- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Annual Report
Equity Income Fund
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
================================================================================
Equity Income Fund
* Stocks posted the third consecutive year of more than 20% returns, fueled
by strong corporate earnings, low inflation, and declining interest rates.
* Your fund returned 12.35% and 28.82% for the 6 and 12 months ended December
31, 1997, respectively, ahead of the Lipper average for both periods but
trailing the broad market over the year.
* Fund returns benefited from rebounding stocks we had bought at undervalued
prices, such as AT&T, and from the shares of utilities and telephone
stocks.
* We continue to seek out attractive investment opportunities but caution
shareholders that returns in 1998 could moderate from levels of the past
three years.
Fellow Shareholders
The equity market performed well in 1997 as good corporate earnings
results, continued low inflation, and a supportive interest rate environment
provided ample fuel for the advance. The performance of stocks in the second
half was particularly impressive in light of the market's October jitters and
concern over the volatility of the Asian markets.
<PAGE>
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Equity Income Fund 12.35% 28.82%
S&P 500 10.58 33.36
Lipper Equity Income
Funds Average 11.11 27.51
================================================================================
As shown in the table, fund returns over the last six months exceeded both
the Lipper Equity Income Funds Average and the unmanaged Standard & Poor's 500
Stock Index. For the year as a whole, the fund surpassed the Lipper average but
trailed the broad market, a not uncommon pattern for conservative funds like
Equity Income in very strong years such as 1997.
Equity returns were notably impressive coming on the heels of considerable
market strength in 1995 and 1996. The 1995-1997 period, in fact, is the first
time in modern history that stock market returns have exceeded 20% in three
consecutive years.
YEAR-END DISTRIBUTIONS
Your Board of Trustees declared a fourth quarter income dividend of $0.19
per share, bringing your 1997 total to $0.66 per share. At the same time, a
$1.76 per share capital gain distribution was declared, of which $0.24
represented short-term gains and $1.52 long-term gains. These distributions were
paid on December 30, 1997, to shareholders of record on December 26. You should
have already received your check or statement reflecting this activity, as well
as Form 1099-DIV summarizing this information for 1997 tax purposes.
PORTFOLIO STRATEGY
The past year was characterized by tremendous stock market volatility.
Equities struggled in the first quarter, particularly in the
small-capitalization sector, but prices rebounded sharply in the second and
third quarters. The fourth quarter returned to a pattern of mixed results as
weakness in October, culminating with the decline of 554 points for the Dow
Jones Industrial Average on October 27, was more than offset by steady gains in
November and December.
[Security Diversification Pie Chart, showing Common stocks 89%, bonds 2%,
reserves 8%, convertibles 1%.]
In this volatile environment, we tried to tune out as much short-term noise
as possible by doing what we have always done: identify reasonably valued
investment opportunities with attractive yields and price/earnings ratios, good
upside potential, and limited downside risk.
<PAGE>
No example demonstrates the fickle nature of investor behavior better than
AT&T, a company we discussed in our December 1996 shareholder report. At the
time, the price of AT&T's stock had languished for several years. The company's
problems were analyzed in the media almost daily. Few Wall Street brokerage
firms found anything positive to say about the firm or its shares, which in our
opinion represented an attractive investment opportunity. Today new management
is in place, investor sentiment has turned positive, and the stock price has
rebounded strongly. We are naturally attracted to situations fraught with
controversy like this one. As long as investor psychology ebbs and flows, there
will be ample opportunities to uncover promising investment opportunities.
As the Major Portfolio Changes table following this letter demonstrates, we
executed a number of transactions over the last six months, adding major new
holdings such as NORFOLK SOUTHERN, EASTMAN KODAK, OLIN, and PPG INDUSTRIES.
These companies, in our opinion, possess interesting valuation characteristics
and the potential for price gains in the year ahead. The largest sales during
the second half were securities whose prices had advanced to the point where we
no longer felt comfortable with their relative valuations. Our largest sale was
Tambrands, which was acquired by Procter & Gamble last summer. Another
acquisition-related sale was ITT, which is being bought by Starwood Lodging at a
significant premium to our cost.
==============================
. . . THE INVESTMENT
ENVIRONMENT HAS BEEN
EXCEPTIONALLY CONDUCTIVE TO
GOOD RETURNS
- ------------------------------
In our last few reports, we commented on our holdings in the electric
utility and telephone company sectors. Thankfully, these stocks performed well
in the last six months after several years of underperformance. Strong price
appreciation in stocks such as BELL ATLANTIC, BEL LSOUTH, BGE, and UNICOM helped
your fund's return in the second half of the year.
