<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
The equity market's flat performance in the fourth quarter capped an
uninspiring year for the unmanaged Standard & Poor's 500 Stock Index, which
generated a total return of 1.3%. The stock market was notable for its
extremely low overall volatility in 1994, continuing the pattern of the prior
two years. The sharp increase in interest rates was the year's big financial
story. Despite the most adverse interest rate environment since the early
1980s, strong corporate earnings growth and continued investor demand
provided support for stocks. The broad market averages hovered near their
highs for most of the year, although approximately half of New York Stock
Exchange issues traded at least 20% below their 1994 highs sometime during
the year.
Your Fund performed extremely well in a challenging environment
relative to both the broad market and the Lipper Equity Income Fund Average.
Performance surpassed the Lipper average and was in line with the S&P 500 in
the fourth quarter, and exceeded both for the entire year, as shown below.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 12/31/94
3 Months 12 Months
----------------------
<S> <C> <C>
Equity Income Fund -0.1% 4.5%
S&P 500 0.0 1.3
Lipper Equity Income
Fund Average -2.6 -2.5
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTION
On December 27, your Board of Trustees declared a fourth quarter dividend of
$0.16 per share, bringing the total for 1994 to $0.59. At the same time, a
$0.68 per-share capital gain distribution was declared, of which $0.23
represented short-term and $0.45 long-term gains. These distributions were
paid on December 29 to shareholders of record on December 27. You should
have received your check or statement reflecting them, as well as Form
1099-DIV summarizing this information for 1994 tax purposes.
PORTFOLIO REVIEW
It was a successful year for your Fund, considering the sluggishness of the
broad market. The portfolio benefited from several situations, including our
investments in AMERICAN CYANAMID, which was acquired late in the year by
American Home Products, and KEMPER, which we sold earlier during General
Electric's attempted takeover of the company. Other positions in health care
- -- somewhat controversial 18 months ago when we initiated them -- paid off for
the Fund. Just as we were early then, so we were early with our recent
purchases of electric utility stocks. This sector had been buffeted by
concerns over rising interest rates as well as increasing competition. Prices
fell precipitously to levels that appear to represent reasonable value, and
we have been investing in this area for the past few quarters.
The table showing major portfolio changes following this letter
highlights recent purchases and sales. A couple of sales were of successful
positions in companies, such as BALTIMORE BANCORP and American Cyanamid,
mentioned earlier, which were acquired by other firms. The sale of BORDEN,
another acquisition target, did not turn out as favorably.
We reduced our exposure to high-yield bonds, since spreads between
them and higher-quality securities narrowed significantly. We also initiated
or added to existing positions in several companies, such as FANNIE MAE,
BELLSOUTH, DOMINION RESOURCES, and KNIGHT-RIDDER, which offer above-average
dividend yields and attractive total return potential. The chart on the
following page shows the diversification of portfolio securities at the end
of the year.
<PAGE>
- --------------------------------------------------------------------------------
Security Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
A pie chart showing the percent of the funds assets investment among common
stock 79.21%, convertibles 4.10%, bonds 7.02% and reserves 9.67%.
SUMMARY AND OUTLOOK
The economy should continue to perform reasonably well in 1995, with good
corporate earnings and dividend growth. However, we believe the pattern of
rising interest rates could limit the stock market's potential. Consequently,
we anticipate modest total returns over the near term. Nevertheless, our
strategy of identifying relatively high-yielding stocks with attractive
valuations should enable us to take advantage of opportunities in what could
be another challenging year.
As always, we appreciate your confidence and support.
