ANNUAL REPORT
- --------------------------------------------------------------------------------
Equity Income Fund
- --------------------------------------------------------------------------------
December 31, 1996
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Report Highlights
- --------------------------------------------------------------------------------
* The stock market and your fund were strong last year, reflecting good
corporate earnings, a generally favorable economic and interest rate
environment, and heavy demand for stocks.
* Your fund returned 11.39% and 20.40% for the 6- and 12-month periods,
respectively, exceeding the Lipper average in both periods but trailing the
broad market over the year.
* Despite poor returns from many income-oriented securities, your fund
performed well due to the continued strength of holdings in the financial,
health care, and energy sectors.
<PAGE>
* We recently initiated positions in several stocks that suffered relative to
the broad market, creating opportunities that we hope to exploit
profitably.
* We are cautious about stock market prospects for 1997 but still expect to
find attractive investments for shareholders.
================================================================================
Fellow Shareholders
- --------------------------------------------------------------------------------
The equity market and your fund were strong in the second half of 1996,
reflecting continued good corporate earnings, a generally favorable economic and
interest rate environment, and heavy investor demand. The postelection rally was
particularly notable in light of how little the political scene actually
changed. For the year as a whole, equity returns were impressive, coming as they
did on the heels of considerable strength in 1995. Stocks have now provided six
consecutive years of positive returns with no interim corrections of 10% or
more.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/96 6 Months 12 Months
- --------------------------------------------------------------------------------
Equity Income Fund 11.39% 20.40%
S&P 500 11.68 22.96
Lipper Equity Income
Funds Average 10.33 18.85
================================================================================
As shown in the table, your fund performed well over the last six months,
with a return approximating that of the unmanaged Standard & Poor's 500 Stock
Index and comfortably ahead of the Lipper Equity Income Funds Average. For the
year as a whole, the fund exceeded the Lipper average but trailed the broad
market, a not uncommon pattern for a conservative fund in robust years like
1996.
YEAR-END DISTRIBUTIONS
- --------------------------------------------------------------------------------
Your Board of Trustees declared a fourth quarter income dividend of $0.17
per share, bringing your 1996 total to $0.65 per share. At the same time, a
$0.71 per share capital gain distribution was declared, of which $0.15 was
short-term and $0.56 long-term. These distributions were paid on December 30 to
shareholders of record on December 26. You should already have received your
check or statement reflecting this activity, as well as Form 1099-DIV
summarizing this information for 1996 tax purposes.
<PAGE>
PORTFOLIO STRATEGY
- --------------------------------------------------------------------------------
While the last 12 months were a strong period for the broad equity market,
it was challenging for income-oriented investors. Bond and money market returns
were generally in the mid-single-digit range in 1996, with shorter-maturity
securities returning more than those with longer maturities. Two traditional
high-yield sectors of the equity market, electric utilities and telephone
companies, were about flat on average for the year. These sectors suffered due
to their interest rate sensitivity and to concern about the impact of a newly
deregulated environment.
Despite poor returns from many traditional yield vehicles, your fund
performed reasonably well due to the continued strength of companies in the
financial (Chase Manhattan, American Express), pharmaceutical (Warner-Lambert),
and energy (Exxon, Texaco) sectors. We purchased many of these holdings in
recent years when they were out of favor and inexpensive on a relative valuation
basis for various reasons. We often make investment decisions based on the
tendency of a company's fundamentals and stock price to regress to the mean
within historical ranges, as well as the likelihood that investor perceptions
about the relative values of these stocks will improve over the intermediate
term. This was clearly the case in 1996 with respect to some of the companies
just mentioned.
[INSERT SOMEWHERE IN HERE: edgar description: Security Diversification pie chart
showing Common Stocks 86%, Bonds 3%, Convertibles 1%, Reserves 10%]
During the second half of the year, despite a market that had advanced
sharply, we were able to find opportunities in companies with
higher-than-average dividend yields, limited risk, and attractive return
potential. In many cases, investments that interest us often involve stocks that
have suffered relative to the broad market for various reasons. Controversy and
underperformance often create opportunities that we hope to exploit profitably
on your behalf. We recently initiated new positions in AT&T, Amoco,
International Flavors & Fragrances, ITT, and Whirlpool, all fine companies that
have been struggling recently because of negative fundamental trends affecting
their businesses, negative investor views of their prospects, or some
combination of these factors.
