- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Annual Report
Equity Income Fund
- --------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
================================================================================
Equity Income Fund
* Stocks staged a powerful late-year rally following a steep summer
correction, but large-cap growth stocks continued to outpace value stocks
during the year.
* The fund returned 2.78% and 9.23%, respectively, for the 6- and 12-month
periods ended December 31, 1998, roughly in line with its Lipper benchmark
but behind the S&P 500.
* Stocks were led by a small group of technology and large-cap companies,
making it difficult for a conservative fund to keep pace with the broad
market index.
* We made substantial new investments in out-of-favor stocks, such as Baker
Hughes and Boeing, with good long-term potential.
* Stocks have been advancing at a faster rate than the fundamentals, which
could make 1999 a challenging year. However, we believe our steady
investment program will continue to serve shareholders well over time.
<PAGE>
Fellow Shareholders
Last year was characterized by positive economic growth, a favorable
interest rate environment, and substantial stock market volatility. A solid
first half was undermined by a severe third quarter correction, which gave way
to a near-euphoric rally in the final months. The S&P 500 Index advanced by more
than 20% for a record fourth consecutive year. However, within the context of
another strong year for equities, large-cap growth stocks outpaced the value
stocks in which your fund invests.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Equity Income Fund 2.78% 9.23%
S&P 500 9.22 28.57
Lipper Equity Income
Funds Average 1.80 10.89
================================================================================
For the last six months, the fund returned 2.78%, which was ahead of the
Lipper universe of similarly managed funds but below the return for the
unmanaged Standard & Poor's 500 Stock Index. The second half was particularly
volatile in that the carnage of the third quarter was quickly followed by the
market's exceptionally strong rebound in the fourth. We were pleased that the
fund provided shareholders with some downside protection during the sell-off,
which is characteristic of our conservative investment approach. This inherent
defensiveness, however, made it difficult for the fund to keep up with the
strong rally during the fourth quarter.
For the year, the fund's 9.23% return was respectable but somewhat
disappointing, since it was the first time since 1991 that calendar year
performance slightly lagged the Lipper peer group. As discussed later in the
report, it is virtually impossible for funds with conservative programs like
Equity Income to keep up with S&P 500 stocks during the broad market advances we
have seen in recent years. In times like these, it is helpful for shareholders
to keep in mind that the purpose of this type of fund is not to generate robust
returns under all market conditions. The fund's goal is to produce attractive
returns, including substantial dividend income, over time -- and also to help
cushion shareholders' investment principal when times get rough.
<PAGE>
================================================================================
Preparing For The Year 2000
- --------------------------------------------------------------------------------
The Year 2000 draws closer every day, and it holds special meaning beyond
the arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all
new systems process and store four-digit years. All critical systems have been
reprogrammed (including business applications required to service our customers
and processing infrastructure necessary to ensure the integrity of customer data
and investments), and they are currently being tested. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. In addition, we are
scheduling tests for critical vendors and companies that claim Year 2000
compliance to ensure that time-related data and calculations function properly
as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition
into the next millennium. We are assessing all systems providing products or
services to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we have modified them where necessary for the Year 2000.
<PAGE>
The Securities Industry Association (SIA) is coordinating Year 2000 testing
to assure that securities markets, clearing corporations, depositories, and
third party service providers can send, receive, and process files and
transactions accurately. In late July 1998, the SIA completed a beta test of
Year 2000 readiness. The test was considered successful in terms of transactions
completed and will serve as the basis for the SIA's industry-wide approach.
During October 1998, T. Rowe Price completed its beta test of Year 2000
readiness with the SIA and is ready for the industry-wide test that is scheduled
for March and April 1999.
For a more detailed discussion of our Year 2000 effort, as well as
continuing updates on our progress, please check our Web site
(WWW.TROWEPRICE.COM).
================================================================================
YEAR-END DISTRIBUTIONS
Your Board of Trustees declared a fourth quarter dividend of $0.15 per
share, bringing the total for 1998 to $0.61. Earlier in the month, a $1.36 per
share capital gain distribution was declared, of which $0.27 represented
short-term and $1.09 long-term gains. The dividend distribution was paid on
December 30, 1998, to shareholders of record on December 28, 1998, and the
capital gain distribution was paid on December 17, 1998, to shareholders of
record on December 15, 1998. You should have received your check or statement
reflecting them as well as Form 1099-DIV summarizing this information for 1998
tax purposes.