In terms of overall portfolio structure, as shown in the security
diversification table on page 2, 89% of fund assets were invested in equities at
year-end, up from 86% six months earlier; 3% were in bonds and convertible
securities, and 8% in short-term money market instruments.
SUMMARY AND OUTLOOK
The equity market has provided investors with three unprecedented years of
prosperity, culminating with the gains of the last six months, and the
investment environment has been exceptionally conducive to good returns. As
prices have advanced, the market's valuation appeal and likely near-term upside
potential have diminished.
<PAGE>
We are mindful of how virtually impossible it is to make accurate market
predictions, and we never try to manage your fund based on someone else's market
forecasts. However, we do question how long the "delinkage" between the
underlying rate of corporate earnings and dividend growth on one hand, and the
more rapid advance of security prices on the other, can continue. The volatility
we experienced in the opening weeks of 1998, due in part to the turmoil in Asia,
is a reminder that investing entails risks that sometimes get in the way of
positive returns. While our emphasis is solely on uncovering interesting
investment values, we believe it is prudent to have more modest expectations for
equity market performance in the year ahead.
As always, we will strive to make sound investments on your behalf, and we
appreciate your continued confidence and support.
Respectfully submitted,
/s/
Brian C. Rogers
President and Chairman of the Investment Advisory Committee
January 20, 1998
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
- --------------------------------------------------------------------------------
AT&T .......................................................... 1.8%
Mellon Bank ................................................... 1.8
Dow Chemical .................................................. 1.5
Atlantic Richfield ............................................ 1.4
ALLTEL ........................................................ 1.3
- --------------------------------------------------------------------------------
American Home Products ........................................ 1.3
Union Pacific ................................................. 1.2
Exxon ......................................................... 1.1
Philip Morris ................................................. 1.1
SBC Communications ............................................ 1.1
- --------------------------------------------------------------------------------
GTE ........................................................... 1.1
Anheuser-Busch ................................................ 1.0
Pharmacia & Upjohn ............................................ 1.0
UST ........................................................... 1.0
J.C. Penney ................................................... 1.0
- --------------------------------------------------------------------------------
Mobil ......................................................... 1.0
International Flavors & Fragrances ............................ 1.0
GE ............................................................ 0.9
Fannie Mae .................................................... 0.9
DuPont ........................................................ 0.9
- --------------------------------------------------------------------------------
Texaco ........................................................ 0.9
Duke Energy ................................................... 0.9
Amoco ......................................................... 0.9
Norfolk Southern .............................................. 0.9
Chase Manhattan ............................................... 0.9
- --------------------------------------------------------------------------------
Total ......................................................... 27.9%
================================================================================
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 12/31/97
Ten Largest Purchases
- --------------------------------------------------------------------------------
Norfolk Southern *
Eastman Kodak *
United States Surgical *
Union Pacific
Olin *
Philip Morris
Transamerica *
Occidental Petroleum *
PPG Industries *
American Home Products
Ten Largest Sales
- --------------------------------------------------------------------------------
Tambrands **
Novartis **
Kellogg **
Georgia-Pacific
Betz Laboratories **
GM
ITT
Eaton **
Gannett **
Chase Manhattan
* Position added
** Position eliminated
================================================================================
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
[Equity Income SEC graph shown here]
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
================================================================================
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
================================================================================
Periods Ended 12/31/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Equity Income Fund 28.82% 27.41% 19.95% 16.99%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
================================================================================
<PAGE>
<TABLE>