The Security Diversification chart on page 2 shows that we had 86% of total
fund assets invested in common stocks on December 31, approximately the same
percentage as at the end of our June reporting period.
<PAGE>
SUMMARY AND OUTLOOK
- --------------------------------------------------------------------------------
The last two years were exceptionally profitable for equity investors, who
enjoyed attractive returns in a nearly perfect environment for stocks. It is
difficult to see how things can get much better; at the same time, it is also
difficult to see anything on the horizon that would cause this environment to
change for the worse. Nonetheless, we are sensitive to the lessons of history,
particularly the tendency of the equity market to pause for breath after
consecutive powerful years like the past two.
Over the last few years, stock prices have appreciated at a much faster
rate than the earnings and dividends of the underlying companies. Because of
this "delinkage," we expect more subdued equity performance in 1997. We do not
have a bearish outlook for the year ahead but simply want to raise the
possibility that it may not live up to many investors' high expectations for a
continuation of recent trends. Notwithstanding this cautionary tone, we continue
to believe we will find interesting investment opportunities during the year.
As always, we appreciate your continued confidence and support.
Respectfully submitted,
[Signature]
Brian C. Rogers
President and Chairman of the Investment Advisory Committee
January 17, 1997
================================================================================
Sticking To Your Game Plan
- --------------------------------------------------------------------------------
[Chart showing TIME REDUCES VOLATILITY OF MARKET RETURNS]
In our report to you one year ago, we mentioned the possibility of a modest
decline in stock prices. In fact, from May to July 1996, the broad market (as
measured by the Standard & Poor's 500 Stock Index) fell around 7%. However, the
bull market resumed its charge to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do not
expect a major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.
<PAGE>
How should you prepare for a potential market pullback? As always, our
advice is to diversify your investments and focus on the long term. If you've
implemented a sound investment strategy, stay the course. Stocks have
historically overcome periods of volatility to provide better returns than most
other investments. Market corrections can even have a silver lining because they
result in good buying opportunities.
Furthermore, the volatility of stock market returns has diminished
significantly over longer time frames. The chart shows the best and worst
annualized returns on stocks over various rolling time periods between 1950 and
1996. (For instance, there were 37 rolling 10-year periods: 1950-1960,
1951-1961, etc.) Investors who held stocks for only one year could have had as
much as a 52.6% gain, or as little as a 26.5% loss -- a spread of 79 percentage
points. However, investors who held stocks for 10-year periods or longer always
overcame interim volatility to post gains for the entire period.
In addition, a well-diversified portfolio can weather volatility better than a
more concentrated portfolio over the long term and particularly during market
corrections. For example, during last summer's correction, small-company stocks
fell nearly 16% while large-company issues dropped 7.3%. However, a portfolio
diversified among large U.S. companies (30% of assets), small U.S. companies
(15%), foreign companies (15%), intermediate-term Treasury bonds (30%), and
Treasury bills (10%) would have lost a smaller 5.2% of its value. {1}
Above all, remember that investing is a long-distance race, not a
sprint.
{1} Ned Davis Research.
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
- --------------------------------------------------------------------------------
6 Months Ended 12/31/96
Ten Largest Purchases
================================================================================
International Flavors & Fragrances *
AT&T *
Amoco *
ITT *
Whirlpool *
Dow Chemical
R.R. Donnelly *
AMP *
Frontier *
Western Resources *
Ten Largest Sales
- --------------------------------------------------------------------------------
Eli Lilly **
Salomon **
PHH **
Conrail
SmithKline Beecham
Honeywell
Eastman Kodak
Kimberly-Clark
Pennzoil **
Vodafone **
- --------------------------------------------------------------------------------
* Position added
** Position eliminated
================================================================================
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/96
- --------------------------------------------------------------------------------
GE 1.6%
Atlantic Richfield 1.5
Chase Manhattan 1.5
Exxon 1.4
Mellon Bank 1.4
- --------------------------------------------------------------------------------
AT&T 1.3
Simon DeBartolo Group 1.2
Warner-Lambert 1.2
Texaco 1.2
General Mills 1.1
- --------------------------------------------------------------------------------
DuPont 1.1
J.P. Morgan 1.1
Wells Fargo 1.0
Chevron 1.0
Pharmacia & Upjohn 1.0
- --------------------------------------------------------------------------------
International Flavors & Fragrances 1.0
Union Camp 1.0
Quaker Oats 0.9
Royal Dutch Petroleum 0.9
American General 0.9
- --------------------------------------------------------------------------------
J.C. Penney 0.9
American Home Products 0.9
Georgia-Pacific 0.9
Dow Chemical 0.9
Unilever N.V 0.9
- --------------------------------------------------------------------------------
Total 27.8%
================================================================================
<PAGE>
================================================================================
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.