Respectfully submitted,
/s/ Brian C. Rogers
Brian C. Rogers
President and Chairman of the
Investment Advisory Committee
January 20, 1995
2
<PAGE>
- --------------------------------------------------------------------------------
Twenty-Five Largest Holdings
- --------------------------------------------------------------------------------
December 31, 1994
<TABLE>
<CAPTION>
Percent of
Company Net Assets
- -------------------------------------------- ----------
<S> <C>
Exxon 1.9%
- ----------------------------------------------------------
SmithKline Beecham 1.8
- ----------------------------------------------------------
Philip Morris 1.7
- ----------------------------------------------------------
Atlantic Richfield 1.6
- ----------------------------------------------------------
Upjohn 1.5
- ----------------------------------------------------------
American Brands 1.5
- ----------------------------------------------------------
Texaco 1.5
- ----------------------------------------------------------
Eli Lilly 1.4
- ----------------------------------------------------------
GE 1.4
- ----------------------------------------------------------
Royal Dutch Petroleum 1.4
- ----------------------------------------------------------
Honeywell 1.4
- ----------------------------------------------------------
GTE 1.3
- ----------------------------------------------------------
J.P. Morgan 1.3
- ----------------------------------------------------------
American Express 1.3
- ----------------------------------------------------------
American Home Products 1.3
- ----------------------------------------------------------
British Petroleum 1.2
- ----------------------------------------------------------
Mellon Bank 1.2
- ----------------------------------------------------------
Dun & Bradstreet 1.1
- ----------------------------------------------------------
Entergy 1.1
- ----------------------------------------------------------
General Mills 1.1
- ----------------------------------------------------------
Mobil 1.1
- ----------------------------------------------------------
Eastman Kodak 1.0
- ----------------------------------------------------------
PacifiCorp 1.0
- ----------------------------------------------------------
Tambrands 1.0
- ----------------------------------------------------------
Warner-Lambert 1.0
- ----------------------------------------------------------
Total 33.1%
- ----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Major Portfolio Changes
- --------------------------------------------------------------------------------
Three Months Ended December 31, 1994
- --------------------------------------------------------------------------------
TEN LARGEST PURCHASES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost (000)
----------
<S> <C>
Fannie Mae $18,390
- ---------------------------------------------------------------
BellSouth* 15,778
- ---------------------------------------------------------------
Cooper Industries* 13,024
- ---------------------------------------------------------------
Maytag* 12,885
- ---------------------------------------------------------------
Alexander & Baldwin* 12,556
- ---------------------------------------------------------------
Dominion Resources* 11,256
- ---------------------------------------------------------------
Knight-Ridder* 10,101
- ---------------------------------------------------------------
Kimberly-Clark 8,782
- ---------------------------------------------------------------
Honeywell 8,741
- ---------------------------------------------------------------
J.P. Morgan 8,627
- ---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST SALES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proceeds (000)
--------------
<S> <C>
American Cyanamid** $40,400
- ------------------------------------------------------------------
Borden** 16,477
- ------------------------------------------------------------------
Kimberly-Clark (Mexico)** 15,341
- ------------------------------------------------------------------
Rite Aid** 12,405
- ------------------------------------------------------------------
Black & Decker** 11,198
- ------------------------------------------------------------------
Baltimore Bancorp** 10,375
- ------------------------------------------------------------------
Kroger Bond** 10,013
- ------------------------------------------------------------------
British Telecommunications** 8,841
- ------------------------------------------------------------------
Campbell** 8,386
- ------------------------------------------------------------------
Ferrellgas Bond 5,918
- ------------------------------------------------------------------
</TABLE>
* Position added
** Position eliminated
3
<PAGE>
- --------------------------------------------------------------------------------
Fiscal-Year Performance Comparison
- --------------------------------------------------------------------------------
[ARTWORK APPEARS HERE]
A two-line chart comparing the growth in an initial $10,000 investment in the
fund with the same investment in the S&P 500 INDEX starting 10/85 and ending
12/94.
- --------------------------------------------------------------------------------
Fiscal-Year Performance
- --------------------------------------------------------------------------------
Periods Ended December 31, 1994
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years* 10/31/85*
------ -------- ---------
<S> <C> <C>
4.53% 9.85% 14.11%
</TABLE>
- --------------------------------------------------------------------------------
*Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Investment Record
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
The table below shows the investment record of one share of the T. Rowe Price
Equity Income Fund, purchased at the initial price of $10.00, for the period
10/31/85 through 12/31/94. Over this time, stock prices in general have
risen. The results shown should not be considered as a representation of the
income or capital gain or loss which may be realized from an investment made
in the Fund today.