T. Rowe Price Equity Income Fund
================================================================================
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
Year
Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ...................... $ 22.54 $ 20.01 $ 15.98 $ 16.65 $ 15.63
Investment activities
Net investment income ............ 0.66 0.64 0.66 0.60 0.54
Net realized and
unrealized gain (loss) ........... 5.67 3.38 4.56 0.13 1.74
Total from
investment activities ............ 6.33 4.02 5.22 0.73 2.28
Distributions
Net investment income ............ (0.66) (0.65) (0.65) (0.59) (0.54)
Net realized gain ................ (2.14) (0.84) (0.54) (0.81) (0.72)
Total distributions .............. (2.80) (1.49) (1.19) (1.40) (1.26)
NET ASSET VALUE
End of period ............................ $ 26.07 $ 22.54 $ 20.01 $ 15.98 $ 16.65
Ratios/Supplemental Data
Total return ............................. 28.82% 20.40% 33.35% 4.53% 14.84%
Ratio of expenses to
average net assets ....................... 0.79% 0.81% 0.85% 0.88% 0.91%
Ratio of net investment
income to average
net assets ............................... 2.67% 3.08% 3.69% 3.63% 3.23%
Portfolio turnover rate .................. 23.9% 25.0% 21.4% 36.3% 31.2%
Average commission
rate paid ................................ $ 0.0444 $ 0.0576 -- -- --
Net assets, end of period
(in millions) ............................ $ 12,771 $ 7,818 $ 5,215 $ 3,204 $ 2,851
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
December 31, 1997
================================================================================
Portfolio of Investments
- --------------------------------------------------------------------------------
Shares/Par Value
In thousands
Common Stocks 89.4%
FINANCIAL 15.5%
Bank and Trust 8.9%
BANC ONE ................................ 1,850,000 $ 100,478
BankBoston .............................. 800,000 75,150
Bankers Trust New York .................. 950,000 106,816
Chase Manhattan ......................... 1,000,000 109,500
First Union ............................. 1,460,000 74,825
Fleet Financial Group ................... 1,200,000 89,925
J. P. Morgan ............................ 900,000 101,588
Mellon Bank ............................. 3,800,800 230,423
Mercantile Bankshares ................... 1,300,000 50,375
National City ........................... 1,000,000 65,750
PNC Bank ................................ 958,300 54,683
Wells Fargo ............................. 225,000 76,373
1,135,886
Insurance 4.5%
American General ........................ 1,828,600 98,859
EXEL .................................... 1,200,000 76,050
Hilb, Rogal and Hamilton ................ 437,700 8,453
Lincoln National ........................ 800,000 62,500
SAFECO .................................. 1,350,800 65,767
St. Paul Companies ...................... 1,300,000 106,681
Transamerica ............................ 650,000 69,225
USF&G ................................... 2,250,000 49,640
Willis-Corroon ADR ...................... 3,330,000 41,001
578,176
Financial Services 2.1%
American Express ........................ 700,000 62,475
Fannie Mae .............................. 2,100,000 119,831
Travelers Group ......................... 1,549,800 83,496
265,802
Total Financial ......................... 1,979,864
<PAGE>
UTILITIES 17.1%
Telephone Services 9.0%
ALLTEL .................................. 4,100,000 168,356
AT&T .................................... 3,800,000 $ 232,750
BCE ..................................... 1,916,600 63,847
Bell Atlantic ........................... 1,200,000 109,200
BellSouth ............................... 1,525,800 85,922
Frontier ................................ 2,000,000 48,125
GTE ..................................... 2,600,000 135,850
SBC Communications ...................... 1,900,000 139,175
Southern New England Telecommunications . 1,157,000 58,211
Sprint .................................. 1,000,000 58,625
U S West Communications ................. 1,000,000 45,125
1,145,186
Electric Utilities 8.1%
BGE ..................................... 1,300,000 44,281
Central and South West .................. 1,400,000 37,888
Dominion Resources ...................... 1,600,000 68,100
DQE ..................................... 1,750,000 61,469
Duke Energy ............................. 2,000,000 110,750
Entergy ................................. 1,700,000 50,894
FirstEnergy * ........................... 3,159,965 91,639
GPU ..................................... 600,000 25,275
Houston Industries ...................... 2,700,000 72,056
PacifiCorp .............................. 2,250,000 61,453
PECO Energy ............................. 2,300,000 55,775
PG&E .................................... 1,245,800 37,919
Public Service Enterprise ............... 1,300,000 41,194
Southern Company ........................ 3,700,000 95,737
Teco Energy ............................. 1,600,000 45,000
Unicom .................................. 2,750,000 84,563
Western Resources ....................... 1,200,000 51,600
1,035,593
Total Utilities ......................... 2,180,779
CONSUMER NONDURABLES 16.9%
Cosmetics 1.0%
International Flavors & Fragrances....... 2,404,500 123,832
123,832
Beverages 1.6%
Anheuser-Busch .......................... 3,000,000 132,000
Brown-Forman (Class B) .................. 1,300,000 $ 71,825