PORTFOLIO STRATEGY
"It was the best of times, it was the worst of times." This opening
sentence in Charles Dickens' classic, A Tale of Two Cities, describes the
dramatic volatility in financial markets, as well as the wide range of
performance within the U.S. equity market in 1998. While the S&P 500 posted a
28% advance, more than one half of this return was generated by 15 of the
largest-capitalization companies in the index. Much of the market's leadership
was contained in the largest-cap growth stocks, while high-yield and low P/E
stocks -- two characteristics the Equity Income Fund has historically sought out
- -- were out of favor. So, while the S&P 500 produced a healthy return, in
reality the average stock on the New York Stock Exchange actually declined
slightly in value.
<PAGE>
==============================
Four of our largest sales
during the past six months
were stocks of companies that
were in the process of being
merged or acquired . . .
- ------------------------------
When looking at the impact of yield and P/E within the S&P 500, the 100
highest-yielding stocks and 100 lowest P/E stocks in the market returned 7.8%
and -0.6%, respectively. Stock funds with broad investment programs had more
flexibility to make different types of investments than are permitted for your
fund. For example, technology stocks produced the best returns for the year --
although they endured an extremely volatile ride along the way. However, given
the conservative nature of our investment program, technology is not a natural
sector for us to invest in, since these stocks normally do not meet our
investment criteria.
The fund was 95% invested in equities at year-end. Four of our largest
sales during the past six months were stocks of companies that were in the
process of being merged or acquired (see Major Portfolio Changes table following
the report). In each case, we were able to sell our shares at prices higher than
our original cost.
We made significant new investments in several companies, including BAKER
HUGHES, BOEING, BANKAMERICA, and CORNING, all of which we bought at prices well
below their highs for the year. Many of our holdings typically trade at
below-average valuation levels because, for many diverse reasons, their share
prices declined before we took a position in them. Baker Hughes is a good
example. While the jury may be out on this investment for a while, we invested
in this oil service company at approximately $19 per share, down from the 1998
high of about $45. In our view, the company represents reasonable value at the
price we paid for the stock and offers the potential for good returns once
investors grow less concerned about recent trends in energy prices.
This investment strategy -- buying out-of-favor stocks with good long-term
potential -- has served shareholders well in the past, and we believe it will in
the future when investors focus again on stocks with appealing market
valuations. The Financial Profile table below lists the valuation
characteristics found in the typical fund investment. The data demonstrate the
degree to which the companies in which we invest have below-average valuations.
The fund's yield is more than double that of the broad index, its price/book
value ratio is about half, its price/earnings ratio is a lot lower, and the
historical beta of 0.68 versus 1.00 for the index means that the fund can be
expected to have about 68% of the volatility of the S&P 500.
<PAGE>
================================================================================
Financial Profile
- --------------------------------------------------------------------------------
Equity Income
As of 12/31/98 Fund S&P 500
- --------------------------------------------------------------------------------
Current Yield 2.7% 1.3%
Price/Book Ratio 3.3 6.5
Price/Earnings Ratio
(1998 estimated EPS) 18.3 25.4
Historical Beta
(based on monthly
returns for 5 years) 0.68 1.00
================================================================================
Among your fund's largest holdings (see Twenty-Five Largest Holdings table
on page 6) are companies from many diverse industries, including SBC
COMMUNICATIONS, MELLON BANK, AMERICAN HOME PRODUCTS, EXXON, ANHEUSER-BUSCH, DOW
CHEMICAL, GE, and others that represent a broad cross-section of the U.S.
economy.
SUMMARY AND OUTLOOK
Twelve months ago, we commented on the rapid appreciation of stock prices
compared with the growth in the underlying earnings and dividends. In 1997,
share prices increased at a much faster rate than the underlying fundamentals,
and this "delinkage" between price and value grew even more pronounced in 1998.
We expect 1999 to be a more challenging year than the one just ended, which
could lead to more moderate returns than the robust and, in our view,
unsustainable performance of the past four years. In this environment, our
investment approach will be steady and constant. We will continue to search for
attractively valued stocks with solid long-term potential.
