<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
The equity market continued to perform well in the second half of 1995,
reflecting strong corporate earnings, low inflation, a benign interest rate
environment, and strong investor demand. The unmanaged Standard & Poor's 500
Stock Index concluded its best year since 1958 and posted one of the strongest
12-month returns in history.
As shown in the table below, your fund did particularly well over the past
six months with a return of 15.6%, surpassing the returns of both the broad
market and the Lipper Equity Income Funds Average. For the year as a whole, the
fund comfortably exceeded the peer group average of similarly managed funds but
trailed the exceptionally powerful S&P 500.
Since our conservative investment approach sometimes lags the broad index
in unusually robust markets, we were pleased with the year's results. Keep in
mind that the generally conservative nature of your fund's investments is also
tailored to protect shareholders in the event of market declines.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/95
6 Months 12 Months
-------- ---------
<S> <C> <C>
Equity Income Fund 15.6% 33.4%
S&P 500 14.5 37.6
Lipper Equity Income
Funds Average 13.3 30.2
- --------------------------------------------------------------------------------
</TABLE>
DIVIDEND DISTRIBUTIONS
On December 26, your Board of Trustees declared a fourth quarter dividend of
$0.16 per share, bringing your 1995 dividend total to $0.65. At the same time, a
$0.40 per share capital gain distribution was declared, of which $0.32 was long-
term and $0.08 short-term. These distributions were paid on December 28 to
shareholders of record on December 26. You should have received your check or
statement reflecting them, as well as Form 1099-DIV summarizing this information
for 1995 tax purposes.
PORTFOLIO REVIEW
The strong performance of many financial stocks, the positive contribution of
our holdings in the health care sector, and gains generated by large-
capitalization consumer products stocks were among the most important influences
on 1995 fund results. Our investments in companies such as J.P. MORGAN, FIRST
INTERSTATE, SALLIE MAE, and TRAVELERS GROUP were particularly profitable.
Pharmaceutical stocks also performed extremely well. As you can see in the
Major Portfolio Changes table following this letter, some of the successful
investments we made in this sector were trimmed in the second half of the year.
After stocks such as ELI LILLY and SCHERING-PLOUGH appreciated, our valuation
discipline encouraged us to reinvest some of the assets in more undervalued
stocks with attractive dividend yields. We also eliminated HALLIBURTON, an oil
well services and engineering firm, following an advance in its share price.
Over the past six months, the prices of many cyclical stocks fell as
investors worried about the durability of corporate earnings gains in 1996. The
decline in the value of such stocks as UNION CAMP, BETZ LABORATORIES,
INTERNATIONAL PAPER, and DUPONT, among others, rendered them exceedingly
attractive, in our view.
For example, in 1995, Union Camp announced two dividend increases and a
stock buyback. With its substantially higher-than-market dividend yield and a
share price that had fallen sharply before our purchase, we believed it prudent
to buy shares and wait for the fundamentals of this quality company to improve
and for investor perceptions of the company to change for the better.
During the past six months, we increased the fund's exposure to stocks by
three percentage points, reduced its bond holdings
<PAGE>
- --------------------------------------------------------------------------------
Security Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Common Stocks 78%
Reserves 15%
Bonds 5%
Convertibles 2%
slightly, and kept reserves steady at 15% of total assets.
SUMMARY AND OUTLOOK
Your fund celebrated its tenth anniversary this fall. On this landmark occasion,
we reviewed the past 10 years' worth of our Summary and Outlook
prognostications. We concluded that we have usually been "cautiously optimistic"
about the future. Perhaps this posture represents our perpetual state of mind
and, over the long term, an appropriate attitude as we face an always uncertain
future.
We anticipate positive but slowing economic growth along with a more
challenging stock market environment in 1996. Instead of making more detailed
economic and market forecasts, we would like to reiterate our primary emphasis,
which is on sound, conservatively based investments on your behalf. This has
been the hallmark of our approach for more than a decade. In almost any market
environment, we believe there will be intriguing opportunities on which we can
capitalize profitably.
As always, we appreciate your continued confidence and support.
Respectfully submitted,
/s/ Brian C. Rogers
Brian C. Rogers
President and Chairman of the
Investment Advisory Committee
January 19, 1996
- --------------------------------------------------------------------------------
A Word on Market Corrections
- --------------------------------------------------------------------------------
After the stock market's spectacular run in 1995, concerns about a "correction"
have intensified. Most market observers consider a correction to be a short and
sometimes steep decline following a period of rising prices. Moderate
corrections of around 10% have been quite common, occurring on average about
once every two years over the last half-century, according to Ned Davis
Research.