- --------------------------------------------------------------------------------
Per-Share Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
With Capital Gains and Income Dividends
Taken in Cash Reinvested in Additional Shares Annual Total Return
-------------------------------------- -------------------------------------- On Investment
Year Net Capital Capital % Change
Ended Asset Gain Income Gain Income Value of ---------------------
12/31 Value Distribution/2/ Dividend Distribution Dividend Investment Fund S&P 500
------- ------- --------------- -------- ------------ -------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985/1/ $11.00 -- -- -- -- $11.00 10.0% 12.0%
1986 12.96 $0.26 $0.65 $0.27 $0.66 13.95 26.8 18.7
1987 11.29 1.35 0.82 1.53 0.92 14.44 3.5 5.3
1988 13.38 0.38 0.62 0.50 0.81 18.43 27.6 16.5
1989 14.06 0.39 0.76 0.56 1.07 20.96 13.7 31.6
1990 12.27 0.19 0.65 0.29 0.99 19.53 -6.8 -3.1
1991 14.62 0.10 0.61 0.16 0.99 24.47 25.3 30.3
1992 15.63 0.39 0.63 0.67 1.07 27.93 14.1 7.6
1993 16.65 0.72 0.54 1.32 0.98 32.08 14.8 10.1
1994 15.98 0.81 0.59 1.61 1.16 33.53 4.5 1.3
- ----------------------------------------------------------------------------------------------------------------------------
Total $4.59 $5.87 $6.91 $8.65
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ From inception 10/31/85 to 12/31/85.
/2/ Includes short-term capital gains of $0.01 in 1986; $0.34 in 1987; $0.26
in 1988; $0.20 in 1989; $0.02 in 1990; $0.10 in 1991; $0.15 in 1992; $0.22
in 1993; and $0.25 in 1994.
5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Net Assets (Value in thousands)
T. Rowe Price Equity Income Fund / December 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common Stocks -- 78.9%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL -- 12.7%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
----------
<S> <C>
BANK & TRUST -- 6.4%
300,000 shs. *Brooklyn Bancorp................... $ 9,075
600,000 Chase Manhattan.................... 20,625
600,000 Chemical Banking................... 21,525
400,000 First Interstate................... 27,050
750,000 J.P. Morgan........................ 42,000
1,300,000 Mellon Bank........................ 39,813
700,000 National City...................... 18,113
250,000 NationsBank........................ 11,281
250,000 PNC Bank........................... 5,281
2,000,000 *SE Banken (SEK).................... 11,439
206,202
INSURANCE -- 2.6%
974,200 *Continental........................ 18,510
500,000 Hilb, Rogal and Hamilton........... 6,063
300,000 Loews.............................. 26,062
700,000 Provident Life & Accident
Insurance (Class B).............. 15,225
250,000 Torchmark.......................... 8,719
725,000 Willis-Corroon ADR................. 7,431
82,010
FINANCIAL SERVICES -- 3.7%
1,400,000 American Express................... 41,300
350,000 Fannie Mae......................... 25,506
800,000 Sallie Mae......................... 26,000
800,000 Travelers.......................... 26,000
118,806
TOTAL FINANCIAL 407,018
- -------------------------------------------------------------------------
UTILITIES -- 12.4%
- -------------------------------------------------------------------------
TELEPHONE -- 5.1%
350,000 BCE................................ 11,244
325,000 Bell Atlantic...................... 16,169
300,000 BellSouth.......................... 16,237
1,400,000 GTE................................ 42,525
950,000 Pacific Telesis.................... 27,075
600,000 Southern New England
Telecommunications................ 19,275
850,000 U.S. West.......................... 30,281
162,806
ELECTRIC UTILITIES -- 7.3%
677,500 BGE................................ 14,990
2,200,000 Centerior Energy................... 19,525
300,000 Dominion Resources................. 10,725
350,000 shs. DQE................................ 10,369
1,600,000 Entergy............................ 35,000
500,000 Florida Progress................... 15,000
500,000 General Public Utilities........... 13,125
900,000 Pacific Gas and Electric........... 21,937
1,750,000 PacifiCorp......................... 31,719
500,000 *Public Service of New Mexico....... 6,500
1,200,000 SCEcorp............................ 17,550
1,000,000 Southern Company................... 20,000
750,000 Unicom............................. 18,000
234,440
TOTAL UTILITIES 397,246
- -------------------------------------------------------------------------
CONSUMER NONDURABLES -- 21.4%
- -------------------------------------------------------------------------
COSMETICS -- 0.7%