As always, we will strive to justify the confidence you have placed in us,
and we appreciate your continued support.
Respectfully submitted,
/s/
Brian C. Rogers
President and Chairman of the Investment Advisory Committee
January 22, 1999
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/98
SBC Communications ......................................... 2.3%
ALLTEL ..................................................... 1.9
Mellon Bank ................................................ 1.8
American Home Products ..................................... 1.7
Exxon ...................................................... 1.6
- --------------------------------------------------------------------------------
Amoco ...................................................... 1.5
Philip Morris .............................................. 1.5
Pharmacia & Upjohn ......................................... 1.5
General Mills .............................................. 1.4
Anheuser-Busch ............................................. 1.4
- --------------------------------------------------------------------------------
GTE ........................................................ 1.3
Norfolk Southern ........................................... 1.2
Dow Chemical ............................................... 1.2
Mobil ...................................................... 1.2
Chevron .................................................... 1.2
- --------------------------------------------------------------------------------
Fannie Mae ................................................. 1.2
GE ......................................................... 1.1
Atlantic Richfield ......................................... 1.1
Kimberly-Clark ............................................. 1.1
AT&T ....................................................... 1.1
- --------------------------------------------------------------------------------
American General ........................................... 1.1
Union Pacific .............................................. 1.1
International Flavors & Fragrances ......................... 1.0
Texaco ..................................................... 1.0
Union Camp ................................................. 1.0
- --------------------------------------------------------------------------------
Total ...................................................... 33.5%
================================================================================
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 12/31/98
Ten Largest Purchases
- --------------------------------------------------------------------------------
Unocal
Baker Hughes *
Boeing *
Telebras *
Toys "R" Us *
Armstrong World
BankAmerica *
Kellogg
Royal Dutch Petroleum
Corning *
Ten Largest Sales
- --------------------------------------------------------------------------------
United States Surgical **
Bankers Trust New York **
BellSouth
Willis-Corroon **
Amoco
PECO Energy
Frontier
Baxter International **
Amgen **
Abbott Laboratories
* Position added
** Position eliminated
================================================================================
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
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.
[Equity Income Fund SEC graph shown here]
================================================================================
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 12/31/98 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Equity Income Fund 9.23% 19.21% 18.75% 15.18%
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>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
<TABLE>
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year
Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period .................... $ 26.07 $ 22.54 $ 20.01 $ 15.98 $ 16.65
Investment activities
Net investment income .......... 0.61 0.66 0.64 0.66 0.60
Net realized and
unrealized gain (loss) ......... 1.74 5.67 3.38 4.56 0.13
Total from
investment activities .......... 2.35 6.33 4.02 5.22 0.73
Distributions
Net investment income .......... (0.61) (0.66) (0.65) (0.65) (0.59)
Net realized gain .............. (1.49) (2.14) (0.84) (0.54) (0.81)
Total distributions ............ (2.10) (2.80) (1.49) (1.19) (1.40)
NET ASSET VALUE
End of period .......................... $ 26.32 $ 26.07 $ 22.54 $ 20.01 $ 15.98
Ratios/Supplemental Data
Total return^ .......................... 9.23% 28.82% 20.40% 33.35% 4.53%
Ratio of expenses to
average net assets ..................... 0.77% 0.79% 0.81% 0.85% 0.88%
Ratio of net investment
income to average
net assets ............................. 2.26% 2.67% 3.08% 3.69% 3.63%
Portfolio turnover rate ................ 22.6% 23.9% 25.0% 21.4% 36.3%
Net assets, end of period
(in millions) .......................... $ 13,495 $ 12,771 $ 7,818 $ 5,215 $ 3,204
<FN>
^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming
reinvestment of all distributions.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
December 31, 1998
================================================================================
Statement of Net Assets Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 95.7%