The market as measured by the Dow Jones Industrial Average has not
experienced a moderate correction since early 1994. Furthermore, the Dow last
hit a bear market bottom -- defined as a drop of at least 20% -- in October
1990. Therefore, it would not be surprising to see a modest pullback in 1996, on
the order of 5% to 10%. In fact, as we write, the market has gotten off to a
rocky start.
Corrections are not only common, but can be beneficial for long-term
investors, especially those who invest in regular amounts through dollar cost
averaging. In a correction, overall stock prices decline, often leading to more
attractive valuations and good buying opportunities. History has shown that
investors who continue to buy through a downturn fare quite well. In fact, the
Dow has proven resilient in the aftermath of past corrections of around 10%,
taking an average of just six months to recover its losses, according to Ned
Davis. (To realize the benefits of dollar cost averaging, you should be prepared
to continuously purchase securities over a period of time, in up and down
markets. This approach does not assure a gain nor protect you from a loss in
declining markets.)
We raise the issue of a market correction not as a prediction, but as a
reminder that stock prices do not move in only one direction. If you are
satisfied that your investments are appropriate for your various objectives, we
recommend that you stay the course when a correction eventually occurs.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Twenty-Five Largest Holdings
- --------------------------------------------------------------------------------
December 31, 1995
<TABLE>
<CAPTION>
Percent of
Company Net Assets
- ------------------------------------------------------------------- ----------
<S> <C>
SmithKline Beecham 1.7%
Atlantic Richfield 1.7
Exxon 1.5
Pharmacia & Upjohn 1.5
Philip Morris 1.5
Texaco 1.4
GE 1.4
Mellon Bank 1.3
DuPont 1.3
Warner-Lambert 1.2
American Home Products 1.2
GTE 1.2
First Interstate 1.2
J. P. Morgan 1.2
Eli Lilly 1.1
Honeywell 1.1
American Brands 1.1
American Express 1.1
Royal Dutch Petroleum 1.1
3M 1.0
Sallie Mae 1.0
British Petroleum 1.0
Union Camp 1.0
Travelers Group 1.0
Anheuser-Busch 1.0
- --------------------------------------------------------------------------------
Total 30.8%
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Major Portfolio Changes
- --------------------------------------------------------------------------------
Six Months Ended December 31, 1995
Listed in descending order of size.
- --------------------------------------------------------------------------------
TEN LARGEST PURCHASES
- --------------------------------------------------------------------------------
Union Camp*
Betz Laboratories*
International Paper*
Corning*
Atlantic Richfield
Heinz*
DuPont
Bankers Trust New York*
Lubrizol*
Eaton*
- --------------------------------------------------------------------------------
TEN LARGEST SALES
- --------------------------------------------------------------------------------
Halliburton**
Eli Lilly
Schering-Plough
Allstate**
Maytag**
NationsBank**
Loews
CPC International
Delta Bond
TJX**
- --------------------------------------------------------------------------------
* Position added
** Position eliminated
3
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
Periods ended December 31, 1995
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C>
33.35% 18.01% 15.87%
</TABLE>
- --------------------------------------------------------------------------------
Investment 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 12/31/95. 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 Distributions/1/ Dividends Distributions/1/ Dividends Investment Fund S&P 500
- ------- ------ ---------------- --------- ---------------- --------- ---------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985/2/ $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
1995 20.01 0.54 0.65 1.16 1.39 44.71 33.4 37.6
- -------------------------------------------------------------------------------------------------------------------
Total $5.13 $6.52 $8.07 $10.04
===================================================================================================================
</TABLE>
/1/ 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, $0.25 in 1994; and $0.18 in 1995.
/2/ From inception 10/31/85 to 12/31/85.