[SEC Chart for Equity Income Fund 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 12/31/96 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Equity Income Fund 20.40% 18.84% 17.08% 14.46%
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>
For a share outstanding throughout each period
====================================================================================================================================
<CAPTION>
Financial Highlights
<S> <C> <C> <C> <C> <C>
Year
Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of period ..................... $ 20.01 $ 15.98 $ 16.65 $ 15.63 $ 14.62
Investment activities
Net investment income ............... 0.64 0.66 0.60 0.54 0.62
Net realized and
unrealized gain (loss) .............. 3.38 4.56 0.13 1.74 1.41
Total from
investment activities ............... 4.02 5.22 0.73 2.28 2.03
Distributions
Net investment income ............... (0.65) (0.65) (0.59) (0.54) (0.63)
Net realized gain ................... (0.84) (0.54) (0.81) (0.72) (0.39)
Total distributions ................. (1.49) (1.19) (1.40) (1.26) (1.02)
NET ASSET VALUE
End of period ........................... $ 22.54 $ 20.01 $ 15.98 $ 16.65 $ 15.63
Ratios/Supplemental Data
Total return ............................ 20.40% 33.35% 4.53% 14.84% 14.13%
Ratio of expenses to
average net assets ...................... 0.81% 0.85% 0.88% 0.91% 0.97%
Ratio of net investment
income to average
net assets .............................. 3.08% 3.69% 3.63% 3.23% 3.95%
Portfolio turnover rate ................. 25.0% 21.4% 36.3% 31.2% 30.0%
Average commission
rate paid ............................... $ 0.0644 -- -- -- --
Net assets, end of period
(in millions) ........................... $ 7,818 $ 5,215 $ 3,204 $ 2,851 $ 2,092
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Shares/Par Value
In thousands
- --------------------------------------------------------------------------------
Common Stocks 85.7%
FINANCIAL 17.1%
Bank and Trust 9.6%
BANC ONE .................................. 800,000 $ 34,400
Bank of Boston ............................ 814,600 52,338
Bankers Trust New York .................... 479,200 41,331
Chase Manhattan ........................... 1,270,900 113,428
Fleet Financial Group ..................... 1,150,000 57,356
J.P. Morgan ............................... 850,000 82,981
Mellon Bank ............................... 1,537,500 109,163
Mercantile Bankshares ..................... 750,000 23,906
National City ............................. 1,000,000 44,875
PNC Bank .................................. 958,300 36,056
Signet Banking ............................ 1,000,000 30,750
U.S. Bancorp .............................. 958,300 43,064
Wells Fargo ............................... 291,650 78,673
748,321
Insurance 3.7%
Alexander & Alexander ....................... 1,500,000 26,063
American General ............................ 1,800,000 73,575
Hilb, Rogal and Hamilton .................... 670,800 8,888
Lincoln National ............................ 600,000 31,500
Provident ................................... 400,000 19,350
SAFECO ...................................... 500,000 19,719
St. Paul Companies .......................... 1,000,000 58,625
USF&G ....................................... 1,500,000 31,312
Willis-Corroon ADR .......................... 2,100,000 24,150
293,182
Financial Services 3.8%
American Express ........................ 1,200,000 67,800
Fannie Mae .............................. 1,427,320 53,168
H&R Block ............................... 1,900,000 55,100
Sallie Mae .............................. 600,000 55,875
Travelers Group ......................... 1,433,200 65,031
296,974
Total Financial ....................................... 1,338,477
<PAGE>
UTILITIES 13.5%
Telephone Services 6.9%
ALLTEL ............................................ 2,000,000 $ 62,750
AT&T .............................................. 2,300,000 100,050
BCE ............................................... 958,300 45,759
Bell Atlantic ..................................... 750,000 48,562
BellSouth ......................................... 1,500,000 60,562
Frontier .......................................... 1,500,000 33,938
GTE ............................................... 1,341,600 61,043
Pacific Telesis ................................... 1,000,000 36,750