250,000 Helene Curtis Industries........... 8,344
300,000 International Flavors
& Fragrances..................... 13,875
22,219
BEVERAGES -- 1.4%
550,000 Anheuser-Busch..................... 27,981
600,000 Brown-Forman (Class B)............. 18,300
46,281
FOOD PROCESSING -- 3.3%
550,000 CPC International.................. 29,288
600,000 General Mills...................... 34,200
1,007,500 Pet................................ 19,898
900,000 Sara Lee........................... 22,725
106,111
HOSPITAL SUPPLIES/HOSPITAL
MANAGEMENT -- 0.9%
1,000,000 Baxter International............... 28,250
PHARMACEUTICALS -- 9.2%
650,000 American Home Products............. 40,788
700,000 Eli Lilly.......................... 45,937
600,000 Merck.............................. 22,875
300,000 Pfizer............................. 23,175
300,000 Schering-Plough.................... 22,200
1,700,000 SmithKline Beecham,
equity units ADR................. 58,225
1,600,000 Upjohn............................. 49,200
400,000 Warner-Lambert..................... 30,800
293,200
MISCELLANEOUS CONSUMER
PRODUCTS -- 5.9%
1,305,000 American Brands.................... 48,937
225,000 Clorox............................. 13,247
300,000 Dixie Yarns........................ 2,100
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
800,000 shs. Hanson ADR......................... $ 14,400
400,000 Jostens............................ 7,450
950,000 Philip Morris...................... 54,625
800,000 Tambrands.......................... 30,900
600,000 UST................................ 16,650
188,309
TOTAL CONSUMER NONDURABLES 684,370
- --------------------------------------------------------------------------------
CONSUMER SERVICES -- 6.1%
- --------------------------------------------------------------------------------
GENERAL MERCHANDISERS -- 2.0%
475,000 *Carson Pirie Scott................. 9,025
400,000 J.C. Penney........................ 17,850
700,000 K mart............................. 9,100
500,000 Sears.............................. 23,000
250,000 Woolworth.......................... 3,750
62,725
SPECIALTY MERCHANDISERS -- 1.0%
550,000 Fleming Companies.................. 12,787
250,000 Hancock Fabrics.................... 2,219
600,000 Melville........................... 18,525
33,531
ENTERTAINMENT & LEISURE -- 0.3%
109,100 Reader's Digest (Class A).......... 5,360
102,100 Reader's Digest (Class B).......... 4,569
9,929
MEDIA & COMMUNICATIONS -- 2.8%
650,000 Dun & Bradstreet................... 35,750
210,300 Knight-Ridder...................... 10,620
400,000 McGraw-Hill........................ 26,750
475,000 Times Mirror....................... 14,903
88,023
TOTAL CONSUMER SERVICES 194,208
- --------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 3.1%
- --------------------------------------------------------------------------------
AUTOMOBILES & RELATED -- 0.2%
400,000 Volvo (Class B) (SEK).............. 7,537
BUILDING & REAL ESTATE -- 1.5%
600,000 DeBartolo Realty................... 9,000
500,000 General Growth Properties.......... 11,312
300,000 McArthur/Glen Realty............... 4,950
300,000 *Rouse.............................. 5,776
590,000 Taubman Centers.................... 5,752
325,000 Weingarten Realty Investors........ 12,309
49,099
MISCELLANEOUS CONSUMER DURABLES -- 1.4%
675,000 Eastman Kodak...................... 32,231
800,000 Maytag............................. 12,000
44,231
TOTAL CONSUMER CYCLICALS 100,867
- --------------------------------------------------------------------------------
TECHNOLOGY -- 3.1%
- --------------------------------------------------------------------------------
ELECTRONIC SYSTEMS -- 1.3%
1,400,000 shs. Honeywell.......................... $ 44,100
TELECOMMUNICATIONS -- 0.9%
325,000 ITT................................ 28,803
AEROSPACE & DEFENSE -- 0.9%
450,000 United Technologies................ 28,294
TOTAL TECHNOLOGY 101,197
- --------------------------------------------------------------------------------
CAPITAL EQUIPMENT -- 1.9%
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
900,000 GE................................. 45,900
MACHINERY -- 0.4%
400,000 Cooper Industries.................. 13,650
TOTAL CAPITAL EQUIPMENT 59,550
- --------------------------------------------------------------------------------
BUSINESS SERVICES & TRANSPORTATION -- 1.6%
- --------------------------------------------------------------------------------
TRANSPORTATION SERVICES -- 0.8%
550,000 Alexander & Baldwin................ 12,237
375,000 PHH................................ 13,031
25,268