5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price Equity Income Fund / December 31, 1995
- --------------------------------------------------------------------------------
(values in thousands)
<TABLE>
<CAPTION>
Value
----------
<C> <S> <C>
- -----------------------------------------------------------------------------------------
Common Stocks -- 78.4%
- -----------------------------------------------------------------------------------------
FINANCIAL -- 14.3%
- -----------------------------------------------------------------------------------------
BANK AND TRUST -- 7.9%
750,000 shs BANC ONE.............................................. $ 28,312
400,000 Bankers Trust New York................................ 26,600
300,000 * Brooklyn Bancorp...................................... 12,188
600,000 Chase Manhattan....................................... 36,375
600,000 Chemical Banking...................................... 35,250
450,000 First Interstate...................................... 61,425
750,000 J. P. Morgan.......................................... 60,187
1,300,000 Mellon Bank........................................... 69,875
750,000 National City......................................... 24,844
600,000 PNC Bank.............................................. 19,350
2,000,000 S-E-Banken (SEK)...................................... 16,567
600,000 U. S. Bancorp......................................... 20,138
411,111
INSURANCE -- 2.0%
500,000 American General...................................... 17,438
700,000 Hilb, Rogal and Hamilton.............................. 9,363
400,000 Loews................................................. 31,350
700,000 Provident Companies................................... 23,712
250,000 UNUM.................................................. 13,750
874,100 Willis-Corroon ADR.................................... 10,161
105,774
FINANCIAL SERVICES -- 4.4%
1,400,000 American Express...................................... 57,925
350,000 Fannie Mae............................................ 43,443
550,000 H&R Block............................................. 22,275
800,000 Sallie Mae............................................ 52,700
800,000 Travelers Group....................................... 50,300
226,643
TOTAL FINANCIAL 743,528
- -----------------------------------------------------------------------------------------
UTILITIES -- 10.4%
- -----------------------------------------------------------------------------------------
TELEPHONE -- 4.5%
1,200,000 ALLTEL................................................ 35,400
500,000 BCE................................................... 17,250
325,000 Bell Atlantic......................................... 21,735
600,000 BellSouth............................................. 26,100
330,800 COMSAT................................................ 6,161
1,400,000 GTE................................................... 61,600
400,000 Pacific Telesis....................................... 13,450
600,000 Southern New England
Telecommunications................................. 23,850
900,000 U. S. West............................................ 32,175
237,721
<CAPTION>
Value
----------
<C> <S> <C>
ELECTRIC UTILITIES -- 5.9%
677,500 shs BGE................................................... $ 19,309
2,700,000 Centerior Energy...................................... 23,962
540,000 Dominion Resources.................................... 22,275
525,000 DQE................................................... 16,144
1,600,000 Entergy............................................... 46,800
500,000 Florida Progress...................................... 17,688
500,000 General Public Utilities.............................. 17,000
900,000 Pacific Gas and Electric.............................. 25,537
1,800,000 PacifiCorp............................................ 38,250
500,000 * Public Service of
New Mexico......................................... 8,813
1,200,000 SCEcorp............................................... 21,300
1,000,000 Southern Company...................................... 24,625
750,000 Unicom................................................ 24,562
306,265
TOTAL UTILITIES 543,986
- -----------------------------------------------------------------------------------------
CONSUMER NONDURABLES -- 18.2%
- -----------------------------------------------------------------------------------------
COSMETICS -- 0.2%
330,000 Helene Curtis Industries.............................. 10,436
BEVERAGES -- 1.4%
750,000 Anheuser-Busch........................................ 50,156
600,000 Brown-Forman (Class B)................................ 21,900
72,056
FOOD PROCESSING -- 2.9%
300,000 CPC International..................................... 20,588
750,000 General Mills......................................... 43,312
1,045,500 Heinz................................................. 34,632
725,000 Quaker Oats........................................... 25,013
900,000 Sara Lee.............................................. 28,687
152,232
HOSPITAL SUPPLIES/HOSPITAL
MANAGEMENT -- 1.1%
450,000 Bausch & Lomb......................................... 17,831
1,000,000 Baxter International.................................. 41,875
59,706
PHARMACEUTICALS -- 7.1%
650,000 American Home Products................................ 63,050