SBC Communications ................................ 600,000 31,050
Southern New England Telecommunications ........... 800,000 31,100
U. S. WEST Communications ......................... 862,500 27,816
539,380
Electric Utilities 6.6%
BGE ........................................ 850,000 22,737
Centerior Energy ........................... 3,066,600 32,966
Dominion Resources ......................... 1,100,000 42,350
DQE ........................................ 650,000 18,850
Duke Power ................................. 500,000 23,125
Echelon International ...................... 33,400 522
Edison International ....................... 1,150,000 22,856
Entergy .................................... 1,533,300 42,549
Florida Progress ........................... 501,000 16,157
GPU ........................................ 479,200 16,113
Ohio Edison ................................ 1,000,000 22,750
Pacific Gas and Electric ................... 1,245,800 26,162
PacifiCorp ................................. 2,000,000 41,000
PECO Energy ................................ 2,000,000 50,500
Public Service Enterprise .................. 1,300,000 35,425
Southern Company ........................... 1,000,000 22,625
Unicom ..................................... 1,750,000 47,469
Western Resources .......................... 1,000,000 30,875
515,031
Total Utilities 1,054,411
CONSUMER NONDURABLES 17.9%
Cosmetics 1.0%
International Flavors & Fragrances 1,700,000 $76,500
76,500
Beverages 1.4%
Anheuser-Busch ........................... 1,399,600 55,984
Brown-Forman (Class B) ................... 1,106,000 50,599
106,583
<PAGE>
Food Processing 4.3%
General Mills ........................ 1,391,600 88,193
Heinz ................................ 1,750,000 62,563
Kellogg .............................. 400,000 26,250
McCormick ............................ 2,300,000 54,194
Quaker Oats .......................... 1,944,800 74,145
Sara Lee ............................. 862,500 32,128
337,473
Hospital Supplies/Hospital Management 1.8%
Abbott Laboratories ...................... 1,200,000 60,900
Bausch & Lomb ............................ 1,200,000 42,000
Baxter International ..................... 958,300 39,290
142,190
Pharmaceuticals 4.7%
American Home Products ................... 1,245,800 73,035
Novartis (CHF) ........................... 53,333 61,083
Pharmacia & Upjohn ....................... 1,935,800 76,706
SmithKline Beecham ADR ................... 900,000 61,200
Warner-Lambert ........................... 1,256,000 94,200
366,224
Miscellaneous Consumer Products 4.7%
American Brands ........................... 1,300,000 64,512
Armstrong World ........................... 400,000 27,800
Dixie Yarns * ............................. 300,000 2,363
Grand Metropolitan ADR .................... 1,054,100 33,336
Philip Morris ............................. 450,000 50,681
RJR Nabisco ............................... 570,879 19,410
Tambrands ................................. 1,400,000 57,225
Unilever N.V. ADR ......................... 400,000 $ 70,100
UST ....................................... 1,400,000 45,325
370,752
Total Consumer Nondurables 1,399,722
CONSUMER SERVICES 5.2%
General Merchandisers 1.3%
J.C. Penney ............................... 1,500,000 73,125
May Department Stores ..................... 561,500 26,250
99,375
Specialty Merchandisers 0.2%
Fleming Companies ......................... 600,000 10,350
Hancock Fabrics ........................... 250,000 2,594
12,944
<PAGE>
Entertainment and Leisure 1.3%
ITT * ............................................ 1,200,000 52,050
Reader's Digest (Class A), non-voting ............ 1,145,100 46,090
Reader's Digest (Class B) ........................ 125,100 4,535
102,675
Media and Communications 2.4%
Cognizant .............................. 299,900 9,897
Dow Jones .............................. 900,000 30,487
Dun & Bradstreet ....................... 1,417,500 33,666
Gannett ................................ 479,200 35,880
McGraw-Hill ............................ 800,000 36,900
R. R. Donnelly ......................... 1,350,000 42,356
189,186
Total Consumer Services ................................... 404,180
CONSUMER CYCLICALS 4.9%
Automobiles and Related 1.3%
Eaton ................................... 517,900 36,124
Ford Motor .............................. 500,000 15,937
Genuine Parts ........................... 450,000 20,025