203,825
<PAGE>
Food Processing 3.6%
Cadbury Schweppes (GBP) ................. 3,563,600 35,967
General Mills ........................... 1,500,000 107,437
Heinz ................................... 1,593,600 80,975
McCormick ............................... 3,000,000 84,187
Quaker Oats ............................. 1,944,800 102,588
Sara Lee ................................ 862,500 48,570
459,724
Hospital Supplies/Hospital Management 2.8%
Abbott Laboratories ..................... 1,100,000 72,119
Bausch & Lomb ........................... 1,500,000 59,437
Baxter International .................... 800,000 40,350
C. R. Bard .............................. 1,200,000 37,575
Smith & Nephew (GBP) * .................. 16,840,700 49,790
United States Surgical .................. 3,200,000 93,800
353,071
Pharmaceuticals 2.6%
American Home Products .................. 2,100,000 160,650
Amgen ................................... 800,000 43,300
Pharmacia & Upjohn ...................... 3,600,000 131,850
335,800
Miscellaneous Consumer Products 5.3%
Armstrong World ......................... 750,000 56,063
Colgate-Palmolive ....................... 250,000 18,375
Fortune Brands .......................... 1,683,700 62,402
Philip Morris ........................... 3,100,000 140,469
PPG Industries .......................... 1,087,100 62,101
RJR Nabisco ............................. 1,700,000 63,750
Tomkins (GBP) ........................... 17,200,000 81,363
Unilever N.V. ADR ....................... 1,000,000 62,437
UST ..................................... 3,500,000 129,281
676,241
Total Consumer Nondurables .............. 2,152,493
CONSUMER SERVICES 5.9%
General Merchandisers 1.4%
J.C. Penney ............................. 2,100,000 126,656
May Department Stores ................... 1,000,000 $ 52,688
179,344
Specialty Merchandisers 0.4%
Tupperware .............................. 1,800,000 50,175
50,175
<PAGE>
Entertainment and Leisure 1.0%
Hilton .................................. 1,433,400 42,644
ITT * ................................... 500,000 41,437
Reader's Digest (Class A) ............... 1,800,000 42,525
Reader's Digest (Class B) ............... 125,100 3,049
129,655
Media and Communications 3.1%
Dow Jones ............................... 1,500,000 80,531
Dun & Bradstreet ........................ 2,000,000 61,875
Knight-Ridder ........................... 2,000,000 104,000
McGraw-Hill ............................. 861,700 63,766
R.R. Donnelly ........................... 2,300,000 85,675
395,847
Total Consumer Services ................. 755,021
CONSUMER CYCLICALS 4.6%
Automobiles and Related 1.8%
Echlin .................................. 1,600,000 57,900
Genuine Parts ........................... 2,600,000 88,237
GM ...................................... 1,300,000 78,813
224,950
Building and Real Estate 1.3%
Rouse ................................... 674,000 22,074
SECURITY CAPITAL PACIFIC TRUST, REIT .... 800,000 19,400
Simon DeBartolo Group, REIT ............. 3,089,532 100,989
Weingarten Realty Investors, REIT ....... 600,000 26,887
169,350
Miscellaneous Consumer Durables 1.5%
Eastman Kodak ........................... 1,750,000 106,422
Whirlpool ............................... 1,500,000 82,500
188,922
Total Consumer Cyclicals ................ 583,222
TECHNOLOGY 0.7%
Electronic Components 0.7%
AMP ..................................... 2,000,000 $84,000
Total Technology ........................ 84,000
CAPITAL EQUIPMENT 1.9%
Electrical Equipment 1.4%
GE ...................................... 1,650,000 121,069
Hubbell (Class B) ....................... 1,300,000 64,106
185,175
Machinery 0.5%
Cooper Industries ....................... 1,200,000 58,800
58,800
Total Capital Equipment ................. 243,975
<PAGE>
BUSINESS SERVICES AND
TRANSPORTATION 4.6%
Transportation Services 0.2%
Alexander & Baldwin ..................... 1,022,500 28,087
28,087
Miscellaneous Business Services 1.7%
Deluxe Corp. ............................ 750,000 25,875
GATX .................................... 500,000 36,281
H&R Block ............................... 1,920,600 86,067
Waste Management ........................ 2,300,000 63,250
211,473
Railroads 2.7%
Burlington Northern Santa Fe ................ 850,000 78,997
Norfolk Southern ............................ 3,584,600 110,450
Union Pacific ............................... 2,500,000 156,094
345,541
Total Business Services and Transportation .. 585,101
ENERGY 11.3%
Energy Services 0.8%
Witco ................................... 2,600,000 106,112
106,112
Gas Transmission 0.5%
Enron ................................... 1,500,000 $62,344
62,344
Integrated Petroleum - Domestic 4.2%
Amerada Hess ............................ 1,500,000 82,312
Atlantic Richfield ...................... 2,200,000 176,275
British Petroleum ADR ................... 983,680 78,387
Occidental Petroleum .................... 2,500,000 73,281
Phillips Petroleum ...................... 1,300,000 63,213
USX-Marathon ............................ 1,987,400 67,075
540,543
Integrated Petroleum - International 5.8%
Amoco ................................... 1,300,000 110,662
Chevron ................................. 1,400,000 107,800
Exxon ................................... 2,300,000 140,731
Mobil ................................... 1,750,000 126,328
Repsol ADR .............................. 1,100,000 46,819