1,050,000 Eli Lilly............................................. 59,063
2,020,000 Pharmacia & Upjohn.................................... 78,275
300,000 Schering-Plough....................................... 16,425
1,600,000 SmithKline Beecham ADR................................ 88,800
650,000 Warner-Lambert........................................ 63,131
368,744
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
----------
<C> <S> <C>
MISCELLANEOUS CONSUMER
PRODUCTS -- 5.5%
1,305,000 shs American Brands....................................... $ 58,236
225,000 Clorox................................................ 16,116
300,000 * Dixie Yarns........................................... 1,181
500,000 Grand Metropolitan ADR................................ 14,375
800,000 Hanson ADR............................................ 12,200
850,000 Philip Morris......................................... 76,925
595,779 RJR Nabisco........................................... 18,395
800,000 Tambrands............................................. 38,200
100,000 Unilever N.V. ADR..................................... 14,075
1,100,000 UST................................................... 36,712
286,415
TOTAL CONSUMER NONDURABLES 949,589
- -----------------------------------------------------------------------------------------
CONSUMER SERVICES -- 5.0%
- -----------------------------------------------------------------------------------------
GENERAL MERCHANDISERS -- 2.0%
260,000 Dayton Hudson......................................... 19,500
800,000 J.C. Penney........................................... 38,100
585,900 May Department Stores................................. 24,754
600,000 Sears................................................. 23,400
105,754
SPECIALTY MERCHANDISERS -- 0.3%
550,000 Fleming Companies..................................... 11,344
250,000 Hancock Fabrics....................................... 2,250
13,594
ENTERTAINMENT AND LEISURE -- 0.2%
182,700 Reader's Digest (Class B)............................. 8,633
MEDIA AND COMMUNICATIONS -- 2.5%
750,000 Dun & Bradstreet...................................... 48,562
500,000 Gannett............................................... 30,688
400,000 McGraw-Hill........................................... 34,850
900,000 U. S. West Media Group................................ 17,100
131,200
TOTAL CONSUMER SERVICES 259,181
- -----------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 4.7%
- -----------------------------------------------------------------------------------------
AUTOMOBILES AND RELATED -- 1.0%
436,100 Eaton................................................. 23,386
300,000 Genuine Parts......................................... 12,300
250,000 TRW................................................... 19,375
55,061
BUILDING AND REAL ESTATE -- 2.1%
1,200,000 DeBartolo Realty, REIT................................ 15,600
800,000 General Growth Properties,
REIT............................................... 16,600
250,000 Rouse................................................. 5,094
300,000 SECURITY CAPITAL PACIFIC
TRUST, REIT........................................ 5,925
1,470,000 Simon Property Group, REIT............................ 35,831
<CAPTION>
Value
----------
<C> <S> <C>
590,000 shs Taubman Centers, REIT................................. $ 5,900
600,000 Weingarten Realty Investors,
REIT............................................... 22,800
107,750
MISCELLANEOUS CONSUMER
DURABLES -- 1.6%
1,200,000 Corning............................................... 38,400
675,000 Eastman Kodak......................................... 45,225
83,625
TOTAL CONSUMER CYCLICALS 246,436
- -----------------------------------------------------------------------------------------
TECHNOLOGY -- 1.7%
- -----------------------------------------------------------------------------------------
ELECTRONIC SYSTEMS -- 1.4%
700,000 EG&G.................................................. 16,975
1,200,000 Honeywell............................................. 58,350
75,325
OFFICE AUTOMATION -- 0.3%
300,000 Pitney Bowes.......................................... 14,100
TOTAL TECHNOLOGY 89,425
- -----------------------------------------------------------------------------------------
CAPITAL EQUIPMENT -- 2.4%
- -----------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.9%
1,000,000 GE.................................................... 72,000
400,000 Hubbell (Class B)..................................... 26,300
98,300
MACHINERY -- 0.5%
750,000 Cooper Industries..................................... 27,563
TOTAL CAPITAL EQUIPMENT 125,863
- -----------------------------------------------------------------------------------------
BUSINESS SERVICES AND TRANSPORTATION -- 2.3%
- -----------------------------------------------------------------------------------------
TRANSPORTATION SERVICES -- 0.6%
709,900 Alexander & Baldwin................................... 16,505
375,000 PHH................................................... 17,531
34,036
MISCELLANEOUS BUSINESS SERVICES -- 0.6%
500,000 Deluxe Corp........................................... 14,500
300,000 GATX.................................................. 14,588
29,088
RAILROADS -- 1.1%
320,000 Conrail............................................... 22,400
550,000 Union Pacific......................................... 36,300
58,700