FINANCIAL 15.3%
Bank and Trust 9.6%
Bank One ............................... 2,100,000 $ 107,231
BankAmerica ............................ 850,000 51,106
BankBoston ............................. 1,400,000 54,513
Chase Manhattan ........................ 1,400,000 95,288
Citigroup .............................. 2,650,000 131,175
First Union ............................ 1,700,000 103,381
Fleet Financial Group .................. 2,400,000 107,250
J. P. Morgan ........................... 1,200,000 126,075
Mellon Bank ............................ 3,500,800 240,680
Mercantile Bankshares .................. 1,715,900 66,009
National City .......................... 1,000,000 72,500
PNC Bank ............................... 958,300 51,868
Wells Fargo ............................ 2,250,000 89,859
1,296,935
Insurance 4.6%
American General ....................... 1,828,600 142,631
EXEL (Class A) ......................... 1,200,000 90,000
Lincoln National ....................... 800,000 65,450
SAFECO ................................. 2,600,000 111,719
St. Paul Companies ..................... 3,869,450 134,463
Transamerica ........................... 650,000 75,075
619,338
Financial Services 1.1%
Fannie Mae ............................. 2,100,000 155,400
155,400
Total Financial ........................ 2,071,673
<PAGE>
UTILITIES 16.3%
Telephone 9.7%
ALLTEL ................................. 4,200,000 251,212
AT&T ................................... 1,900,000 142,975
BCE ADR ................................ 1,916,600 72,711
Bell Atlantic .......................... 2,400,000 $ 127,200
BellSouth .............................. 1,300,000 64,838
Frontier ............................... 400,000 13,600
GTE .................................... 2,800,000 182,000
SBC Communications ..................... 5,832,617 312,774
Telebras ADR ........................... 850,000 61,784
U S West ............................... 1,300,000 84,013
1,313,107
Electric Utilities 6.6%
BGE .................................... 1,000,000 30,875
Central and South West ................. 1,000,000 27,438
Dominion Resources ..................... 1,000,000 46,750
DQE .................................... 1,750,000 76,891
Duke Energy ............................ 1,500,000 96,094
Entergy ................................ 1,500,000 46,687
FirstEnergy ............................ 3,159,965 102,896
GPU .................................... 800,000 35,350
Houston Industries ..................... 2,400,000 77,100
PacifiCorp ............................. 3,100,000 65,294
PECO Energy ............................ 900,000 37,462
Southern Company ....................... 3,500,000 101,719
Teco Energy ............................ 1,600,000 45,100
Unicom ................................. 2,400,000 92,550
882,206
Total Utilities ........................ 2,195,313
CONSUMER NONDURABLES 17.9%
Cosmetics 1.1%
International Flavors & Fragrances ..... 3,185,600 140,764
140,764
Beverages 2.1%
Anheuser-Busch ......................... 2,900,000 190,312
Brown-Forman (Class B) ................. 1,300,000 98,394
288,706
Food Processing 4.3%
General Mills .......................... 2,480,000 192,820
Heinz .................................. 1,593,600 90,238
Kellogg ................................ 2,500,000 $ 85,312
McCormick .............................. 2,981,600 100,722
Quaker Oats ............................ 1,944,800 115,716
584,808
<PAGE>
Hospital Supplies/Hospital Management 1.4%
Abbott Laboratories .................... 1,150,000 56,350
Bausch & Lomb .......................... 1,325,300 79,518
Smith & Nephew (GBP) ................... 16,840,700 51,202
187,070
Pharmaceuticals 3.1%
American Home Products ................. 4,000,000 225,250
Pharmacia & Upjohn ..................... 3,500,000 198,187
423,437
Miscellaneous Consumer Products 5.9%
Armstrong World ........................ 1,800,000 108,562
Fortune Brands ......................... 2,400,000 75,900
Philip Morris .......................... 3,800,000 203,300
PPG Industries ......................... 1,500,000 87,375
RJR Nabisco ............................ 2,750,000 81,641
Stanley Works .......................... 800,000 22,200
Tomkins (GBP) .......................... 17,200,000 81,728
UST .................................... 3,800,000 132,525
793,231
Total Consumer Nondurables ............. 2,418,016
CONSUMER SERVICES 4.7%
General Merchandisers 1.0%
J.C. Penney ............................ 1,700,000 79,687
May Department Stores .................. 1,000,000 60,375
140,062
Specialty Merchandisers 0.6%
Toys "R" Us * .......................... 3,000,000 50,625
Tupperware ............................. 1,800,000 29,588
80,213
Entertainment and Leisure 0.8%
Hilton ................................. 2,500,000 47,812
Reader's Digest (Class A) .............. 2,100,000 52,894
100,706
Media and Communications 2.3%
Dow Jones .............................. 1,300,000 $ 62,563
Dun & Bradstreet ....................... 2,000,000 63,125
Knight-Ridder .......................... 2,100,000 107,362
R.R. Donnelley ......................... 1,750,000 76,672
309,722
Total Consumer Services ................ 630,703