GM ...................................... 500,000 27,875
99,961
Building and Real Estate 1.8%
Rouse ........................................... 470,000 $ 14,923
SECURITY CAPITAL PACIFIC TRUST, REIT ............ 400,000 9,150
Simon DeBartolo Group, REIT ..................... 3,089,532 95,775
Weingarten Realty Investors, REIT ............... 600,000 24,375
144,223
Miscellaneous Consumer Durables 1.8%
Corning .............................. 1,437,500 66,484
Eastman Kodak ........................ 350,000 28,088
Whirlpool ............................ 1,000,000 46,625
141,197
Total Consumer Cyclicals .................................. 385,381
TECHNOLOGY 1.1%
Electronic Systems 0.4%
Honeywell ............................. 450,000 29,587
29,587
Office Automation 0.2%
Pitney Bowes ............................ 287,500 15,669
15,669
<PAGE>
Electronic Components 0.5%
AMP ............................... 1,000,000 38,375
38,375
Total Technology ......................................... 83,631
CAPITAL EQUIPMENT 3.1%
Electrical Equipment 2.3%
GE ....................................... 1,300,000 128,537
Hubbell (Class B) ........................ 1,183,400 51,182
179,719
Machinery 0.8%
Cooper Industries ....................... 1,100,000 46,338
FMC * ................................... 273,300 19,165
65,503
Total Capital Equipment ................................... 245,222
BUSINESS SERVICES AND
TRANSPORTATION 1.4%
Transportation Services 0.2%
Alexander & Baldwin ........................ 718,700 $17,833
17,833
Miscellaneous Business Services 0.4%
Deluxe Corp. ............................ 600,000 19,650
GATX .................................... 287,500 13,944
33,594
Railroads 0.8%
Conrail ................................. 185,782 18,509
Union Pacific ........................... 700,000 42,087
60,596
Total Business Services and Transportation 112,023
ENERGY 10.7%
Energy Services 0.7%
McDermott International ................... 718,700 11,948
Witco ..................................... 1,500,000 45,750
57,698
Gas Transmission 0.2%
TransCanada PipeLines ....................... 670,800 11,739
11,739
Integrated Petroleum - Domestic 3.9%
Amoco .................................... 750,000 60,375
Atlantic Richfield ....................... 910,400 120,628
British Petroleum ADR .................... 479,100 67,733
Sun Company .............................. 509,712 12,424
USX-Marathon ............................. 1,916,600 45,759
306,919
<PAGE>
Integrated Petroleum - International 5.9%
Chevron .................................... 1,200,000 78,000
Exxon ...................................... 1,150,000 112,700
Mobil ...................................... 500,000 61,125
Repsol ADR ................................. 1,100,000 41,938
Royal Dutch Petroleum ADR .................. 431,200 73,627
Texaco ..................................... 958,300 94,033
461,423
Total Energy 837,779
PROCESS INDUSTRIES 8.9%
Diversified Chemicals 2.0%
Dow Chemical .......................... 900,000 $ 70,537
DuPont ................................ 910,400 85,919
156,456
Specialty Chemicals 3.1%
3M ....................................... 650,000 53,869
Betz Laboratories ........................ 900,000 52,650
Great Lakes Chemical ..................... 1,135,100 53,066
Lubrizol ................................. 1,200,000 37,200
Nalco Chemical ........................... 1,200,800 43,379
240,164
Paper and Paper Products 2.9%
Consolidated Papers ...................... 800,000 39,300
International Paper ...................... 1,350,000 54,506
James River .............................. 700,000 23,188
Kimberly-Clark ........................... 350,000 33,337
Union Camp ............................... 1,600,000 76,400
226,731
Forest Products 0.9%
Georgia-Pacific ......................... 1,000,000 72,000
72,000
Total Process Industries .................................. 695,351
BASIC MATERIALS 1.6%
Metals 0.7%
Reynolds Metals ......................... 1,031,000 58,123
58,123
Mining 0.9%
LONRHO (GBP) ........................... 10,000,000 21,415
Newmont Mining ......................... 1,000,000 44,750
66,165
Total Basic Materials 124,288
<PAGE>
Miscellaneous Common Stocks 0.3% 20,603
Total Common Stocks (Cost $5,083,191) 6,701,068
Convertible Bonds 1.2%
Banco Nacional De Mexico SA, 11.00%, 7/15/03 ....... $13,507,000 $13,845