TOTAL BUSINESS SERVICES AND TRANSPORTATION 121,824
- -----------------------------------------------------------------------------------------
ENERGY -- 10.4%
- -----------------------------------------------------------------------------------------
ENERGY SERVICES -- 0.8%
410,150 Cooper Cameron........................................ 14,560
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
----------
<C> <S> <C>
750,000 shs McDermott International............................... $ 16,500
400,000 Witco................................................. 11,700
42,760
EXPLORATION AND PRODUCTION -- 0.2%
230,000 Eastern Enterprises................................... 8,108
GAS TRANSMISSION -- 0.2%
700,000 TransCanada PipeLines................................. 9,625
INTEGRATED PETROLEUM -
DOMESTIC -- 3.8%
800,000 Atlantic Richfield.................................... 88,600
500,000 British Petroleum ADR................................. 51,063
381,000 Pennzoil.............................................. 16,097
531,912 Sun Company........................................... 14,561
1,500,000 USX-Marathon.......................................... 29,250
199,571
INTEGRATED PETROLEUM -
INTERNATIONAL -- 5.4%
500,000 Chevron............................................... 26,250
1,000,000 Exxon................................................. 80,125
400,000 Mobil................................................. 44,800
400,000 Royal Dutch
Petroleum ADR...................................... 56,450
950,000 Texaco................................................ 74,575
282,200
TOTAL ENERGY 542,264
- -----------------------------------------------------------------------------------------
PROCESS INDUSTRIES -- 7.5%
- -----------------------------------------------------------------------------------------
DIVERSIFIED CHEMICALS -- 1.9%
950,000 DuPont................................................ 66,381
275,000 Monsanto.............................................. 33,688
100,069
SPECIALTY CHEMICALS -- 2.5%
800,000 3M.................................................... 53,000
1,000,000 Betz Laboratories..................................... 41,000
900,000 Crompton & Knowles.................................... 11,925
890,400 Lubrizol.............................................. 24,820
130,745
PAPER AND PAPER PRODUCTS -- 2.7%
1,000,000 International Paper................................... 37,875
600,000 Kimberly-Clark........................................ 49,650
1,068,100 Union Camp............................................ 50,868
138,393
FOREST PRODUCTS -- 0.4%
300,000 Georgia-Pacific....................................... 20,587
TOTAL PROCESS INDUSTRIES 389,794
<CAPTION>
Value
----------
<C> <S> <C>
- -----------------------------------------------------------------------------------------
BASIC MATERIALS -- 0.7%
- -----------------------------------------------------------------------------------------
MINING -- 0.7%
824,289 shs Newmont Mining........................................ $ 37,299
TOTAL BASIC MATERIALS 37,299
- -----------------------------------------------------------------------------------------
CONGLOMERATES -- 0.5%
- -----------------------------------------------------------------------------------------
9,500,000 LONRHO (GBP).......................................... 25,967
TOTAL CONGLOMERATES 25,967
MISCELLANEOUS COMMON STOCKS--0.3% 14,438
TOTAL COMMON STOCKS (COST $3,057,897) 4,089,594
- -----------------------------------------------------------------------------------------
Preferred Stocks -- 0.2%
- -----------------------------------------------------------------------------------------
100,000 California Federal Bank,
10.625%, Series B.................................. 10,944
TOTAL PREFERRED STOCKS (COST $10,000) 10,944
- -----------------------------------------------------------------------------------------
Convertible Preferred Stocks -- 0.6%
- -----------------------------------------------------------------------------------------
195,500 Ford Motor, Dep. Shs., $4.20,
Cum., Series A..................................... 18,523
562,000 James River, Dep. Shs.,
Series P........................................... 13,137
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $19,469) 31,660
- -----------------------------------------------------------------------------------------
Convertible Bonds -- 1.5%
- -----------------------------------------------------------------------------------------
$18,000,000 Banco Nacional de Mexico, Sub.
Deb., 7.00%, 12/15/99.............................. 14,445
6,000,000 Delta, Sub. Deb., 3.23%,
6/15/03............................................ 5,729
45,900,000 Roche Holding, LYONs, Zero
Coupon, 4/20/10.................................... 20,253
12,062,850 Time Warner, Sub. Deb.,
8.75%, 1/10/15..................................... 12,515
20,000,000 WMX Technologies, Sub. Deb.,
2.00%, 1/24/05..................................... 17,300
70,242
MISCELLANEOUS CONVERTIBLE BONDS 5,100
TOTAL CONVERTIBLE BONDS (COST $72,514) 75,342
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
----------
<C> <S> <C>
- -----------------------------------------------------------------------------------------
Corporate Bonds -- 2.1%
- -----------------------------------------------------------------------------------------
$ 5,750,000 American Standard, Sr. Sub.