Royal Dutch Petroleum ADR ............... 1,724,800 93,463
Texaco .................................. 2,056,600 111,828
737,631
Total Energy ............................ 1,446,630
<PAGE>
PROCESS INDUSTRIES 8.7%
Diversified Chemicals 3.4%
Dow Chemical ............................ 1,900,000 192,850
DuPont .................................. 1,871,800 112,425
Eastman Chemical ........................ 750,000 44,672
Olin .................................... 1,900,000 89,062
439,009
Specialty Chemicals 2.8%
3M ...................................... 414,900 34,048
Great Lakes Chemical .................... 2,200,000 98,725
Imperial Chemical ADR ................... 1,000,000 64,938
Lubrizol ................................ 1,200,000 44,250
Nalco Chemical .......................... 1,350,000 53,409
Pall .................................... 3,200,000 66,200
361,570
Paper and Paper Products 1.6%
Consolidated Papers ..................... 1,255,100 $ 66,991
Kimberly-Clark .......................... 500,000 24,656
Union Camp .............................. 2,000,000 107,375
199,022
Forest Products 0.8%
Georgia-Pacific ......................... 600,000 36,450
International Paper ..................... 1,500,000 64,687
101,137
Building & Construction 0.1%
Georgia-Pac Timber ...................... 600,000 13,613
13,613
Total Process Industries ................ 1,114,351
BASIC MATERIALS 1.7%
Metals 1.0%
Inco .................................... 1,300,000 22,100
Reynolds Metals ......................... 1,000,000 60,000
USX-U. S. Steel ......................... 1,500,000 46,875
128,975
Mining 0.7%
LONRHO (GBP) ............................ 13,000,000 20,071
Newmont Mining .......................... 2,250,000 66,094
86,165
Total Basic Materials ................... 215,140
Total Miscellaneous Common Stocks 0.5%.. 69,816
Total Common Stocks (Cost $8,296,469) .. 11,410,392
<PAGE>
Convertible Preferred Stocks 0.2%
Crown Cork & Seal ....................... 500,000 23,500
Total Convertible Preferred Stocks (Cost $24,026) 23,500
Convertible Bonds 0.5%
Corporate Express
Notes, 4.50%, 7/1/00 .............. $15,000,000 13,730
(144a), 4.50%, 7/1/00 ............. 30,000,000 27,461
Roche Holding, LYONs, Zero Coupon, 4/20/10 $43,985,000 $24,357
Total Convertible Bonds (Cost $60,489).. 65,548
U.S. Government Obligations/
Agencies 2.9%
U.S. Treasury Bonds, 6.875%, 8/15/25 .... 75,000,000 83,625
U.S. Treasury Notes
5.50%, 11/15/98 ................... 57,900,000 57,837
5.875%, 11/15/99 - 2/15/00 ........ 125,000,000 125,465
6.25%, 5/31/99 .................... 50,000,000 50,399
6.50%, 10/15/06 ................... 50,000,000 52,351
8.875%, 11/15/98 .................. 5,000,000 5,134
Total U.S. Government Obligations/Agencies (Cost $362,783) 374,811
Short-Term Investments 6.9%
Bank Notes 0.1%
Comerica Bank, 5.93%, 6/24/98 ........... 10,000,000 9,997
9,997
Certificates of Deposit 0.6%
Commerzbank, 5.93%, 6/26/98 .............. 20,000,000 19,994
General Banque, 5.96%, 6/18/98 ........... 15,000,000 14,997
Hessische Landesbank, 6.13%, 4/7/98 ...... 10,000,000 9,997
Rabobank Nederland N.V., 5.97%, 3/20/98 .. 10,000,000 9,999
Royal Bank of Canada, 5.91%, 6/17/98 ..... 10,000,000 9,996
Royal Bank of Canada, 5.95%, 3/24/98 ..... 15,000,000 14,996
79,979
Commercial Paper 0.4%
KFW International, 5.50%, 1/22/98 ........ 20,000,000 19,936
Oesterreichische Kontrollbank, 5.50%, 1/14/98 20,725,000 20,684
Woolwich Building Society, 5.50%, 1/20/98. 10,000,000 9,971
50,591
Medium-Term Notes 0.3%
Morgan Stanley Group, VR, 6.176%, 5/18/98.. 36,000,000 36,035
36,035
Money Market Funds 5.1%
Reserve Investment Fund, 5.84%#+ .......... 653,852,191 653,852
653,852
<PAGE>
Structured Investment Vehicles 0.4%
Short Term Card Account Trust, VR, (144a)
6.00%, 1/15/98 ...................... $30,000,000 $30,000
SMM Trust, VR, (144a), 5.969%, 3/26/98 20,000,000 20,000
50,000
Total Short-Term Investments (Cost $880,454) 880,454
Total Investments in Securities
99.9% of Net Assets (Cost $9,624,221) ..... $12,754,705
Other Assets Less Liabilities ............. 16,480
NET ASSETS ................................ $12,771,185
# Seven-day yield
+ Affiliated company
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
VR Variable rate
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 year-end amounts to
0.61% of net assets.
GBP British sterling
LYONs Liquid Yield Option Notes
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
December 31,1997
================================================================================
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
In thousands
Assets
Investments in securities, at value
Affiliated companies (cost $653,852) ......................... $ 653,852
Other companies (cost $8,970,369) ............................ 12,100,853
Total investments in securities .............................. 12,754,705
Other assets ................................................... 67,130
Total assets ................................................... 12,821,835
Liabilities
Total liabilities .............................................. 50,650
NET ASSETS ..................................................... $12,771,185
Net Assets Consist of:
Accumulated net investment income - net of distributions ....... $ 1,521
Accumulated net realized gain/loss - net of distributions ...... 63,046