<PAGE>
CONSUMER CYCLICALS 6.7%
Automobiles and Related 2.4%
Eaton .................................. 200,000 14,138
Genuine Parts .......................... 3,000,000 100,312
GM ..................................... 1,600,000 114,500
TRW .................................... 1,700,000 95,519
324,469
Building and Real Estate 2.4%
Archstone Communities Trust, REIT ...... 1,400,000 28,350
Crescent Real Estate Equities, REIT .... 2,200,000 50,600
Rouse .................................. 700,000 19,250
Simon DeBartolo Group, REIT ............ 3,489,532 99,452
Starwood Hotels & Resorts, REIT ........ 4,000,000 90,750
Weingarten Realty Investors, REIT ...... 600,000 26,775
315,177
Miscellaneous Consumer Durables 1.9%
Corning ................................ 1,200,000 54,000
Eastman Kodak .......................... 1,700,000 122,400
Whirlpool .............................. 1,500,000 83,062
259,462
Total Consumer Cyclicals ............... 899,108
TECHNOLOGY 2.8%
Electronic Systems 0.8%
Hewlett-Packard ........................ 1,500,000 102,469
102,469
Electronic Components 0.9%
AMP .................................... 2,355,075 122,611
122,611
Aerospace and Defense 1.1%
AlliedSignal ........................... 1,850,000 $ 81,978
Boeing ................................. 2,000,000 65,250
147,228
Total Technology ....................... 372,308
CAPITAL EQUIPMENT 2.4%
Electrical Equipment 2.0%
GE ..................................... 1,500,000 153,094
Hubbell (Class B) ...................... 1,300,000 49,400
Tyco International ..................... 950,750 71,722
274,216
Machinery 0.4%
Cooper Industries ...................... 1,200,000 57,225
57,225
Total Capital Equipment ................ 331,441
<PAGE>
BUSINESS SERVICES AND
TRANSPORTATION 5.2%
Transportation Services 0.2%
Alexander & Baldwin .................... 1,022,500 23,453
23,453
Miscellaneous Business Services 2.2%
Browning-Ferris ........................ 2,750,000 78,203
GATX ................................... 1,000,000 37,875
H&R Block .............................. 1,920,600 86,427
Waste Management ....................... 2,000,000 93,250
295,755
Railroads 2.8%
Burlington Northern Santa Fe ........... 2,250,000 75,938
Norfolk Southern ....................... 5,250,000 166,359
Union Pacific .......................... 3,150,000 141,947
384,244
Total Business Services and Transportation 703,452
ENERGY 12.4%
Energy Services 0.9%
Baker Hughes ........................... 4,000,000 70,750
Witco .................................. 2,800,000 $ 44,625
115,375
Integrated Petroleum - Domestic 4.2%
Amerada Hess ........................... 2,000,000 99,500
Atlantic Richfield ..................... 2,300,000 150,075
British Petroleum ADR .................. 733,680 69,700
Occidental Petroleum ................... 2,000,000 33,750
Phillips Petroleum ..................... 1,200,000 51,150
Unocal ................................. 3,600,000 105,075
USX-Marathon ........................... 1,900,000 57,237
566,487
Integrated Petroleum - International 7.3%
Amoco .................................. 3,500,000 206,500
Chevron ................................ 1,900,000 157,581
Exxon .................................. 2,900,000 212,063
Mobil .................................. 1,850,000 161,181
Royal Dutch Petroleum ADR .............. 2,400,000 114,900
Texaco ................................. 2,600,000 137,475
989,700
Total Energy ........................... 1,671,562
<PAGE>
PROCESS INDUSTRIES 10.0%
Diversified Chemicals 3.2%
Dow Chemical ........................... 1,800,000 163,687
DuPont ................................. 2,200,000 116,737
Hercules ............................... 3,500,000 95,813
Olin ................................... 2,000,000 56,625
432,862
Specialty Chemicals 3.3%
3M ..................................... 1,780,000 126,602
Great Lakes Chemical ................... 2,200,000 88,000
Imperial Chemical ADR .................. 1,250,000 43,672
Lubrizol ............................... 1,300,000 33,394
Nalco Chemical ......................... 2,000,000 62,000
Pall ................................... 3,443,000 87,151
440,819
Paper and Paper Products 2.6%
Consolidated Papers .................... 2,510,200 69,031
Kimberly-Clark ......................... 2,700,000 147,150
Union Camp ............................. 2,000,000 $ 135,000
351,181
Forest Products 0.9%
Georgia-Pacific ........................ 1,000,000 58,562
International Paper .................... 1,500,000 67,219
125,781
Total Process Industries ............... 1,350,643
BASIC MATERIALS 1.7%
Metals 1.4%
Inco ................................... 3,000,000 31,688
Phelps Dodge ........................... 1,300,000 66,137
Reynolds Metals ........................ 1,000,000 52,687
USX U.S. Steel ......................... 1,500,000 34,500
185,012
Mining 0.3%
Newmont Mining ......................... 2,750,000 49,672
49,672
Total Basic Materials .................. 234,684
Total Miscellaneous Common Stocks 0.3% 41,063
Total Common Stocks (Cost $9,711,354) 12,919,966
Convertible Preferred Stocks 0.1%
Crown Cork & Seal, 4.50% ................ 500,000 14,625