Deb., 9.875%, 6/1/01............................... $ 6,196
5,000,000 Ametek, Sr. Notes, 9.75%,
3/15/04............................................ 5,550
9,150,000 B.F. Saul, REIT, Sr. Secured
Notes, 11.625%, 4/1/02............................. 9,333
2,434,435 Carson Pirie Scott, 13.00%,
3/28/05............................................ 2,453
10,855,000 Coltec Industries, Sr. Sub.
Deb., 10.25%, 4/1/02............................... 11,154
10,000,000 Container Corporation of
America, Sr. Notes,
9.75%, 4/1/03...................................... 9,750
8,625,000 Continental Cablevision, Sr.
Deb., 9.00%, 9/1/08................................ 9,056
2,900,000 Crown Central Petroleum, Sr.
Notes, 10.875%, 2/1/05............................. 3,060
6,100,000 Exide, Sr. Notes, 10.75%,
12/15/02........................................... 6,618
7,000,000 IMC Fertilizer Group, Sr. Notes,
9.25%, 10/1/00..................................... 7,402
10,000,000 Imo Industries, Sr. Sub. Deb.,
12.00%, 11/1/01.................................... 10,200
10,000,000 Paging Network, Sr. Sub.
Notes, 8.875%, 2/1/06.............................. 10,250
10,000,000 Riverwood International, Sr.
Sub. Notes,
10.375%, 6/30/04................................... 11,125
8,000,000 Texas Bottling Group, Sr. Sub.
Notes, 9.00%, 11/15/03............................. 7,920
TOTAL CORPORATE BONDS (COST $106,023) 110,067
- -----------------------------------------------------------------------------------------
U.S. Government Obligations/Agencies -- 2.8%
- -----------------------------------------------------------------------------------------
U.S. Treasury Notes
30,000,000 5.375%, 11/30/97................................... 30,098
30,000,000 6.125%, 7/31/96.................................... 30,145
35,000,000 6.625%, 3/31/97.................................... 35,580
30,000,000 7.375%, 11/15/97................................... 31,134
17,000,000 8.875%, 11/15/97 - 5/15/00......................... 18,791
TOTAL U.S. GOVERNMENT OBLIGATIONS/AGENCIES
(COST $141,636) 145,748
- -----------------------------------------------------------------------------------------
Short-Term Investments -- 14.1%
- -----------------------------------------------------------------------------------------
BANKERS' ACCEPTANCES -- 0.1%
8,000,000 Societe Generale, 5.55%,
2/2/96............................................. 7,949
<CAPTION>
Value
----------
<C> <S> <C>
BANK NOTES -- 1.2%
$15,000,000 Comerica Bank, 6.18%,
5/28/96............................................ $ 15,029
24,000,000 First National Bank of
Maryland, 6.45%, 1/5/96............................ 24,039
25,000,000 Lasalle National Bank, 5.71%,
1/18/96............................................ 25,000
64,068
CERTIFICATES OF DEPOSIT -- 2.9%
26,000,000 Banque Nationale de Paris,
5.77-5.82%,
2/12/96-2/14/96.................................... 25,998
20,000,000 Bayerische Hypotheken, 5.79%,
2/12/96............................................ 20,001
30,000,000 Deutsche Bank AG, 5.78%,
1/18/96............................................ 30,001
25,000,000 Mellon Bank, 5.70%, 3/7/96............................ 25,000
25,000,000 National Westminster Bank
USA, 5.81%, 1/12/96................................ 25,000
10,000,000 Societe Generale, 5.73%,
1/16/96............................................ 10,001
15,000,000 Westpac, 5.80%, 2/29/96............................... 15,001
151,002
COMMERCIAL PAPER -- 7.8%
10,000,000 ANZ (Delaware), 5.70%,
1/26/96............................................ 9,834
27,000,000 Asset Securitization Cooperative
4(2), 5.70-5.72%,
1/29/96-2/2/96..................................... 26,799
10,000,000 B.B.V. Finance (Delaware),
5.68%, 2/5/96...................................... 9,904