Net unrealized gain (loss) ..................................... 3,130,483
Paid-in-capital applicable to 489,852,786 shares of
no par value capital stock outstanding;
unlimited shares authorized .................................... 9,576,135
NET ASSETS ..................................................... $12,771,185
NET ASSET VALUE PER SHARE ...................................... $ 26.07
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/97
Investment Income
Income
Dividend ................................................ $ 280,629
Interest ................................................ 82,924
Total income ............................................ 363,553
Expenses
Investment management ................................... 60,406
Shareholder servicing ................................... 19,515
Custody and accounting .................................. 411
Registration ............................................ 1,057
Prospectus and shareholder reports ...................... 993
Directors ............................................... 41
Legal and audit ......................................... 26
Miscellaneous ........................................... 95
Total expenses .......................................... 82,544
Net investment income ..................................... 281,009
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities .............................................. 857,368
Futures ................................................. 3,020
Foreign currency transactions ........................... (646)
Net realized gain (loss) ................................ 859,742
Change in net unrealized gain or loss
Securities .............................................. 1,502,892
Futures ................................................. 372
Other assets and liabilities
denominated in foreign currencies ....................... 15
Change in net unrealized gain or loss ................... 1,503,279
Net realized and unrealized gain (loss) ................... 2,363,021
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS .................................... $ 2,644,030
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
T. Rowe Price Equity Income Fund
================================================================================
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands
<CAPTION>
Year
Ended
12/31/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income ..................................................... $ 281,009 $ 200,010
Net realized gain (loss) .................................................. 859,742 457,366
Change in net unrealized gain or loss ..................................... 1,503,279 571,388
Increase (decrease) in net assets from operations ......................... 2,644,030 1,228,764
Distributions to shareholders
Net investment income ..................................................... (281,472) (201,399)
Net realized gain ......................................................... (948,478) (274,623)
Decrease in net assets from distributions ................................. (1,229,950) (476,022)
Capital share transactions *
Shares sold ............................................................... 3,858,730 2,769,484
Distributions reinvested .................................................. 1,194,182 457,250
Shares redeemed ........................................................... (1,513,941) (1,376,120)
Increase (decrease) in net assets from capital
share transactions ........................................................ 3,538,971 1,850,614
Net Assets
Increase (decrease) during period ................................................. 4,953,051 2,603,356
Beginning of period ............................................................... 7,818,134 5,214,778
End of period ..................................................................... $ 12,771,185 $ 7,818,134
*Share information
Shares sold ............................................................... 156,117 130,381
Distributions reinvested .................................................. 47,135 20,657
Shares redeemed ........................................................... (60,273) (64,822)
Increase (decrease) in shares outstanding ................................. 142,979 86,216
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
December 31, 1997
================================================================================
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Equity Income Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company and commenced operations on October 31, 1985.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
VALUATION Equity securities listed or regularly traded on a securities
exchange 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. Listed securities not traded on a particular day and securities
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, or by persons delegated by the Board, 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 amortized cost which, when combined
with accrued interest, approximates fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
AFFILIATED COMPANIES As defined by the Investment Company Act of 1940, an
affiliated company is one in which the fund owns at least 5% of the outstanding
voting securities.