MISCELLANEOUS BUSINESS SERVICES -- 0.8%
425,000 Deluxe Corp........................ 11,263
265,800 GATX............................... 11,695
145,000 Gilbert Associates (Class A)....... 2,066
25,024
TOTAL BUSINESS SERVICES & TRANSPORTATION 50,292
- --------------------------------------------------------------------------------
ENERGY -- 12.0%
- --------------------------------------------------------------------------------
ENERGY SERVICES -- 0.5%
500,000 Halliburton........................ 16,562
EXPLORATION & PRODUCTION -- 0.2%
230,000 Eastern Enterprises................ 6,038
GAS TRANSMISSION -- 0.5%
192,156 Tenneco............................ 8,167
700,000 TransCanada PipeLines.............. 8,487
16,654
INTEGRATED PETROLEUM-DOMESTIC -- 4.5%
500,000 Atlantic Richfield................. 50,875
500,000 British Petroleum ADR.............. 39,937
381,000 Pennzoil........................... 16,812
650,000 Sun Company........................ 18,688
1,000,000 USX-Marathon....................... 16,375
142,687
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / Statement of Net Assets (Cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INTEGRATED PETROLEUM-
INTERNATIONAL -- 6.3%
300,000 shs. Chevron............................. $ 13,388
1,000,000 Exxon............................... 60,750
400,000 Mobil............................... 33,700
425,000 Royal Dutch Petroleum ADR........... 45,687
800,000 Texaco.............................. 47,900
201,425
TOTAL ENERGY 383,366
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES -- 3.5%
- --------------------------------------------------------------------------------
DIVERSIFIED CHEMICALS -- 1.5%
500,000 DuPont.............................. 28,125
277,000 Monsanto............................ 19,529
47,654
SPECIALTY CHEMICALS -- 0.9%
370,000 Avery Dennison...................... 13,135
210,200 Great Lakes Chemical................ 11,981
170,000 Lubrizol............................ 5,759
30,875
PAPER & PAPER PRODUCTS -- 1.1%
253,000 Albany International
(Class A)......................... 4,870
600,000 Kimberly-Clark...................... 30,300
35,170
TOTAL PROCESS INDUSTRIES 113,699
- --------------------------------------------------------------------------------
CONGLOMERATES -- 0.3%
- --------------------------------------------------------------------------------
4,000,000 LONRHO (GBP)........................ 9,512
TOTAL CONGLOMERATES 9,512
MISCELLANEOUS COMMON STOCKS -- 0.8% 24,971
TOTAL COMMON STOCKS (COST $2,364,240) 2,526,296
- --------------------------------------------------------------------------------
Preferred Stocks -- 0.3%
- --------------------------------------------------------------------------------
100,000 California Federal Bank,
10.625%, Series B................. 10,025
TOTAL PREFERRED STOCKS (COST $10,000) 10,025
- --------------------------------------------------------------------------------
Convertible Preferred Stocks -- 2.4%
- --------------------------------------------------------------------------------
400,000 Cooper Industries, $1.60............ 8,150
195,500 Ford Motor, Dep. Shs.,
$4.20, Cum., Series A............. 17,986
562,000 James River, Series P............... 11,380
176,500 Mobile Telecommunication
Technologies (144a), $2.25........ 4,788
442,600 Newmont Mining (144a), $2.75........ 23,292
300,000 shs. Tandy, PERCS, $2.14,
Series C.......................... 11,325
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $65,362) 76,921
- --------------------------------------------------------------------------------
Convertible Bonds -- 1.8%
- --------------------------------------------------------------------------------
$ 18,000,000 Banco Nacional de Mexico,
Sub. Deb., 7.00%, 12/15/99........ 14,175
18,000,000 Delta, Sub. Deb., 3.23%,
6/15/03........................... 12,735
10,900,000 Rockefeller Center, 8.00%,
12/31/00.......................... 10,083
20,000,000 Time Warner, Sub. Deb.,
8.75%, 1/10/15.................... 18,900
TOTAL CONVERTIBLE BONDS (COST $61,052) 55,893
- --------------------------------------------------------------------------------
Corporate Bonds -- 4.6%
- --------------------------------------------------------------------------------
5,750,000 American Standard, Sr.
Sub. Deb., 9.875%, 6/1/01......... 5,578
1,965,000 American Standard, Sub.
Deb., 9.25%, 12/1/16.............. 1,798
10,000,000 Ametek, Sr. Notes, 9.75%,
3/15/04........................... 10,000
4,000,000 ARA Services, Sr. Notes,
10.625%, 8/1/00................... 4,200
5,000,000 Coltec Industries, Sr.