Corporate Express, (144a), 4.50%, 7/1/00 ........... 30,000,000 27,952
Roche Holding, LYONs, Zero Coupon, 4/20/10 ......... 43,985,000 20,123
WMX Technologies, Sub. Deb., 2.00%, 1/24/05 ........ 38,330,000 35,879
Total Convertible Bonds (Cost $92,449) ............. 97,799
Corporate Bonds 0.9%
American Standard, 9.875%, 6/1/01 ....................... 5,750,000 6,095
BF Saul REIT, Sr. Secured Notes, 11.625%, 4/1/02 ........ 9,150,000 9,882
Container Corporation of America, Sr. Notes
9.75%, 4/1/03 ...... 9,585,000 10,064
El Paso Electric, 1st Mtg. Notes, 9.40%, 5/1/11 ......... 10,000,000 10,600
Texas Bottling Group, Sr. Sub. Notes, 9.00%, 11/15/03 ... 8,000,000 8,100
Trump Atlantic City, 1st Mtg. Notes, 11.25%, 5/1/06 ..... 22,075,000 21,855
Total Corporate Bonds (Cost ............................. $ 64,930)
66,596
U.S. Government Obligations/
Agencies 3.1%
U.S. Treasury Bonds
6.875%, 8/15/25 ........................ 75,000,000 76,477
U.S. Treasury Notes
5.375%, 11/30/97 ................... 28,750,000 28,687
5.50%, 11/15/98 ................... 57,900,000 57,511
6.625%, 3/31/97 ................... 33,540,000 33,639
7.375%, 11/15/97 ................... 30,750,000 31,192
8.875%, 11/15/98 - 5/15/00 ................... 15,000,000 15,968
Total U.S. Government Obligations/Agencies (Cost $240,775) 243,474
Short-Term Investments 8.8%
Certificates of Deposit 2.3%
Bank of Scotland, (London), 5.42%, 3/13/97 ............. 25,000,000 25,000
Bayerische Vereinsbank, (London), 5.43%, 3/13/97 ....... 25,000,000 25,001
Bayerische Hypotheken und Wechsel, (London), 5.375-5.62%
2/18/97-2/27/97 ..... 40,000,000 40,000
Commerzbank, 5.45%, 1/9/97 ............................. 22,000,002 2,000
<PAGE>
National Bank of Canada, 5.43%, 2/10/97 ................ 15,000,000 15,000
National Westminster Bank, 5.41%, 2/10/97 .............. 5,000,000 5,000
Royal Bank Canada, 5.60%, 2/28/97 ...................... 19,000,000 18,999
Societe Generale, 5.60%, 2/10/97 ....................... 6,000,000 6,000
United States National Bank Oregon, 5.42%, 1/8/97 ...... 20,000,000 20,000
177,000
Commercial Paper 5.9%
Asset Securitization Cooperative, 4(2), 5.32-5.36%
1/29/97-2/13/97 35,000,000 34,810
Bank of America, 5.41%, 2/6/97 .......................... 40,000,000 39,784
Beta Finance, 4(2), 5.30%, 2/25/97 ...................... 20,000,000 19,838
BHF Finance (Delaware), 5.30%, 4/11/97 .................. 20,000,000 19,706
Caisse Des Amortissement, 5.33-5.40%, 1/31/97-2/20/97 ... 45,000,000 44,739
Ciesco, 5.30%, 2/13/97 ............................... 20,000,000 19,873
Countrywide Funding, 5.73%, 1/22/97 ..................... 10,000,000 9,967
Cregem North America, 5.34%, 1/3/97 ..................... 18,000,000 17,995
Delaware Funding, 4(2), 5.45%, 1/10/97 .................. 7,600,000 7,590
Den Danske, 5.37%, 2/10/97 ........................... 20,000,000 19,881
Deutsche Bank Finance, 5.40%, 1/8/97 .................... 25,000,000 24,974
Falcon Asset Securitization, 4(2), 5.45%, 1/3/97 ........ 6,560,000 6,558
Finova Capital, 5.39%, 1/24/97 ....................... 18,000,000 17,938
Golden Managers Acceptance Corporation, 5.35%, 1/8/97 ... 20,000,000 19,979
Indosuez North America, 5.33%, 1/17/97 ............... 20,000,000 19,953
Investments in Commercial Paper through a joint account
6.75-7.10%, 1/2/97 ... 41,329,139 41,321
Island Finance Puerto Rico, 5.32-5.34%, 1/7/97-1/24/97 20,450,000 20,395
KFW International, 5.38%, 1/10/97 .................... 25,000,000 24,966
Nordbanken North America, 5.40%, 2/10/97 ................ 20,000,000 19,880
Preferred Receivables Funding, 5.35%, 2/3/97 ............ 8,100,000 8,060
Telstra, 5.38%, 2/5/97 ............................... 20,000,000 19,895
Unifunding, 6.39%, 1/6/97 ............................... 2,000,000 1,998
460,100
Medium-Term Notes 0.6%
Morgan Stanley Group, VR, 5.656%, 1/31/93 1,445,000 31,455
SMM Trust, VR, 5.706%, 3/26/97 ......... 19,000,000 18,998
50,453
Total Short-Term Investments (Cost $687,553) 687,553
Total Investments in Securities
99.7% of Net Assets (Cost $6,168,898) $7,796,490
Futures Contracts
In thousands
<PAGE>
Contract Unrealized
Expiration Value Gain (Loss)
---------- -------- -----------
Long, 100 Standard & Poor's 500 Stock Index
contracts, $2,500,000 of U.S. Treasury Notes
pledged as initial margin 3/97 $37,225 $(372)
Net payments (receipts) of variation
margin to date (358)
