed,
may be worth more or less than their original cost. The
boxes on top of the
graphs are designed to give you an idea of how much the
Fund's returns can
fluctuate from year to year by measuring the best and worst
calendar years
in terms of total annual return since inception of each
share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Equity Income
Fund (Class A, B,
C, and Z shares) with a similar investment in the Standard &
Poor's 500
Composite Stock Price Index (S&P 500 Index) by portraying
the initial account
values at the commencement of operations of Class A, Class
C, and Class Z
shares, and for 10 years for Class B shares, and subsequent
account values
at the end of each fiscal year (October 31), as measured on
a quarterly basis,
beginning in 1990 for Class A shares, 1988 for Class B
shares, 1994 for Class
C shares, and 1996 for Class Z shares. For purposes of the
graphs, and unless
otherwise indicated in the accompanying tables, it has been
assumed (a) that
the maximum applicable front-end sales charge was deducted
from the initial
$10,000 investment in Class A shares; (b) the maximum
applicable contingent
deferred sales charges were deducted from the value of the
investment in Class
B and Class C shares, assuming full redemption on October
31, 1998; (c)
beginning November 2, 1998, Class C shares are subject to a
front-end sales
charge of 1% and a CDSC of 1% for 18 months. This change is
not reflected in
the charts to the right; (d) all recurring fees (including
management fees)
were deducted; and (e) all dividends and distributions were
reinvested. Class
B shares will automatically convert to Class A shares, on a
quarterly basis,
approximately seven years after purchase. This conversion
feature is not
reflected in the graphs. Class Z shares are not subject to a
sales charge or
distribution fee.
The Standard & Poor's 500 Composite Stock Price Index (S&P
500 Index) is a
market capitalization-weighted index representing the
aggregate market value
of the common equity of 500 stocks primarily traded on the
New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the
reinvestment of
all dividends, but does not reflect the payment of
transaction costs and
advisory fees associated with an investment in the Fund. The
S&P 500 is not
the only index that may be used to characterize performance
of equity funds,
and other indexes may portray different comparative
performance. Investors
cannot invest directly in an index.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Caren Cunningham, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Fund's portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
743916207 MF131E
743916108
743916306
743916405