Sub. Notes, 9.75%, 11/1/99........ 4,900
10,000,000 Coltec Industries, Sr. Notes,
10.25%, 4/1/02.................... 9,800
10,000,000 Container Corporation of
America, Sr. Notes,
9.75%, 4/1/03..................... 9,475
8,625,000 Continental Cablevision,
Sr. Deb., 9.00%, 9/1/08........... 7,762
6,100,000 Exide, 10.75%, 12/15/02............. 6,100
6,000,000 Ferrellgas, Sr. Notes,
10.00%, 8/1/01.................... 5,910
7,500,000 Fleming Companies,
Sr. Notes, 10.625%, 12/15/01...... 7,500
4,000,000 Gulf Canada Resources,
Notes, 9.25%, 1/15/04............. 3,670
7,000,000 IMC Fertilizer Group,
Sr. Notes, Series B,
9.25%, 10/1/00.................... 6,755
5,000,000 IMC Fertilizer Group,
Sr. Notes, 10.75%, 6/15/03........ 5,175
10,000,000 Imo Industries, Sr. Sub.
Deb., 12.00%, 11/1/01............. 10,087
10,000,000 Paging Network, Sr.
Sub. Notes, 8.875%, 2/1/06........ 7,800
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
$ 10,000,000 Riverwood International,
Sr. Sub. Notes,
10.375%, 6/30/04.................. $ 9,925
3,000,000 Rowan Companies, Sr. Notes,
11.875%, 12/1/01.................. 3,090
10,000,000 Southern Pacific Rail,
Sr. Notes, 9.375%, 8/15/05........ 9,300
6,625,000 Stone Container, Sr. Notes,
9.875%, 2/1/01.................... 6,228
10,000,000 Texas Bottling Group,
Sr. Sub. Notes, 9.00%,
11/15/03.......................... 8,700
5,000,000 Westpoint Stevens,
Sr. Notes, 8.75%, 12/15/01........ 4,600
TOTAL CORPORATE BONDS (COST $155,330) 148,353
- --------------------------------------------------------------------------------
U.S. Government Obligations/Agencies -- 3.0%
- --------------------------------------------------------------------------------
U.S. Treasury Notes,
20,000,000 5.125%, 11/15/95.................. 19,659
30,000,000 6.125%, 7/31/96................... 29,353
30,000,000 7.375%, 11/15/97.................. 29,681
17,000,000 8.875%, 11/15/97 - 5/15/00........ 17,625
TOTAL U.S. GOVERNMENT OBLIGATIONS/AGENCIES
(COST $96,743) 96,318
- --------------------------------------------------------------------------------
Short-Term Investments -- 8.8%
- --------------------------------------------------------------------------------
BANK NOTES -- 0.6%
10,000,000 First National Bank of
Maryland, VR,
5.80%, 1/9/95..................... 9,994
10,000,000 Fleet National Bank Providence
Rhode Island,
5.60%, 1/26/95.................... 10,000
19,994
CERTIFICATES OF DEPOSIT -- 0.9%
10,000,000 Banque Nationale de Paris,
5.81%, 1/9/95..................... 10,000
20,000,000 Societe Generale, 5.80%,
3/1/95............................ 20,004
30,004
COMMERCIAL PAPER -- 6.0%
10,000,000 Abbey National,
5.50%, 2/2/95..................... 9,859
10,000,000 Asset Securitization
Cooperative, 4(2),
5.45%, 1/18/95.................... 9,870
20,000,000 Banque Nationale de Paris,
6.05%, 1/13/95.................... 19,896
14,000,000 Bell Atlantic Financial
Services, 6.00%, 1/12/95.......... 13,928
10,000,000 Caisse des Depots et
Consignations, 4(2),
5.94%, 1/17/95.................... 9,970
20,000,000 Dresdner U.S. Finance,
5.71%, 1/17/95.................... 19,806
15,000,000 Ford Credit Europe, 5.78%,
1/30/95........................... 14,851
10,000,000 Generale Bank, 5.53%, 2/1/95........ 9,862
3,000,000 John Hancock Capital, 4(2),
6.00%, 1/5/95..................... 2,997
25,000,000 National City Credit,
6.00%, 1/3/95..................... 24,983
20,000,000 New South Wales Treasury,
5.85%, 1/13/95.................... 19,857
17,204,000 PHH, 6.00%, 1/19/95................. 17,095
145,000 President & Fellows
Harvard College,
6.00%, 1/3/95..................... 145
10,000,000 R.R. Donnelly, 4(2),
6.00%, 1/10/95.................... 9,952
10,000,000 Total Compagnie Francaise
des Petroles, 5.94%, 1/9/95....... 9,983
193,054
MEDIUM-TERM NOTES -- 1.3%
10,000,000 Avco Financial Services, VR,
6.16%, 12/21/95................... 10,000
5,000,000 Merrill Lynch & Co., VR,
6.125%, 9/6/95.................... 5,000
25,000,000 Morgan Stanley Group, VR,
6.475%, 3/15/95................... 25,000
40,000
TOTAL SHORT-TERM INVESTMENTS
(COST $283,052) 283,052
- -------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES -- 99.8%
(COST $3,035,779) 3,196,858
- -------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / Statement of Net Assets (Cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Other Assets Less Liabilities $ 6,993
NET ASSETS CONSISTING OF:
Accumulated net investment income --
net of distributions................. $ 1,425
Accumulated realized gains/losses --
net of distributions.................. 27,934
Net unrealized gain..................... 161,077
Paid-in-capital applicable to
200,448,619 no par value
capital stock outstanding;
unlimited shares authorized........... 3,013,415
----------
NET ASSETS $3,203,851
==========
NET ASSET VALUE PER SHARE $15.98
======
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts to
0.88% of net assets.