20,000,000 Bank Of New York, 5.84%,
1/23/96............................................ 19,886
15,000,000 Barnett Banks, 5.70%,
1/25/96............................................ 14,917
20,000,000 Bayer, 4(2), 5.52%, 2/27/96........................... 19,816
15,000,000 BHF Finance (Delaware),
5.58%, 3/6/96...................................... 14,793
10,000,000 Chase Manhattan, 5.67%,
2/15/96............................................ 9,858
25,000,000 Corestates Capital, 5.67%,
2/13/96............................................ 24,638
10,000,000 Cregem North America, 5.72%,
1/30/96............................................ 9,855
20,000,000 Finnish Export Credit Ltd.,
5.71%, 1/17/96..................................... 19,692
15,000,000 Generale Bank, 5.57%, 3/7/96.......................... 14,787
22,000,000 International Nederland Bank,
5.47%, 3/20-3/22/96................................ 21,699
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
----------
<C> <S> <C>
$ 2,898,312 Investments in Commercial
Paper through a joint account,
5.90-6.05%, 1/2/96................................. $ 2,896
10,000,000 Kingdom of Sweden, 5.70%,
1/31/96............................................ 9,815
20,000,000 National Australia Funding
(Delaware), 5.72%,
1/22/96............................................ 19,736
4,000,000 Nationsbank, 5.625%,
1/12/96............................................ 3,903
35,000,000 New Center Asset Trust, 5.77%,
1/25/96............................................ 34,753
17,900,000 Preferred Receivables Funding,
5.72-5.73%,
1/22/96-1/24/96.................................... 27,649
25,000,000 Royal Bank Of Canada New
York, 5.72%, 1/22/96............................... 24,674
20,000,000 SBNSW (Delaware), 5.77%,
1/10/96............................................ 19,891
25,000,000 Southwestern Bell Capital 4(2),
5.50%, 3/5/96...................................... 24,736
22,000,000 Statoil (Den Norske Stats
Oljeselskap), 5.57%,
2/16/96............................................ 21,803
406,334
GOVERNMENT AGENCY OBLIGATIONS -- 0.7%
35,000,000 Federal National Mortgage Assn.,
5.615-6.00%,
9/27/96-10/7/96.................................... 35,000
MEDIUM-TERM NOTES -- 1.4%
7,000,000 GMAC, 5.48%, 7/19/96.................................. 7,002
31,445,000 Morgan Stanley Group, 6.063%,
1/31/97............................................ 31,455
14,000,000 PHH, VR, 5.820%,
11/12/96........................................... 13,993
19,100,000 Wells Fargo, VR, 5.813%,
9/16/96............................................ 19,095
71,545
TOTAL SHORT-TERM INVESTMENTS
(COST $735,898) 735,898
- -----------------------------------------------------------------------------------------
<CAPTION>
Value
----------
<S> <C> <C>
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES -- 99.7%
OF NET ASSETS (COST $4,143,437) $5,199,253
- -----------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 15,525
----------
NET ASSETS CONSIST OF: Value
----------
Accumulated net investment income -
net of distributions......................... $ 3,373
Accumulated net realized gain/loss -
net of distributions......................... 36,816
Net unrealized gain (loss)...................... 1,055,816
Paid-in-capital applicable to
260,657,689 shares of no par
value capital stock outstanding;
unlimited shares authorized.................. 4,118,773
----------
NET ASSETS................................................................. $5,214,778
==========
NET ASSET VALUE PER SHARE.................................................. $20.01
======
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing
REIT Real Estate Investment Trust
VR Variable rate
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."