Variation margin receivable
(payable) on open futures contracts (730)
Other Assets Less Liabilities 22,374
NET ASSETS $7,818,134
Net Assets Consist of:
Accumulated net investment income - net of distributions $1,984
Accumulated net realized gain/loss - net of distributions 151,782
Net unrealized gain (loss) 1,627,204
Paid-in-capital applicable to 346,873,938 shares of no par
value capital stock outstanding; unlimited shares authorized 6,037,164
NET ASSETS $7,818,134
NET ASSET VALUE PER SHARE $22.54
* Non-income producing
REIT Real Estate Investment Trust
VR Variable rate
<PAGE>
4(2) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers N total of such securities at year-end amounts to
0.36% of net assets.
CHF Swiss franc
GBP British sterling
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/96
- --------------------------------------------------------------------------------
Investment Income
Income
Dividend ............................................. $ 185,328
Interest ............................................. 67,348
Total income ......................................... 252,676
Expenses
Investment management ................................ 37,762
Shareholder servicing ................................ 13,312
Registration ......................................... 708
Custody and accounting ............................... 384
Prospectus and shareholder reports ................... 363
Trustees ............................................. 39
Legal and audit ...................................... 33
Miscellaneous ........................................ 65
Total expenses ....................................... 52,666
Net investment income ...................................... 200,010
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
Securities ........................................... 456,505
Futures .............................................. 1,022
Foreign currency transactions ........................ (161)
Net realized gain (loss) ............................. 457,366
Change in net unrealized gain or loss on
Securities ........................................... 571,776
Futures .............................................. (372)
Other assets and liabilities
denominated in foreign currencies .................... (16)
Change in net unrealized gain or loss ................ 571,388
Net realized and unrealized gain (loss) .................... 1,028,754
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ..................................... $ 1,228,764
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
================================================================================================
Statement of Changes in Net Assets
In thousands
- ------------------------------------------------------------------------------------------------
<CAPTION>
Year
Ended
<S> <C> <C>
12/31/96 12/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 200,010 $ 152,570
Net realized gain (loss) ........................ 457,366 139,663
Change in net unrealized gain or loss ........... 571,388 894,739
Increase (decrease) in net assets from operations 1,228,764 1,186,972
Distributions to shareholders
Net investment income ........................... (201,399) (150,621)
Net realized gain ............................... (274,623) (130,781)
Decrease in net assets from distributions ....... (476,022) (281,402)
Capital share transactions *
Shares sold ..................................... 2,769,484 1,431,239
Distributions reinvested ........................ 457,250 272,282
Shares redeemed ................................. (1,376,120)(598,164)
Increase (decrease) in net assets from capital
share transactions .............................. 1,850,614 1,105,357
Net Assets
Increase (decrease) during period ..................... 2,603,356 2,010,927
Beginning of period ................................... 5,214,778 3,203,851
End of period ......................................... $ 7,818,134 $ 5,214,778
*Share information
Shares sold ...................................... 130,381 78,850
Distributions reinvested ......................... 20,657 14,467
Shares redeemed .................................. (64,822) (33,108)
Increase (decrease) in shares outstanding ........ 86,216 60,209
================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
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.