PERCS Participating Equity Redemption Certificate
VR Variable Rate
GBP British sterling
SEK Swedish krona
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / Year Ended December 31, 1994
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
INVESTMENT INCOME
Income
Dividends........................................................................ $ 100,686
Interest......................................................................... 34,839
---------
Total income..................................................................... 135,525
---------
Expenses
Investment management............................................................ 17,847
Shareholder servicing............................................................ 7,397
Prospectus and shareholder reports............................................... 350
Custody and accounting........................................................... 297
Proxy and annual meeting......................................................... 156
Registrations.................................................................... 152
Trustees......................................................................... 47
Legal and auditing............................................................... 34
Miscellaneous.................................................................... 61
---------
Total expenses................................................................... 26,341
---------
Net investment income.............................................................. 109,184
---------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on:
Securities....................................................................... 158,899
Foreign currency transactions.................................................... 72
---------
Net realized gain................................................................ 158,971
---------
Change in net unrealized gain or loss on:
Securities....................................................................... (134,229)
Other assets and liabilities denominated in foreign currencies................... (5)
---------
Change in net unrealized gain or loss............................................ (134,234)
---------
Net realized and unrealized gain................................................... 24,737
---------
INCREASE IN NET ASSETS FROM OPERATIONS $ 133,921
=========
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1994 1993
---------- ----------
(Amounts in thousands)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income......................................... $ 109,184 $ 81,761
Net realized gain............................................. 158,971 119,000
Change in net unrealized gain or loss ........................ (134,234) 144,242
---------- ----------
Increase in net assets from operations........................ 133,921 345,003
---------- ----------
Distributions to shareholders
Net investment income......................................... (107,759) (83,418)
Net realized gain............................................. (152,377) (115,568)
---------- ----------
Decrease in net assets from distributions..................... (260,136) (198,986)
---------- ----------
Capital share transactions/1/
Shares sold................................................... 760,081 893,271
Distributions reinvested...................................... 251,069 191,926
Shares redeemed............................................... (532,431) (473,049)
---------- ----------
Increase in net assets from capital share transactions........ 478,719 612,148
---------- ----------
Net equalization................................................ -- 1,647
---------- ----------
Increase in net assets.......................................... 352,504 759,812
NET ASSETS
Beginning of year............................................... 2,851,347 2,091,535
---------- ----------
End of year..................................................... $3,203,851 $2,851,347
========== ==========
- -----------------------------------------------------------------------------------------------------
/1/Capital share transactions (number of shares)
Shares sold................................................... 45,628 54,585
Distributions reinvested...................................... 15,592 11,613
Shares redeemed............................................... (32,027) (28,794)
---------- ----------
Increase in capital shares outstanding........................ 29,193 37,404
========== ==========
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / December 31, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Equity Income Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
A) Valuation - Equity securities listed or regularly traded on a securities
exchange (including Nasdaq) are valued at the last quoted sales price on the
day the valuations are made. A security which is listed or traded on more
than one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Other equity securities and those
listed securities that are not traded on a particular day are valued at a
price within the limits of the latest bid and asked prices deemed by the
Board of Trustees, or by persons delegated by the Trustees, best to reflect
fair value.