Total Convertible Preferred Stocks (Cost $24,026) 14,625
<PAGE>
Corporate Bonds 0.3%
Starwood Hotel & Resort, Sr. Secured Notes
VR, 8.868%, 2/23/03 ...... $ 33,750,000 33,413
Total Corporate Bonds (Cost $33,716) .... 33,413
Short-Term Investments 4.2%
Money Market Funds 4.2%
Reserve Investment Fund, 5.42% #+ ........ 566,787,408 566,787
Total Short-Term Investments (Cost $566,787) 566,787
Total Investments in Securities
100.3% of Net Assets (Cost $10,335,883) .. $ 13,534,791
Other Assets Less Liabilities ............ (39,741)
NET ASSETS ............................... $ 13,495,050
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (2,528)
Accumulated net realized gain/loss - net of distributions 117,577
Net unrealized gain (loss) 3,198,911
Paid-in-capital applicable to 512,712,115 shares of no par
value capital stock outstanding; unlimited shares authorized 10,181,090
NET ASSETS ................................ $ 13,495,050
NET ASSET VALUE PER SHARE ................. $ 26.32
# Seven-day yield
+ Affiliated company
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
VR Variable rate
GBP British Sterling
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
12/31/98
Investment Income
Income
Dividend ............................................. $ 345,533
Interest ............................................. 64,806
Total income ......................................... 410,339
Expenses
Investment management ................................ 77,394
Shareholder servicing ................................ 25,010
Prospectus and shareholder reports ................... 1,031
Registration ......................................... 601
Custody and accounting ............................... 445
Trustees ............................................. 40
Legal and audit ...................................... 23
Miscellaneous ........................................ 82
Total expenses ....................................... 104,626
Net investment income ........................................ 305,713
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities ........................................... 784,485
Foreign currency transactions ........................ 180
Net realized gain (loss) ............................. 784,665
Change in net unrealized gain or loss
Securities ........................................... 68,424
Other assets and liabilities
denominated in foreign currencies .................... 4
Change in net unrealized gain or loss ................ 68,428
Net realized and unrealized gain (loss) ...................... 853,093
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ....................................... $1,158,806
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
<TABLE>
====================================================================================================================================
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands
<CAPTION>
Year
Ended
12/31/98 12/31/97
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income .................................................... $ 305,713 $ 281,009
Net realized gain (loss) ................................................. 784,665 859,742
Change in net unrealized gain or loss .................................... 68,428 1,503,279
Increase (decrease) in net assets from operations ........................ 1,158,806 2,644,030
Distributions to shareholders
Net investment income .................................................... (309,762) (281,472)
Net realized gain ........................................................ (730,134) (948,478)
Decrease in net assets from distributions ................................ (1,039,896) (1,229,950)
Capital share transactions *
Shares sold .............................................................. 3,094,274 3,858,730
Distributions reinvested ................................................. 1,005,143 1,194,182
Shares redeemed .......................................................... (3,494,462) (1,513,941)
Increase (decrease) in net assets from capital
share transactions ....................................................... 604,955 3,538,971
Net Assets
Increase (decrease) during period ................................................ 723,865 4,953,051
Beginning of period .............................................................. 12,771,185 7,818,134
End of period .................................................................... $ 13,495,050 $ 12,771,185
*Share information
Shares sold .............................................................. 115,398 156,117
Distributions reinvested ................................................. 38,342 47,135
Shares redeemed .......................................................... (130,881) (60,273)
Increase (decrease) in shares outstanding ................................ 22,859 142,979
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
December 31, 1998
================================================================================
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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 deter mined 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.