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, 1995
(in thousands)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income
Dividend............................................................... $ 125,378
Interest............................................................... 61,652
----------
Total income........................................................... 187,030
----------
Expenses
Investment management.................................................. 24,358
Shareholder servicing.................................................. 8,849
Prospectus and shareholder reports..................................... 485
Registration........................................................... 343
Custody and accounting................................................. 297
Trustees............................................................... 48
Legal and audit........................................................ 29
Miscellaneous.......................................................... 51
----------
Total expenses......................................................... 34,460
----------
Net investment income..................................................... 152,570
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities............................................................. 139,630
Foreign currency transactions.......................................... 33
----------
Net realized gain (loss)............................................... 139,663
----------
Change in net unrealized gain or loss on:
Securities............................................................. 894,736
Other assets and liabilities denominated in foreign currencies......... 3
----------
Change in net unrealized gain or loss.................................. 894,739
----------
Net realized and unrealized gain (loss)................................... 1,034,402
----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......................... $1,186,972
==========
</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
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
---------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income..................................................... $ 152,570 $ 109,184
Net realized gain (loss).................................................. 139,663 158,971
Change in net unrealized gain or loss..................................... 894,739 (134,234)
---------- ----------
Increase (decrease) in net assets from operations......................... 1,186,972 133,921
---------- ----------
Distributions to shareholders
Net investment income..................................................... (150,621) (107,759)
Net realized gain......................................................... (130,781) (152,377)
---------- ----------
Decrease in net assets from distributions................................. (281,402) (260,136)
---------- ----------
Capital share transactions*
Shares sold............................................................... 1,431,239 760,081
Distributions reinvested.................................................. 272,282 251,069
Shares redeemed........................................................... (598,164) (532,431)
---------- ----------
Increase (decrease) in net assets from capital share transactions......... 1,105,357 478,719
---------- ----------
Increase (decrease) in net assets............................................ 2,010,927 352,504
NET ASSETS
Beginning of period.......................................................... 3,203,851 2,851,347
---------- ----------
End of period................................................................ $5,214,778 $3,203,851
========== ==========
- -------------------------------------------------------------------------------------------------------------
* Share information
Shares sold............................................................... 78,850 45,628
Distributions reinvested.................................................. 14,467 15,592
Shares redeemed........................................................... (33,108) (32,027)
---------- ----------
Increase (decrease) in shares outstanding................................. 60,209 29,193
========== ==========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / December 31, 1995
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 are valued at the last quoted sales price at the time 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. Listed securities that are not traded on a particular day and
securities that are regularly traded in the over-the-counter market are valued
at the mean of the latest bid and asked prices. Other equity securities are
valued at a price within the limits of the latest bid and asked prices deemed by
the Board of Trustees,
12
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund / December 31, 1995
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 translated 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 and losses is reflected as a component of such gains and 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 the 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.
NOTE 2 - INVESTMENT TRANSACTIONS
A) Commercial Paper Joint Account - The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
B) Other - Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $1,212,773,000 and $741,409,000,
respectively, for the year ended December 31, 1995.
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
income.
At December 31, 1995, the aggregate cost of investments for federal income
tax and financial reporting purposes was $4,143,437,000 and net unrealized gain
aggregated $1,055,816,000, of which $1,087,818,000 related to appreciated
investments and $32,002,000 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 $2,542,000 was payable at December 31, 1995. 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, 1995, and for the year then ended, the effective annual Group Fee
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Fund (Spectrum) invests. In accordance with an Agreement among
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
$7,781,000 for the year ended December 31, 1995, of which $758,000 was payable
at period-end.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Equity Income Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................ $15.98 $16.65 $15.63 $14.62 $12.27
------ ------ ------ ------ ------
Investment activities
Net investment income............................ 0.66 0.60 0.54 0.62 0.62
Net realized and unrealized gain (loss).......... 4.56 0.13 1.74 1.41 2.44
------ ------ ------ ------ ------
Total from investment activities................. 5.22 0.73 2.28 2.03 3.06
------ ------ ------ ------ ------
Distributions
Net investment income............................ (0.65) (0.59) (0.54) (0.63) (0.61)
Net realized gain................................ (0.54) (0.81) (0.72) (0.39) (0.10)
------ ------ ------ ------ ------
Total distributions.............................. (1.19) (1.40) (1.26) (1.02) (0.71)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD...................... $20.01 $15.98 $16.65 $15.63 $14.62
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total return........................................ 33.4% 4.5% 14.8% 14.1% 25.3%
Ratio of expenses to average net assets............. 0.85% 0.88% 0.91% 0.97% 1.05%
Ratio of net investment income to
average net assets............................... 3.69% 3.63% 3.23% 3.95% 4.44%
Portfolio turnover rate............................. 21.4% 36.3% 31.2% 30.0% 33.5%
Net assets, end of period (in thousands)............ $5,214,778 $3,203,851 $2,851,347 $2,091,535 $1,335,400
- --------------------------------------------------------------------------------------------------------------------------
</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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Equity Income Fund (the "Fund") at December 31, 1995, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, 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 December 31, 1995 by
correspondence with custodians and brokers, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 18, 1996
15
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
T. Rowe Price
- -------------
EQUITY INCOME FUND
DECEMBER 31, 1995
[LOGO APPEARS HERE]
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.
Invest With Confidence/(R)/ [LOGO APPEARS HERE]
T. Rowe Price
EIF