Debt securities are generally traded in the over-the-counter market
and are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent pricing
service. Short-term debt securities are valued at their cost which, when
combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the officers
of the Fund, as authorized by the Board of Trustees.
B) Currency translation - Assets and liabilities are converted into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated into
U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains or losses is reflected as a component of such
gains or losses.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Dividend income and distributions
to shareholders are recorded by the Fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. Effective January 1, 1994, the Fund
discounted its practice of equalization. The results of operations and net
assets were not affected by this change.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
Government securities, aggregated $1,298,699,000 and $955,320,000,
respectively, for the year ended December 31, 1994.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At December 31, 1994, the aggregate cost of investments for federal
income tax and financial reporting purposes was $3,035,779,000 and net
unrealized gain aggregated $161,079,000, of which $267,651,000 related to
appreciated investments and $106,572,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, of which $1,592,000 was payable at December 31, 1994. The fee is
computed daily and paid monthly, and consists of an Individual Fund Fee equal
to 0.25% of average daily net assets and a Group Fee. The Group Fee is based
on the combined assets of certain mutual funds sponsored by the Manager or
Rowe-Price Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. At December 31, 1994, and for
13
<PAGE>
the year then ended, the effective annual Group Fee rate was 0.34%. The Fund
pays a pro rata share of the Group Fee based on the ratio of its net assets
to those of the Group.
In addition, the Fund has entered into agreements with the Manager
and two wholly-owned subsidiaries of the Manager, pursuant to which the Fund
receives certain other services. The Manager computes the daily share price
and maintains the financial records of the Fund. T. Rowe Price Services, Inc.
(TRPS) is the Fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the Fund. T. Rowe Price
Retirement Plan Services, Inc. provides subaccounting and recordkeeping
services for certain retirement accounts invested in the Fund. Additionally,
the Fund is one of several T. Rowe Price mutual funds (the Underlying Funds)
in which the T. Rowe Price Spectrum Growth and Income Funds (Spectrum)
invests. In accordance with an Agreement between Spectrum, the Underlying
Funds, the Manager and TRPS, expenses from the operation of Spectrum are
borne by the Underlying Funds based on each Underlying Fund's proportionate
share of assets owned by Spectrum. The Fund incurred expenses pursuant to
these related party agreements totaling approximately $6,557,000 for the year
ended December 31, 1994, of which $653,000 was payable at year end.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each
-----------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........... $16.65 $15.63 $14.62 $12.27 $14.06
------ ------ ------ ------ ------
Investment Activities
Net investment income.................... 0.60 0.54 0.62 0.62 0.67
Net realized and unrealized gain (loss).. 0.13 1.74 1.41 2.44 (1.62)
------ ------ ------ ------ ------
Total from Investment Activities......... 0.73 2.28 2.03 3.06 (0.95)
------ ------ ------ ------ ------
Distributions
Net investment income.................... (0.59) (0.54) (0.63) (0.61) (0.65)
Net realized gain........................ (0.81) (0.72) (0.39) (0.10) (0.19)
------ ------ ------ ------ ------
Total Distributions...................... (1.40) (1.26) (1.02) (0.71) (0.84)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR................. $15.98 $16.65 $15.63 $14.62 $12.27
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return................................. 4.5% 14.8% 14.1% 25.3% (6.8)%
Ratio of Expenses to Average Net Assets...... 0.88% 0.91% 0.97% 1.05% 1.13%
Ratio of Net Investment Income to
Average Net Assets....................... 3.63% 3.23% 3.95% 4.44% 5.09%
Portfolio Turnover Rate...................... 36.3% 31.2% 30.0% 33.5% 24.4%
Net Assets, End of Year (in thousands)....... $3,203,851 $2,851,347 $2,091,535 $1,335,400 $862,059
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
T. Rowe Price Equity Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial position
of the T. Rowe Price Equity Income Fund at December 31, 1994, and the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the selected per share
data and information for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and selected per share data and information (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 December 31, 1994 by correspondence with
custodians and brokers and, where appropriate, the application of alternative
auditing procedures for unsettled security transactions, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 19, 1995
15
<PAGE>
ANNUAL REPORT
T. Rowe Price
- -------------
EQUITY INCOME FUND
DECEMBER 31, 1994
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to
others who have received a copy of the prospectus of the T. Rowe Price Equity
Income Fund.
T. Rowe Price
Invest With Confidence(R)
EIF