Valuation
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time the valuations are made.
A security which is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary market for such
security. Listed securities 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 their amortized cost which, when
combined with accrued interest, approximates fair value. Financial futures
contracts are valued at closing settlement prices.
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.
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.
<PAGE>
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. Payments ("variation margin") made or received
by the fund to settle the daily fluctuations in the value of futures contracts
are recorded as unrealized gains or losses until the contracts are closed.
Unrealized gains and losses on futures contracts are included in Change in net
unrealized gain or loss in the accompanying financial statements.
NOTE 2 - INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Futures Contracts At December 31, 1996, the fund was a party to futures
contracts, which provide for the future sale by one party and purchase by
another of a specified amount of a specific financial instrument at an agreed
upon price, date, time, and place. Risks arise from possible illiquidity of the
futures market and from movements in security values.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $3,062,717,000 and $1,446,244,000, respectively, for the
year ended December 31, 1996.
<PAGE>
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.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of an in-kind redemption of portfolio securities,
the following reclassifications were made during the year ended December 31,
1996. The results of operations and net assets were not affected by the
reclassifications.
================================================================================
Undistributed net realized gain $(67,777,000)
Paid-in-capital 67,777,000
- --------------------------------------------------------------------------------
At December 31, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $6,168,898,000, and net unrealized gain
aggregated $1,627,592,000, of which $1,679,026,000 related to appreciated
investments and $51,434,000 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 $3,793,000 was payable at December 31, 1996. 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 0.305% for assets in
excess of $50 billion. At December 31, 1996, and for the year then ended, the
effective annual group fee rate was 0.33%. The fund pays a pro-rata share of the
group fee based on the ratio of its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund.
<PAGE>
T. Rowe Price Services, Inc. (TRPS) is the fund's transfer and dividend
disbursing agent and provides shareholder and administrative services to the
fund. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the fund.
Additionally, the fund is one of several T. Rowe Price mutual funds (the
underlying funds) in which the T. Rowe Price Spectrum Growth and Income Funds
(Spectrum) invest. In accordance with an agreement among Spectrum, the
underlying funds, the manager, and TRPS, expenses from the operation of Spectrum
are borne by the underlying funds based on each underlying fund's proportionate
share of assets owned by Spectrum. The fund incurred expenses pursuant to these
related party agreements totaling approximately $11,455,000 for the year ended
December 31, 1996, of which $1,052,000 was payable at period-end.
================================================================================
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, 1996, 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, 1996 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 20, 1997
<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).
<PAGE>
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.
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 typeNstock, 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 developments and provides
comprehensive performance information for every T. Rowe Price fund.
<PAGE>
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, 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.
================================================================================
T. Rowe Price Mutual Funds
================================================================================
================================================================================
Mutual Funds
- --------------------------------------------------------------------------------
Stock Funds
================================================================================
Domestic
- --------------------------------------------------------------------------------
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
<PAGE>
International/Global
- --------------------------------------------------------------------------------
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
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
<PAGE>
International/Global
- --------------------------------------------------------------------------------
Global Government Bond
Emerging Markets Bond
International Bond
Money Market
================================================================================
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
Blended Asset
================================================================================
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
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
* Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send
money.
<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. 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 optional S&P 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.
* 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(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://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
<PAGE>
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.
RPRTEIF 12/31/96