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
securities, aggregated $3,102,347,000 and $2,860,498,000, respectively, for the
year ended December 31, 1998.
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, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$10,335,883,000. Net unrealized gain aggregated $3,198,908,000 at period end, of
which $3,797,918,000 related to appreciated investments and $599,010,000 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 $6,518,000 was payable at December 31, 1998. 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. At
December 31, 1998, and for the year then ended, the effective annual group fee
rate was 0.32%. 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. 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 $18,515,000 for the year ended
December 31, 1998, of which $1,697,000 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 held approximately 5.1% of the outstanding shares of the
Equity Income Fund at December 31, 1998. For the year then ended, the fund was
allocated $1,622,000 of Spectrum expenses, $173,000 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, 1998, totaled
$40,668,000 and are reflected as interest income in the accompanying Statement
of Operations.
<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 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, 1998, 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, 1998 by
correspondence with custodians, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
<PAGE>
T. Rowe Price Equity Income Fund
- --------------------------------------------------------------------------------
================================================================================
Tax Information (Unaudited) for the Tax Year Ended 12/31/98
- --------------------------------------------------------------------------------
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:
* $152,195,000 from short-term capital gains,
* $577,939,000 from long-term capital gains, all of which was subject to the
20% rate gains category.
For corporate shareholders, $308,487,000 of the fund's distributed income
and short-term capital gains qualified for the dividends-received deduction.
================================================================================
<PAGE>
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE 1-800-225-5132 Available Monday through Friday from 8 a.m. to
10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
IN PERSON Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions.
DISTRIBUTION Options Reinvest all, some, or none of your
distributions.
AUTOMATED 24-HOUR SERVICES Including Tele*Access [Registration Mark]
and the T. Rowe Price Web site on the Internet. Address:
www.troweprice.com
BROKERAGE SERVICES*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals, and
other securities at a savings over full-service commission rates.
INVESTMENT INFORMATION
COMBINED STATEMENT Overview of all your accounts with T. Rowe Price.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies and
results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing
markets and financial strategies.
PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund results.
INSIGHTS Educational reports on investment strategies and financial
markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit,
Diversifying Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning
Kit.
* T. Rowe Price Brokerage is 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 Growth & Income
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 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 Intermediate Bond +
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
INTERNATIONAL/GLOBAL
Emerging Markets Bond Global Bond ++
International Bond Money
MARKET FUNDS +++
TAXABLE
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
TAX-FREE
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
<PAGE>
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 named Equity Index.
** Closed to new investors.
*** Formerly named Florida Insured Intermediate Tax-Free.
+ Formerly named Tax-Free Insured Intermediate Bond.
++ Formerly named Global Government Bond.
+++ Neither the funds nor their share prices are insured or guaranteed by the
U.S. government.
Please call for a prospectus. Read it carefully before investing.
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 Retirement Plans and Resources
- --------------------------------------------------------------------------------
Retirement Plans and Resources
We recognize that saving for retirement is the number one investment
goal for most Americans. We can help you meet your retirement needs,
whether you are starting an IRA or designing a retirement program for
your employees. T. Rowe Price offers an assortment of retirement plans
for individuals, the self-employed, small businesses, corporations,
and nonprofit organizations. We provide recordkeeping, communications,
and investment management services, as well as a variety of
educational materials, self-help planning guides, and software tools
to help you choose and implement a retirement plan appropriate for
you. For information or to request literature, call us at
1-800-638-5660.