<PAGE>
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.
PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
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
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $4,453,409,000 and $2,171,386,000,
respectively, for the year ended December 31, 1997. Purchases and sales of U.S.
government securities aggregated $224,953,000 and $103,718,000, respectively,
for the year ended December 31, 1997.
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, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $9,624,221,000, and net unrealized gain
aggregated $3,130,484,000, of which $3,224,824,000 related to appreciated
investments and $94,340,000 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 $6,118,000 was payable at December 31, 1997. 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 0.30% for assets in excess of $80 billion. The
effective annual group fee rate was 0.32% at December 31, 1997, and 0.33% for
the year then ended. The fund pays a pro-rata share of the group fee based on
the ratio of its net assets to those of the group.
<PAGE>
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. The fund incurred expenses pursuant to these
related party agreements totaling approximately $14,793,000 for the year ended
December 31, 1997, of which $1,359,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual
funds (underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum)
may invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum Growth Fund and
Spectrum Income Fund collectively held approximately 5.4% of the outstanding
shares of the Equity Income Fund at December 31, 1997. For the year then ended,
the fund was allocated $1,433,000 of Spectrum expenses, $112,000 of which was
payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the year ended December 31, 1997, totaled
$12,103,000 and are reflected as interest income in the accompanying Statement
of Operations.
================================================================================
Tax Information (Unaudited) for the Tax Year Ended 12/31/97
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
* $109,350,000 from short-term capital gains, and
* $839,128,000 from long-term capital gains; of which $457,636,000 was
subject to the 20% rate gains category.
For corporate shareholders, 63% of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
================================================================================
<PAGE>
T. Rowe Price Equity Income Fund
================================================================================
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 assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of T. Rowe Price Equity Income Fund
(the "Fund") at December 31, 1997, 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 estimate
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with custodians 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 21, 1998
<PAGE>
T. Rowe Price Shareholder Services
================================================================================
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE Shareholder service representatives are available from 8
a.m. to 10 p.m. ET Monday through Friday and from 8:30 a.m. to 5
p.m. ET on weekends. Call 1-800-225-5132 to speak directly with a
representative who will be able to assist you with your accounts.
IN PERSON Visit one of our investor center locations to meet with
a representative who will be able to assist you with your
accounts. You can also drop off applications or obtain
prospectuses and other literature at these centers.
AUTOMATED 24-HOUR SERVICES
TELE*ACCESS [Registration Mark] Call 1-800-638-2587 to obtain
information such as account balance, date and amount of your last
transaction, latest dividend payment, fund prices, and yields.
Additionally, you have the ability to request prospectuses,
statements, and account and tax forms; to reorder checks; and to
initiate purchase, redemption, and exchange orders for
identically registered accounts.
T.ROWE PRICE ONLINE Through a personal computer via dial-up
modem, you can replicate all the services available on
Tele*Access plus conduct transactions in your Discount Brokerage
and Variable Annuity accounts.
ACCOUNT SERVICES
CHECKING Write checks for $500 or more on any money market and
most bond fund accounts (except the High Yield and Emerging
Markets Bond Funds).
AUTOMATIC INVESTING Build your account over time by investing
directly from your bank account or paycheck with Automatic Asset
Builder. Additionally, Automatic Exchange enables you to set up
systematic investments from one fund account into another, such
as from a money fund into a stock fund. A $50 minimum makes it
easy to get started.
AUTOMATIC WITHDRAWAL If you need money from your fund account on
a regular basis, you can establish scheduled, automatic
redemptions.
<PAGE>
DIVIDEND AND CAPITAL GAINS PAYMENT OPTIONS Reinvest all or some
of your distributions, or take them in cash. We give you maximum
flexibility and convenience.
DISCOUNT BROKERAGE*
INVESTMENTS AVAILABLE You can trade stocks, bonds, options,
precious metals, and other securities at a savings over regular
commission rates.
TO OPEN AN ACCOUNT Call a shareholder service representative for
more information.
INVESTMENT INFORMATION
COMBINED STATEMENT A comprehensive overview of your T. Rowe Price
accounts is provided. The summary page gives you earnings by tax
category, provides total portfolio value, and lists your
investments by type-stock, bond, and money market. Detail pages
itemize account transactions by fund.
SHAREHOLDER REPORTS Portfolio managers review the performance of
the funds in plain language and discuss T. Rowe Price's economic
outlook.
T. ROWE PRICE REPORT This is a quarterly newsletter with relevant
articles on market trends, personal financial planning, and T.
Rowe Price's economic perspective.
PERFORMANCE UPDATE This quarterly report reviews recent market
develop- ments and provides comprehensive performance information
for every T. Rowe Price fund.
INSIGHTS This library of information includes reports on mutual
fund tax issues, investment strategies, and financial markets.
DETAILED INVESTMENT GUIDES Our widely acclaimed Asset Mix
Worksheet, College Planning Kit, Diversifying Overseas: A Guide
to International Investing, Retirees Financial Guide, and
Retirement Planning Kit (also available on disk for PC use) can
help you determine and reach your investment goals.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
<PAGE>
T. Rowe Price Mutual Funds
================================================================================
STOCK FUNDS
- --------------------------------------------------------------------------------
DOMESTIC
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications*
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons**
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value**
Spectrum Growth
Total Equity Market Index
Value
INTERNATIONAL/GLOBAL
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
<PAGE>
BOND FUNDS
- --------------------------------------------------------------------------------
DOMESTIC TAXABLE
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
DOMESTIC TAX-FREE
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
INTERNATIONAL/GLOBAL
Emerging Markets Bond
Global Government Bond
International Bond
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
TAXABLE
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
<PAGE>
TAX-FREE
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
- --------------------------------------------------------------------------------
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD VARIABLE ANNUITY
- --------------------------------------------------------------------------------
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Formerly the closed-end New Age Media Fund. Converted to open-end status on
7/28/97.
** Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
<PAGE>
T. Rowe Price Discount Brokerage
================================================================================
DISCOUNT BROKERAGE
A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC
This low-cost service gives you the opportunity to easily consolidate all
your investments with one company. Through T. Rowe Price Discount Brokerage, you
can buy and sell individual securities-stocks, bonds, options, and others-at
considerable commission savings over full-service brokers.* We also provide a
wide range of services, including:
AUTOMATED TELEPHONE AND COMPUTER SERVICES You can enter trades, access
quotes, and review account information 24 hours a day, seven days a week. Any
trades executed through these programs save you an additional 10% on
commissions.**
INVESTOR INFORMATION A variety of informative reports, such as our
Brokerage Insights series, S&P Market Month newsletter, and select stock
reports, can help you better evaluate economic trends and investment
opportunities.
DIVIDEND REINVESTMENT SERVICE Virtually all stocks held in customer
accounts are eligible for this service, free of charge.
* Based on a February 1997 telephone survey that compared our commission
rates on stock transactions of various sizes with those of other
full-service and discount brokerages. Commission rates will vary based on
size and nature of trades. Services vary by firm. For additional
information concerning our commission rates and services, call
1-800-638-5660.
** Discount applies to our current commission schedule; subject to our $35
minimum commission.
<PAGE>
FOR YIELD, PRICE, LAST TRANSACTION,
CURRENT BALANCE, OR TO CONDUCT
TRANSACTIONS, 24 HOURS, 7 DAYS
A WEEK, CALL TELE*ACCESS [REGISTRATION MARK]:
1-800-638-2587 toll free
FOR ASSISTANCE
WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
TO OPEN A DISCOUNT BROKERAGE
ACCOUNT OR OBTAIN INFORMATION,
CALL: 1-800-638-5660 toll free
INTERNET ADDRESS:
www.troweprice.com
T. Rowe Price Associates
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.
INVESTOR CENTERS:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor. F71-050 12/31/97