IRAs AND QUALIFIED PLANS
----------------------------------------------------------------------
Traditional IRA
Roth IRA
Rollover IRA
SEP-IRA
SIMPLE IRA
Profit Sharing
Money Purchase Pension
"Paired" Plans (Money Purchase Pension and Profit Sharing Plans)
401(k)
403(b)
457 Deferred Compensation
RETIREMENT RESOURCES AT T. ROWE PRICE
----------------------------------------------------------------------
PLANNING AND INFORMATIONAL GUIDES
Minimum Required Distributions Guide
Retirement Planning Kit
Retirees Financial Guide
Tax Considerations for Investors
<PAGE>
INVESTMENT KITS
The IRA Investing Kit
Roth IRA Conversion Kit
Rollover IRA Kit
The T. Rowe Price SIMPLE IRA Plan Kit
The T. Rowe Price SEP-IRA Plan
The Simplified Keogh Plan [Registration Mark] From T. Rowe Price
The T. Rowe Price 401(k) Century PlanRegistration Mark (for small
businesses)
Money Purchase Pension/Profit Sharing Plan Kit
Investing for Retirement in Your 403(b) Account
The T. Rowe Price No-Load Variable Annuity Information Kit
INSIGHTS REPORTS
The Challenge of Preparing for Retirement
Financial Planning After Retirement The Roth IRA: A Review
SOFTWARE PACKAGES
T. ROWE PRICE RETIREMENT PLANNING ANALYZER TM CD-ROM or diskette
$19.95. To order, please call 1-800-541-5760. Also available on the
Internet for $9.95.
T. ROWE PRICE VARIABLE ANNUITY ANALYZER TM CD-ROM or diskette, free.
To order, please call 1-800-469-5304.
Many of these resources are also available for viewing or ordering on
the Internet at WWW.TROWEPRICE.COM.
<PAGE>
T. Rowe Price Insights Reports
- --------------------------------------------------------------------------------
THE FUNDAMENTALS OF INVESTING
Whether you are unsure how to get started or are saving for a specific
goal, such as retirement or college, the T. Rowe Price Insights series
can help you make informed investment decisions. These reports,
written in plain English about fundamental investment topics, can be
useful at every stage of your investment journey. They cover a range
of topics, from the basic, such as getting started with mutual funds,
to the more advanced, such as managing risk through diversification or
buying individual securities through a broker. To request one or more
Insights, call us at 1-800-638-5660.
INSIGHTS REPORTS
----------------------------------------------------------------------
GENERAL INFORMATION
The ABCs of Giving
Back to Basics: The ABCs of Investing
The Challenge of Preparing for Retirement
Financial Planning After Retirement
Getting Started: Investing With Mutual Funds
The Roth IRA: A Review
Tax Information for Mutual Fund Investors
INVESTMENT STRATEGIES
Conservative Stock Investing
Dollar Cost Averaging
Equity Index Investing
Growth Stock Investing
Investing for Higher Yield
Managing Risk Through Diversification
The Power of Compounding
Value Investing
<PAGE>
TYPES OF SECURITIES
The Basics of International Stock Investing
The Basics of Tax-Free Investing
The Fundamentals of Fixed Income Investing
Global Bond Investing
Investing in Common Stocks
Investing in Emerging Growth Stocks
Investing in Financial Services Stocks
Investing in Health Care Stocks
Investing in High-Yield Municipal Bonds
Investing in Money Market Securities
Investing in Mortgage-Backed Securities
Investing in Natural Resource Stocks
Investing in Science and Technology Stocks
Investing in Small-Company Stocks
Understanding Derivatives
Understanding High-Yield "Junk" Bonds
BROKERAGE INSIGHTS
Combining Individual Securities With Mutual Funds
Getting Started: An Introduction to Individual Securities
What You Should Know About Bonds
What You Should Know About Margin and Short-Selling
What You Should Know About Options
What You Should Know About Stocks
T. Rowe Price Insights are also available for reading or downloading
on the Internet at WWW.TROWEPRICE.COM.
<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 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 12/31/98
